Written evidence submitted by Regen (DHH0058)

Key Messages
Regen is an independent, not-for-profit centre of expertise in sustainable energy with over 15 years’ experience in transforming the energy system and we have extensive experience delivering independent expert advice and market insight on all aspects of sustainable energy delivery. Regen has over a decade of experience working in decarbonising heat in buildings, including:

• Key delivery partner in EU funded retrofit programmes, providing business support to deliver whole house retrofit solutions
• Embedded in the Bristol City Council heat infrastructure team to deliver heat networks in the city
• Published the thought leadership paper ‘The Decarbonisation of Heat’ which proposes multiple pathways to heat decarbonisation to achieve net zero

Regen is also a membership organisation with 150 members from business, local authority, community energy, clean energy developers, academic institutions, and research organisations across the energy sector.

Our responses to the questions below can be summarised as 4 key recommendations:

1. Implement long-term, joined up policies to create a sustainable, secure industry
2. Provide training and reskilling to create a secure supply chain
3. Fix market distortions and create incentives
4. Put the customer at the heart of all building decarbonisation policies

The following diagram from our thought leadership ‘Decarbonisation of Heat’ paper, illustrates these key recommendations and outlines a pathway from high carbon heat in 2020, through to low carbon heat by 2030.

Response to committee questions (2900 words, excluding questions)

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?
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)?

Over the last decade there have been many different public policies aimed at developing low carbon heat, with mixed success. In almost all examples, the policies and funding available were not long term enough and have not enabled a robust supply chain to develop and deliver low carbon heating mechanisms at the scale required.

Regen has been involved in several projects over the last decade to deliver retrofit measures to households and buildings. We have hands-on knowledge of the impacts of the Renewable Heat Incentives (RHI), the Energy Companies Obligation (ECO), Heat Networks Investment Project (HNIP), Heat Networks Delivery Unit (HNDU) and Green Deal. We also learn from, and listen to, our members who have been delivering these schemes – we have had feedback from members over the last few months about the Green Homes Grant and how we should learn from previous schemes.

We detailed this learning in our recent paper, The Decarbonisation of Heat, and the below points reflect our key recommendations from this paper.

1. Implement long-term, joined up policies to create a sustainable, secure industry
1. Government schemes need to avoid the ‘boom and bust’ cycles created by past initiatives and provide long-term support and confidence for the industry.
2. As such, the Green Homes Grant should be developed into a long-term programme to allow the supply chain and market to consistently grow.
2. Provide training and reskilling to create a secure supply chain
1. There should be more consultation with the industry to understand how policy can best support training and reskilling, as part of a green recovery.
2. This support and training should be mainstream – available to those from the construction and building trades, who would not normally be exposed to such courses.
3. Incentives need to be given to those in the gas installation sector who, at present, have no reason to transition to low carbon heating.
3. Fix market distortions and create incentives
1. As outlined in questions 5 and 6, market distortions must be rectified to provide economic and societal incentive to decarbonise homes and heating
2. Redistribute distorted carbon levies between electricity and gas bills
3. VAT relief for energy efficiency materials and low carbon heat technologies. In particular, VAT on retrofit must be zero rated, as is the case with new build, to incentivise investment and stimulate the market.
4. More implicit market incentives could be implemented, including green mortgages, stamp duty, EPC reform or rental standards (see further detail in question 6).
4. Put the customer at the heart of all building decarbonisation policies
1. The transformation of heat must be led and embraced by individual consumers. No amount of regulation or subsidy will be enough to overcome the barriers to new heat technology adoption unless there is a strong ‘pull’ and acceptance from householders and businesses to change.
2. Run a national consumer engagement programme, dedicated to increasing consumer knowledge of the measures available and associated benefits. This should be run as a national campaign, but with funding for local stakeholders to reinforce the messaging and act as the trusted intermediary.
3. Such a campaign must show the advantages for a consumer beyond economic and decarbonisation benefits

The table below outlines the lessons we have learnt from our experience with government schemes.

Figure 1 Deployment of measures under each phase of Eco[4].

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?

To decarbonise heat, and achieve net zero, will require the UK to use a wide variety of different technologies. Our analytical projects for gas and electricity networks, our delivery of projects on the ground and the feedback from our members, have informed our views below on the mix of technologies required.

The most important conclusion of this work is that it is vital that energy efficiency, and the adoption of higher building standards, must be a prerequisite no matter what the technology mix.

Electrification and Hydrogen Technology pathways

Electrification using zero carbon heat networks and heat pumps is the obvious heat decarbonisation pathway as it can coincide with the expansion of renewable electricity generation and the electrification of transport. Heat networks also offer economies of scale, with installed infrastructure offering the opportunity to connect multiple buildings.

Hydrogen, almost certainly, will have a role in heavy transportation and in industrial clusters.

It is not yet clear whether hydrogen could become a ubiquitous low carbon fuel for heating homes on the gas grid. Hydrogen could offer a less disruptive route for consumers. However, electrification offer a more efficient use of low carbon electricity. The challenges of producing, storing and transporting the required volume of hydrogen are also considerable, as is the likely cost when compared to electrification or a hybrid pathway[5].

A pathway that involves both electrification and hydrogen delivery, very likely tailored around local and regional factors, provides important advantages.

Electrification could be developed as a widespread solution for most energy efficient buildings, while hydrogen, produced by electrolysis using cheap summertime electricity, could be used as the basis of inter-seasonal energy balancing, in industrial clusters, in hybrid systems and in discrete urban hydrogen networks.

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

See question 1/2 for outline of key barriers

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?

Environmental levies make up around 20% of the average domestic electricity bill, but only 1.6% of the average domestic gas bill, despite both having a similar carbon impact per kWh of energy consumed. This creates a significant price distortion that is dissuading consumers from switching to lower carbon electricity for heating or adopting energy efficiency measures. We explored this is more detail in our Decarbonisation of heat paper, with findings as follows:

• Regen’s analysis suggests that redistribution of the existing annual environmental levies of £3.8 billion into a carbon levy would result in a domestic carbon levy equal to £36 per tonne of CO2e (see Fig 2).
• Redistributing these costs would not increase the overall level of revenue raised, but it would help resent cost benefit analyses and give a much stronger price signal.
• Although revenue neutral redistribution would not have significant impact on the average dual-fuel consumer, it would send a strong ethical signal that carbon emissions have a wider cost. Communicating this, and engaging with consumers and energy suppliers, would be critical for the scheme success.
• This should not, however, hide the fact that a new carbon levy will have several distributional impacts, particularly for fuel poor customers. The carbon levy could itself be banded or weighted to mitigate impacts on the fuel poor. This could also be done using complementary measures to improve energy efficiency, address fuel poverty and provide, for example, targeted winter fuel allowances, using revenues from the carbon levy, earmarked for low income households.

Figure 2 A potential redesign of the current domestic energy environmental levy into a carbon levy based on relative emissions[6].
 

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?

A package of measures will be needed to send the right signals to householders. We recommend:

• VAT relief is provided for all energy efficiency and low carbon technologies and services.
• Policies must particularly target property owners at key trigger points when owners are likely to consider or undertake works, e.g. renovation and purchase. An example would be a Stamp Duty Land Tax rebate if efficiency works are undertaken within six months of purchase.
• The EPC should be tied more explicitly to a decarbonisation plan for the building (see Fig 3). The improved EPC could come with a set of building specific recommendations that the homeowner or business could then implement to obtain a higher ranked EPC, both to meet future regulatory standards and access to the market incentives.
• Rental bands and price controls could be changed to incentivise property owners to improve building fabric efficiencies to reduce energy bills.
• Lenders could be encouraged to allow more favourable mortgage terms to householders (or businesses) with lower emissions and greater efficiency.
• Reflecting on households’ feedback on the Green Homes Grant, and the lack of guidance and advice that was felt, we recommend a two-stage voucher scheme:
• First stage, offering a voucher to employ an impartial retrofit professional to do an assessment of the available options for one’s house.
• Second stage, offering a voucher for households to employ a trusted, recommended contractor to carry out the desired measures.

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?

The customer must be at the heart of all building decarbonisation policies. No amount of regulation or subsidy will be enough to overcome the barriers to new heat technology adoption unless there is a strong ‘pull’ and acceptance from householders and businesses to change. Through our work on housing retrofit projects (see case study 4), we found that there was a gap in knowledge and little awareness of the funding available and the benefits of energy efficiency.

Recommendations:

• Run a national consumer engagement programme, dedicated to increasing consumer knowledge of the measures available and associated benefits.
• Support local authorities with reinforcing the government’s messaging campaign, emphasising the benefits of energy efficiency and low carbon heating beyond the economic and decarbonisation opportunities, as well as directing residents to local points of contact for guidance and advice.
• Ensure consumers have trusted, local intermediaries to seek impartial, affordable advice on the best energy efficiency and low carbon heating measures for their household.
• Ensure there is an equivalent consumer protection and regulatory safeguards in place. This is essential to give consumers confidence that they will not become ‘trapped’ in an inappropriate heating scheme.
• It’s also critical the market distortions are resolved to accurately reflect the true cost of gas, as well as the savings consumers can expect through energy efficiency measures (see question 6).

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?

As detailed in our recent paper, Local Leadership to Transform our Energy System, local strategic planning developed by the local authority, in partnership with key local stakeholders including the network operators, can deliver low carbon heating in the most efficient, place-based manner with the appropriate technology in the appropriate homes.

Our recommendations to achieve this are:

• Provide central guidance and funding to support a comprehensive programme of Local Area Heat and Energy Efficiency Planning. A national net zero strategy will be key to supporting local areas to understand the national policy context in which local technology choices are to be made.
• Establish a formal governance role for UK regions over the future of critical energy infrastructure, including delegated powers from the regulator, to guide the networks’ investment planning, appraisal and delivery processes.
• We recommend such heat and energy efficiency planning is done on a street-by-street basis, as opposed to zoning, which covers too much of an area, or house-by-house, which is unnecessarily granular. Network operators need to make strategic investments in network capacity in line with the plans and priorities set out by local authorities, to enable heat decarbonisation.
• Government should adopt, through the upcoming Heat and Buildings Strategy, the use of energy and heat hierarchies. We have seen these hierarchies work successfully through our work with Bristol City Council, who have included them in their Development Framework Core Strategy, for use with new developments.

Case study 5

November 2020