Written evidence submitted by Grid Edge Policy (DHH0087)

Introduction

Until 2016 I was Senior Partner Networks at Ofgem, having previously led on their consumer and fuel poverty work. Since leaving Ofgem I have been working as a consultant and thought leader through my company Grid Edge Policy and have taken a particular interest in the de-carbonisation of heat. In particular I have written two reports which bear directly on this inquiry:

• “Heat De-carbonisation: potential impacts on social equity and fuel poverty” for National Energy Action – here. This report looked at how the different cost structures of different heat solutions (in terms of the balance of up front and running costs) mean that the most cost-effective solution will vary depending on the heat demand of the property. It also looked at lessons from previous decarbonisation incentive schemes.
• “Electric Heat Pathways: Looking Beyond Heat Pumps” funded by SSE Networks – here. This looked at the role that smart electric storage heating – a neglected technology in the heat debate – could play as part of the heat de-carbonisation challenge. It also highlighted the importance of building a better understanding around hot water usage and the value of hot water tanks as thermal stores in a world where flexibility will be increasingly important to the system.

In addition to these two reports I have supported Carbon Connect’s work in their Future of Gas series, including chairing the launch of their Uncomfortable Home Truths report on the need to build awareness of the role heat plays in climate change and for an independent source of advice for consumers.

I also chair SGN’s Customer Engagement Group (giving me visibility of their work on hydrogen) and am an Associate with the charity Sustainability First where I have looked at issues of fairness around the funding of the costs of the energy transition (“What is Fair?”) and am just completing a report on how smart meter data could help fill some of the evidence gaps that currently exist around heat usage (distinguishing the modelled energy consumption of properties from the actual energy usage, including taking account of consumer behaviour and preferences).

I have drawn on this range of experience to provide views below on the questions raised in the call for evidence. I have sought in particular to highlight areas that others may not raise.

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?

In looking to learn lessons it is worth also considering the experience of policies to support low carbon electricity and energy efficiency. My report for NEA provided a framework for thinking about the different incentives and policies that have existed over time including whether they are targeted at individual households or at market participants and whether they are aimed at encouraging initial uptake or are addressing a long-term market failure (eg to reflect externalities such as the cost of carbon).

A key recommendation was that grants to deal with up-front costs are more effective than ongoing support and are essential to enable low-income customers to participate. Most schemes to date (like FITs) have favoured the better off who are able to afford the upfront costs.

The report also recommended that schemes aimed at individuals should be subject to careful thought and consumer research to understand wider customer drivers and impacts (learning from the Green Deal experience).

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)?

I would expect that almost all respondents will stress:

• Regardless of the heat technology adopted, the need for urgent action to improve the energy efficiency of our building stock;
• the need to build evidence around the viability of hydrogen as a solution and to start to rollout heat pumps at scale, in particular in off-gas areas;
• the need for a framework for regulating heat networks

In addition, I would highlight two areas:

First, the importance of providing the powers and funding that local authorities need to enable them to move forward on heat de-carbonisation. There would seem to be a broad consensus that a mix of solutions will be required and that this will vary depending on geography. Decisions will have to be taken at a local level given that is where the understanding sits about the housing stock, about fuel poverty, about the potential for anchor loads for district heating or industrial clusters that may point to hydrogen as a longer-term solution. However, there is not yet any acknowledgment from government about the need for this local leadership or any basis for allowing local governments to set direction. With some local authorities keen to meet accelerated timescales for achieving net zero a governance framework that frees them to move forward where the local solution is clear could unlock this ambition.

Second, the need for a clear statement on the enduring role for smart electric storage heating as a solution that is available now and is likely to be the best solution in certain properties longer term, as set out in my SSEN report and summarised below. While current storage heating has a poor reputation new high heat retention, smart storage heaters are much more effective. Currently social housing providers looking to improve properties with electric storage heating are installing gas. If we are to move away from using gas in new homes then smart electric storage heating should be signalled as being an acceptable solution for smaller properties or ones where heat pumps cannot practically be installed.

Supporting smart electric storage heating requires action by Ofgem to ensure that tariff and metering arrangements are suitable for these customers. There are then a range of other policy decisions and practicalities that are critical to get right if smart storage heating is to play a more credible role in a flexible, de-carbonised energy future. These include building and appliance standards (MHCLG and BEIS), network charging arrangements (Ofgem), up-front funding for the heaters for those in fuel poverty (BEIS and Scottish government), tailored customer information and ongoing support (various including consumer bodies), and addressing the current regulatory incentives in network price-controls that continue to drive gas replacing electric heating (Ofgem).

Sending a clear signal that smart storage heating has a part to play in a de-carbonised future would deliver a valuable signal to the supply chain and to housing associations and others who are grappling with what to do with their properties in the short term as they strive to deliver against SAP targets.

More generally an increased focus on the provision of hot water and an improved understanding of how different heating solutions can support a smarter, more flexible electricity system is needed as part of the heat decarbonisation debate.

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?

There seems to be a broad consensus that we will inevitably need a mix of technologies – hydrogen, heat pumps and district heating. Biomethane and hybrid heat pumps can also play a role, at least in the transition. The appropriate technology will vary depending on a range of practical factors including the resources available in a region, the type of property, including its tenancy, as well as consumer acceptability (which may vary by demographic). In my view it does not make sense to try to determine the mix centrally given the “place based” nature of the different solutions.

However, one solution that is neglected in all the discussions on heat de-carbonisation, and which was the focus of my report for SSEN mentioned above, is smart electric storage heating – which I have termed the Cinderella solution.

Currently around 2.2 million homes across GB are electrically heated, of which around 1.4 million have storage heaters. Historically storage heating was “leaky” and had only crude controls, delivering a poor customer experience. However, the next generation of smart storage heaters are less leaky and provide far more sophisticated controls. Evidence from a range of trials show that these can save customers money (compared to traditional storage heating) and deliver much improved comfort. Even fitting smart controls to existing storage heating has been shown to improve comfort.

While smart storage heaters are technically less efficient forms of electric heating than heat pumps (which use the electricity to draw heat from surrounding ground or air) there are very significant numbers of homes for which heat pumps are not a practical solution. This can be either because of a lack of space or because in homes with a low energy demand the upfront costs of a heat pump may not be justified, despite having lower running costs.

Today’s homes with storage heaters risk being put to the back of the queue as hard to upgrade and therefore “hard to de-carbonise”. However, these properties are overwhelmingly lived in by more vulnerable households on lower incomes who can be pushed into fuel poverty by the higher running costs of existing legacy electric heating systems. Developing a clear vision for this segment of households and the housing stock should be a priority given the often-voiced commitment to “no-one left behind” in the move to net zero.

The other strong reason why storage heating ought to be given more serious consideration is that discussion around the energy transition places a strong emphasis on the growing value of flexibility as far more intermittent generation comes onto the system. Smart storage heating and hot water could potentially provide this flexibility more readily than a heat-pump.

It is critical to address the many legacy problems for existing storage heater customers. These customers represent many of the most vulnerable in society. Moreover, finding an enduring solution that works for them should also help provide a way for electric storage heating and hot water to play a valuable role in providing flexibility in future.

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

Encouraging consumer uptake of low carbon heating technology remains a major challenge. To date the thinking has been largely “technology-led” which risks consumer resistance as you start to scale up. This could be helped by:

- ensuring equal focus is given to the consumer experience of these technologies and what drives customer acceptability;

- bringing together case studies and evidence on real life performance of the different technologies (in terms of costs and comfort) to give consumers – and advisers – confidence in them. Consumers cannot “try before they buy” with a new heating system and the limited experience of heat pumps in the GB is a barrier in itself;

- addressing the cost distortions between gas and electricity that means that low carbon solutions are almost invariably cheaper;

- reviewing EPC ratings that focus on the current cost of different fuels (hence underplaying the long-term running costs of different systems) and also outdated assumptions on the carbon intensity of gas versus electricity.

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?

Taxation is known to be less regressive and will have less impact on those in fuel poverty - but it is hard to be confident that money collected through taxation will actually be spent on heat decarbonisation. Though not ideal, it may therefore be a pragmatic solution to fund the costs through the bill but ensure protections are in place for those on low incomes.

The current distribution of environmental levies – which account for 20.4% of the electricity bill but only 1.6% on gas (source: Ofgem) - discourages a switch to low carbon sources and also penalises those households (typically low income) with electric heating currently.

The distribution of environmental levies should be reviewed. In the absence of a carbon tax on domestic gas this would help send the right signal. However ultimately there is a need to include a carbon tax on domestic gas to reflect the externalities involved in greenhouse gas emissions. This carbon tax could be used to cover some of the costs of decarbonisation.

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?

Building standards are the most effective way of “choice editing” and preventing households from continuing with high carbon solutions. However, households must still be left with an element of choice around the solution – or for this to be determined at a community level where they have a say in the decision taken.

Individual incentives (up-front grants) can prompt the take-up of solutions at a household level such as heat pumps. As noted above, the up-front cost is particularly important for low income households.

Solutions that need to be delivered on a collective basis (district heating or hydrogen) will need incentives or obligations that deliver de-carbonised solutions at a cost that will be acceptable to consumers.

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?

In considering the technology options policy makers need to put a strong emphasis on the fact that some solutions are more disruptive than others – it will be very hard to force disruptive solutions on people. This points to investing in R&D to find ways to make solutions more acceptable in terms of minimising disruption (eg heat pumps that can be used with existing radiators) and ongoing usage (eg controllability).

The Carbon Connect report “An Uncomfortable Truth” highlights the need now for awareness raising and also for a source of independent advice. The Climate Assembly found that people are concerned about climate change and ready to change their behaviours – but research shows very few people are actually aware that heating our homes has a climate impact. Building this awareness now will make it easier to introduce change later.

My report for SSEN also stressed the importance of independent advice and hand-holding through the process based on a review of a number of pilots. This applies at all stages – from the choice of technology, getting the right size pump / boiler / tank, operating the controls to ensure comfort and cost are balanced and the choice of tariff in a world where flexibility will be important. While much support can be provided by installers and manufacturers these are unfamiliar technologies and it is essential that mis-selling does not undermine confidence in the new market. This points to both the need for independent advice and robust enforcement of consumer protection legislation.

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?

Central government will clearly need to set standards (to determine the available options) and provide a level of funding / incentives.

However it is hard to see this being delivered on the ground other than by devolved nations, metro-mayors and local authorities. There is almost certainly a need for new local bodies – with additional powers and government support – to work through options for heat in their local area (as an extension to local governments’ existing planning function). Energy networks are currently being encouraged by Ofgem to work with local authorities to develop local area energy plans. However the evidence is that local authorities are not resourced to do this and there is a capability gap that needs to be filled. Energy companies will need funding if they are to play a larger role and a central expert resource (as has been provided on district heating) could also help fill that capability gap.

December 2020