Written evidence submitted by EDF (DHH0076)

Summary and Introduction

1. EDF is the UK’s largest producer of low carbon electricity. We operate low carbon nuclear power stations and are building the first of a new generation of nuclear plants. We also have a large and growing portfolio of renewables, including onshore, offshore wind and solar generation, as well as coal and gas stations and energy storage. We have around five million electricity and gas customer accounts, including residential and business users. EDF aims to help Britain achieve net zero by building a smarter energy future that will support delivery of net zero carbon emissions, including through digital innovations and new customer offerings that encourage the transition to low carbon electric transport and heating.
2. EDF welcomes the opportunity to provide evidence to the BEIS Select Committee inquiry on decarbonisation of heat.  EDF has a wide range of experience of providing our customers with lower carbon heating solutions, including for residential customers through our delivery of the ECO energy efficiency scheme and heat pump-based offers to our customers[1] – and for commercial customers through our energy services joint venture Imtech.
3. Only modest progress has been made on the decarbonisation of heat so far. This will need to increase substantially in the coming decade if net zero ambitions are to be achieved and decisions are required on the overall strategic approach. EDF welcomes the ambition shown by the Prime Minister’s recent Ten Point Plan for a Green Industrial Revolution, especially in the new 600,000 per year target for heat pumps by 2028. The forthcoming Energy White Paper and Heat and Buildings Strategy provide opportunities to flesh out more detail on how and when new measures will be implemented, and decisions taken.  Progress can also be made on a range of important low regrets measures, including expanded energy efficiency programmes and early measures to require new homes to be fossil fuel free and to prevent further expansion of the gas grid. 

4. As a proven source of low carbon heat, electrification should form a major part of any heat decarbonisation strategy.  Electrification is the optimal approach for new homes and buildings and off-gas grid properties.  Heat networks using a range of low carbon options will be important in urban areas. To achieve the full decarbonisation of heat is likely to require a mixed strategy also involving significant use of low carbon hydrogen, which can be of particular value as a source of peak heat and as a heating fuel for a range of industrial processes.

5. For the mass of existing on-gas grid buildings EDF considers a hybrid strategy involving both electrification and low carbon hydrogen could have significant attractions.  Hybrid heating systems with a smaller heat pump operating alongside a gas boiler can reduce gas consumption by up to around 80%. Greater adoption of these systems would be a pragmatic near-medium term approach which would allow substantial decarbonisation progress to be made, markets to grow, costs to fall and customer and industry experience of heat pump technologies to be enhanced. It would retain flexibility to use much existing network infrastructure and determine the ultimate balance between electrification and hydrogen based on the evolution of technologies and costs in coming decades. 

6. Low carbon heating solutions are not yet economic on a whole-life basis for consumers in most circumstances. This represents the key existing barrier to progress. Measures to address existing imbalances in the allocation of policy costs between electricity and gas would substantially improve the economics of lower carbon options and should include the introduction of carbon taxation onto domestic and commercial gas consumption, as well as wider moves to equalise policy costs between gas and electricity. Changes in these areas should be introduced gradually and with affordability for energy consumers in mind. Through a combination of an enhanced energy efficiency programme and support for early markets for heat pumps, hybrid heating systems and low carbon hydrogen, growing markets in low carbon heating options can be achieved. 

7. In addition, there is at present low public awareness of the challenge of decarbonising heat. A major communication effort will be required from both Government and business, but to be effective this must be accompanied by changes to the policy and regulatory framework to allow attractive customer propositions for low carbon heat to be developed.

Main Response

Q1. 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?

8. To date there has been limited progress on the decarbonisation of heat. Carbon emissions from homes (the largest source of heat related emissions) have only reduced modestly over the past 30 years – as the government’s own data shows[2]:

9. Where progress in emissions reductions from heat has been achieved, this has very largely been in the area of energy efficiency – in the main thanks to the ECO and its predecessor schemes delivered by energy suppliers, which at their peak in the period 2008-12 were delivering in excess of 1m pa installations of loft insulation and more than 0.5m of cavity wall insulation.  However, after 2012 the scale of energy efficiency schemes was substantially scaled back and, prior to the launch of the recently announced Green Homes Grant scheme, which EDF welcomes, installations of loft and wall insulation had fallen to no more than around 5% of the peak levels achieved in 2012[3]. 

10. While there has been some modest progress in energy efficiency, there has been very little progress in encouraging switching to lower carbon forms of heat.  This reflects a range of factors, but most specifically the continuing popularity and low cost of gas for heating buildings and the high cost and limited availability of alternatives.  At a policy level the government is still to set a strategic vision for decarbonisation of heat or to develop a policy mix which would combine economic incentives and regulatory measures in ways which would drive a large scale move away from fossil gas consumption for home heating.

11. By comparison with most countries, the UK has a very high dependency on gas for heating and, despite some progress, the UK building stock remains relatively energy inefficient. Gas prices are also very low in the UK by international standards, limiting the commercial case for change.  No country or region in the world has yet adopted low carbon hydrogen as a heating fuel. But many other countries, both in Europe and beyond, do have much higher penetrations of electric heating (eg in Norway today electricity meets ~80% of residential and commercial heating demand[4]). With electricity in the UK a now substantially lower carbon fuel, and with further reductions in the carbon intensity of electricity anticipated over the coming decade, the carbon reduction benefits available from greater electrification of heat would be substantial.

Q2. 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)?

12. It is widely recognised that the decarbonisation of heat is one of the most politically, economically and technically challenging areas for achieving net zero. It raises some fundamental strategic questions for government around:

a)      The balance to be pursued between different technological options for decarbonisation of heat – electrification, low carbon gases and hybrid options combining both

b)      How the substantial costs associated with decarbonisation of heat are to be allocated and met.

13. EDF considers that strategic decisions on these questions are required by the mid-2020’s in order to ensure that the regulations and funding measures needed to implement the chosen strategy can be delivered in the latter part of this decade and beyond.  For our views on these questions see our responses to Q3 and Q5 below.

14. In the interim there are a number of important “no or low regrets” steps which can be taken in to accelerate progress and increase future optionality.  These measures should be included in the forthcoming Buildings and Heat Strategy.  They are:

a)      An expanded programme of energy efficiency relevant for all forms of UK buildings and all categories of homeowner. Energy efficiency remains the most cost effective of heat decarbonisation options.  It is also a vital component of any long-term heat decarbonisation strategy as it substantially reduces the scale of energy system infrastructure which would be needed to support either electrification or low carbon gas-based options (or hybrid approaches combining both).  EDF welcomes the recent extension of the £2bn Green Homes Grant scheme and the £1bn Public Sector Decarbonisation Scheme.  However, these remain, at present, time-limited measures and there is a need to put in place a more lasting large-scale energy efficiency programme.  For this EDF favours an expansion of the existing ECO scheme, increasing eligibility beyond the current focus on fuel poor households to include the much larger “able to pay” market.  ECO has proved itself to be an effective delivery mechanism and existing structures mean the scheme is well placed to be ramped up in scale.

b)      Early implementation of the proposed future home standard preventing installation of fossil gas boilers in new build homes. New build homes can be built with high insulation standards and heat needs that can be comfortably met through provision of electric heating. This should be the default option for new build homes and we strongly welcome the commitment in the Prime Minister’s 10 Point Plan to move quickly in this area.

c)       Suspension of the extension of the gas grid into new areas – with alternative lower carbon electric heating options available for off-gas grid areas, increasing the penetration of fossil gas into the UK heating system runs contrary to the objectives of net zero.

d)      Begin the process of equalising policy costs between gas and electricity –imbalances in the allocation of costs between gas and electricity are a substantial impediment to progress in decarbonising heat - see our response to Q5 below for further detail.

e)      Bring forward proposals to prevent the installation of new carbon intensive heating in the off-gas grid – requiring instead installation of electric or hybrid-electric systems. EDF considers that the Sustainable Energy Association’s proposal for a declining carbon intensity standard has merit and should be considered further[5].

f)        Grow the market for heat pumps through new regulatory interventions, expanded funding and extending eligibility for grants to hybrid heating systems.  EDF supports the government’s proposals to replace the existing complex Renewable Heat Incentive scheme with simpler grant funding-based schemes.  We strongly welcome the new target of achieving 600k pa heat pump installations by 2028.  This is the scale of ambition which is needed to realise economies of scale and achieve cost reductions in heat pump costs. However significant funding and regulatory support will be needed to grow the early market for heat pumps and previous announcements on funding for the proposed new Clean Heat Grant Scheme (at £50m pa for only 2 years, which would support only around 12,500 heat pump installations pa - relative to over 1.5m new gas boilers installed every year) are clearly inadequate for the scale of ambition reflected in the new target.  Hybrid heat pump systems, which may play an important strategic role in the decarbonisation of heat (see our response to Q3 below) should also be included in the scheme. 

g)      Develop the market for low carbon hydrogen and continue to progress trials on the use of hydrogen for heating.  Low carbon hydrogen has the potential to play an important role in the decarbonisation of heat. EDF’s focus is on electrolytic hydrogen, which through nuclear and renewables, has the lowest carbon emissions over the full life cycle. Again, we welcome the ambition in the PM’s 10 Point Plan in this area. The key policy next steps are to develop mechanisms which will allow early deployment of low carbon hydrogen projects, facilitating the learning and economies of scale which would allow the UK to develop a major hydrogen industry over the longer-term.

15. Delivery of the above measures over the coming few years would bring real progress in the decarbonisation of heat as well as helping to develop the technologies, markets, skills and evidence base needed to support further progress over coming decades.

Q3. 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?

16. A range of technological approaches are likely to be needed to achieve the full decarbonisation of heat in homes, buildings and industry.  The optimal technology mix will evolve over time but can best be examined today by considering different categories of buildings and heat demand:

• For new build homes and offices, electrification (typically based on heat pumps) is a proven efficient option which, combined with high insulation levels, can meet all building requirements.

• For off-gas grid homes, electrification through full electric heat pump or hybrid heat pump systems is widely recognised as the optimal approach, given the large costs associated with extending the gas network.

• In urban locations low carbon heat networks can be an attractive option – with a range of potential technology solutions including use of low carbon gases, waste heat from industrial processes and/or the use of heat pumps. Low carbon heat from new nuclear stations could also be a potential approach in future in some regions.

• For a range of industrial processes low carbon hydrogen is likely to be the best or only technologically credible option (for example metal works and for industrial processes where post combustion CO2 capture is difficult such as in furnaces and kilns).

17. Beyond the above sectors there is still a large volume of existing on-gas grid homes (over 20m) and buildings where heating needs are currently met by gas boilers. Strategic decisions are needed on the preferred approach to decarbonisation of these buildings. 

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

19. EDF therefore considers that a mixed approach, with substantial electrification alongside widespread deployment of low carbon hydrogen, is likely to represent the optimal “whole-system” solution for the GB energy system. This would imply that hybrid heat pump systems could play a valuable role with the following advantages:

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

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

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

20. A hybrid approach could therefore be a pragmatic way forward which allows progress to be made, markets for heat pumps and low carbon hydrogen to grow, costs to fall and customer experience of the options to be enhanced. It would retain flexibility to determine the ultimate balance between electrification and hydrogen based on the evolution of technologies and costs in these areas in coming decades.  Whole system analyses have indicated that hybrid options combining electrification and low carbon hydrogen can be cost comparable or more cost effective than full electrification or full hydrogen options[6].  
21. To realise the full benefits of widespread adoption of hybrid systems, it will be critical to ensure high standards are applied to their installation and operation – ensuring that such systems are smartly controlled and will meet the large majority of heat requirements from the electric heat pump.  Measures to address policy cost imbalances between gas and electricity (see our response to Q5 below) will also ensure consumers are incentivised to maximise the electric contribution from their heating system.

Q4. What are the barriers to scaling up low carbon heating technologies? What is needed to overcome these barriers?

22. Today there are a range of barriers to the scaling-up of low carbon heating technologies.  There are economic barriers (low carbon options are more expensive than existing natural gas boilers), consumer familiarity barriers (e.g. consumers are generally unfamiliar with heat pumps) and industry capacity barriers (e.g. there is a limited pool of installers and expertise relating to low carbon heating options).

23. Of these the economic barrier is by far the most fundamental. Issues of consumer familiarity and industry capacity can be addressed through growing markets but without an economic proposition for consumers, there is no realistic prospect of market growth.  Public resistance to regulatory interventions which force adoption of lower carbon heating without providing financial support would be very likely.  It is essential therefore that government policy focusses in the near term on measures which will grow markets for low carbon heating technologies, allowing economies of scale and cost reduction to be realised. 

Q5. 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?

24. Today policy costs (including carbon pricing) are levied mainly on electricity and very lightly on gas.  To illustrate, for a typical residential consumer using gas for home heating, EDF estimates that more than £160 per annum of the electricity bill is composed of policy costs and environmental levies but only around £20 pa of the gas bill[7].   A customer using an efficient low carbon electric heat pump would pay an additional ~£210 pa in policy costs.  Over the typical 15-20 year lifetime of a heat pump or gas boiler, these imbalances therefore add several thousands of pounds to the lifetime cost of the heat pump option and so represent a major negative impact on the business case for heat pumps.  The same issue arises for most commercial, who also pay large policy costs on electricity and are not incentivised to switch away from fossil gas. 

25. There is a compelling case for gradually addressing these imbalances, albeit on a gradual basis to avoid cost shocks for energy customers. EDF favours:

• An early move to place the costs of the ECO energy efficiency scheme exclusively onto gas bills.
• The gradual introduction of a carbon tax on fossil gas consumption in domestic and commercial settings – rising over time in line with levels needed to promote fuel switching and net zero objectives.  The absence of any carbon pricing on gas consumption  is a clear existing market distortion which requires addressing[8]. 
• At least some of the costs of future schemes to decarbonise gas, or promote low carbon hydrogen to displace gas, should be charged to gas consumption rather than to electricity consumption or met exclusively through taxpayer funding.

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

Q6. 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?

27. See our response to Q2 and Q5 above for our position on the range of incentives and regulatory measures which would help deliver progress on the decarbonisation of heat. 

Q7. 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?

28. There is currently low public awareness of the need to decarbonise heating and the implications of this for the long-term use of boilers for home heating fuelled by natural gas.  Government must play a major role in this area through its communications and public statements.  Energy companies can also contribute very significantly to this process through their interactions with customers and their marketing material and EDF is very keen to play its part in promoting heat pump opportunities to our customer base. However, for communications to be effective, there is a clear need for economically attractive consumer propositions to promote – see our comments on earlier questions.

Q8. 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?

29. The decarbonisation of heat raises some fundamental questions around technology, cost allocation and regulation.  Major legislative, spending and policy decisions are needed and these will fall inevitably to central government and in some cases to the devolved administrations.  The national energy regulator Ofgem is also likely to have a role in delivering some elements of any heat decarbonisation programme and its regulatory decisions on networks will also need to reflect national and regional choices in this area.  Co-ordination of government activity and decision making on heat decarbonisation will be important and could suggest a case for new structures within the Departments and organisations which will make critical regulatory and spending decisions.  

30. Various recent reports have suggested the need for some form of national delivery body for low carbon heat.  While this concept could have some future merit, as our responses to earlier questions indicate, the more pressing need today is for changes to policy frameworks, funding streams and cost allocation principles – such that ambitions for heat decarbonisation are increased and lower carbon heating options become more viable economic propositions for consumers.

November 2020