Written evidence submitted by Aldersgate Group (DHH0054)

The Aldersgate Group is an alliance of major businesses, academic institutions, professional institutes, and civil society organisations driving action for a sustainable and competitive economy. Our corporate members, who have a collective turnover in excess of £550bn, believe that ambitious and stable low carbon and environmental policies make clear economic sense for the UK.[1] They have operations across the UK economy and include companies such as Associated British Ports, Aviva Investors, BT, CEMEX, the John Lewis Partnership, Johnson Matthey, Michelin, Siemens, SUEZ, Tesco and Willmott Dixon.

We develop independent policy solutions based on research and the expertise and diversity of our members. Through our broad membership, we advocate change that delivers benefits to an ever-growing spectrum of the economy. 

Our response

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)?

Direct emissions from buildings account for 17% of the UK’s total emissions at present, and when indirect emissions are included this goes up to 26%.[2] This covers domestic and commercial buildings and includes emissions from different life stages of the buildings.

Achieving a net zero building stock is a complex challenge, given that the objective of reducing emissions needs to be taken into account at each stage of the building and planning process. While recent consultations and funding announcements are helpful first steps to support the roll out of low carbon heat and improve energy efficiency, a clear government strategy for decarbonising the housing sector is required, to ensure that the regulation, supply chains, skills and market mechanisms to attract private finance are in place to facilitate transformation at scale.

The Aldersgate Group therefore calls for the following actions to be taken by Government over the course of this Parliament:

Improving energy efficiency

Improving the energy efficiency of the housing stock should be the foundation of the Buildings and Heat Strategy. A number of low carbon heat options (e.g. direct electric heating or heat pumps) can be less feasible if installed in energy inefficient buildings, either due to high cost or sacrifices in thermal comfort. In addition, studies[3] show that consumers see the need to improve energy efficiency as a priority alongside installing low carbon heating. Moreover, if bills are reduced and better thermal comfort is achieved, consumers have been shown to be more willing to be flexible regarding different low carbon heating options.

Given this, our response will cover a set of measures that need to be taken over this parliamentary term to improve energy efficiency first, before going into details about policies to decarbonise heating.

Government should include large scale energy efficiency upgrades as part of a national infrastructure programme, with appropriate investment levels and management to improve over 20 million homes by 2035. The £3bn of government grants to improve the energy efficiency of homes and public sector buildings announced in July 2020 is a good start, but continued funding in the coming years will be important given the scale of the challenge and the need to build a stable supply chain.

Implement and properly enforce energy efficiency standards for existing buildings:

For homes and commercial buildings, binding regulatory standards to mandate energy efficiency improvements should be put in place. Regulatory drivers include a tightening of the Minimum Energy Efficiency Standards (MEES) for privately rented domestic buildings and for commercial properties to achieve EPC band C by 2035. These standards should eventually be rolled out to privately owned homes and social accommodation as a priority to ensure that the transition to low carbon homes also benefits the whole of society and those facing fuel poverty.

Develop and implement the Future Homes Standard (FHS) to uplift energy efficiency levels in new homes:

Under the FHS, new homes need to be designed at much higher levels of heating and cooling efficiency. Achieving zero operational emissions in new homes by 2030 will be essential for meeting the net zero target and we welcome the government’s plan to close the performance gap between designed and as-built homes. However, the FHS should ensure that new buildings perform as well as possible from the start, to avoid expensive retrofits later. The FHS should commit to the highest standards of energy efficiency from the design phase, to ensure the levels achieved in practice, albeit lower, are sufficient for achieving the reductions needed.

Government should engage local planning authorities in the implementation of the FHS and remove proposed restrictions for them to set higher energy efficiency standards for new homes compared to the national average. Local authorities should be encouraged to set ambitious requirements for new dwellings, in addition to give support to businesses and guidance to homeowners, given their vital role in ensuring that planning reflects local conditions. The government should also ensure there is training for local planning teams to implement the new standards.

Drive the market for energy efficiency investment through fiscal incentives which are carefully tailored to the needs and characteristics of the domestic and the non-domestic sectors:

The Green Homes Grant announced in August 2020, will provide much needed funding to install insulation, heat pumps, draft-proofing and more to help households cut energy bills. Whilst this is a step in the right direction and an important part of driving a green recovery, it is a long way from the scale of retrofits that we should be aiming for to decarbonise the housing sector.

To make energy efficiency competitive on upfront cost and incentivise the rapid adoption of necessary measures, the government should also consider introducing well-timed and targeted fiscal incentives. These can include VAT and stamp duty rebates for homes adopting energy efficiency measures, which will deliver immediate savings to businesses and consumers and help strengthen the link between efficiency levels and property value. Tax breaks for businesses investing in energy efficiency should have the same effect, such as through variable business rates and consistent funding pots for energy efficiency improvements, which are easily accessible.

Scale up investment in energy efficiency and attract private funds:

For domestic buildings in particular, the level of investment needed to improve energy efficiency is substantial for individuals, but too small to attract capital from major investors. For example, house by-house retrofits for a small semidetached home average less than £600 for cavity wall insulation or around £7,000 for internal wall insulation.[4]

These projects would not come on the radar of big investors unless aggregated into larger portfolios, which has been done mainly in the non-domestic building sector through Energy Service Companies (ESCOs). ESCOs aggregate smaller projects and allow capital to be invested at scale. Similar projects are being developed for homes through approaches like Energiesprong UK but need significant support to build up scale.

In addition, the government has a role to play in boosting the use of green mortgages and loans for energy efficiency improvements, similar to the Netherlands where mortgage lending rules allow households to borrow up to €25,000 extra to purchase or refurbish to a net zero energy home.[5]

Whilst initiatives to uplift energy efficiency are numerous and the supply chains for energy efficiency in the UK are well-established, the rate of home insulation has decreased by 90% since 2012 due to changes in government policy. Given the urgency and the scale of the task, government should provide long-term certainty by providing a detailed plan on upgrading 20 million homes and avoid stop-start policies, such as cuts to the Energy Company Obligations scheme or the Green Deal scheme, which negatively impact investors’ and consumers’ confidence.

Reducing emissions from heating

Heating UK homes and providing access to hot water amounts for 40% of national energy consumption and 14% of GHG emissions, which is in addition to emissions from home electricity consumption.[6] Cutting heating emissions requires:

Trialling at-scale zero carbon alternatives to natural gas and quickly rolling out established alternatives:

These include low regret options and mature technologies such as electric heat pumps or low carbon district heating for new and existing homes, which should be prioritised whenever possible as the more cost-effective option for cutting emissions. For houses connected to the gas grid, technologies like injecting clean hydrogen into the grid could play a significant role, although this needs to be trialled at scale first.

We welcome recent announcements in the Budget, such as the launch of the Green Heat Network Scheme, the Clean Heat Grant, the Low Carbon Heat Support Scheme and the introduction of the Green Gas Levy, all of which will be essential to support the use of clean fuels in the gas grid and the wider installation of low carbon heating. However, these initiatives are currently insufficient, as they only provide short-term support and, in the case of the Clean Heat Grant, offer limited funding that overwhelmingly prioritises the installation of individual heat pumps, even in densely populated areas where low carbon heat networks might be the more effective option.

This is why these initiatives need to be urgently accompanied by a coherent, long-term strategy to send a clear signal to the low carbon heat supply chain, improve skills, cut costs and ensure that low carbon heating technologies are deployed efficiently and at scale. According to the Committee on Climate Change (CCC), alternative technologies will need to be deployed at scale by 2030 if the UK is to meet its net zero target by 2050[7] which means that trials should commence now so that policy decisions to roll out technologies at scale can be made by no later than 2025.

Engage consumers to facilitate the transition to low carbon forms of heating:

Government should set up a reliable system of certification for technologies unfamiliar to consumers, such as heat pumps and hybrid systems, which will help build trust and overcome the perception of gas boilers as the default purchase. This could be achieved through the recently launched Green Homes Grant, Each Home Counts Quality Mark scheme, and by harnessing trusted voices and organisations, for example, by expanding the role of the Energy Savings Trust to share information on technologies and respond to any concerns.

Where technologies are at very early stages of deployment, such as hydrogen, government should commit to early, genuine, open and transparent public engagement to ensure public acceptability, with ongoing monitoring and feedback to consumers about the performance and reliability of technologies in practice. It is crucial to avoid the perception that concerns are not being acknowledged, or that decisions have been made ahead of adequate public engagement.

Government should collaborate closely with business and local authorities to assess the best technological choices based on cost, local specificities and existing infrastructure:

Government will play a fundamental role in coordinating the nationwide roll-out of low carbon heat infrastructure, potentially through a coordinating institution modelled on the Gas Council, which managed the transition from town gas to natural gas. The Gas Council facilitated the development of bulk gas supplies at the same time as rolling out a gas network, and the conversion to gas boilers and central heating in homes. Similarly, the low-carbon heat transition requires coordination of energy supply and new infrastructure, so government should consider setting up a body to oversee these developments.[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?

The Aldersgate Group believes that the use of heat pumps and heat networks should be prioritised to deliver low carbon heating, primarily given lower costs of installation, compatibility with existing infrastructure, and savings on bills that can be offered by these options.[9] Given the urgency of getting on with decarbonising the building stock, heat pumps and heat networks are the most obvious choices as they can be deployed at scale much sooner than other low carbon heating technologies such as hydrogen (the potential and applicability of which should be urgently trialled in practice).

These two options also have the distinct advantage of being easy to install, with 5,000,000 customers in the UK already connected to one of the 14,000 heat networks existing in the UK, 91% of them located in England.[10] The additional capital cost of heat pump systems should be supported by the continuation of the current Renewable Heat Incentive subsidy, to provide lower home energy costs to consumers.

Heat networks

Heat networks are estimated to deliver savings of roughly £100 per year on bills for customers when compared to gas. They are low maintenance, with no boiler repairs needed, and less specific expertise required for installation.

However, it is worth noting that heat networks are predominantly used at present in urban and high-density areas, and their use in rural, more isolated areas makes less economic sense. Decarbonising the building stock in these regions will require reliance on alternative options, depending on local characteristics. In rolling out either of these options, local authorities will be key as they will be aware of both local capacities and limits and will be able to provide information to businesses to find the most efficient low carbon heating solution on a case by case basis.

Additionally, it is worth noting that heat networks do not currently distribute low carbon heat: in many cases existing district heating is served by gas CHP (combined heat and power), that emits high carbon emissions, introduces additional capital and billing costs, removes the consumer's ability to switch suppliers and is less efficient than traditional gas boilers due to network losses. A review of the regulatory regime around heat networks to ensure consumer protection and the decarbonisation of heat sources will be key to make heat networks a viable solution.

Heat pumps

Heat pumps are a low regret option for providing low carbon heating to around half of the four million homes currently not connected to the gas grid, delivering considerable savings to customers. However, only about 20,000 are installed each year in the UK though the technology has been in common use for more than a decade. One of the reasons for this is the lack of suitably skilled engineers that can install heat pumps and the lack of understanding of heat pumps from homeowners.

Engineers should benefit from high quality heat pump installation and energy efficiency training, as they are the key source of advice to customers, usually following a boiler breakdown. A recent report by National Grid shows that, because plumbers are often not familiar with these technologies themselves, customers have limited knowledge of gas boiler alternatives: only 20% of those interviewed by National Grid were familiar with heat pumps and only 2% were familiar with heat networks.[11]

The government should update the education and training system, to ensure students and trainees are equipped with the knowledge and skills needed to drive the transition to a net zero emissions economy. In the case of plumbers and engineers, the focus should be primarily on apprenticeship programmes, lifelong learning and on-the-job training, providing a platform for workers to update their knowledge and understanding of new technologies like heat pumps. In the immediate term, an important lesson can be learn from the transition from town gas to natural gas, with a Conversion Strategy Handbook directed at engineers, which looked at possible concerns or barriers that might be experienced with different social groups. This made engineers more familiar with the new technology and better able to explain it to customers.

Another important aspect to consider as part of at-scale deployment is that heat pumps deliver heat at lower temperatures over much longer periods. Deploying heat pumps needs to be done when good levels of energy efficiency have been attained (see recommendations under Q2). 

Direct electric heating and hydrogen

Besides the alternatives above, options for low carbon heating include direct electric heating and hydrogen. However, direct electric heating delivers 2-3 times less heat than a heat pump for the same amount of carbon emissions and is more expensive for residents. It should therefore only be considered a feasible option when exceptional levels of energy efficiency have been achieved.

The use of clean hydrogen as a source of heat is still an emerging technology, which has not been trialled at scale so far. This is why trialling the use of hydrogen for the provision of heat must be an urgent priority for government. At present, the potential use of hydrogen for heating should be prioritised for decarbonising heat in existing homes, given the availability of low regret and more cost-effective options to deliver low carbon heating in new homes. As the technology matures and economies of scale are achieved, the use of hydrogen for new homes connected to the gas distribution network could become more economical.

Question 4: What are the barriers to scaling up low carbon heating technologies? What is needed to overcome these barriers?

There are a series of barriers to scaling up low carbon heating technologies.

Firstly, the lack of adequately-skilled engineers and plumbers has been shown to have an impact on the wider adoption of well-established technologies like heat pumps, as explained under Q3.

Secondly, consumer attitudes towards these technologies can act as a barrier, especially as the range of low carbon heating options is not well understood by the majority of customers, and concerns around safety and thermal comfort need to be addressed. Government should set up a reliable system of certification for technologies unfamiliar to consumers, through the recently launched Green Homes Grant, Each Home Counts Quality Mark scheme, or harness the voice of trusted organisations such as the Energy Saving Trust or Ofgem, as detailed under Q3.

Where technologies are at very early stages of deployment, early and transparent public engagement will be essential to ensure public acceptability, as well as a clear explanation of the co-benefits of switching to low carbon heating. The transition from town gas to natural gas offers a useful precedent, through the ‘Guaranteed Warmth’ campaign, through which the Gas Council was able to market the desirable effects of both gas as a fuel, and central heating as a technology, as an integrated package. Similarly, by marketing low carbon heating options as not just a way to cut emissions, but also a way to tackle fuel poverty or to reduce dampness and mould in homes, customers can be more open to change. Similarly, by designing materials similar to the Conversion Strategy Handbook (discussed under Q3), government bodies managing the transition can ensure that the options are clearly communicated to consumers and safety concerns are addressed in a timely manner.

Thirdly, funding that is limited, too fragmented and available for very short time frames has also acted as a barrier to date. For instance, the Clean Heat Grant, is available on a time frame of only 2 years, versus 15 years for the Green Gas Levy, which tilts the incentives from clean heat to gas. Moreover, Clean Heat Grant is due to support 25,000 installations over 2 years – 12,500 installations per year – when the current deployment of heat pumps is 22,000 per year, creating the risk of halving current deployment levels. Finally, the funding is targeted at individuals in particular through small sums being made available. This means that government is currently overwhelmingly subsidizing individual heat pump installation over other options such as district heat, even in densely populated areas.

This clearly shows the need for more ambitious funding and pricing signals that are consistent with the net zero target, giving preference to established low carbon options over heating fuels like gas. In the absence of this, the adoption of low carbon heating systems will remain patchy, and consumer confidence could be undermined. Furthermore, by offering long-term support for key technologies like heat pumps through a mixture of stable funding and well-designed regulation, government has an opportunity to attract private capital to supplement existing grants and enable quicker at scale deployment.

Question 5: 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? 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?

The first step towards ensuring costs are fairly distributed is the timely publication of a comprehensive strategy, with clear timelines for phasing out fossil fuel heating and targets for retrofitting existing buildings. This will enable businesses and consumers to plan ahead and avoid investing in boilers that will have to be replaced shortly afterwards when new regulation is enforced. The proposed phaseout of hybrid cars in 2035 or sooner offers a useful lesson in this sense, as these types of vehicles were eligible for grants as late as 2018. The change in direction has generated frustration and diminished consumer confidence, and it is important that the transition to low carbon heating is handled more effectively.

A clear plan for how the transition will be managed can also help resolve a key issue for consumers: upfront costs. This is cited as a key barrier to wider adoption of low carbon heating system, but with clear communication consumers and businesses will be better able to plan and manage their finances. A continuation of the Renewable Heat Incentive beyond 2022 will also be important.

To ensure that high upfront costs do not impact those less able to afford them, heat-as-a-service options should also be explored. Under these, customers buy hours of warmth in their home – called ‘Warm Hours’ instead of buying units of energy (kWh). This approach has already been trialled by Baxi Heating UK, which sold a Heat Plan that bundled a new heating system, servicing, maintenance and energy for a fixed monthly price and by Bristol Energy UK, the first energy supplier in the UK to trial selling heat-as-a-service, selling both fixed price and Pay-As-You-Go Heat Plans to domestic customers.[12] This lower-cost retrofit option allows consumers to budget for this transition in advance, and should be trialled at scale.

A key part of an effective transition will be supporting households living in fuel poverty, a figure estimated at 11.1% just in England.[13] Energy efficiency investment will be essential to resolve this, with social housing and homes in the private-rented sector prioritised, as fuel poverty is more prevalent there. By mandating MEES of EPC band C by 2030, government can play a key role in driving this market. Moreover, supporting initiatives like Energiesprong UK to build up scale will be essential. The Energiesprong standard focuses on creating desirable homes by investing in retrofit using money from partner housing associations that would normally be paid on energy bills and maintenance to pay for the works. The Energiesprong approach can do this while assuring the cost of living does not go up, because the standard guarantees real life performance for both indoor comfort and energy use for up to 40 years. The retrofits are also quick to install: a complete house makeover should take less than 10 days.[14]

Finally, to tackle issues around the cost of the transition, government should establish a national body, similar to the Scottish Just Transition Commission, to maximise the opportunities brought by the transition and ensure existing inequalities are not exacerbated.[15] This body could also ensure that the costs of the transition do not fall disproportionately on those less able to afford them, by working in partnership with businesses, SMEs, local authorities and consumer groups.

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?

Well-designed regulation can play a key role in the wider adoption of low carbon heating options. A good example in this sense is the Future Homes Standard, which mandates that all new buildings from 2025 will have to be fitted with low carbon heating instead of gas boilers.

However, the picture becomes more complicated when it comes to retrofitting existing buildings. Because established low carbon technologies like heat pumps or direct electric heating are more feasible when high levels of energy efficiency have been attained, regulating for energy efficiency improvements should be the first step. Government should tighten the MEES for privately rented domestic buildings and for commercial properties to achieve EPC band C by 2035. These standards should eventually be rolled out to privately owned homes and social accommodation as a priority to ensure that the transition to low carbon homes also benefits the whole of society and those facing fuel poverty.

In addition, regulating for a phaseout date for fossil fuel heating systems in existing buildings will play an important role, providing a clear direction of travel for businesses and households looking to replace their heating systems in the near future. A timely announcement of this phaseout date will guarantee that consumer confidence is not undermined, avoiding situations where expensive heating systems are purchased that need to be retired earlier than their average lifespan.

In terms of incentives, a better correlation between building emissions and the building’s market value should be established. This can be done through fiscal incentives such as VAT and stamp duty rebates for homes installing low carbon heating, scrappage schemes for gas boilers or tax breaks for businesses investing in low carbon heating technologies. Moreover, financial support for low carbon heat installation through schemes such as the Clean Heat Grant or the Renewable Heat Incentive needs to operate to longer time frames to provide the stability needed for the sector and associated supply chains to scale up.

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?

Despite 93% of consumers saying climate change is a serious issue, only 5% see heat as a main contributor to the UK’s carbon emissions, which shows a significant knowledge gap.[16] Yet, we know that the quick adoption of low carbon heating systems as alternatives to fossil fuel boilers will be essential to cut emissions from homes. This shift cannot be achieved without customers being aware of the benefits of low carbon heating systems and engaged in conversations, to avoid the perception that decisions are made without due consultation. The government therefore needs to invest in a public awareness campaign to highlight the benefits of new heating technologies to address consumer concerns and gain public acceptability for these solutions.

Studies[17] have show that consumers are fairly open to trying a range of alternatives to fossil fuel heating once these are explained to them properly. Some will have strong preferences depending on their local circumstances: for example, rural consumers see direct electric heating as a less acceptable option given the frequency of power cuts affecting more remote areas. Likewise, some consumers in urban areas can perceive heat pumps as a less acceptable option given the space they take up. However, most consumers agreed that they can be flexible if a new heating system provides other benefits such as reduced bills. This shows the importance of a nationwide campaign, clearly presenting the range of options and their co-benefits. It will be crucial to avoid the perception that decisions are being imposed on consumers, with no due regard given to their particular circumstances.

To do this effectively, government can learn from previous examples, such as the transition from town gas to natural gas between 1966 to 1977. The transition was facilitated, among other factors, by the role of coordinating institutions that provided information, technical assistance, and response to consumer concerns. Additionally, a Conversion Strategy Handbook directed at engineers looked at possible concerns or barriers that might be experienced with different social groups.  (more details under Q3)

The private sector is also exploring different ways to support the transition and engage consumers: Willmott Dixon is currently supporting Birmingham City Council by providing information and training to city council employees on heat pumps specificities, which will be readily available to occupants on move-in day. In devising a low carbon heat strategy and a national campaign that addresses any concerns the public may have, collaboration and consultation with the private sector will be essential.

November 2020