DHH0028

Written evidence submitted by Regulatory Assistance Project

1. Broadly we agree with the recommendations of the NAO report into ‘decarbonising home heating’. In particular, international evidence suggests that rebalancing costs and reducing the relative cost of electricity compared to gas and oil should be a policy priority to encourage the deployment of heat pumps and building electrification. Such a change is also supported by the National Infrastructure Commission[1]. We have forthcoming analysis under review by an academic journal that looks at the impact of different levy reform options on the total costs of ownership of a heat pump which we would be willing to share with the PAC ahead of its official publication if of interest.
2. We also strongly agree with the recommendation that government should provide more certainty on the (likely limited) role of hydrogen in home heating because of the uncertainty this is creating for consumers and the market. The committee might note that we have been made aware of a coordinated media campaign by gas interests to publicly challenge this NAO recommendation. In our view, this media campaign is likely to be because of how important such a policy decision would be for some of the vested gas industry players. Nevertheless, such a recommendation has also been made by the Climate Change Committee who in their 2023 annual progress report suggested that government should ‘publicly narrow the potential role for hydrogen’ in heating[2]. The National Infrastructure Commission has also stated that ‘there is no public policy case for hydrogen to be used to heat individual homes or other buildings’ in its recent infrastructure assessment’[3].
3. We also agree with the NAO that the current regulatory model of the gas networks exposes UK taxpayers to a significant level of risk. Accelerated depreciation of gas assets should be considered by network regulator Ofgem and plans should be made for the delivery and funding of gas network disconnection and decommissioning. We have provided detailed analysis on this issue[4].
4. We disagree with some of the assumptions used in the NAO report. In particular, the 600,000 heat pump installations a year target, while a government target, is too low compared to Climate Change Committee pathways. The Climate Change Committee’s ‘balanced pathway’ from their sixth carbon budget report suggests that around 900,000 heat pumps would need to be installed annually in UK homes in 2028[5]. With slower than anticipated heat pump deployment to dat, some ‘catching up’ will be needed and so even 900,000 per annum may now be too low.
5. We also disagree with the assumption used in the NAO report that 20% of homes are unsuitable for heat pumps or low carbon heating technology. This number emerged from the speech of Rishi Sunak on 23rd September 2023[6] but is as far as we can tell not based on any specific analysis. It is unclear whether this is actual government policy as it has not been costed and the carbon implications have not been assessed. Previous analysis by UK government innovation agency the Energy Systems Catapult has suggested that ‘All housing types are suitable for heat pumps[7]’.
6. We note that the NAO report has focused on heat pump deployment and the lack of policy and deployment progress hitherto. However, there is also expected to be a major role for heat networked solutions to heating, broadly a tenfold growth in connection numbers to existing homes by 2050, particularly in dense areas. While this growth is lower than for heat pumps, it represents a particular challenge for many dense urban areas and is worthy of consideration by the committee. The retrofit of heat network solutions to existing buildings is currently happening at a snail’s pace.
7. As well as heat pumps and heat networks, there is also expected to be a significant role for fabric energy efficiency measures to reduce the heat demand of houses and buildings, and this is ‘significantly off-track’ compared to Climate Change Committee indicators[8].       
8. On heat pump cost reductions, while it is positive to note a reduction in real installation costs, only modest growth in the heat pump market means that a limited economies of scale are currently being realised. It is likely that as the market continues to grow, learn  and innovate, costs will reduce somewhat and a 25% reduction seems possible, based on wider evidence[9]. However, achieving a 50% reduction appears unlikely, particularly when around 50% of installation costs may be for labour.
9. The heat pump market is being negatively affected by market uncertainty caused by policy uncertainty. The NAO recognized that the proposed Clean Heat Market Mechanism to drive heat pump uptake may be delayed but that no Government decision had been made. However, on the 14th March, the Secretary of State for Energy Security and Net Zero made a statement to parliament explaining that the introduction of the policy would be delayed by a year to 2025[10]. While the policy impact of this change may only be limited, it has provided a knock to industry confidence, with some companies already developing incentive schemes to support the policy.
10. The Future Homes Standard, which is expected to ban the use of fossil fuels in new homes from 2026 and therefore expected to drive heat pump uptake, has still not been legislated for. Government has not yet responded to its recent consultation[11] and any delays will lead to the continued use of fossil fuels in new buildings and therefore a greater need to retrofit. This situation is exacerbated by the fact that even when legislation is introduced, there will still be a time lag before it takes effect, due to exemptions and ‘transitional arrangements’.
11. To drive more rapid heat pump uptake, we suggest the following options could be considered by government. Many of these have been suggested in our previous analysis[12]
1. Increase heat pump grants to provide a greater household incentive to switch.
2. Provide even larger grants for those struggling with living costs to cover full heat pump install costs if necessary.
3. Provide government backed low cost loans for household energy upgrades.
4. Provide greater support for local authorities to plan and deliver buildings decarbonisation. At the same time coordinate with the new National Energy System Operator (NESO) to understand what the new ‘regional energy system planning’ function of NESO means for heat decarbonisation.
5. Accelerate the decision on the future of the gas grid and the (likely limited) role of hydrogen in heating to provide market certainty.
6. Deliver the required secondary legislation for the Clean Heat Market Mechanism as soon as possible to provide market certainty.
7. Accelerate efforts to reform levies and rebalance energy prices.

April 2024