Written evidence submitted by E.ON UK (DHH0043)

Executive Summary

1. E.ON has been at the cutting edge of delivering significant reductions in the UK power sector’s carbon emissions, investing billions of pounds in renewable energy projects over the last twenty years.  This has been driven by a long-term stable policy framework, initially supported through subsidies and complemented by long term regulations which has driven innovation, cost reduction and a decreasing dependency on subsidy.  The challenge is to replicate this success in decarbonising the heat sector.
2. The Government should take account of the recent report by Climate Assembly UK[1].  This highlighted the need to develop solutions to climate change that are fair, and for the Government to provide strong and clear leadership to forge a cross-party consensus that allows for certainty, long-term planning and a phased transition.
3. In the 2020s, the Government must deliver a suite of policies and enablers that allow markets to scale up deployment of low carbon heating technologies.  This should include minimum energy efficiency standard targets for all homes, mandatory building renovation passports, a ban on gas connections in new homes, a clear phase out date for replacement oil and gas boilers, and tax incentives including a carbon price for fossil fuel heating.
4. A supportive financial framework is essential, with grants aimed at incentivising early take-up and ongoing support provided through green finance options.
5. The focus for the 2020s should be on shovel ready low carbon heat pumps, hybrid heat pumps and heat networks whilst options around hydrogen continue to be developed.  There must be no delay in implementing Part L building regulations and the 31% uplift to energy efficiency standards for new homes, and to reducing carbon emissions from new homes by at least 80% compared to today’s requirements from 2025. 
6. We believe that the fairest approach to distributing the cost of heat decarbonisation is to apply a carbon price to heating fuels.  The monies raised from applying this carbon tax should be used to take legacy policy costs off the electricity bill which will help to protect vulnerable customers as well as incentivising a switch to low carbon electrical based heating.
7. Consumer engagement and inclusion is critical for a successful transition to low carbon heating.  Building trust between consumers, communities, industry and Government is also fundamental.  Homeowners need to hear a consistent message and feel they can rely on what they are being told.  Advice needs to be clear and credible, and those offering products and services must be competent and reliable. 
8. Strong, clear leadership from central Government in setting the strategy and framework for heat decarbonisation is essential.   Delivery should be at the local level, informed by a ‘zoning’ approach to ensure that the right solutions are focussed on for local areas, with coordination and alignment with national targets undertaken by a national delivery body.

About E.ON

9. E.ON is one of the largest energy companies in the world focussed on clean growth.  We have over 70,000 employees across 15 European countries, more than 54 million customers and operate c1.5 million km of energy networks. 
10. What we do reflects the key emerging trends of the decentralised, digital and renewable new energy world – smart energy networks, innovative customer solutions, renewable energy and, at the heart of it all, our customers.
11. Support for the UK target to reach net zero is fundamental to E.ON’s strategy.  We have been investing in and building renewable energy projects since the 1990s and, in the last decade alone, we have invested more than £2.5 billion into renewable energy in the UK.   We no longer operate any large-scale fossil fuel power stations and, since June 2019, we have supplied 100% renewable electricity to all our residential customers. 
12. E.ON aims to change people's lives for the better by taking the expertise we have gained in helping to decarbonise power generation and using it to support the decarbonisation of heating and transport. Our focus is on personalised and sustainable customer solutions. 

Question 1

What has been the impact of past and current policies for low carbon heat, and what lessons can be learnt, including examples from devolved administrations and international comparators?

13. Improving the energy efficiency of buildings, including homes, is a fundamental first step to decarbonising heating and is why we believe it must become a National Infrastructure Priority.  However, the UK has only scratched the surface of what is needed.  The last decade has seen a significant drop in funding for supplier obligations and the rate of loft and wall insulation has fallen to just 5% of peak market delivery in 2012[2].  Furthermore, the abandonment of the Zero Carbon Homes policy in 2015 means that homes have continued to be built without measures needed to reach net zero.[3]
14. With the Energy Company Obligation (ECO) focussed on vulnerable customers, there are many households with little financial incentive to invest in energy efficiency, particularly in the owner-occupied sector.  Policies are urgently needed that will galvanise action.
15. The minimum energy efficiency standard (MEES) regulations, introduced in 2018, require homes in the private rented sector to be at least EPC band E in order to be let out.  Whilst MEES is a first step for introducing regulations to put the private rented housing stock on the path to meet net zero, its effectiveness to date has been limited by both the low ambition and the ability of local authorities to enforce them. We are nevertheless pleased that the current consultation on raising PRS minimum standards to EPC C by 2025 for new tenants and 2028 for existing tenants will help to support deployment of both insulation and lower carbon heating solutions to meet these tighter standards.  It is important this is matched with an improvement on compliance and enforcement.
16. The Renewable Heat Incentive (RHI) has arguably been one of the main policy levers to support deployment of low carbon heating. However, the scheme has been unable to support large scale deployment.  By September 2020, only around 82,000 heating systems had been installed[4], which is far below the 513,000 originally targeted when the scheme opened in 2014.
17. With the upfront costs of the heating system having to be paid by the householder, access has been restricted to wealthier households and the scheme has done little to increase demand beyond that of an existing niche market.  The introduction of assignment of rights[5] in June 2018 has opened the door to more households potentially being able to afford a renewable heating system but, with the scheme due to end in March 2022, there is little time for this to have a significant impact.
18. We are pleased that the successor to the RHI, the proposed Clean Heat Grant (CHG) scheme, will replace annual tariff payments with an upfront capital grant.  However, the proposal to set a flat rate of £4,000 means that the overall support for customers is significantly less generous compared to the RHI and risks stalling deployment if the level is not reviewed.  We also believe that the CHG scheme should support hybrid heat pumps as well so that we can start to help on-gas grid customers transition to a lower carbon heating system.
19. Government and industry must work together to capitalise on the consumer interest generated by the recently launched Green Homes Grant (GHG) so that public awareness about investing in lower carbon solutions, such as heat pumps, can grow.  Furthermore, the scheme must be part of a longer-term strategy if it is to play a meaningful role in decarbonising the UK’s homes and not repeat the failings of the Green Deal Home Improvement Fund (GDHIF) which was short-lived, created a boom/bust effect and showed that, without further action, demand will disappear once the scheme is over.
20. The use of regulation to influence behaviour and engaging consumers at ‘trigger points’ are two learnings drawn out by Citizen’s Advice in their recent paper ‘Lessons for Net Zero’[6] which identifies lessons learned from previous energy efficiency and low carbon home improvement schemes. 
21. Making the customer journey simple is also important.  Customers must be able to access relevant information and act on it, for example by having a choice of qualified installers to approach for quotes. To this end, we believe that the Home Upgrade Grant (HUG) scheme included in the Government’s manifesto should combine the concepts of the GHG and CHG in order to simplify the support framework for customers. 

Devolved Administrations

22. The devolved administrations in both Scotland and Wales have put additional funding towards energy efficiency.  With these funds being able to blend with GB-wide energy efficiency schemes like ECO, more properties that are harder to treat and require more expensive measures have been able to benefit from energy efficiency improvements.
23. The CCC estimates that around 8m of the homes requiring energy efficiency retrofit in the UK are solid wall properties that are harder, and therefore more expensive, to treat.  As such, it will be increasingly important for funding sources to work together to be able to bring all the UK’s housing up to the levels of energy efficiency required for heat decarbonisation. This principle should be part of future policy design, including ECO 4, which is due to start in April 2022.

Lessons from other countries

24. With a high proportion of homes reliant on gas for heating, the Netherlands has a similar starting point and similar challenges to the UK.  However, the country is further ahead than the UK in making progress on heat decarbonisation with the Government there having already voted to ban gas connections in new build homes.  As a result, heat pumps have quickly become the preferred technology in new build homes.
25. The Dutch Government has also committed to a gradual transition away from gas by actively disconnecting 30,000 to 50,000 homes per year until 2022, from which date the process will be accelerated to 200,000 homes a year by 2030.  This complementary approach for both new build and existing homes provides a framework for how the country will progress towards its 2050 targets.
26. Local ‘Heat Transition Vision’ plans, akin to local area energy plans, will set out the direction for heating at the local level and will provide more insight into how natural gas use might change throughout the 2020s.  This should inform the UK’s approach, with central Government setting the goals and policy framework and local areas responsible for delivery.

Question 2

What key policies, priorities and timelines should be included in the Government’s forthcoming ‘Buildings and Heat Strategy’ to ensure that the UK is on track to deliver Net Zero? What are the most urgent decisions and actions that need to be taken over the course of this Parliament (by 2024)?

27. The scale of the heat decarbonisation challenge is clear, with fewer than 500,000 homes currently having some form of low-carbon heating[7] and the vast majority of new build homes still being connected to the gas grid. [8]   The low carbon heating market will need to grow from one that is delivering around 30,000 systems a year, to one which is able to replace fossil fuel boilers.  As noted above, this currently comprises around 1.6 million gas boiler installations per year (and 80-100k oil or LPG boilers).  Low carbon heat networks also have a vital role to play in achieving net zero, particularly in helping housing developers meet tighter emission standards from 2021.  
28. The Heat and Buildings Strategy (HBS) should set out a clear trajectory to achieving net zero by 2050 and a coherent set of policies that will deliver this.  This must involve a comprehensive framework of regulatory standards, planning policy and tax incentives, particularly around carbon and VAT, and the removal of policy costs from the electricity bill which is distorting the low carbon heat market.  Alongside this framework, there will need to be complementary, short-term financial support mechanisms to pump-prime the market and help the supply chain to gear up, innovate and be suitably ready for a large scale roll out plan during the 2020s. 
29. The HBS should have, as a core principle, the fact that a mix of fuel sources and technologies will be needed to decarbonise buildings and that progress will need to be made at different paces in different areas. Local authorities will need to play a key role in identifying and driving heat decarbonisation solutions and the HBS should empower them to do so.  The ADE have referred to the approach of ensuring that the right solutions are focussed on for local areas as ‘zoning’.  Zoning can help to drive investment by creating a clear pipeline of opportunities for different technologies and interventions, thereby developing local supply chains, jobs and skills.

Regulatory standards

30. The proposals to tighten the MEES regulations to EPC band C by 2025 / 2028 are a bold move in the right direction.  It is also positive that the consultation will look at how to encourage compliance with the regulations and explore practical ways to strengthen enforcement.   This must now be put into regulations so landlords can plan when they are going to upgrade their buildings. Improving all PRS properties to EPC band C would deliver c.6.1 MtCO2e of savings for Carbon Budget 5.
31. The policy gap in the owner-occupied sector needs to be addressed as a matter of urgency to give clarity and certainty to homeowners about the changes that will be required to homes during the 2020s and give them time to plan ahead.  The trajectory for minimum standards in owner occupied homes should align with the PRS regulations, requiring EPC band C from 2025 at identified trigger points with a backstop date of 2028. 
32. Homeowner engagement in energy efficiency has been boosted as a result of the GHG scheme.  Combining access to funding now and for the duration of this Parliament (as we have set out above) with the prospect of an obligation to act in the future would help make such a move more acceptable and bring about a ‘mindset shift’ whereby people would start to plan for when to upgrade their homes.
33. Fuel poor households live across all tenures.  The incidence is highest in the private rented sector (19.4% in England, equivalent to 900,000 homes[9]), although the volume is highest in the owner-occupied sector (c.1.2m homes in England).  The proposals for tightening the PRS regulations therefore provide a framework for taking around half of these homes to EPC band C.  ECO3 (due to end in March 2022) is specifically targeted at low income, vulnerable and fuel poor households.    We believe that the budget of the next obligation scheme should be doubled to £1.3bn with the additional funding being provided by Government, consistent with the principles of delivering a fair transition.  A larger scheme would be able to increase the amount of support provided to vulnerable customers.
34. New build homes must to be built to stricter standards to mitigate the need for more expensive retrofit in the future and to put the brakes on the number of homes requiring retrofit continuing to grow.  We support the government’s proposal for a 31% uplift in energy efficiency building regulations standards from 2021 which would future-proof homes for low carbon heating systems.

35. There must be no delay to implementing Part L building regulations that would bring in the 31% uplift in 2021 and reducing carbon emissions from new homes, by at least 80% compared to today’s requirements, from 2025.  This is crucial for ramping up the installation of low carbon heating systems such as heat pumps and heat networks.
36. In the UK today, around 85% of homes are connected to the gas grid.  It is clear that, if we are to reach net-zero by 2050, all new heating installations in the retrofit market will need to be low carbon from 2035 at the latest. A ban on new gas boilers from 2030 or 2035 was strongly supported (86%) by members of the Climate Assembly UK. 
37. We believe a regulatory approach with a clear end date for oil and gas fired boilers can help support significant market building for heat pumps (including hybrids) and hydrogen-ready boilers in the UK to drive demand which will, in turn, help to reduce manufacturing costs.  We propose four regulatory stages to help support this:

• Oil-fired boilers sales should be banned by the end of 2023.  This can help prime the heat pump market ahead of the new 2025 Future Homes Standard.
• From 2023, boiler manufacturers should face an (increasing) obligation to sell a minimum amount of low carbon alternative heating systems to customers. 
• Mandate that, after 2025, all new gas-connected boiler installations must be part of a hybrid heat pump system or be ‘hydrogen-ready’.
• By 2035 at the latest, no new natural gas boilers can be sold.

Financial framework

38. There must be a supportive financial framework in place which helps all households finance energy efficiency and low carbon heating measures in a sustainable way.   Grants should be aimed at incentivising early take-up with ongoing support provided through green finance options.
39. As an immediate first step, all low carbon solutions should have a zero rate of VAT applied, which will reduce the upfront cost for customers.  This is supported by the recent report by Climate Assembly UK where 83% of its members supported this approach.
40. The Government should continue to support all homeowners, including landlords, for the duration of this Parliament through HUG, with the ability to blend funds with other schemes so that some vulnerable households can benefit from higher cost measures such as solid wall insulation and air source heat pumps.  HUG should have an annual budget of £3bn a year for the rest of this Parliament.  If £2bn of the annual funding was allocated to the able to pay market, this could support the installation of up to 8,000 new low carbon measures every week.
41. Homeowners, including landlords, should be able to easily take out additional borrowing on an existing mortgage to access finance for energy efficiency improvements and low carbon heating installations.  This is being trialled through the Green Finance Institute’s ‘Add-to-My-Mortgage’ demonstrator project.

Building Renovation Passports

42. We support the introduction of Building Renovation Passports (BRPs), as proposed by the Green Finance Institute[10], which would provide information on what measures are possible for a home and set out a long-term renovation plan that can be achieved at a flexible pace in the context of national targets, supportive policies and regulatory requirements.  This approach is also endorsed by the CCC which noted the importance of home-specific, forward-looking advice to enable homeowners to renovate over time, and to bridge changes in ownership.[11]
43. BRPs would digitally collate all data relating to energy efficiency, carbon emissions and resilience, with a long-term roadmap for improvements. This would ensure that homeowners and landlords knew what they needed to do and could prevent them from wasting effort/time/money on measures that needed to be replaced in the future. 
44. BRPs would also allow buyers and prospective tenants to see what measures have been installed to date, where the property is on its path to zero carbon, and what else would need to be done, by when, helping homeowners comply with legal requirements.  Lastly, BRPs would assist lenders in assessing risk, facilitating lower mortgage interest rates for homes which met or exceeded energy efficiency ratings, for example.
45. We believe that mandatory BRPs should be introduced at sale, major renovation or re-mortgage (including buy-to-let) when the associated cost of having the home assessed would not be a significant additional burden and could be added to the mortgage or home renovation loan. They would work in conjunction with EPCs, providing a tailored pathway and recommendations for achieving energy efficiency improvements and low carbon heating.  Whilst doing some of this work would not be a choice for consumers (i.e. minimum standards will need to be met), how and when (if introduced early enough) could be more within their control.
46. BRPs should work within the context of regional or local area plans for heat decarbonisation.  For example, if an area has been identified as suitable for a heat network then the BRP should factor this into the recommendations for any individual home in the area. (See Question 8)

Question 3

Which technologies are the most viable to deliver the decarbonisation of heating, and what would be the most appropriate mix of technologies across the UK?

47. Decarbonising heating across the UK will require a mix of technologies, underpinned by high levels of energy efficiency.  Whilst there has been considerable debate around the right mix of technologies, in particular electrification vs hydrogen, it is clear that significant action needs to start now which means ramping up deployment of available solutions today including heat pumps and heat networks.
48. Climate Assembly UK members agreed that each of hydrogen (83%), heat pumps (80%), and heat networks (80%) should be part of how the UK gets to net zero, demonstrating that UK citizens see achieving the goal as a priority over the type of technology used.  Crucially, solutions must be sustainable for the future.  Climate Assembly members also showed strong support for people in different areas of the country being offered different solutions to zero carbon heating according to what was best suited to their needs.
49. One area it could be helpful for Government to set out is the right conditions for choosing between technologies, particularly as there is a geographical element to this (for example, housing density or the conditions for producing hydrogen).  Mapping out the feasibility for different technologies in different locations could go some way to creating a practical roadmap.  BRPs will help at an individual building level, and zoning for energy efficiency and heat could be helpful for local areas.  We support the Government’s plan to consult on zoning for heat networks in 2021.

Heat pumps

50. Heat pumps, whether pure or hybrid, individual or large-scale and connected to heat networks offer a viable solution that can start to be delivered at scale now, assuming the right policy framework is put in place (Question 2) and steps are taken to address the known barriers to deployment (Question 4).
51. The Government has already recognised that off-gas grid homes would benefit from an initial focus on the electrification of heating and the deployment of heat pumps, suggesting that high carbon fossil fuels should be phased out in off-gas-grid areas during the 2020s. 
52. The Government has also recognised, in its response to the CCC 2020 Progress Report, that deploying heat pumps for some on-gas grid households in the 2020s will be beneficial, regardless of the outcome of the decisions regarding the majority of on-gas grid households.  Hybrid heat pumps will have an important role to play here. 
53. Hybrid heat pumps can be installed with little disruption to the home-owner since they can operate with the existing pipework and radiators in the house. Hybrids can therefore play a role in fostering acceptance of heat pumps through a ‘softer’ change such that people may be more willing to have them installed. They also offer peace of mind as the property is still connected to gas so people may feel more comfortable moving part of the way towards electrification but with gas still there as a ‘back up’.
54. However, current EPCs will not recommend a heat pump for an on-gas property as the running costs would be much higher than the existing gas boiler.  The inclusion of hybrids in SAP 10 and the updating of calculations to consider carbon as well as costs should mean that hybrids start to be recommended for on-gas homes.  If building renovation passports are introduced, this will be an even better way of ensuring the right solutions are installed in homes.

Heat networks

55. Heat networks are expected to provide heating in around 20% of UK homes by 2050.  They are well suited to densely populated urban areas and are important technology from a system wide perspective being able to provide flexibility through heat storage. They will also have a strong role in helping housing developers meet tighter emission standards from 2021.  However, heat networks are large projects with high capital costs and lengthy build-out timescales.
56. Investment therefore needs to be made more attractive, recognising the crucial role they have to play in the decarbonisation of heat.  It is encouraging that HNIP is being followed by the £270m Green Heat Networks Fund (GHNF) and proposed green levy to support biomethane as well as the consultation on a regulatory framework for heat networks, which should help the UK transition to sustainable low carbon heat networks by the mid-2020s.

Hydrogen

57. Hydrogen will not be ready to use at scale until the 2030s.  Whilst it is likely to have a role to play in the transport sector and the decarbonising of industry, the scale of hydrogen demand for the domestic market remains unclear.  Further research is needed into the commercial viability of hydrogen for heating at scale, including questions of consumer acceptance and cost compared with other low carbon heating alternatives.
58. In a recent article[12], Michael Leibricht states that, “hydrogen’s role in the final energy mix of a future net-zero emissions world will be to do things that cannot be done more simply, cheaply and efficiently by the direct use of clean electricity and batteries.”
59. On the assumption that hydrogen becomes viable in roughly ten years-time, based on National Grid’s future energy scenarios, following a heat pump-led transition now provides more certainty on reaching net zero.   The focus for the 2020s should be on shovel ready low carbon heat pumps, hybrid heat pumps and heat networks whilst options around hydrogen continue to be developed.

Question 4

What are the barriers to scaling up low carbon heating technologies? What is needed to overcome these barriers?

60. The barriers to scaling up low carbon heating technologies can be grouped into three categories – barriers to industry investment, skills and training, and consumer take up.  The key to addressing these issues lies in Government action.  It must set clear regulatory targets and timelines to provide clarity and certainty for both industry and consumers about why decarbonisation of heat is critical, what needs to happen, when that needs to happen, and how.
61. Furthermore, the barriers must be tackled holistically.  Alongside creating the right conditions for businesses to invest, the Government needs to reset the context within which consumers are making decisions about heating.

Industry investment

62. One of the biggest barriers holding back investment decisions is policy uncertainty.  This creates risk for businesses whilst, at the same time, failing to address the existing lack of demand in the market for low carbon heating technologies.
63. Despite the Government’s legal commitment to reduce the UK’s greenhouse gas emissions to net zero by 2050, the lack of a long-term regulatory framework to deliver this means that there is not enough certainty for businesses about future demand.
64. Businesses need to see an opportunity in the market and have confidence in the longevity of that the market.  Whilst there have been incentives to encourage consumers to install low carbon technologies, these have been short-term and launched in the absence of a supporting longer-term framework.    This creates a boom/bust cycle, seen in schemes like the Green Deal Home Improvement Fund where demand spiked to such an extent that the scheme had to close early, but was not sustained when the scheme finished.
65. A framework of policy certainty with long-dated regulations, financing support for consumers and short-term incentives to kick-start demand will give businesses the confidence and motivation to invest in jobs, training and innovation.
66. The biggest barrier to heat network deployment and expansion remains the capital cost of investment.  Action to support strategic investment in heat networks such as heat-zoning and concession schemes would strengthen the investment case for heat networks through them being part of a coordinated UK heat decarbonisation strategy.    Alongside this, other policies such as business rates should be aligned with the Government’s direction to grow heat networks in order to facilitate investment decisions that are consistent with meeting the UK’s net zero target.

Skills and training

67. Linked to barriers to investment is the shortage of low carbon heating engineers within the installer base.  The lack of clear policy drivers in the short-medium term means that heating installers have no immediate incentive to upskill.  However, the need to significantly scale up the deployment of heat pumps during the 2020s will require an installer base that is capable of delivering this.
68. Furthermore, as argued by the Heat Pump Association (HPA)[13] the current route to becoming a heat pump installer is too costly, bureaucratic and confusing, with outdated content still being taught.   With the pace of retraining installers crucial to achieving net zero, the Government should give serious consideration to the HPA’s proposal of a voucher scheme for the first 5,000 installers to go through a new course with £1.5m Government funding to enable this.
69. There should also be an emphasis on re-educating installers as part of the training to focus on the importance of a well-designed heating system.  The average gas usage for a UK household is around 9-12 kWh and yet a typical gas boiler is around 30kw in order to provide instant hot water, rather than being optimally sized for space heating.  As a result, the design skills taught as part of the training are not utilised in practise and are lost.
70. Ensuring a heat pump works as efficiently as possible relies on the heating system being correctly sized and designed.  If this is not done the heat pump will be less efficient and the household will pay more for their heating as a result.  More focus therefore needs to be put on the design content of college training courses and reinforced through quality standards for heat pump installations.  The Government should introduce a national standard/accreditation for heat pump installers.

Consumer take up

71. One of the biggest challenges to mass heat pump deployment will be public awareness and acceptance.  This is something we have come up against time and again, including in our Electrification of Heat project in Newcastle-upon-Tyne. 
72. Whilst still in the early stages of the project, out of 326 surveyed properties so far[14] we have seen 235 (72%) cancellations. The reasons most commonly given are the potential disruption and complexity of having a heat pump installed and the subsequent remedial works that would be required.
73. Installing a heat pump can require new pipework and radiators, meaning it can be invasive and require significant remedial works inside the home.  In the Newcastle project we have found that this, understandably, is less of a barrier when a customer’s existing boiler is broken.  However, this level of disruption is usually associated with undertaking a major extension or renovation works rather than a heating system upgrade, particularly where the existing heating system still functions well.  Households being well informed about the necessary transition to low carbon heating and being able to plan ahead can mitigate this to some extent.

74. In practise, heat pumps are a very different way of heating your home compared to fossil fuels, providing a lower level, constant heat rather than a high temperature, quick response.  In addition, they may not necessarily work as well with open plan spaces and large glazing areas, so goes against recent trends of home design and renovation.  This, again, highlights the importance of energy efficiency, but also shows that consumer education and support will be really important to bring about a shift in behaviours.

75. Innovation should be focussed on making heat pumps more attractive to customers and easier to install, for example by reducing noise level and seeking to make the installation of pure heat pumps less invasive. Hybrid heat pumps do not involve the same level of disruption as pure heat pumps as they work with the existing heating system.  As such, if installed in suitable areas/homes as part of a coordinated plan, they could play a significant role in helping to grow public acceptance of the technology more generally.
76. The upfront costs of installing a heat pump system is a known barrier and one that the RHI has sought to address, but with limited success.  The provision of upfront grants in the short term will help to address this issue, as will innovation and savings through economies of scale.  Greater reductions are possible in the installation costs, the skills for which are currently charged at a premium given the fact that this is a niche market.  An exemption from VAT for all heat pumps would have the effect of reducing the overall installation cost. 
77. New build homes should be installed with low carbon heating systems as standard.  This provides a ‘ready-made’ solution for the homeowner and will help build awareness and acceptance amongst consumers.   Deployment of heat pumps through the new build sector will help towards building a sufficiently large market capable of delivering economies of scale.
78. Policy should also strive to make it easier for customers to change their behaviour.  91% of Climate Assembly UK members supported making products more energy efficient and ‘smart’ through changing product standards.  In this way, tighter standards are achieved whilst the element of customer choice is preserved.  The same principle can be applied to new build homes.
79. Finally, the unequal sharing of policy and carbon costs between electricity and gas makes heat pumps less financially attractive because of the higher operating costs of heat pumps.  This clear market distortion between the fuels needs to be tackled.  We have advocated an energy wide carbon tax which is complemented by the removal of legacy policy costs on the electricity bill (funded instead out of general taxation).

Question 5a

How can the costs of decarbonising heat be distributed fairly across consumers, taxpayers, business and government, taking account of the fuel poor and communities affected by the transition?

80. We believe that the fairest approach to distributing the cost of heat decarbonisation is to apply a carbon price to heating fuels (gas, oil, electricity etc) on a £/MWh basis. This could be linked to the new UK carbon trading/taxation scheme that is currently being reviewed or it could be a separate scheme with a separate carbon price. The scheme would ensure that the polluter pays which will incentivise consumers to consider zero/low carbon alternatives.
81. However, we acknowledge that a ‘polluter pays’-based scheme will impact vulnerable customers significantly. There is a link between social economic ranking and energy consumption[15] such that any scheme based on demand will be progressive. Nevertheless, any additional cost (no matter how progressive) will still push more families into fuel poverty.
82. Therefore, we believe that the monies raised from applying a carbon levy/tax should be returned to customers via a flat rate rebate to all electricity customers. Using a flat rate rebate ensures that low consuming gas customers actually see an overall carbon rebate whilst high consuming quintiles (which tend to align with high social economic groups) pay out more than they get back. This should then incentivise all groups to switch to electrical heating, keeping the flat rate rebate whilst avoiding the gas carbon levy/tax.
83. The CCC recognise that carbon taxes can support the public finances and strengthen incentives to reduce emissions. However, particular attention is needed to where the costs and benefits of action fall, given the uneven effects of the COVID-19 crisis.[16]
84. Financial incentives that are introduced to support the uptake of low carbon heating systems should, like the RHI, continue to be funded by the Government as opposed to energy consumers.  This is the most progressive way to pump prime the market, which we have highlighted above will be needed throughout this Parliament.

Question 5b

What is the impact of the existing distribution of environmental levies across electricity, gas and fuel bills on drivers for switching to low carbon heating, and should this distribution be reviewed?

85. Environmental levies are disproportionately placed on the electricity bill, thereby creating significant incentives NOT to switch to electrical based heating. As a simple example, an Ofgem average domestic customer, who consumes 3100kWh of electricity and 12000kWh of gas per annum will pay approximately £127 for environmental and social levies on their electricity consumption and £10 for environmental and social levies on their gas consumption, a total of £137 per annum.
86. However, a customer with a heat pump (assume a 300% efficiency) will pay approximately £292 for environmental levies on their electricity consumption. This is an additional £155 per annum or 213% of the gas heating option. We believe that this distribution should be reviewed as a matter of urgency given the timeframes to hit the UK’s net zero targets.  Our proposal is to take the legacy policy costs off the bill and for this to be funded out of general taxation.
87. Experience from countries such as Sweden and Finland shows that once fossil fuel heating is no longer the cheapest option the market changes rapidly, provided other issues such as skills, certification of installers and performance are addressed.[17]

Question 6

What incentives and regulatory measures should be employed to encourage and ensure households take up low carbon heat, and how will these need to vary for different household types?

88. Please see our responses above regarding incentives and regulatory measures (Question 2), barriers (Question 4) and rebalancing environmental costs to reduce the cost of electricity relative to gas (Question 5).
89. In addition, time-of-use tariffs can significantly reduce the cost of operating a heat pump by rewarding consumers for moving their electricity demand outside of peak periods. Customers taking advantage of time-of-use tariffs in the UK who scheduled their heat pumps to avoid peak hours have seen average prices of less than 8p/kWh compared to the average rate paid of 15p/kWh. This makes the business case for heat pumps much stronger and households could potentially see their energy bills fall significantly, compared to using gas or heat pumps with a flat rate electricity tariff.[18]

Question 7

What action is required to ensure that households are engaged, informed, supported and protected during the transition to low carbon heat, including measures to minimise disruption in homes and to maintain consumer choice?

90. Please see our responses to Question 2, Question 4 and Question 6.
91. Consumer engagement and inclusion is critical to a successful and fair transition to low carbon heating.   However, an independent report[19] published by BEIS earlier this year revealed that, whilst support for policies aimed at reducing carbon emissions is high, public awareness of the link with heating is low. The CCC[20] have also stated that the “lack of public awareness and support for low-carbon heating is arguably the single greatest consumer barrier to achieving Net Zero.”
92. The findings of the Climate Assembly UK report should inform Government’s approach.  The top three principles for the path to net zero were, ‘informing and educating everyone’, ‘fairness within the UK’, and ‘leadership from government’.  On home retrofits, assembly members emphasised the need to minimise disruption in the home, put in place support around costs, and offer flexibility and choice to homeowners.
93. Building trust between consumers, communities, industry and Government is also fundamental.  Homeowners need to hear a consistent message and feel they can rely on what they are being told.  Advice needs to be clear and credible, and those offering products and services must be competent and reliable.  In order to be successful on the scale needed for heat decarbonisation, the whole industry must be on board.
94. The Climate Assembly report made it clear that choice is important to people.  Members expressed preferences for both gradual and all-in-one retrofits, indicating a feeling that this should be for homeowners to decide.  The best way to allow this would be through early implementation of long-dated regulation and the introduction of BRPs to give people time to plan ahead and facilitate an informed choice.
95. The report also showed that education will have an important role to play.  The great strength of the Climate Assembly UK was that it was representative of the UK population and that members, through their engagement with the Assembly, were knowledgeable about climate issues.  This suggests that similar engagement is possible with the wider public if awareness and understanding can be raised. 
96. Education packs could be mandated for customers moving home, either through their mortgage provider or energy supplier, to keep them informed on current and upcoming regulation, as well as the benefits of heat pumps and other low carbon technologies.   A mortgage pack along these lines could also include information about the BRP assessment, and financing options.
97. Finally, a large majority of the Climate Assembly UK (79%) felt that steps taken to help economic recovery from the Covid-19 pandemic should be designed to help achieve net zero and that the Government should encourage lifestyles to change.   This suggests that consumers are ready to engage and, with the right framework and mechanisms in place, will be willing to support the transition to lower carbon heating.

Question 8

Where should responsibility lie for the governance, coordination and delivery of low carbon heating?  What will these organisations need in order to deliver such responsibilities?

Governance

98. Strong and clear leadership from central Government in setting the strategy and framework for heat decarbonisation is essential.  The Climate Assembly UK emphasised the need for “leadership to forge a cross-party consensus that allows for certainty, long-term planning and a phased transition.”
99. Alongside government leadership, achieving net zero will also require a joined-up approach across society.  The coordination of action on the ground should be driven at a local level, through local area energy planning to identify the opportunities and constraints and the most suitable approach and technologies for transitioning to low carbon heating.  Local plans should link to achieving the overall UK net zero targets, which is coordinated by a national delivery body.

Coordination

100.         We support calls for a heat sector deal and back the creation of a National Centre for Decarbonisation of Heat (NCDH) in the West Midlands.  This is designed to support innovation and deployment of low carbon heating systems manufactured in the UK and equip people with the skills required to install these systems across the country. The Green Heat Network Fund should be designed to be compatible with the aims of the NCDH and support the coordinated development of training in Heat Pump technology and 5th generation heat networks.
101.         A whole systems approach is envisaged, including the adoption and integration of digitally enabled smart solutions which will support standards development, manufacturing, skills, business incubation, citizen engagement, demonstration and deployment and green finance to deliver significant regional and national benefits.
102.         The NCDH will enable the rapid scaling up of manufacturing, skills and deployment of low carbon heat solutions.  The scale of intervention mirrors that which happened in the Offshore Wind sector.  This delivered a sectorial transition by recognising that a scale-up and cost reduction programme required the co-ordination of standards development, supply chains, planning, scaling of manufacturing and working with business to enable them to transition into the sector

Delivery

103.         Delivery of low carbon heating should be organised at the local level through the framework of local energy/heat and energy efficiency plans.  Delivery of local heat decarbonisation solutions needs to be linked in a structured way to national targets.  This could be the role of a national delivery body.
104.         The national delivery body, or associated regional centres, could also provide local authorities with expert advice and information. Local authorities will also need the resources to deliver heat decarbonisation in a way that ensures fairness across all areas and communities. 
105.         To deliver at the local level also requires consumers to be engaged.  Government must take steps to build on the things identified in Question 8 to make this work. In addition, recommendations made at individual property level, through the BRP, should be consistent with decisions made at the local level for appropriate low carbon heating solutions, e.g. an identified heat network zone.

E.ON

November 2020