Written evidence submitted by the Department for Business, Energy and Industrial Strategy (DHH0090)

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?

Meeting our net zero target of net zero emissions by 2050 will require virtually all heat in buildings to be decarbonised.[1] Between 1990 to 2018 the UK reduced its direct emissions from the residential sector by 14% and the Government has made good progress on delivering low carbon heating in recent years, for example:  

• The Renewable Heat Incentive (RHI) has supported over 100,000 business, public bodies, charities and households in transitioning to low-carbon heating as of July 2020, with estimated carbon emissions reductions of over 120 million tons (Mt) of CO2e over the lifetime of the scheme.[2][3]
• Through the Heat Network Investment Project (HNIP) £320 million is being invested up to April 2022 to support the construction of heat networks and accelerate the growth of the market. Over £76 million has been awarded to thirteen projects across England and Wales with more still to be announced.[4] 
• In the response to the recommendations by the Each Home Counts review 2016, the Department has worked with industry to introduce a new Trustmark scheme, develop a new Publicly Available Specification standards (PAS) through the British Standards institute, and supported the Microgeneration Certification Scheme (MCS).  

We have looked to build on the success of these schemes and adapt policy to take into account lessons learned from ongoing evaluations of our policies. In 2018 we published Clean Growth: Transforming Heating, an evidence review[5] of the options available for decarbonising heat. We identified the continued challenges and barriers that need to be addressed, and the need for strategic decisions for the future of heat infrastructure in the 2020s. In due course the Government will set out ambitious actions to address these challenges in the upcoming Heat and Buildings Strategy.

Ahead of the Strategy’s publication, the Government has set out a package of policy this year to increase the deployment the of low carbon heating in the early part of the 2020s that reflects lessons learned from the delivery of previous UK policy and international initiatives:  

• In April, the Future Support for Low Carbon Heat[6] consultation set out proposals for future schemes which build on evidence and lessons learnt from the RHI, in particular on how to tackle non-compliance and ensure value for money. The Spring Budget set out a new £100 million Clean Heat Grant scheme, following the closure of the Domestic RHI in March 2022. The scheme will provide upfront grant payments for the installation of heat pumps and biomass (in limited circumstances), helping to overcome the upfront cost barrier which was one of the biggest challenges identified with existing Domestic RHI uptake. 
• We have consulted on the Green Gas Support Scheme to drive increasing proportions of green gas in the grid through biomethane injection, supported by a tariff mechanism similar to the existing Non-Domestic RHI, which industry feedback and evaluation evidence shows has been effective in providing financial stability for investors. 
• We recently consulted on a Heat Networks Market Framework and propose to replace the Heat Network Investment Project with a new £270m Green Heat Network Fund (GHNF) which supports and incentivises lower carbon heat sources.  
• The Chancellor recently announced a net zero building package worth in excess of £3 billion. This new funding represents a significant and accelerated down payment on decarbonising buildings, to help stimulate economic recovery and create green jobs, including support for installing heat pumps through the Green Homes Grant, Public Sector Decarbonisation Scheme and Social Housing Decarbonisation Fund. The 10-Point Plan announced an intention to provide further funding for the Public Sector and Social Housing Decarbonisation schemes and extend the Green Homes Grant by a further year.
• The Prime Minister has set out his ambitious ten-point plan for a green industrial revolution[7] this including investing £1 billion to make our homes, schools and hospitals greener, warmer and more energy efficient, whilst creating 50,000 jobs by 2030, and setting out an ambition to install 600,000 heat pumps by 2028. This includes extending the Green Homes Grant and improving the energy efficiency of lighting and appliances.

We consider international examples and learn from international comparators wherever relevant for example as part of our consultation on building a heat network market framework we commissioned research looking at regulatory structures in seven different heat networks markets across the world, from British Columbia to Denmark. The unique complexity of the UK’s gas distribution network means that direct international comparators are sometimes limited, but consideration of international best practice is integrated into policy and project design across government.

The UK has made good progress improving the energy performance of our housing stock, when compared with the EU average improvement. 34% of homes in England at Band C or above according to the 2018 English Housing Survey[8], an increase from just 7% of homes in 2007. This improvement is roughly twice as much as the EU average over this period, which experienced a 17 per cent reduction in consumption per dwelling and a 21 per cent reduction in consumption per m2.  

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)?

The Heat and Buildings Strategy will deliver a package of policies and enabling measures that drive ambitious market growth in energy efficiency and low carbon heat installations needed for net zero.  Policy actions taken to improve homes will need to be broadly consistent across the owner occupier and private rented sectors to avoid distorting the housing market.

The Strategy will take a holistic approach to energy use in buildings, considering energy efficiency as well as heat decarbonisation. Key priorities will be:

• Improving the efficiency of our buildings to reduce energy demand, lower bills whilst improving comfort and health. This will be key to meeting our statutory targets on fuel poverty. Early action should target the worst performing homes, to result in the largest carbon saving.
• Eradicating Fuel Poverty in line with our statutory target by publishing an updated Fuel Poverty Strategy and extending the Energy Company Obligation to 2026.
• Bringing existing homes up to at least EPC C by 2035 will deliver these benefits in a cost-effective, no-regrets way. This will require the introduction of minimum energy efficiency standards starting with the private rental sector.
• Supporting recovery and growing supply chains by extending the Green Homes Grant and continuing funding for Social Housing and Public Sector Decarbonisation.
• Introducing the Future Homes and Building Standards in England for new build homes and buildings. The Devolved Administrations are also exploring updates to Building Regulations.
• Growing the low carbon heating market (in the most part heat networks and heat pumps), from one that is currently delivering around 35,000 systems a year, to one which is able to supply the average annual demand for new heating systems (around 1.7m gas and 50k Oil/LPG domestic installations per year[9]) we have an ambition to grow the Heat Pump market to 600k installations per annum by 2028. Ultimately, delivering net zero buildings will mean moving away from burning fossil fuels for heating.  The Government committed to phasing out the installation of such heating systems in new and existing homes that are off the gas grid during the 2020s.
• Investing in R&D to test the feasibility and potential for using low carbon hydrogen to help decarbonise our heating. The Government is committed to exploring this in the early 2020s, including beginning a trial Hydrogen Village by 2025 and a vision for a pilot Hydrogen Town before the end of the decade.
• Introducing enabling policies to remove barriers to delivery of regulatory measures, including developing a workforce with skills to meet the requirements of the Net Zero transition.

Further, we will set out the nature and timings of strategic decisions required over the course of this parliament. Many, such as the relative roles of hydrogen and electrification, still require preparatory work, which we will address in the Heat and Buildings Strategy and next year’s Hydrogen Strategy.

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 UK building stock is very varied, which means we need a flexible approach to heat decarbonisation. There will be no “one-size-fits-all" technology that can be used to decarbonise.

For new buildings, and buildings that are not connected to the gas grid, the electrification of heat is already commercially available and works at scale across a broad spectrum of buildings. Heat pumps deliver effective heating with lower emissions than fossil fuel or direct electric heating. In those hardest to treat off-gas grid buildings, bioenergy also has the potential to make substantial contributions.

For buildings that are connected to the gas grid, biomethane is currently the only green gas commercially produced in the UK that can be used to reduce the carbon intensity of gas on the grid. Over the longer-term, Hydrogen has exciting, but unproven, potential for decarbonising heating. The Government is therefore supporting a range of R&D and testing projects to determine the feasibility and cost of using low carbon hydrogen as an alternative to decarbonising heating through electrification. We are setting an ambition to have 5GW of low carbon hydrogen production capacity by 2030 for industry, transport, power and homes. 

Heat networks have an important role to play, especially in areas of high-density demand and where there are large low-carbon heat sources. Heat networks are technology neutral with the ability to exploit multiple sources of heat such as larger-scale renewables and recovered heat sources.

Initial research indicates that hybrid heat pumps have a lot of potential to decrease demand on the electricity system, but also have some key drawbacks such as dependence on consumer behaviour.

Complimentary technologies will also help deliver low carbon heat such as thermal or fabric storage to store energy for later use and rooftop solar, solar-thermal and smart meters to help manage energy use provide greater choice and flexibility for the consumer.

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

The imbalance between the costs of electricity and gas in the UK is one barrier to the take up of electric low carbon heating technologies. The average per unit costs of electricity is significantly higher than for gas, including wholesale, network, and operational costs[10]. This is partly amplified by the proportionally higher ‘environmental levies and taxes’ on electricity when compared to natural gas, for both industrial and domestic customers. We recognise that this will need to be addressed, particularly where this represents a barrier to take up of clean technologies, although it is important to note that UK industrial and domestic gas prices are relatively competitive, and they are the second lowest when compared to other countries in the EU15[11].

The Government will also need to tackle the upfront cost of low carbon heating installations during the 2020s by establishing a market for investment, enabling access to green finance for those who are able to pay and providing subsidies for consumers who are vulnerable or fuel poor. The Government is currently supporting deployment of low carbon heating technologies through the Domestic and Non-domestic RHI, Heat Network Investment Project, Energy Company Obligation, and the Chancellor’s net zero building package.

By better understanding our building landscape and how heat is used, we can make more accurate projections and shape policy to best reflect current practices in heat installations.  Innovation, whether through the creation of new technologies and systems, or the refinement of existing ones, can drive improved performance and reduce costs. By enabling the market to explore quicker, cheaper manufacturing and delivery, costs to consumers can be reduced and technologies can be made more affordable.

Low public awareness is also a barrier to scaling up low carbon heat. There will be important roles for industry, for government, and for a wider set of voices to explain the importance of decarbonising buildings in our journey to net zero.

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?

Any future policy framework will need to address the distribution of costs across the energy system and the needs of different groups of consumers. HMT are currently carrying out a review of the costs of net zero, as recommended by the Climate Change Committee, to consider how the transition to net zero will be funded and assess options for where the costs will fall.   

The Government is considering the appropriate mix of subsidy, incentives and regulations required to drive decarbonisation of heat, to ensure costs are distributed fairly. The forthcoming Heat and Buildings Strategy will set out our approach for the 2020s, and the updated Fuel Poverty Strategy for England will provide a plan to upgrade fuel poor homes.

BEIS is already delivering a programme of support to encourage the uptake of energy efficiency measures by those who have difficulty with their energy bill costs through The Warm Home Discount scheme[12], Energy Company Obligation which we have extended to 2026 and the £2 billion Green Homes Grant Scheme, which will fund up to two thirds of the cost of upgrading the energy performance of homes (of which low income households will be eligible for up to 100% government funding, up to around £10,000). This could save households up to £600 a year on their energy bills. The rollout of smart meters will further help to inform consumer behaviour, encouraging more efficient energy usage reducing the costs to the whole energy system.

The Green Homes Grant is comprised of two elements; a £1.5 billion voucher scheme direct to consumers, and £500 million earmarked for Local Authorities to raise the energy efficiency of low-income and low-EPC rated households, including those living in the worst quality off-gas grid homes. The Local Authority Delivery scheme focuses on owner occupiers and those in the private and social rented sector, with a household income of under £30,000 across England. This will target the most vulnerable households and will directly help people with the cost of living by reducing their energy bills.  We will extend the Green Homes Grant for another year to support homeowners to improve the energy efficiency of their homes and replace fossil fuel heating, as well as continuing to fund the Social Housing Decarbonisation to continue the programme of upgrading the least efficient social housing.

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?

The Heat and Buildings Strategy will set out the immediate actions the Government will take to reduce emissions from buildings in a way that minimises disruption and maximises consumer choice. We believe tying action to natural trigger points, like appliance replacement cycles, transitions in building use and ownership, and building works, will help smooth the transition to low carbon heating.

We are examining the feasibility of setting long term standards to encourage household take up, including consulting on improving the energy performance of privately rented homes to EPC C Band by 2028 and introducing mandatory disclosure requirements for lenders on the energy performance of homes they lend to and voluntary improvement targets. We have also consulted on proposals for all non-domestic rented buildings to obtain EPC B by 2030.

By taking ambitious action in the public sector will help stimulate the wider market for commercial energy efficiency and low carbon heating and help build up supply chains for larger buildings. We will set out our plans later this year to phase out high-carbon, off-grid fuel fossil fuel heating in the 2020s where we know electrification is the lead pathway to net zero as there is no current strategic hydrogen option.  In the next decade we will need to prepare the market, growing proven technology markets (such as energy efficiency, heat pumps and heat networks), so that these technologies can be deployed at a large scale in the 2030s and 40s.

As outlined above, the Government is providing financial incentives to encourage take up of low carbon heating technologies in households through policies such as the Renewable Heat Incentive and the Chancellor’s net zero building package. We plan to launch a new £100 million Clean Heat Grant scheme which will provide targeted support to consumers and small businesses for heat pumps and limited biomass from April 2022.

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?

There will be important roles for industry, Government, and a wider set of voices to inform and engage the public to explain the importance of decarbonising buildings in our overall journey to net zero. This engagement will need to build confidence in the technologies, processes and policy measures required to deliver this ambition. To achieve this, we recognise that we need to take a holistic approach considering the installation of low carbon heating measures, retrofit and effective consumer protection.

Through targeted support such as the £1.5 billion Green Homes Grant voucher scheme we can minimise the cost burden to consumers of transitioning to low carbon heating. Eligible low income and vulnerable households can access a grant covering up to £10,000 for low carbon heating and energy efficiency measure installations. The Green Homes Grant scheme application process is supported by the Simple Energy Advice (SEA) online portal. We launched the SEA digital service to provide impartial and tailored advice to encourage uptake of energy efficiency and low carbon heating measurers in response to the Each Home Counts Review.

To go with the grain of consumer habits, we will improve energy efficiency standards of household products so they use less energy and materials, helping households and businesses reduce their bills with minimal effort, including by launching an improved Energy Technology List website.

Work is ongoing to improve access to comprehensive and impartial advice for all consumers, empowering them to confidently make informed heating choices. To ensure consumers are appropriately protected, future policies will incorporate the highest industry standards guaranteed through Trustmark, PAS and MCS for the relevant heating technologies. We are exploring how best to align engagement with green recovery work and other strategic net zero activities and engagement.

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?

Along our journey to net zero, we will need organisations of all sizes – national, regional, local and individuals – to play a role in assessing, planning and deploying the most suitable low-carbon heat source. Given the diversity of heat demand, no one low carbon heating solution can provide the best option for every building.

We will need to consider what type of decisions and responsibilities will be required (planning, coordinating or delivery) and how best to ensure impartiality is maintained, local expertise is used, and impacts of and to the wider energy system are considered.

The Government are already working closely with existing bodies and group to deliver decarbonise homes against our net zero ambition:  

• Ofgem are the administrators for Government schemes such as the Renewable Heat Incentive (RHI), Non-Domestic RHI, Energy Company Obligation & the Warm Homes Discount. 
• We set up the Heat Network Delivery Unit (HNDU) to support local authorities in England and Wales through the early stages of heat network project development. We have given out around £20m in grants through HNDU. 
• We deliver work through the almost £20m BEIS Local Energy Programme (LEP) which is designed to maximise local contribution to clean growth. The key focus is mobilisation of green finance to support projects at local level. The Local Energy Programme addresses local barriers to clean growth activity and equips local areas to drive private sector investment into clean growth across a pipeline of local projects.  

December 2020