Written evidence submitted by the Regulatory Assistance Project (DHH0096)
RAP welcomes the opportunity to provide input into the “Decarbonising heat in homes” inquiry.
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?
The main policy for delivering low carbon heating in the UK is the Renewable Heat Incentive (RHI). This policy was set out to deliver 513,000 installations by March 2021.[1] So far only about 85,000 homes have received low-carbon heating systems through the Renewable Heat Incentive. Given the low rate of take-up, the National Audit Office estimated the RHI will achieve around 111,000 installations in Great Britain by March 2021. This is just 22% of its original expectations of and below its lowest estimate, which assumed the Domestic RHI scheme would not be launched.
The failure to successfully deliver low-carbon heating so far results in the UK featuring in the bottom three countries compared to all other countries in the European Union when it comes to the share of renewable heat.[2] Leading countries in Europe when it comes to domestic heat decarbonisation include many Baltic and Nordic countries (Sweden, Finland, Latvia, Estonia, Denmark). Key technologies deployed in these countries include heat pumps and district heating.
The Netherlands, with the highest penetration of gas heating in Europe, has recently decided to phase out gas completely — asking each municipality to put together a phase‑out plan for gas heating. Involvement of citizens and stakeholders in that process is a key element that could be considered for the UK context.
Confidence in new low carbon heating technology can be established through having strict installation and training standards. Sweden has also set up a special body for consumers to raise concerns and get recourse where justified. This has helped to build trust in heat pump technology in Sweden.
Sweden is also offering learnings regarding their carbon tax which makes fossil heating alternatives much less attractive.
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)?
It is extremely unlikely that heat decarbonisation will be achieved without significant policy interventions. Fundamentally, it is important to recognise that the speed and scale of the required heat transformation means that relying on consumer-led schemes, such as the RHI and the planned Clean Heat Grant, is not sufficient. Incentives for consumers need to be part of a suite of policy measures based on skills, financial support and packages, local area-based planning approaches and a cross-industry strategy.
1) Establish phase-out date for fossil heating: Setting a long-term phase-out target for fossil heating similar to what has been decided for petrol and diesel cars will be needed to provide certainty to the market that the conversion from carbon-intensive heating to clean heating will happen. Various countries around the world have set phase-out dates for fossil heating technologies, although mostly for heating oil and coal.
2) Rebalance levies: The current levy distribution puts disproportionately more costs on electricity bills. Whilst such an approach may have been justified a decade ago when electricity was much more carbon intensive, this has become an obstacle to decarbonisation. Electricity is now cleaner than gas, and electrification of heating will play an important part in the decarbonisation of heating. Rebalancing the levies reflecting the falling carbon content of electricity is an important step to encourage consumers to adopt technologies such as heat pumps.
3) Establish a long-term support mechanism for lowcarbon heating: Because clean heating technologies have often higher up-front costs than fossil fuel alternatives there will need to be financial support programmes to enable consumers to switch. The current RHI and the future Clean Heat Grant are not sufficient in terms of scale to do that — with the Clean Heat Grant being designed to support only 12,500 homes to switch away from fossil heating. To put this into perspective, the annual rate of gas boilers being installed is 1.7 million. Achieving the 600,000 heat pumps per year by 2028 target the government announced in its 10-point plan will require a much more ambitious financial support programme.
4) Reform the Energy Company Obligation (ECO): ECO still provides subsidies for new gas boilers which is counterintuitive when considering the need to switch away from fossil heating, including fossil gas. Instead, ECO could provide some support for heat pumps especially for poorer households. This would require an expansion of the current funding levels for ECO.
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?
Recent analysis by UK Energy Research Centre[3] provides important insights in this regard. The well-established UK TIMES model was run to analyse UK futures that span both ambitious emission targets and more liberal technology investment options and includes two pathways, conservative and progressive (which explores increased freedom in choosing heating system options across the sector). Results highlight the scale of change required in the residential sector. Figure 1 shows how the share of the technologies change with increasingly ambitious carbon reduction targets, depicting conservative and progressive scenarios, relative to 1990 levels. Note that this is delivered heat rather than final energy consumption.
Figure 1. Heat decarbonisation meeting different emissions targets
Source: UKERC (2020): The pathway to net zero heating in the UK. https://ukerc.ac.uk/publications/net-zero-heating/
Taken together, the results highlight the significance of the change that is required to move towards the new net zero emissions target for the UK. Residential heat supplied via fossil gas in 2050 is near halved for an 85% emissions reduction target and is non-existent beyond a 95% reduction. Instead, results suggest a dominant role for energy efficiency (termed conservation), community heating (in majority heat pump based), and individual heat pumps.
Uncertainty currently exists and will exist for some time, regarding the optimal mix of low carbon heating technologies for the UK. While electrification and district heating (alongside energy efficiency) are widely seen as key options available today, a number of recent analyses have proposed and explored the potential to convert the gas grid to provide low carbon hydrogen for use in domestic heating systems. Despite emerging in policy and technology debates relatively recently, the idea appears to have gained some traction as an option with UK policymakers. Yet significant uncertainties over the viability of converting the gas network to hydrogen exist. These include the suitability of pipework, both external and internal to homes and buildings, how and where hydrogen will be produced or imported from, and how much this approach would cost.[4] Various UK projects are investigating many of the technical issues associated with converting the gas grid to hydrogen including H21, H100 and HyNet, but as yet no UK city or region has been converted from natural gas to low carbon hydrogen. As a result, hydrogen used for heating is an unproven and deeply uncertain pathway to net zero heating. Hydrogen will also be significantly more expensive than current fossil gas central heating: Recent Imperial College research concludes that over a 35-year timeframe the total cost of hydrogen heat supply may be greater by a factor of 3 on average compared to present domestic gas prices.[5] In addition, hydrogen is likely to be most useful in helping to decarbonise long-haul transport, chemicals, and iron and steel, where options to meaningfully reduce emissions are more limited.
What are the barriers to scaling up low carbon heating technologies? What is needed to overcome these barriers?
There are numerous barriers to the take-up of low carbon heating technologies. Below we describe some of the key barriers to uptake in the UK.
Relative running costs
We note that structural inequalities in pricing appear to be having a negative impact on the potential for electrification. Previous research[6] demonstrates that consumers still pay a lot more of the costs of the energy transition through their electricity bills than their heating bills, with gas carrying a much lower environmental and social policy cost burden than electricity, and having no carbon price applied (Figure 2). This unequal sharing of costs between electricity and gas makes heat pumps less financially attractive because of the higher operating costs of heat pumps on standard (non-variable) tariffs. Unless consumers can see a financial benefit in the form of lower operating costs, it is unlikely that a modest upfront grant will provide sufficient incentive. Experience from countries such as Sweden and Finland shows that once fossil fuel heating is no longer the cheapest option the market changes rapidly, provided that other issues such as skills, certification of installers and equipment and performance are addressed.[7] Of course, the challenges in the UK are different to the context in Sweden and Finland. But the basic observation is that changing the economics of running fossil versus clean heating can have a significant impact.
Figure 2. Environmental levies
In addition, time-varying tariffs coupled with the smart operation of electric heating systems can reduce running costs further. Dynamic tariffs can significantly reduce consumer costs of operating heat pumps. Customers taking advantage of dynamic tariffs in the UK who scheduled their heat pumps to avoid peak hours have seen average prices of
less than 8p/kWh 37 compared to the average rate paid of 15p/kWh. This makes the business case for heat pumps much stronger and households could potentially see their energy bills fall significantly.
Addressing increase in peak load
The electrification of existing fossil fuel heat demand will increase the peak capacity and throughput requirements for electricity systems. This is widely anticipated and should come as no surprise, since expanding electricity systems are a principal feature of many scenarios of decarbonisation. There is some space in the electricity system to electrify new end uses including heating without the need for network upgrades, especially in rural areas. However, with this expansion for heating there will be challenges and specific issues around electricity generation and network capacity. While it is apparent that electrification and energy efficiency can play a key role in heat decarbonisation, these changes may have impacts on energy consumers and the wider energy system. Recent analysis has suggested that system impacts of electrification can be minimised through an integrated approach that focuses on the operation of electrified heating loads in a way that minimises system costs and supports the integration of variable renewable electricity generation.
While most past attention has been paid to specific within-electricity-system flexibility, the scale of heat demand as a proportion of total demand means that heating flexibility could become increasingly important. Pilot studies indicate that heat pump flexibility at portfolio level (i.e., a fleet of heat pumps) can reduce the peak contribution from heat pumps by around 30%.
Upfront costs
Most low carbon heating technologies currently cost consumers more compared to fossil fuel alternatives. This is partly a result of supply chains not being mature compared to fossil heating technologies where innovation brought down costs over time. Even if the running costs might be lower, the upfront cost still poses a barrier to many consumers. A grant or loan scheme can help mitigate this and innovation will drive down costs further.
Unfamiliarity with low carbon heating technologies
Research shows that most people do not understand the low carbon heating alternatives well at this point, indicating a need for a public-facing information campaign on this topic. Over time and with increasing adoption this hurdle will diminish as more and more people can see their neighbours using this technology successfully.
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 fair distribution of costs is critical for heat decarbonisation to succeed.[8] The costs of decarbonising heat are not only in the future, low carbon technologies but in paying to phase out the redundant infrastructure.
Higher income households are usually the first to adopt low carbon technologies. In return for their contribution to the upfront costs of technologies, which creates a market and reducing prices for all, these households benefit more from incentives like the RHI. By contrast, incentives still exist for low-income households to be connected to the gas grid as part of energy poverty alleviation efforts. There are significant risks in continuing to allow low-income households to benefit last from heat decarbonisation.
As incentives and regulations work to reduce the number of households connected to the gas grid, a smaller number of users are left to pay for the infrastructure costs; costs which also need to be recouped over a shorter timeframe. Fewer users and a shorter timeframe over which to spread costs mean higher costs of infrastructure for each household that remains on the gas grid. There is a significant risk that the households left on the gas grid, facing higher costs, are low-income households that are least able to pay escalating costs and least able to move away from gas unsupported. This risk is exacerbated by the uncertainty of availability and cost of gas replacement fuels (hydrogen).
Therefore, significant public funding that is currently missing needs to be directed to enable low-income households to electrify heat or connect to decarbonised district heating systems at the beginning of the transition, not at the end. This is why a reform of ECO is much needed because the funding of new gas boilers for the poorest in society can have the opposite effect.
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?
Minimum energy efficiency standards (MEES) for privately rented homes should be extended to the owner-occupied housing stock[9] and used to set out a long-term trajectory for full decarbonisation of the housing stock.[10] MEES are key to support efficient heat decarbonisation. In this year’s consultation on extending the existing MEES for rented homes from EPC ‘E’ to EPC ‘C,’ BEIS proposed that MEES should take a fabric first approach. This approach to delivering fabric efficiency through MEES should be coupled with a heat decarbonisation strategy that identifies the most efficient routes to decarbonisation for each area and sets in place a strategy to support households to decarbonise.
The long-term support mechanism proposed above (Question 2) must be aligned with households’ ability to pay, which implies significant level of funding for the lowest income and fuel poor households. Support for decarbonising heat should avoid the current approach to delivering priority support in ECO which draws a ‘line in the sand’ for eligibility that leaves in need households just outside of eligibility with no provision.
December 2020