PMP0044

Written evidence submitted by EDF

Summary and Introduction

1. EDF is the UK’s largest producer of low carbon electricity. We operate low carbon nuclear power stations and are building the first of a new generation of nuclear plants. We also have a large and growing portfolio of renewables, including onshore, offshore wind and solar generation, as well as coal and gas stations and energy storage. We have around five million electricity and gas customer accounts, including residential and business users. EDF aims to help Britain achieve net zero by building a smarter energy future that will support delivery of net zero carbon emissions, including through digital innovations and new customer offerings that encourage the transition to low carbon electric transport and heating.
2. EDF welcomes the opportunity to provide evidence to the Environmental Audit Committee. As a proven source of efficient, low carbon heat, heat pumps should form a major part of any heat decarbonisation strategy.  EDF has direct experience of marketing and providing heat pumps to our customers – today we are offering customers both full air source heat pumps (benefiting from the Green Homes Grant Scheme) and heat pump-based hybrid heating solutions for the off-gas grid (benefiting from assignment of rights under the Renewable Heat Incentive - RHI)[1].

3. Today, however, heat pumps are not economic for consumers in most circumstances without the support provided by government interventions. EDF supports the government proposal to replace the complex RHI scheme with a much simpler up-front grant. However, the scale of the proposed new programme at £50m per annum for only two years is too small to have a real impact on the heat pump market and the exclusion of hybrid systems from this and the Green Homes Grant scheme runs counter to the major role these systems could play in the decarbonisation of heat.  

4. In addition, imbalances in the allocation of policy costs between electricity and gas represent a substantial market distortion – adding several thousand pounds to the lifetime cost of a domestic heat pump compared to a gas boiler.  Measures to address these imbalances should include the gradual introduction of carbon taxation onto gas consumption, as well as wider moves to equalise policy costs between gas and electricity. 

5. Regulatory interventions can also help to grow the heat pump market.  Heat Pumps will be the best low carbon approach for most new homes and buildings, and for existing buildings in the off-gas grid, but regulations driving adoption are needed.  For the many existing on-gas grid buildings, a strategy involving more support for the adoption of hybrid heat pump systems could have significant attractions.  As hybrid systems can reduce gas consumption by up to ~80%, this would be a pragmatic approach allow substantial progress to be made in the near-medium term, markets to grow, costs to fall and customer and industry experience of the technologies to be enhanced.  It would retain flexibility to determine the ultimate balance between electrification and low carbon hydrogen based on the evolution of technologies and costs in coming decades. 

6. Skills programmes and communication campaigns will play a valuable role in supporting heat pump adoption.  However, they will only be effective in conjunction with changes to policies, funding streams and policy cost allocations which will facilitate a growing market for heat pumps, enabling attractive consumer propositions to be developed, and cost reductions from economies of scale to be realised.

Main Response

Q1 - What steps can the Government take to increase uptake of heat pumps?

7. Over the past decade the heat pump market has seen new installations running at a low level of around 20,000 per annum (pa), with a modest rise in installations to around 30,000 pa in 2018 and 2019.  Most of these installations are air source heat pumps.  Installation volumes represent less than 2% of the approx. 1.6m new gas boilers which are installed every year in the UK.

8. Today heat pumps are not an economic proposition for consumers in most circumstances without additional support provided by government interventions. Heat Pump installations over the past decade have been supported by the Renewable Heat Incentive (RHI).  While the scheme is relatively generous in the scale of financial support it provides, public awareness of the scheme is very low, it is administratively complex to apply for, and it provides no up-front contribution to the costs of the heat pump, which is typically several times more expensive than a typical gas boiler.  As a result, adoption of the scheme has to date largely been limited to affluent homeowners who have sector knowledge and can afford the high up-front costs of a heat pump.

9. For these reasons EDF has supported the government’s proposal to replace the RHI, from April 2022 onwards, with a Clean Heat Grant scheme, which will offer a simple up-front grant. In principle such a scheme has the potential to provide a much more attractive proposition for consumers, installers and heat pump providers.  However, the government is proposing to fund the new scheme only to the level of £50m pa for 2 years.  At the proposed level of grant this modest scale of funding will support only around 12,500 installations pa, less than current adoption levels.  It is therefore very unlikely to deliver growth in the market for heat pumps or allow economies of scale in heat pump supply and installation to be realised.

10. The government is also proposing to exclude hybrid heat pump systems from support under the new scheme, although they are currently supported by the RHI.  EDF believes this is misguided, given the important strategic role that hybrid heat pump systems could play in the decarbonisation of heat – see our response to Q4 below. 

11. While the recent inclusion of heat pumps within the Green Homes Grant Scheme is a welcome development, this is a temporary programme with a limited life and hybrid systems have also been excluded from support under this scheme.  Greater long-term ambition in the scale of support for heat pumps is essential if the potential of the technology to support the decarbonisation of heat is to be realised. 

12. In addition, the business case for heat pumps would be substantially enhanced if steps were taken to address the large imbalances which currently exist in the charging of policy costs (the costs of carbon pricing and other policy schemes, mainly for environmental purposes) between gas and electricity.  Today, these policy costs are levied mainly on electricity and very lightly on gas.  To illustrate, for a typical residential consumer using gas for home heating, EDF estimates that more than £160 pa of the electricity bill is composed of policy costs and environmental levies but only around £20 pa of the gas bill. A customer using an efficient low carbon electric heat pump instead of a gas boiler would pay an additional ~£210 pa in policy costs. 

13. These imbalances add several thousands of pounds to the lifetime cost of the heat pump and so represent a major negative impact on the business case for switching to a lower carbon option.  The same issue arises for most commercial and industrial organisations, who also pay large policy costs on electricity and so are not incentivised to switch away from fossil gas. 

14. There is a compelling case for addressing these imbalances, albeit on a gradual basis to avoid sudden cost impacts on energy customers.  EDF favours:

• An early move to place the costs of the ECO energy efficiency scheme exclusively onto gas bills. 

• The gradual introduction of a carbon tax on fossil gas consumption in domestic and commercial settings – rising over time in line with levels needed to promote fuel switching and net zero objectives.  The absence of any carbon pricing on gas consumption is a clear existing market distortion which needs to be addressed. 

• At least some of the costs of future schemes to decarbonise gas, or promote low carbon hydrogen to displace gas, should be charged to gas consumption.

15. Through its ongoing net zero review HMG should also review the overall balance between energy consumer and taxpayer funding of decarbonisation costs.  Energy consumers already bear a significant burden of policy costs and this has implications for fuel poverty in residential sector and industrial competitiveness in the business sector.  It is unlikely to be desirable to place all the future costs of decarbonisation on energy consumers.

16. The combination of more widely available grant support, along with measures to address policy cost imbalances, would go a long way to grow the market for heat pumps.  EDF estimates that, with equalised policy costs, heat pumps and hybrid heat pump systems could become economic today for most customers on a full lifetime basis with a grant of a similar size to that currently offered for the purchase of electric vehicles.  Over time, with a growing market and economies of scale, the size of per installation grant support could be significantly reduced.

Q2 - How can we ensure that the regulatory frameworks in place work together to guarantee heat pumps are used in the most effective places, alongside other technological solutions?

17. Regulatory frameworks can play an important role in supporting the adoption of heat pumps in a range of markets. In 2019 the Government announced its intention to mandate the end of fossil fuel heating systems in new homes from 2025.  EDF supports this measure: for new build homes, electrification is a proven efficient option which, when combined with high insulation levels, can comfortably meet all building heat requirements and should be the default approach for new homes sold after 2025. For some smaller new homes, electrification through direct electric heating may be appropriate, for larger homes and buildings a heat pump would likely be the best option.  It is important that the government now moves quickly to implement this future home standard and clarifies how it will operate.  While low carbon hydrogen may well play an important future role in decarbonising heating (see our comments on Q4), it would be a mistake to dilute the early impact of this new homes standard by allowing compliance simply through the installation of “hydrogen ready” boilers – it will take many years to grow the market for low carbon hydrogen and in practice this could perpetuate the consumption of fossil fuel gas in new homes for an indefinite period.    

18. For off-gas grid homes and buildings, electrification through full electric heat pump or hybrid heat pump systems is the optimal approach, given the large costs associated with extending the gas network.  However, a regulatory framework, alongside the financial measures mentioned in our response to Q1 above, will be needed to drive the gradual replacement of fossil fuel heating systems with electric ones in off-gas grid locations.  EDF considers that the Sustainable Energy Association’s proposal for a carbon intensity standard, applicable to all new heating installations in the off-gas grid, has merit and should be considered further[2].  In addition, steps should be taken to suspend the extension of the gas grid into new areas – with alternative lower carbon electric heating options available for off-gas grid areas, increasing the penetration of fossil gas into the UK heating system runs contrary to the objectives of net zero.  

19. In addition to domestic properties, larger scale heat pumps can also be used in commercial and public sector buildings, or as part of heat networks.   Government should ensure that its policies relevant to these sectors encourage the adoption of heat pumps and provide appropriate financial incentives. 

20. In combination the above regulatory measures would significantly increase the market opportunity for heat pumps. Other more detailed policy changes would also support heat pump adoption – notably:

• The EPC assessment process used during the sale of properties should be amended. At present there is no element in the process which provides a focus on lower carbon heating options and no credit is gained in the scoring matrix which arrives at an EPC rating for the presence of a heat pump or hybrid heating system.   

• The Standard Assessment Procedure (SAP) - the methodology used by the Government to assess and compare the energy and environmental performance of dwellings - and which is used to underpin the delivery of several energy and environmental policy initiatives including Buildings Regulations – needs to be much more regularly up-dated to reflect the rapidly falling carbon intensity of electricity generation.  While SAP is now in the process of being up-dated, for most of the past decade a very out-dated 2012 figure on the carbon intensity of electricity generation has been used, thereby significantly understating the scale of carbon emissions savings which would arise from the adoption of efficient electric heating in the form of heat pumps.

Q3 - What steps can be taken to lower heat pump installation costs? 

21. The most effective measure to lower heat pump costs would be the economies of scale and greater expertise in installations which a larger market for heat pumps would deliver. A study commissioned by the government in 2016 suggested that total heat pump costs would fall by around 20% in the event of a mass market, thanks to a combination of ~40-50% cost reduction in non-equipment (e.g. labour/installation) costs, and up to a ~10% cost reduction in equipment costs including the cost of the heat pump itself [3].

22. These are likely to be conservative estimates of the scope for cost reduction, in our view.  While heat pumps are a mature established technology, it is well established from many sectors, including with respect to a range of low carbon technologies, that volume purchasing and growing markets can deliver significant cost reductions.  Moreover, as the 2016 study notes, “there is high technical potential to increase efficiencies and identify lower cost materials for heat pumps – but it has to make business sense for manufacturers to invest in the necessary R&D”. Growing UK and international markets for heat pumps will assist in this process.  Government innovation programmes should include calls for research on improving heat pump performance in key areas such as efficiency, cost and noise – incremental improvements in these areas will all contribute over time to the attractiveness of heat pumps for consumers.  

Q4 - What role should gas or hybrid heat pumps play in helping the UK reach the target of net zero emissions by 2050?

23. We noted in our response to Q2 that heat pumps are especially well suited to new homes and buildings and those off the gas grid.  However, the majority of UK residential and many small commercial properties are existing on-gas grid properties (over 20 million) where heating needs are currently met by gas boilers.  Strategic decisions are needed on the preferred approach to decarbonisation of these buildings. 

24. As a proven and efficient source of low carbon heat, electrification should form a major part of the heat decarbonisation strategy for existing homes and buildings. However, a full electrification strategy is likely to bring challenges in terms of the scale of generation and network capacity needed to meet peak heat demand.  An advantage of low carbon hydrogen is its greater ease of storage, and therefore ability to contribute to meeting peak heat demand with hydrogen produced during periods of lower demand.  However, a full hydrogen approach to decarbonising heating also raises major questions around costs and the scale of hydrogen infrastructure and production capacity which would be needed to satisfy an extremely large demand for low carbon hydrogen. 

25. EDF therefore considers that a mixed approach, with substantial electrification alongside widespread deployment of low carbon hydrogen, is likely to represent the optimal “whole system” solution for the GB energy system. For the mass of existing on-gas grid properties  this would imply that hybrid heat pump systems could play a valuable role in the near-medium term with the following additional advantages:

• Greater deployment of hybrid heat pumps would allow substantial progress to be made in emissions reduction from existing homes and buildings over the coming decade.    A well-designed smart hybrid system can meet up to 80% of heat demand from the efficient electric heat pump and therefore reduce emissions by a similar percentage given an increasingly decarbonised power system.

• Our experience of marketing to customers indicates hybrid options are often likely to be more attractive for many homeowners – as they enable gas to be retained for home cooking and peak heating requirements.  This reduces customer concerns about the impacts of switching to a new technology and can also avoid the need to install some of the more extensive energy efficiency measures which might be required for a full heat pump only system.

• Hybrid heating systems can be managed flexibly to support the operation of a smart energy system, helping manage peak demands and system frequency.

26. A hybrid approach could therefore be a pragmatic way forward which allows progress to be made, markets for heat pumps and low carbon hydrogen to grow, costs to fall and customer experience of the options to be enhanced. At the same time, it retains flexibility to determine the ultimate balance between electrification and hydrogen based on the evolution of technologies and costs in these areas in coming decades. 

27. Some question marks have been raised about the case for a hybrid approach as it requires the retention of two systems and networks (electric and hydrogen) for heating and two kinds of device (heat pump and boiler) within any building using a hybrid system.  However, there is in fact limited evidence that the two systems approach would be more expensive or sub-optimal either for the home owner or the energy system. For many home-owners, a hybrid system will enable the heat pump to be reduced in size, lowering costs and reduced use of the gas boiler means reduced wear and tear and extended life.  Hybrid heating systems can also be managed flexibly to support the operation of a future energy system, helping manage peak demands and system frequency – a smart flexible approach which will be facilitated by greater penetration of smart meters and could be supported by stronger carbon pricing.  At the energy system level, whole system analyses have indicated that hybrid options combining electrification and low carbon hydrogen can be cost comparable or more cost effective than full electrification or full hydrogen options[4]    This reflects the greater flexibility of the hybrid option as well as the reduced need to invest in networks, generation and hydrogen production capacity.

Q5 How can the Government tackle the current skills gap for designers, builders and installers of heat pumps?

28. There is today a limited pool of people with relevant skills in the installation of heat pumps and the overall design of heat pump based low carbon heating solutions for homes and businesses.  In their 2019 paper, “Delivering Net Zero: A roadmap for the role of heat pumps”[5] the Heat Pump Association address a range of detailed points around how the skills base for heat pump design and installation can be developed. New dedicated skills programmes in this area could be welcome. However, as the Heat Pump Association observe in their paper, to be effective any such programmes need to run alongside confidence in a growing market for heat pumps.  With such confidence, companies will invest in the training and skills development needed to take advantage of new opportunities and individuals with relevant experience (e.g. those currently installing, servicing and maintaining gas boilers) will be motivated to retrain for the heat pump market.  Conversely, without such confidence, individual skills programmes are unlikely to attract many permanent recruits into the industry or achieve a lasting impact.   

Q6 How can public awareness of heat pumps be improved?

29. There is currently low public awareness of the need to decarbonise heating and the implications of this for the long-term use of boilers for home heating fuelled by natural gas.  Government must play a major role in this area through its communications and public statements.  Energy companies can also contribute very significantly to this process through their interactions with customers and their marketing material and EDF is very keen to play its part in promoting heat pump opportunities to our customer base.  However, for such communications to be effective, there is a clear need for a long-term policy and regulatory framework which allows attractive consumer propositions to be created.  The prerequisite at this stage is therefore additional policies, longer term funding arrangements and changes to the allocation of policy costs between electricity and gas, such that heat pumps and hybrid heat pump systems can become a credible whole life economic proposition for a wide range of domestic and commercial customers.  See our responses to earlier questions for how this can be achieved.

November 2020