DHH0040

Written evidence submitted by Energy & Utilities Alliance (EUA)

The Energy and Utilities Alliance (EUA) provides a leading industry voice helping shape the future policy direction within the sector. Using its wealth of expertise and over 100 years of experience, it acts to further the best interests of its members and the wider community in working towards a sustainable, energy secure and efficient future. EUA has six organisational divisions - Utility Networks, the Heating and Hotwater Industry Council (HHIC), the Industrial & Commercial Energy Association (ICOM), the Manufacturers of Equipment for Heat Networks Association, the Hot Water Association (HWA), the Manufacturers’ Association of Radiators and Convectors (MARC).

The Energy and Utilities Alliance (EUA) is a company limited by guarantee and registered in England. Company number: 10461234, VAT number: 254 3805 07, registered address: Camden House, 201 Warwick Road, Kenilworth, Warwickshire, CV8 1TH.

Summary

There are 25.4 million dwellings in England and Wales according to the 2021 census[1] and approximately 23 million homes in the UK are heated by natural gas boilers. In 2023 alone, 1.5 million natural gas boilers were installed into homes with around 60-70,000 heat pumps installed in comparison[2]. The cost of a natural gas boiler today is around £2,500 versus £13,582 for an air source heat pump (other types cost more).

In 2021, government set an ambitious target to install 600,000 heat pumps per year by 2028. It was considered unachievable by industry at the time and is supported by current market trends which clearly show only a slow growth in heat pump installations in the UK, year on year. An eleven-fold increase in heat pump installations from current levels would be required to hit the 2028 government target.

The Energy and Utilities Alliance (EUA) believes that achieving net zero is vital and we think that heat pumps, heat networks, renewable liquid fuels and hydrogen all have a role to play in our decarbonisation pathway. But, we have concerns over the approach adopted and the current trajectory.

We have, for example, long supported a fabric-first approach to decarbonising the UK housing stock. This would deliver immediate rewards with a permanent reduction in energy consumption along with lower bills while enhancing our energy security and reducing our carbon footprint. It would also deliver local jobs across all our communities in the UK.

Energy efficiency

Adopting a fabric-first approach would allow the UK to reduce carbon emissions now while investigating the best approach to fully decarbonising our homes in a fair and affordable manner.  Instead, we are too focused on the low carbon technological appliance and not the fabric of properties.

The installation of energy efficiency measures in homes have plummeted since 2013, and government initiatives such as the Green Deal have been a failure. ECO funding, levied on bills (regressive in nature), delivered via energy suppliers has been used to plug the gap in funding in England.

According to the English Housing survey (2020-21) basic energy efficiency measures are still required in millions of homes – 5 million dwellings need loft insulation installed or upgraded; 4.8 million homes have uninsulated cavity walls[3].

Using the Energy Savings Trust calculator, for an average semi-detached house, loft insulation can save £285/year and 620kgs of CO2; cavity wall insulation £300/year and 650kgs of CO2. That equates to an overall bill reduction of £1.4 billion for just insulating lofts, saving 3.1 million tonnes of CO2.

Solid wall insulation is more expensive to install, according to the EST, around £11,000 v £930 for loft insulation. According to the EHS there are 8.7 million uninsulated solid walls in England, with potential for savings of £3.6 billion on bills, 7.6 million tonnes of CO2 but costing £96 billion to deliver.

Barriers to heat pump deployment

The NAO report is right to highlight that there are considerable barriers to heat pump deployment in the UK but the report’s conclusions provide very few solutions to address the primary issue: heat pumps remain expensive technologies and their uptake will likely be further reduced by the financially difficult period currently being experienced by many.

Data from the Boiler Upgrade Scheme (BUS) in England and Wales reveals the cost of installing a heat pump is rising, not falling. The average cost is £13,582 according to the February 2024 statistics[4], without any of the additional necessary home upgrades such as new radiators, or replacement pipework and the added cost of redecorating rooms affected by the heating switch. This is despite the Heat and Buildings Strategy (October 2021) clearly stating that the ambition was “for industry to reduce the costs of installing a heat pump by at least 25-50% by 2025 and to ensure heat pumps are no more expensive to buy and run than gas boilers by 2030”[5].  Last year’s UK Parliament POST note 699 on heat pumps states that, “large costs reductions are unlikely”[6].

A recent case study from the Department for Energy Security and Net Zero (DESNZ) demonstrated that the cost of upgrading a Victorian property in London to an ‘Eco Home’ with solar PV, battery storage and improved insulation resulted in a bill of circa £41,000[7].

According to work conducted by the heating industry, as many as eight to 12 million homes[8] are not suitable for an economic fitting of a heat pump due to challenges around space and the actual physical construction of the building – for example having solid walls. Contrary to popular belief, insulation is critical to the economic and high-performance outputs of an air source heat pump. It is good to see DESNZ have recognised that there are some limitations to heat pumps and that they are not a one-size-fits-all solution. Prime Minister Rishi Sunak has stated on the record that around 20% of homes will be exempt from installing a heat pump something which was later confirmed by DESNZ Secretary of State Claire Coutinho[9]).

In addition, data from the then-BEIS funded Electrification of Heat trial, published in 2022, suggested that 93% of homes fitted with heat pumps needed new radiators. In addition, 81% of homes required a new hot water cylinder[10]. Hot water cylinders have been slowly but surely ripped out of homes over the past 25 years with the advent of the combi-boiler and the cupboards previously used to sit them in, re-purposed for something else.

There are also the hidden and unknown costs of electricity upgrade to the home (according to UK Power Networks this can be over £6,000 per property). And there is a question over the willingness of the public to make the switch: EUA’s polling over the years has asked consumers “How much, if at all, would you be willing to personally pay to have low carbon heating systems installed in your home?”. Results from July 2023, compiled by Savanta, show the following: - 41% pay nothing; 15% up to £500; 16% up to £1,000; 10% up to £5,000; 3% up to £10,000; 1% up to £15,000; 1% up to £20,000; 0% more than £20,000. Don’t know at 14%.

Other possible solutions to decarbonise our homes include a greater role for hybrid heating systems. For some, they would act as a good transitional technology given, they are primarily fuelled by electricity (via the heat pump system). From a consumer perspective, hybrid heating systems have the benefit of incorporating a technology and a system which people know and understand (the traditional boiler part) and the heat pump which they can get used to over time, allowing for a full heat pump installation in the future. There are emerging new energy tariffs that can help to support this transition.

Renewable liquid fuels and renewable LPG also offer a sustainable alternative for off grid homes to decarbonise quickly, and at a more affordable cost to the consumer. Hydrotreated Vegetable Oil (HVO) has been trialled in 150 homes across the UK in the last two years. The upfront cost of conversion has been c£500[11]. It requires minimal changes to the boiler, no immediate alterations to the fabric of the house, no planning permission or additional building work but still reduces emissions by up to 88% compared to traditional kerosene heating oil. Industry has the equipment, support and a workforce able to apply HVO conversions at scale and maintaining distribution of the fuel through existing channels.

BioLPG, alternatively known as biopropane, is a versatile, ‘drop-in’ renewable solution which can provide up to 90% carbon emissions reduction compared to fossil-based LPG. Already available on the market today, bioLPG is chemically indistinct from LPG and can be used as it is, just like conventional LPG. This means it can be seamlessly ‘dropped-in’ to existing supply chains and can be used by consumers in their existing heating appliances, stored in existing bulk tanks and cylinders without any modifications, and transported using today’s infrastructure and skilled workforce.

It is our strongly held view that if the costs of decarbonising home heating are forced on consumers or they feel coerced to pay the sums involved, the resentment created could jeopardise the whole net zero agenda.

Retrofit schemes including the Boiler Upgrade Scheme

Government backed retrofit schemes to widen consumer knowledge and increase heat pump uptake have had a chequered history – either being overly bureaucratic or poorly targeted. The Green Deal, Green Homes Grant and similar derivatives all failed to capture the attention of consumers. Flaws in the thinking, identified by industry, were largely ignored. The only really successful scheme in the past 15 years has been the Boiler Scrappage Scheme, which was delivered by the UK’s heating installer workforce and was bureaucracy light and therefore consumer friendly.

The latest iteration, the taxpayer funded Boiler Upgrade Scheme, has already highlighted that heat pump costs are increasing and serves only to provide an effective tax cut to those who can already afford it by handing out a £7,500 grant. By definition, only those consumers who can afford to pay the remaining £6,000 minimum to top up the grant can participate. According to the Resolution Foundation, some 11.2 million working-age people in Britian have savings of less than £1,000[12] and 40% of the UK population have less than £2,000 in savings[13].

Uptake of heat pumps via the BUS remains stubbornly low given the size of the taxpayer funded grant which had to be increased from £5,000 to £7,500 in October 2023 due to the lack of installations which saw over half of the £150 million allocated budget returned to Treasury after year one of the scheme.

Data from the BUS clearly highlights the inequality and disparity driven by the government-backed retrofit scheme. Voucher redemptions are almost universally focused in more wealthy, sub-urban or rural retreats. Westmorland and Furness, for example, has the highest proportion of heat pumps to people (77.75 per 100,000 people) in the entirety of the north-west. Blackburn and Blackpool, by contrast, are the lowest with 2.57 and 2.83 heat pumps per 100,000 people respectively. They are followed by Liverpool, Burnley, Hyndburn and Oldham.

Cornwall with 754 installations through the BUS has received more voucher redemptions than anywhere else in England and Wales and homeowners here have benefited more from taxpayer’s money than the whole of the Birmingham metropolitan area combined which has had just 216 heat pump installations via the BUS, despite its near 3 million population to Cornwall’s 575,000 residents. One in six heat pumps via the BUS are being installed into self-build homes.

It is clear that the BUS is giving those people in better off socio-economic areas a £7,500 tax cut at a cost to those people living in more deprived areas. The BUS is a grossly unfair and inadequate scheme, allowing those with second homes to take advantage of the benefits of installing a heat pump while accessing free money to help them do it when many will already have the fiscal head room to buy a heat pump without the government grant. The benefits of the BUS to the UK’s decarbonisation efforts are extremely limited given that the grant is not large enough for many consumers; residents in many urban areas are simply not accessing it; and the scheme is costing via general taxation those very same people in lower socio-economic areas who we should be trying to help more with grants etc to decarbonise. In its current form, this is not a scheme which is helping to decarbonise our housing stock.

We have undertaken our own research to ascertain whether it would be financially sensible to replace a gas boiler with a heat pump as a consumer[14]. Our report found that replacing a gas boiler for a heat pump in homes with solid walls could not be economically viable even with the BUS grant, zero rate of interest and a seasonal coefficient of performance (sCOP) of 6.0. This means policymakers should rule out the use of heat pumps in these dwellings.

For other homes, the required sCOP needed to break even financially is 4.7 but very few heat pumps in the UK currently achieve sCOPs this high. To make the spending decision financially rational to install a heat pump, we estimate that the BUS grant would need to increase to £12067 (when the boiler has broken) or £14567 if a fully functioning boiler was to be replaced along with any energy efficiency improvements deemed necessary for the heat pump to run to its optimal performance.

Installers and skills

EUA has alerted DESNZ to our concerns over the lack of trained installers to fit heat pumps and this is born out in Ofgem’s annual report of the BUS as just 1,005 installers signed up for an account and the top 30 installers were responsible for 6,001 (38.1%) of applications[15]. Given that (on average), it takes three to four days to complete each installation, there are simply not enough qualified and certified installers of heat pumps even if there was consumer demand.

This is further exacerbated as there is no consistent approach by government towards the required accreditation for heat pump installers. For any heat pump installation that is subsidised or funded by government, such as the BUS, the installer must be Microgeneration Certification Scheme (MCS) certified. This requirement does not exist for non-government funded installs. Requiring all heat pump installs to be undertaken by MCS (or equivalent) accredited installers would increase their numbers, giving consumers greater protection and helping to enhance the reputation of heat pumps to a sceptical consumer base.

In practical terms, the UK’s entire heating workforce will have to fundamentally shift in nature if government pursues a heat pump only policy. The era of solo engineers will be over, and it will likely need to be more big company driven. There are around 130,000 engineers on the Gas Safe Register today, and only 1,600 MCS accredited companies.

In the Heat and Buildings Strategy, DESNZ claimed that targets can be delivered with 12,400 heat pump installers by 2025 and 50,200 by 2030. Under scrutiny, these numbers are Full Time Equivalent not the total number of real installers. The assumption is that heat pump installers will only fit heat pumps and not engage in the range of work undertaken by the current cohort of 130,000 Gas Safe Registered heating installers – such as plumbing jobs. The consequence is to seriously underestimate the labour force required to deliver their strategy. HHIC, at the request of DESNZ, calculated the UK needs 150,000 trained installers to meet the 600,000 heat pumps by 2028 target[16], compared to the 33,000 FTE backed by DESNZ.

Given the low uptake of heat pumps through the BUS and the Social Housing Decarbonisation Fund, DESNZ would appear to be somewhat underestimating the numbers of heating engineers needed to meet this government’s stated ambition in 2028.

Given government and industry do not agree on the figures required to install 600,000 heat pumps by 2028, it is clear that the training and qualification arrangements are not fit for scaling up. Existing heating engineers will need to be upskilled, resulting in expensive and time-consuming training with no real guidance on who will be expected to pay for it.

We believe that recognised accreditation, such as MCS, should apply to all heat pump installations, not just those for government-funded schemes.

The future of the gas network?

The NAO report was also right to highlight the potential consequences of decommissioning parts of the gas network if/when natural gas is no longer used or required. We currently have a circa £90 billion pound asset underneath our feet which will be slowly turned off in an all-electric future.

Given gas networks are regulated monopolies which depend on private investment to fund on-going operation and maintenance, there is a very real scenario where streets are literally turned off from the gas network overnight with those able to afford the switch to heat pumps being able to continue to heat their home and those consumers unable to afford a heat pump left behind in the cold. There seems to have been no thought given as to who will pay for the gas networks to continue in service (if at all) with a decreasing customer base trapped by the costs of switching to an alternative low-carbon heating source.

As of June 2023, DESNZ stated that it has a limited understanding of the costs and indeed feasibility of decommissioning the gas network[17]. This is an urgent issue which needs to be addressed to ensure there is a plan in place to support customers unable to cope with the costs of an all-electric energy transition. We believe hydrogen has a role to play in filling this gap which would allow the gas network to continue to operate as it largely is today.

Research undertaken by Savanta in July 2023, on behalf of EUA, showed that 58% of those asked believe it is important to maintain both gas and electricity connections to homes, compared to 11% who do not think it is important. (23% responded neither important or not, 8% did not know).

In the same research, by a margin of 60% to 8%, consumers supported a policy of ensuring all future gas boilers should be capable of using a low carbon gas (e.g. hydrogen). Again, supporting the idea of establishing the infrastructure and framework for the networks, but allowing consumers to choose whatever technology to suit them.

We are therefore disappointed that DESNZ chose not to mandate hydrogen-ready boilers from 2026 – something the CCC suggested would be a ‘no regrets’ option[18] – as it effectively delays our transition to net zero if the strategic decision on hydrogen, slated for 2026, is given the green light. At the current replenishment rate of natural gas boilers per year, around 22 million could be ready for a low carbon switch over to hydrogen by 2040. Our members have already confirmed with government that hydrogen-ready boilers will be priced the equivalent of a natural gas boilers, so the consumer is protected from price hikes.

The conversion from a hydrogen-ready boiler burning natural gas to hydrogen (zero carbon emissions at this point) takes minutes (government has set a maximum of two hours) and facilitates an area by area switch similar to the conversion from Towns Gas to natural gas in the 1960s.

Solutions

We need a common-sense approach to net zero which involves keeping all of our low-carbon options on the table for as long as possible.

• Energy efficiency should be the number one tool to improve energy security, reduce bills and cut energy consumption. Successive governments have ignored its importance, but energy efficiency is the first step in creating a successful net zero home.

There remain significant barriers to heat pump uptake and while costs remain high (or continue to rise), heat pump market share vs natural gas boilers will remain low.

• Data from grant schemes such as the Boiler Upgrade Scheme show they are poorly targeted and doing very little to actually help us decarbonise much of our existing housing stock while widening existing economic and social divides. We urgently request that DESNZ re-evaluate the scheme and base it on fairer aspects such as overall household income etc. As of today, there is very little evidence to financially support moving from an existing gas boiler to a heat pump unless grant levels increase and sCOP dramatically improves.

Failure to focus on the practical elements of the net zero transition will result in us not meeting our targets on time.

• Industry does not believe enough heating engineers are being trained to meet 2028 or 2030 heat pump targets, even if there was consumer demand. Depending on the direction of travel chosen, the energy transition may demand a fundamental shift in the way the heating industry has worked since its inception with the end of individual engineers on the Gas Safe Register going around the country in white vans fixing heating appliances. There needs to be greater clarity around the numbers required and who is responsible for training the net zero workforce of the future.

We do believe that government should ensure the necessary infrastructure is in place to allow innovation to flourish and local solutions to be harnessed.

• For example, providing the backbone of fully decarbonised power and gas networks across the UK, serving the vast majority of homes and allows innovative technological solutions to home heating to be established.

Government has accepted that not all homes are suitable for a heat pump but has cancelled the scheduled hydrogen village trials which reduces the evidence base to make a proper and considered decision on hydrogen in 2026.

• We know that many industries and businesses are relying on hydrogen to decarbonise and therefore some parts of the existing gas network will be required in the future, but there need to be enough consumers to ensure the network pays for itself. And conversely, who picks up the bill for maintaining a declining asset to a reducing consumer base?

We fundamentally believe that consumer choice is at the heart of any just energy transition.

• This will see a mixture of low-carbon technologies deployed right across the UK, whether it be heat pumps, heat networks, hydrogen or alternative renewable liquid fuels, helping us to reach our net zero goals.

April 2024