Written evidence submitted by the CBI (DHH0048)

1. The Confederation of British Industry (CBI) welcomes the Business, Energy and Industrial Strategy Select Committee’s inquiry into decarbonising heat in homes. Industry can be the bedrock of the low-carbon transition and with increasing energy costs an on-going threat, a smart transition which maintains industrial competitiveness is critical. The CBI is the UK’s leading business organisation, speaking for some 190,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing, and Delhi, the CBI communicates the British business voice around the world.

The challenge of decarbonising heat

2. If the UK is to meet its commitment to decarbonise energy by 2050 then the decarbonisation of heat is the biggest challenge. Heating accounts for around 40% of energy consumption and in large part is delivered through the combustion of natural gas. Heat is generated locally in homes and businesses, meaning that any transition requires over 20 million individual interventions that will need to be coordinated nationally, regionally and locally. This stands in contrast to recent success in decarbonising the power sector.
    
3. The scale of intervention required is colossal. A major overhaul of national infrastructure with mass engagement of the population will be required. The established manufacturing and installation base for fossil fuel boilers needs to quickly deliver low-carbon heat solutions, such as heat pumps, hybrid heat pumps, and hydrogen-ready boilers, and connections to heat networks. We need to increase the current installation of around 30,000 heat pumps a year to more than a million units per year. To aid progress, government should remove distorting price signals, and use tools such as consistent long-term carbon pricing to support uptake. The value of flexibility to electricity network operation needs to be unlocked downstream to lower the energy bills for users of heat networks, heat pumps and/or green hydrogen.
    
4. Moreover, heat solutions will not be a one size fits all. Population density, existing regional infrastructure, mix of new and old housing stock and consumer preferences, all will influence what needs to be deployed. This will necessitate local and regional planning which needs to be aggregated into a national plan, which respects the available energy supply. At present, regional planning is either limited or non-existent and presents a fundamental barrier to delivering solutions.

Policy landscape

5. The government has developed schemes to try and incentivise consumers to switch to low-carbon heating solutions in their home. Some of these schemes have been focused on able-to-pay market, while there have also been moves to target those on low-incomes and in fuel poverty. But none has delivered to the degree now required to deliver the UK’s carbon budgets and the energy efficiency landscape, particularly UK buildings, lags behind our European neighbours.

6. Most notably, the Renewable Heat Incentive first proposed in 2009 was opened to applicants in 2014 with (albeit highly uncertain) estimates of total installation numbers in the range 400,000 and 900,000 by 2021 of which 54% were expected to be heat pumps. To date, 42,000 new heat pumps have been installed with £300m subsidy payments but without building a sustained growth rate in deployment over the period.
    
7. The energy efficiency policy landscape, which will be integral to any successful decarbonisation of heat programme, has gone through a variety of changes aimed at improving energy efficiency amongst businesses and consumers. And is largely a result of the European Union’s Energy Efficiency Directive and the Energy Performance of Buildings Directive, which urged member countries to design polices on improving energy efficiency that achieve a highly energy efficient and decarbonised building stock by 2050, create a stable environment for investment decisions and enable consumers and businesses to make more informed choices to save energy and money. At a UK level, the coalition government’s Green Deal, provided a financial framework aimed at improving residential energy efficiency. The then Department of Energy and Climate Change, created the Energy Efficiency Deployment Office to “drive a step change in energy efficiency.”[1]

8. There have been other policy interventions such as the Energy Company Obligation scheme, aimed delivering energy efficiency and low-carbon heating improvements to low income and vulnerable households. The scheme is similar to its predecessors CERT and CESP which target improvements in cavity wall and loft insulations.[2] Previous governments have also used the tax system to incentivise action, such as the Enhanced Capital Allowance scheme which allowed businesses to offset costs of certain energy efficiency products against tax. Additionally, there have been attempts at behavioural changes through the introduction of Energy Performance Certificates (EPC) and the smart meter rollout.

9. The government has recognised the importance of improving energy efficiency in order to help consumers and businesses transition to low-carbon heat. In his summer economic statement, the Chancellor announced a £3 billion investment in energy efficiency through a Green Homes Grant which has been welcomed by industry. The scheme provides vouchers up to £5,000 to pay for energy efficiency and low-carbon heat measures. Our members believe that the grant is an important first step however there are still policy and investment gaps to improve energy efficiency in all homes. Considerations include how to improve a building’s fabric standards in order for low-carbon heating to work. Questions also remain around the timeframe of the scheme with many businesses delivering the scheme, concerned about the deliverability within the six-month timeframe of the scheme to deliver installations of energy efficiency measures by 31 March 2021. The government should build on the ambition of the Clean Homes Grant and commit to a longer-term policy and investment strategy to improve homes. In addition to this, there are concerns around the skills shortage in delivering the installations required. This concern is also applicable to the low-carbon heat sector as the transition will mean a significant development of the UK’s current skills capabilities.
    
10. Analysis presented by National Grid estimates that during the decade 2031-2040, the UK will need 152,000 new jobs in the net-zero workforce, which is a period when installation of low-carbon heat solutions will need to ramp-up. These new skills will be needed in a range of sectors, such as construction, and skilled tradespeople who will install low-carbon heating solutions such as heat pumps, hybrid hydrogen boilers and wall insulations, as currently, most heating system installers would need upskilling in order to advise and install new low-carbon heating solutions.[3]

11. In addition to the £3 billion funding announcement for energy efficiency, the government has also announced key policy interventions to address the challenge of decarbonising heat. In the Budget in March and subsequent consultation on the ‘future support for low-carbon heat’, the government outlined proposals for two support schemes that would provide support on transitioning to low-carbon heating solutions for businesses and consumers. The money allocated for these schemes would be separate from the £9 billion of support made in the Conservative 2019 manifesto to support energy efficiency.

12. The Green Gas Support Scheme which aims to increase the proportion of green gas in the grid, through support for biomethane injection will start in 2021 running through to financial year 2025/26. The scheme would be funded through a Green Gas Levy.

13. The Clean Heat Grant is another scheme announced by the government and is expected to start in April 2022 following on from the Domestic RHI and will run until March 2024. Through this scheme, the government is proposing a technology-neutral, flat rate grant of £4,000 for all technologies eligible under the Grant. The scheme is expected to be delivered through a voucher system with the first stage of the application being ‘consumer led’ and second stage ‘installer led’. Although our members view the structure of the scheme as a positive development, there are concerns around the level of funding proposed with the scheme as it is potentially only supporting approximately 12,500 installation per annum. Members would also like hybrid heat pumps to be covered by the scheme, given the potential contribution of this technology.

14. Heat networks continue to offer a promising cost-effective opportunity in dense urban environments with the CCC identifying the potential for 18% of all heat to be supplied from heat networks by 2050, up from 2% today. Heat networks could deliver the equivalent of 12% of domestic heat by 2050. Government support is available via the Heat Networks Delivery Unit, Heat Networks Investment Programme (£320m), the forthcoming Clean Heat Networks Grant (£270m) with investment funds and consumer confidence to be unlocked via the introduction of a heat networks market regulatory framework in 2021/22. Reforms to planning policy and building regulations provide opportunity to complement these measures and stimulate growth, or otherwise risk stifling investment, increasing the cost of capital and impairing existing assets.

15. Business is of the view that these schemes are positive indications of the government’s commitment to transitioning to low-carbon heat. However, longer fully funded programmes that take a whole systems approach together with the eradication of policy gaps will be needed in order to achieve a successful cost-effective decarbonisation of heat programme.  

16. For example, the government could extend the Green Homes Grant to March 2022, followed by the introduction of a new Low-Carbon Heating Scheme to replace the Domestic Renewable Heat Incentive with a grant system from April 2022 to support a range of low-carbon heat solutions, including heat pumps and hybrid systems. In parallel, sustaining momentum in heat networks investment would be helped by a clear timeline, cost trajectory and transition period for the introduction of the heat networks market regulatory framework, alongside the timely introduction of the Green Heat Networks Fund to follow-on from the closure of the Heat Networks Investment Programme and Renewable Heat Incentive.

Energy efficiency – a gateway for low-carbon heat

17. In the first instance the government must start by designating energy efficiency and heat as a national infrastructure priority. Designating energy efficiency and heat as a national infrastructure priority would change the way in which the issue is treated by government and government departments. Energy efficiency would be given similar attention as other major infrastructure investments on road, rail and broadband. This would send a clear message to the investment community and consumers of the government’s long-term policy commitment therefore providing confidence for further investment in energy efficiency and low-carbon heat.

18. The priority has been highlighted by recent analysis that shows UK homes lose heat up to three times faster than home in neighbouring European countries like Germany.[4] Alongside the issues related to energy costs poor living conditions, low levels of energy efficiency in buildings creates a challenge for our energy system. Heat demand can peak at around 3.5TWh in winter days, over seven times higher than some summer days. In comparison, electricity demand remains relatively constant with peaks rarely exceeding 1TWh.[5] Better insulated homes can flatten these peaks, thus reducing the energy demand at peak times, regardless of heat source. This means well-insulated homes can create additional energy storage capacity, with opportunities to shift energy demand to better peaks and troughs of renewable electricity generation, therefore reducing system costs. A major programme of domestic energy efficiency and smart home solutions provides opportunity for dramatic load shifting and the avoidance of costs at the level of the overall energy system.
     
19. In addition to this, we recommend that the government announce a national low-carbon skills programme which includes skills needed to decarbonise heat. There is a need for a coherent plan which will create the skills for the installation and retrofit work that then transitions to maintenance and customer service. There needs to be a well-developed skills roadmap which sets out the skills required at each stage of the programme and an agreed skills checklist for each role. Additionally, any skills programme would also need to run alongside policy and regulatory changes.

Technology challenge

20. The challenge of transitioning 85% of homes connected to the gas grid, reducing the 12% of greenhouse gas emissions from non-domestic buildings and reducing industrial heat demand by making industrial processes more efficient and low-carbon will not be easy. There are a range of technologies that will be required, with some ready for immediate rollout and others needing added innovation before being delivered at scale.
     
21. These technologies include heat pumps (also hybrid heat pumps), hydrogen and heat networks. For these to be deployed at scale, the government will need to create the right policy environment taking into account the different challenges and advantages each technology presents. Long-lead time regulation will help signal the changes that need to take place, and give consumers and businesses the confidence to invest in new technologies. Also recognising the profiles of different regions and the capabilities each have in reaching the level of development required to implement some of the changes that will be needed, in particular this applies to the hydrogen pathway. Further considerations around the level of disruption to communities and consumers will have to be made in creating the correct policy framework for the deployment of these technologies. Business also notes that other solutions are possible and will be needed and may feature strongly in particular sectors, including off grid solutions.

22. The government should use the Heat and Buildings Strategy to provide clear signals about the technology options available. We recommend that the government continue to be technologically neutral on this, as a mix of technology solutions will be needed. However, there are decisions that can be made now to end the installation of the most carbon-intensive heat options. For example, oil-fired boilers are particularly carbon-intensive, and there are now other options available. Therefore from 2023 no new domestic oil-fired boilers should be installed.

23. Government should mandate the phased switch over from existing natural gas boilers to other solutions like heat pumps, hydrogen technologies or heat networks. As a result, by 2035 all new and replacement heating installations will need to be low-carbon and installed alongside appropriate building energy efficiency retrofit measures, to help ensure that we are on track to meet net-zero emissions by 2050.

24. Lastly, to administer the changes required, we recommend that the government announce the creation of a National Delivery Body (NDB). This point is discussed further at the end of the consultation response.

Cost of the transition to low-carbon heat

25. The CCC has estimated that the UK’s 2050 net-zero target is likely to cost between 1-2% of GDP as technology costs continue to fall, and innovation continues to increase. The estimates from the manifestos of both political parties at the time of the last election suggested levels of investment of the order of hundreds of billions of pounds. This will need to be drawn from both the public and private sector and can be unlocked at the scale and pace needed by coordinating aggregation of demand within geographic regions or via compiled project portfolios.

26. The costs of some technologies will depend on improvements in existing energy efficiency measures. For example, should energy efficiency measures be scaled up, then costs of running heat pumps could be lower.[6] In its report on ‘Financing energy efficient buildings’, the Green Finance Institute state that the cost of heat decarbonisation could be £6.2 billion higher without all appropriate efficiency improvements. [7]

27. For developing technologies such as hydrogen and heat electrification the cost to the consumer is yet unclear. The cost is dependent on both the cost of new infrastructure (electricity reinforcements and repurposing the gas grid) and the method of production (renewable power and water electrolysis or steam methane reformation and carbon capture). At present most industrial hydrogen is produced through steam methane reforming, but this needs to include carbon capture and storage or usage in order to make the production low-carbon. This additional step has a price penalty. There are also opportunities to produce more low-carbon hydrogen via electrolysis from renewables and nuclear. Heating using hydrogen sourced from electrolysis is inefficient compared to heat from heat pumps, and the hydrogen produced is currently more expensive than from steam methane reforming, therefore there needs to be an innovation programme that will drive down the cost of hydrogen production from electrolysis to make it a cost-effective and low-carbon solution. This route will also require a scaling up of low-carbon electricity generation to ensure adequate supplies of low-carbon hydrogen at a time of increased electrification across sectors. The potential for hydrogen to act as a long-term form of energy storage should also be considered as part of energy system planning, which could help reduce system costs through balancing of peaks and troughs in electricity demand and supply.

28. Over time the rebalancing of costs between electricity and gas would be a powerful force for change toward meeting heat decarbonisation commitments. As things stand, the costs imbalances are a significant market distortion against heat pumps which is not about the fundamental costs or efficiency of heat pump technologies. Similarly, there will need to be consideration on the role of carbon pricing for fossil fuels used for heating. This challenge underpins the need prioritise a ‘just transition’ that ensures a fair transition to new technologies that does not add significant costs to consumers, particularly the most vulnerable in society.

Consumer challenge

29. Throughout most of the transition to low-carbon heat, will need to be driven through consumer choice of technology solutions, vendors and installers and the removal of the worse performing products from the market (through raising minimum standards for product performance). To initiate the transition public funding through the form of grants will be required, transitioning to loans with a final cut-off mandating a switch from gas boilers to low-carbon solutions. For the consumer choice and market to function, that choice needs to be genuine, with viable options for households and businesses. For this to be the case then the infrastructure to support the technology alternatives needs to be in place, including electricity, hydrogen or heat networks. Of course, not all of these options will be available everywhere but for the market to function and drive prices through competition some optionality is required. This infrastructure investment needs to be supported by government through clear regulation and market-support where required.

30. As there is no single technological solution to this challenge, business and government must work together in creating a clear public awareness campaign setting out; what decarbonising heat entails for the country, what this means for the public and how the government plans on working with the public in tackling this challenge. Due to the intervention required and the disruption that will be caused, this awareness campaign will be critical in preparing the public for the changes that will occur in the next decade, through to net-zero and beyond. Alongside stimulating the public imagination by showcasing and engaging the public in this way, public sector leadership to decarbonise their property portfolios provides a significant opportunity to build markets and lower costs.

National Delivery Body

31. The changes required to decarbonise heat, including energy efficiency upgrades, installation of low-carbon heating technologies and changes to heat generation and distribution systems, will inevitably be disruptive to consumers and businesses. There are clear lessons to be learned from recent policy efforts to install low-carbon technologies in peoples’ homes. Schemes to deliver energy efficiency measures have varied in success, meanwhile there have been significant delays and operational issues relating to the installation of new smart meters. These challenges and learnings demonstrate the need for a delivery mechanism that links together national policy, consumer interaction, skills and training and local delivery.

32. The positive impact of this national decarbonisation of heat is that it would provide economic stimulus creating jobs via a national programme that touches every region and every community through a major upgrade in infrastructure. The required energy efficiency measures necessary for a successful heat decarbonisation programme have been widely identified as a fundamental priority for the country’s recovery from the coronavirus epidemic due to the job creation opportunities. This improvement in energy efficiency would then create the conditions needed for the heat decarbonisation programme, maintaining the jobs create and national investment opportunities that will support a clean and resilient recovery from the pandemic.

33. In order to administer these changes, we recommend that the government create a National Delivery Body (NDB) for heat decarbonisation. The NDB would be the convening mind for a low-carbon heat transition. It brings together all of the expertise, information and data into a single place ensuring that a single body is joining up all aspects of the heat delivery. This would include ensuring that there are regional and local plans for each area, that there is capacity to deliver against those local plans in terms of skills, manufacturing capacity, infrastructure investment (local grid capacity,  national electricity supply and hydrogen production), that there are standards and regulations in place to support the delivery. The NDB would also make recommendations to government around incentives and regulations which are required to deliver a transition. It is only by bringing all of these elements together that a programme can be accelerated and optimised to ensure that there is not over or under capacity of low-carbon heat. The NDB would work with government (both national and local) to develop a public communications plan, and sector organisations to create websites with information for consumers and businesses to support the transition.

November 2020