Written evidence submitted by OFTEC (DHH0102)

 

About OFTEC

Established in 1991, OFTEC is a 'not for profit' trade organisation for the liquid fuel heating and cooking industries in the UK and Republic of Ireland. We also manage a competent person scheme for technicians working on a wide range of non-gas heating technologies. Our aim is to promote the highest professional and technical standards for technicians and businesses working in the industry and, by doing so, support the needs of heating users.

Summary of submission

Our submission relates mainly to off-gas grid homes, particularly those that use oil heating. Our industry predominately serves these households, giving us a significant insight into the energy efficiency and decarbonisation challenges they face.

In the 2017 Clean Growth Strategy, the government stated “our ambition is to phase out the installation of high carbon fossil fuel heating in new and existing off gas grid residential buildings (which are mostly in rural areas) during the 2020s”. We are concerned that the scale of this challenge is still underestimated by MPs and policy makers, that the current assumptions around the suitability of heat pumps as the leading low carbon solution for these homes are too optimistic, that the potential financial impact on rural households needs to be better understood, and the potential role of renewable liquid fuels to support the transition to net zero has not been sufficiently appreciated.

Submission to the inquiry

  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?

When measured against published targets, there is little evidence to date that government policies to deploy low carbon heat have been successful. The Domestic Renewable Heat Incentive (RHI) scheme, launched in 2014, had a stated aim of “developing the renewable heat market enough to enable successful mass deployment in the 2020s, while the Impact Assessment further suggested that the scheme “might support around 750,000 renewable heating systems by 2020, predominantly installed off the gas grid”.

Both goals are very far from being achieved. As of August 2020, only 55,876 new low carbon installations had been approved via the domestic RHI, and 24,497 legacy accreditations, making 80,373 in total, barely 10% of the original target. Heat pumps, the technology considered key to achieving decarbonisation, are still being installed in very low numbers, supply chains and installer expertise are not yet developed sufficiently to support their deployment at scale and consumer awareness and support remains low. For example, the recent Boiler Alert report (Social Market Foundation 2020) found consumer awareness of heat pumps is below 20%. Although targeted at off-gas grid homes, less than 1% of oil heated homes have so far converted to low carbon heating via the RHI.

As part of the RHI consultation process, OFTEC proposed that the scheme also support a blended low carbon liquid fuel called B30K. This would have overcome many of the deployment challenges associated with conversion to heat pumps or solid biomass. DECC declined to accept this proposal on the basis that it represented a partial solution. However, acceptance would have been an important signal to industry, providing policy certainty and unlocking investment and innovation in the liquid fuel sector. In our view DECC/BEIS has consistently underestimated the potential of this option, thereby missing an opportunity to progress the deployment of low carbon heating and to have already saved many tonnes of carbon.

By contrast, expectations over the deployment of heat pumps were (and remain) over-optimistic. DECC underestimated both the unique challenge of retrofitting off-gas grid homes successfully and the capacity of rural households to act. It also failed to adequately consider whether the technologies chosen were a good fit for these households and whether they would see heat pumps as a value proposition.

The deployment of heat pumps at scale, alongside other technologies, will be essential if the UK is to meet its net zero target. However, in OFTEC’s view, the assumption that heat pumps will be the primary solution for off-gas grid homes, and that these households offer the opportunity to build heat pump supply infrastructure and installer expertise ahead of wider deployment, is seriously misplaced.

We are concerned that BEIS’s understanding of retrofit costs remains superficial (see for example ‘What does it cost to retrofit homes – BEIS 2017), it lacks a true understanding of the unique challenges posed by rural homes (as does its advisor the Committee for Climate Change (CCC)), appears insufficiently engaged with the views of consumers and has missed the opportunity to work collaboratively with incumbent industries or installersboth of which are in a strong position to support its aims – preferring instead to rely heavily on the views of academics, technical consultants and think tanks.  

The current Green Homes Grant scheme shows how little BEIS has learnt. Its rushed introduction with only very limited industry consultation has resulted in easily predictable problems. Installer businesses don’t have capacity to support it, the training sector has no time or capacity to increase the workforce quickly to fill the gap, the limited range of options supported, and rules about primary and secondary technologies, make the scheme too complicated and the requirement for heating installers to hold Competent Person Scheme, Microgeneration Certification Scheme and TrustMark accreditation adds expense, bureaucracy and friction for what are mainly small businesses. This requirement also extends the lead time for work to begin. The decision to extend the scheme for a further year is welcome, but this is still relatively little incentive for some key elements of the industry to pick up the baton.

In conclusion, OFTEC’s overriding concern is that there is a significant risk that these mistakes will continue to be made because, in policy terms, BEIS’s general assumptions and approach seem little changed since 2014.

  1. 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 government has set out its intention to phase out the installation of high carbon fossil fuels in homes off the gas grid by 2030. It has also stated an ambition for all homes to be EPC rated ‘C’ by 2035 where cost effective, affordable, and practical. OFTEC believes these aims should remain key priorities. We think that if advanced renewable liquid fuels such as Hydrotreated Vegetable Oil (HVO) were also supported as a low carbon heating solution, the installation of high carbon fossil fuel systems in off-gas grid homes could be ended by the mid-2020s.

Consumers are most likely to adopt energy efficiency and low carbon measures that are affordable and cause least disruption, a point highlighted in the recently published report of the UK citizen climate assembly (The Path to Net Zero – 2020). It emphasised the need for tailored solutions for local areas and individual households. It also stressed that changes need to work for all income groups and housing types. On home retrofits, the need to minimise disruption, put in place support around costs, and offer flexibility and choice were highlighted. We think it is vital that future heat policy reflects these views.

Due to the often high capital cost, we believe that the energy efficiency of many rural homes is unlikely to be upgraded without substantial state funding support. We also think it unlikely that sufficient funding will be available to support oil and LPG using households in hard-to-treat (EPC band E-G) homes to switch to heat pumps cost effectively, and some may never reach EPC Band C. It’s vital that the government listens to the views of consumers and industry and now adopts a more pragmatic approach, setting demanding targets through regulation but maximising flexibility and choice over how these are achieved. This means not being proscriptive about solutions and encouraging innovation, competition and choice.

OFTEC therefore makes the following recommendations:

Adopt stricter emissions standards for off-gas grid heating systems from 2024, in line with carbon reduction targets, that all new installations must meet. This would be enforced by changes to Building Regulations that would mandate that all new and replacement heating systems must be installed to a maximum carbon emission standard. This could be based upon a combination of appliance efficiency and the carbon intensity of the fuel source. However, the revised standard should be technology neutral. Such a move will provide industry with a clear, long-term framework and encourage investment.

Immediate targeted support should be given to help rural households install energy efficiency measures and improve EPC ratings to at least Band C where cost-effective and practically possible. The funding should not be means tested and should extend beyond the parameters of ECO to help many more off grid households reduce overall heat demand and cut energy bills.

Extend the parameters of the proposed £4,000 Clean Heat Grants, and existing Green Homes Grants, to include boiler replacement. The upfront grant could then be used to cover the cost of upgrading an older standard efficiency oil boiler to a HVO-ready condensing boiler that is fully compliant with the new, higher standards (estimated installation cost £3,000). We propose that a zero VAT rate for HVO would be helpful in encouraging initial take up. 

Subsidise training and simplify the certification arrangements for installers to improve standards and encourage participation. The existing competent person schemes work well and offer a solid basis for ensuring good outcomes for consumers, so we recommend the CPS registration be made mandatory. However, the present range of registration tiers, which also includes MCS, PAS and TrustMark, is complicated and confusing. We recommend that that the current arrangements be reviewed. Training is a significant cost for small installation businesses so a subsidised training programme in system design and renewables would encourage installers to enhance their skill set and diversify, enabling them to offer a wider range of low carbon heating options. Support for training centres to offer courses would also be desirable.

  1. 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?

OFTEC and its members propose that Hydrotreated Vegetable Oil (HVO), a renewable liquid fuel, be accepted as part of the solution for existing oil-heated homes, alongside other technologies such as heat pumps, bio-LPG and biomass.

With appropriate policy support, HVO could be deployed rapidly during the 2020s when households replace their existing appliances, amounting currently to circa 65,000 conversions p.a. Further, we estimate that, with financial support, an additional 35,000 existing oil using customers could be encouraged to convert their current oil boiler each year to run on HVO.

We consider that HVO is well-suited to deployment in the off-gas grid heat market. It is extremely stable, capable of long-term storage and tests have confirmed that it offers a near drop-in solution, avoiding largescale capital outlay. Tests suggest capital outlay to convert existing oil heating systems will be no more than £600 in most cases.

100% HVO offers the most frictionless solution to decarbonise the existing oil heated housing stock and would be an almost complete solution for these homes, offering a carbon saving comparable or superior to the solutions currently preferred by BEIS. The table below compares the potential carbon savings of deploying HVO at a rate of 100,000 conversions per annum against a mixed deployment of air source heat pumps (80%) and biomass (20%). However, we recommend all three options be supported to maximise flexibility and consumer choice and to maximise speed of conversion.

Please note that the carbon reduction modelling above is based upon Building Research Establishment (BRE) determined CO2e emission factors for both HVO and biomass. CO2e emission factors for electricity have been taken from BEIS - Long-run marginal electricity emission factors to 2100. Any delay in reducing the carbon intensity of power generation over time would result in under delivery of carbon reductions using heat pump.

HVO is currently treated as a transport fuel, but if duty and VAT were the same as kerosene is now for domestic heating purposes, the cost to the end user could be around 73ppl. A zero VAT rate would encourage uptake.

The chart below compares annual low carbon heating costs for a three-bedroom house, based on data from the Sutherland tables. HVO is modelled at the same duty and VAT as kerosene. Capital costs for installation or building fabric improvements have not been included.

While HVO running costs are comparable to other low carbon heating systems, the greatest financial benefit is that the conversion from kerosene to HVO can be done at a fraction of the CAPEX cost required in deploying alternative technologies (see also answer to question 4).

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

BEIS’s current preferred option for off-gas grid homes, and recommended by the CCC, is that heat pumps displace existing fossil fuel heating, except in hard to treat situations where biomass is proposed as an alternative. OFTEC believes there are significant practical, financial and socio-economic barriers to achieving this.

Taken collectively, these homes are some of the UK’s least energy efficient. In October 2018, BEIS reported that the energy efficiency of oil heated homes in Great Britain was as follows:

EPC Band

Total

Percentage

Band A-C

37,000

3%

Band D

373,000

32%

Band E

448,000

38%

Band F-G

317,000

27%

Total

1,175,000

100%

 

Rural homes are extremely diverse in character, age, design and construction. They have been built using a wide range of materials and have been subject to varying levels of modification and improvement over time. Many have period features that are valued by their owners or are subject to planning constraints. Analysis of oil heated homes in England reveals that 46% were built before 1919 and have solid walls, while 51% are detached and typically larger than average (English Housing Survey).

BEIS has stated that bringing EPC band E oil heated homes up to an acceptable band C would cost on average £12,300, and from bands F and G to C £18,900 (BEIS statement to Parliament – 2020). This does not include the capital cost of installing low carbon heating. The average installation costs of converting these homes to low carbon heating is set out below (Average installation costs of RHI-funded installations reported to MCS - 2019).

The total cost of installing heat pumps and retrofitting all 765,000 oil heated homes currently in EPC bands E-G to band C, based on these average costs, would be £19.85 billion.

Heating solution

Average Installation cost of heating installation alone

Average cost including retrofitting EPC band E home to band C

Average installation cost including retrofitting EPC band F and G home to band C

Air source heat pump

£10,918

£23,218

£29,818

Ground source heat pump

£22,507

£34,807

£41,407

Biomass

£16,114

£28,414

£35,014

 

The capacity of rural households to act must also be considered a potential barrier. The income and expenditure profile is significantly different to other areas. For example, average weekly household expenditure is 17% higher than the national average for England, while the proportion of disposable income fell from 29% to 26% between December 2013 and March 2017. Median workplace-based earnings in rural areas are lower than those in predominantly urban areas (excluding London) while fuel poverty levels are significantly deeper for households off the gas network (DEFRA Statistical Digest of Rural England, March 2020).

While not specific to rural homes it is also worth noting that unsecured household debt across the UK is also at a record high at over £14,000, putting increased pressure on consumer finances. Almost 70% of households have less than £1,500 in savings, while over 55% have no savings at all (Office for National Statistics). This suggests there is little scope for households to fund energy efficiency work or meet installation costs.

This appears to be confirmed by research in Belgium, carried out by the ITINERA Institute, (De financiële barrière voor klimaat- en comfortrenovaties - 2020) which looked at the capacity of households to fund energy efficiency improvements. Their analysis found that 40 to 51% of current owners cannot finance the aspired climate renovations. A large proportion of these owners were more than € 50,000 short. If this is replicated in the UK, it suggests that limited renovation premiums such as the Green Homes Grant will make little difference. They also found that climate-related renovations are not a priority for all owners; many mainly want to upgrade their home in terms of comfort, utilisation and subsequent resale value.

OFTEC is concerned that the situation is likely to be similar in the UK, but relatively little reliable data appears to exist. We therefore recommend that BEIS urgently commission similar research to inform heat policy.

A further potential barrier to heat pump deployment in rural areas is that it is not always cost effective to upgrade the local electricity network, an issue highlighted recently by the National Grid (Future Energy Scenarios 2020). In the three successful net zero scenarios National Grid modelled, between 619,200 and 1,008,215 off-gas grid homes, currently heated by oil or LPG, would require an alternative non-electric heat solution, with biofuels being recommended.

The low installer base must also be considered a barrier at present. Relatively few heating installers offer heat pumps and consequently the skills required are in short supply. Installers tend to be led by consumer demand so, until customers begin to demand heat pumps frequently, it is very unlikely that most installers will see any point in offering this technology. Previous ‘false dawns’ such as the Green Deal and the RHI have damaged installer confidence, so few are attracted to invest in the acquiring the skills and accreditations needed. We also note that training provision is currently very limited and that new installation guidance are still in preparation (OFTEC is a partner in this work).

We would also draw the Committee’s attention to the fact that the government’s £14.6 million Electrification of Heat Demonstration Project, designed to showcase the feasibility of installing heat pumps in a range of homes across the UK, has only just got underway and only 19 installations have been completed – all in homes that previously used mains gas. As explained earlier, rural off gas grid homes present a far greater variety of challenges than more homogenous urban dwellings, and we would be concerned about any plans to deploy heat pumps until the lessons from this project have been thoroughly absorbed.

It should also be noted that under the project, if building upgrade measures are required then they are capped at £5,000 per property, except in exceptional circumstances. As we have set out above, many oil heated homes will exceed this, a concern acknowledged recently by the Secretary of State who stated in a written answer on 23rd November that some homes with high heat demand and poor insulation, may require significant investment in energy efficiency measures to make them suitable for a heat pump. We would urge the committee to consider whether a cost-effectiveness limit should be developed to protect consumers from meeting costs that are clearly unreasonable in pursuit of decarbonisation goals.

We would also highlight the economic impact of Covid-19 which, while as-yet uncertain and difficult to calculate, is very likely to further suppress the ability of rural households to invest in expensive low carbon heating.

Collectively, these issues create significant friction in the deployment of low carbon heating to off-gas grid households and there is a risk that if current policy thinking remains unchanged, both energy efficiency and carbon reduction targets will continue to be missed. As we have set out in our answers to questions two and three, off-gas grid households will require a mix of greater economic support combined with a wider range of cost-effective options to enable them to transition away from dependence on fossil fuel heating. They should also be protected from excessive costs. Unless greater pragmatism is adopted by BEIS over technology options, we are concerned that either targets will continue to be missed or, if greater compulsion is mandated through building regulations, significant financial hardship and practical difficulty will be caused to rural households.

  1. 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?

In our answer to question four we highlighted the challenge that rural homes present, particularly those with low energy efficiency. Fairness demands that these households are not presented with a one size fits all solution; a range of choices must be available to avoid the potential for excessive costs and to encourage competition. The CCC has recommended heat pumps as the low carbon heat solution for most off-grid homes but we are concerned that this will cause significant practical and financial difficulty which will impact most acutely on poorer households.

There are not the same economies of scale in the countryside that can be found in urban and suburban areas, so fitting heat pumps to rural homes can often only be achieved as part of an individually planned retrofit project, often also requiring significant fabric improvements to the building. It will frequently not be feasible to quickly replace a failed boiler with a heat pump in a distress purchase situation, so it is vital that households are not left in a situation where no affordable or practical heating solution is available. It is therefore essential that boilers are not simply banned where no realistically achievable – i.e. affordable and easily implemented - replacement exists.

Support scheme design must be progressive and should not simply reward those households that can already afford to take action – as is the case with the RHI. Given the high levels of household debt, upfront grants should be made available to support the capital cost of energy efficiency improvements and appliance replacements rather than loans. We propose that that the Green Home Grant scheme be extended to include boilers where the system is converted to renewable liquid fuels and achieves an appropriate carbon intensity target.

A key concern for OFTEC is the use of environmental levies or carbon taxes as a policy lever to drive conversion to low carbon heating. It is vital that any policy does not result in some household being left behind, facing higher fuel costs but without the capacity to take action, as this risks increasing inequality and fuel poverty, while any perception of unfairness may result in a loss of support for decarbonisation.

While we believe policy measures of this kind should be considered, policy design must take account of the fact that households with the highest heating costs will frequently be low income households that have little or no capacity to act. There are obvious risks that any additional levy on fuel will simply make it more difficult for them to heat their homes while eroding their capacity to take action. These households will also often live in homes that require the most expensive energy efficiency interventions. Careful policy design is therefore essential, with generous and easily accessible support for energy efficiency measures to counterbalance any increased fuel cost for those that do not take action.

As we have set out above, the high costs associated with installing heat pumps into less energy efficient rural homes means that in practice it is unlikely that sufficient grant support will be available. Consequently, we recommend that policy measures to support the gradual deployment of renewable liquid fuels should also be implemented. The capital costs of conversion to these fuels is much lower, enabling support through grant schemes to be spread much further.

  1. 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?

We recommend that government regulate to set much stricter carbon intensity targets for new installations, or where appliance replacement takes place, but adopts a technology neutral approach to encourage innovation and competition and allow more choice for consumers. We propose that the government also sets an end date for the use of kerosene and other high carbon fuels, as this would send a clear signal to both households and industry of the need to change. This should take account of the typical lifespan of existing appliances, the expected annual installation rate, and the likely speed that renewable alternatives can be rolled out. We think an end date between 2030 and 2035 should be achievable.

OFTEC proposes that alongside support for other low carbon solutions, future support schemes offer incentives to replace older boilers with high efficiency condensing boilers that are configured to run only on renewable liquid fuel (HVO). Free boiler replacements should be offered to fuel poor households. We also propose that the renewable fuel is initially subsidised to cushion the households adopting it from increased running costs for a limited period (the degree to which this will be necessary will depend on the price of kerosene). A fuel subsidy should also be offered to those who replace their boiler in a distress purchase scenario.

  1. 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?

See answers above.

  1. 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?

We think government should use regulation to set the performance and carbon intensity standards that future heating systems must achieve. However, we do not think it is the role of government to tell consumers what type of heating system they should install. Instead, government should be working with industry to support the deployment of any solution that can meet the required efficiency and carbon intensity target.

 

(December 2020)