Written evidence submitted by OVO (DHH0106)
Dear Mr Jones,
OVO’s response to the Business, Energy and Industrial Strategy Select Committee’s Call for Evidence on Decarbonising Heat in Homes
One of the greatest challenges the UK faces in achieving net zero by 2050 is cutting the carbon footprint of heating our homes. With around 85% of the UK’s heating in buildings currently being supplied by natural gas, we need to make rapid progress this decade if we are to put the UK on a trajectory to reach net zero emissions by 2050.
OVO is calling for a greater sense of urgency. Last year, we published Plan Zero, our response to the climate crisis and strategy to achieve net zero carbon emissions across our operations by 2030. This includes our commitment to supporting our members eliminate their household emissions.
Given the scale of the challenge of decarbonising heat, it is clear that a range of technologies will be required to suit different geographies and housing types. With little visibility of whether the adoption of hydrogen to heat our homes is even viable, and no guarantee of the carbon reductions it could achieve, the transition should be powered in the first instance by existing technologies.
At OVO, we fully support energy efficiency measures, combined with smart electric heat devices, as no-regrets, scalable solutions that will cut carbon at a cost effective rate for consumers and can be immediately installed in off-gas grid and new build properties to kick-start the mass transition away from gas boilers. We have direct experience in smart electric heat delivery for the purpose of decarbonisation and have most recently been chosen by the Government to lead its Electrification of Heat Demonstrator Project to showcase a low cost smart storage heater plus heat pump offer to help create zero carbon homes in the UK.
One million homes will need to be retrofitted each year for the next thirty years to meet net zero [UK Energy Research Centre, 2020]. The Government has clearly identified the need for action, with the Prime Minister recently committing to deploying 600,000 heat pumps a year by 2028 in his ’10-point plan for a Green Industrial Revolution’.
However, only 27,000 heat pumps were deployed in the UK in 2018 [EHPA] and the rate of installation of the energy efficiency measures required to meet net zero has dropped to 12% [Institute for Public Policy Research, 2020]. The majority of new build homes are also being connected to the gas grid, meaning an ever-increasing proportion of UK homes are heated by fossil fuels [UK Energy Research Centre, 2020].
An urgent and concerted effort will be required to dramatically scale up electric heat deployment and energy efficiency upgrades in the UK, supported by significant reforms to the policy and regulatory framework. These reforms should emulate the strong policy framework that has been created to encourage consumers to switch away from ICE vehicles and towards EVs.
To avoid missing the net zero target, it is crucial that the Heat and Buildings Strategy sets out an ambitious policy roadmap that will take low carbon heat from a niche market in the UK to the dominant form of new heating installation. Our answers to the consultation questions below provide our recommendation on the policy measures, priorities and timelines the Heat and Buildings Strategy should address. We would welcome the opportunity to discuss these with the Committee in more detail and encourage you to get in contact should this be of interest.
Director of Policy and Public Affairs
A key lesson learned from the Domestic Renewable Heat Incentive (RHI), which has led to limited success in incentivising the uptake of heat pumps, is the need for policy to address the upfront cost barrier to low carbon heat installations.
Whilst quarterly payments for each unit of heat produced via a tariff based system provides consumers with a cost incentive for installing low carbon technologies where broader policy has failed, the scheme has been heavily criticised for failing to increase take up at a level that would deliver value for money for the £23bn cost to the taxpayer. In 2018, the Public Accounts Committee found that over four years just 60,000 low carbon heating systems were installed under the Domestic RHI. In the same period, 6.2 million gas boilers were installed across the country.
A key reason for lower than expected take up under the scheme is the upfront cost barrier to participating in the RHI, particularly for low-income households. To join the RHI and receive quarterly payments, applicants have to finance the upfront cost of the hardware and installation of the eligible heating system, which is more expensive than a gas boiler installation. The installation of low carbon heating systems also often requires additional work to be carried out on the property, such as insulation and radiators that support a lower flow temperature system, which further add to the upfront cost barrier to participating in the RHI.
The later inclusion of an ‘Assignment of Rights’ mechanism within the RHI, which allows a third party to pay for an applicant’s heating system in return for their quarterly tariff payments, has gone some way in addressing the upfront cost barrier. However, this vital mechanism was not in place from the start of the scheme [Public Accounts Committee, 2018].
To avoid the lowest pace of progress on decarbonising heat and reaching net zero, the Heat and Buildings Strategy must set out the policy interventions the Government will bring forward in this Parliament to rapidly accelerate low carbon heat deployment across the UK’s housing stock over the next decade.
The specific policy measures we recommend the Government includes in the Heat and Buildings Strategy are set out in our response to question seven below. However, the introduction of these policy measures should be supported and underpinned by the following four urgent priorities:
● Upgrading the energy efficiency of the UK’s housing stock.
○ The majority of the UK’s homes do not yet meet EPC Band C. As long as the building stock remains amongst the most inefficient in Europe, progress towards maximising energy demand and carbon savings, and reducing consumer energy bills and creating more comfortable homes, will continue to be undermined. While the Government’s recent announcement to extend the Green Homes Grant scheme is a welcome step in the right direction, it is not enough to match the size of the decarbonisation of heat challenge. We support the Committee on Climate Change’s call on the Government to ensure its Heat and Buildings Strategy is supported by a national effort to improve the energy efficiency of UK buildings [CCC]. We further call on the Government to bring forward the full £9.2bn of support promised for energy efficiency measures over the next decade in the Conservative Party’s 2019 General Election Manifesto. Clean heat will only be achievable at scale if combined with energy efficiency improvements across the entire building stock.
● Leveling the playing field between low carbon and fossil fuel heating systems.
○ A lack of cost parity between low carbon and fossil fuel heating systems is undermining consumer take up. This is created by a higher upfront cost of the technology (heavily impacted by a lack of economies of scale within the supply chain), the fabric upgrades that are required on a home to support a low carbon heating system installation, as well as the price of gas per kWh remaining cheaper than electricity despite holding a higher carbon intensity. So long as the cost delta remains so large for consumers, gas boiler installations will continue at pace. Policy must support the creation of cost parity to support take up before economies of scale reduce the existing upfront cost differential to zero. Efforts to create cost parity on upfront cost must also be supported by policies that reduce the running cost of electric heating systems. The main way this can be achieved is through the introduction of fair carbon pricing on fossil fuels and amending the policy cost distortion on electricity bills.
● Creating a fully flexible energy system that puts consumers at the heart of the net zero transition.
○ The decarbonisation of heat will be achieved at lowest cost through a combination of electric heat and flexible, smart ‘behind-the-meter’ devices, all coordinated by distributed energy management platforms capable of providing grid balancing services. Unleashing flexible energy at a residential level will be critical to reducing carbon emissions across the energy system at the lowest cost. With new technologies such as smart electric heaters and home energy storage, consumers can actively participate and engage in the energy transition, whilst also saving themselves and others billions of pounds. Our research with Imperial College London shows that domestic flexibility can create whole system cost savings of up to £6.9bn and household savings of over £250 per year [OVO and Imperial College London]. For a flexible energy system to become a reality, we need Government and Ofgem to ensure policy supports metering customer's energy use half hourly, completing the smart meter rollout, making energy data available at local level and building price signals that inform suppliers and energy users when is best to use energy or store it.
● Supporting a green recovery from COVID-19.
○ The Government’s current pursuit of a green economic recovery from COVID-19 makes the delivery of an ambitious Heat and Buildings Strategy even more pertinent. The Institute for Public Policy Research has estimated that a green recovery package that prioritises jobs in sectors relevant to decarbonisation could create up to 1.6m new jobs. It is vital that huge pockets of shovel ready jobs in the fields of building retrofitting and low-carbon heat installations are maximised by the Government as part of the nation’s economic recovery [Institute for Public Policy Research, 2020].
The technologies that are the most viable to deliver the decarbonisation of heating are those that are available now. For this reason, we support smart electric heating systems such as smart storage heaters and heat pumps, combined with energy efficiency upgrades, as the technologies that should be pursued to avoid the slowest pace of progress to reaching net zero. This mix of technologies should be pursued over hydrogen injection into the gas grid, which will not be commercially available for at least another ten years and holds no certainty on the level of carbon reduction it will achieve.
There are six key barriers to scaling up low carbon heating technologies across the UK housing stock. These include:
● Lack of cost parity between low carbon and fossil fuel heating systems.
○ As set out in our answer to question two, gas boiler installations are a fraction of the price of a low carbon heating installation and this lack of cost parity serves as a barrier to take up for the majority of consumers. As an example of the upfront cost delta, the average heat pump installation costs around £8,000. In comparison, a gas boiler costs around £2,000-3,000. A lack of cost parity between low carbon and fossil fuel heating systems is also created by the unequal distribution of policy costs on electricity bills compared to gas.
● The level of work required on a property to make the switch away from gas boilers.
○ Low carbon heating installations such as heat pumps often require fabric upgrades to the property to make it “low carbon ready.” This problem not only adds to the cost differential between gas boiler and low carbon heating installations, but also adds to the amount of disruption the consumer experiences within their home. Fabric upgrades can include increasing the size of the radiators to support a lower temperature system (gas heating systems are typically installed to run at high flow temperatures) or upgrading the energy efficiency of the building. So long as gas boilers are installed at high flow temperatures and the majority of the UK’s housing stock remains below at least EPC Band C, the need for fabric upgrades during low carbon heating installations will continue to serve as a major barrier to the uptake.
● The fact the majority of new heating system installations are made in a “distress situation”.
○ Domestic consumers largely make the choice to install a new heating system when they encounter a “distress situation” (e.g. their boiler has suddenly broken down and needs to be replaced with urgency to avoid being left without hot water or heating for a long period of time). The installation of a low carbon heating system requires forward planning due to the necessary fabric upgrades to the home and is therefore not a decision that can be made quickly. This factor contributes to gas boilers being the easier, more convenient option for consumers to make.
● A general lack of consumer awareness on alternatives to gas boilers and need to switch away.
○ The lack of time consumers have to make decisions on new heating system installations is compounded by a lack of awareness on alternatives to gas boilers. According to Citizens Advice, only 38% of people are aware they will need to change the way they heat their home to help the Government reach net zero [Citizens Advice]. Polling by the Social Market Foundation also shows that only 30% of the public can correctly identify the meaning of “net zero” and more than 30% of the public are unfamiliar with alternatives to gas heating [Social Market Foundation]. If such low awareness of the need to move away from gas boilers and the alternative low carbon options that are available continues, then the crucial public buy-in that a successful transition to net zero by 2050 requires will not be secured.
● A lack of low carbon heating system installers compared to gas boiler installers.
○ There are only around 850 MCS (Microgeneration Certificate Scheme) certified heat pump installation companies in the UK. This equates to around 2,000 individual installers and pales in comparison to the 100,000 plus Gas Safe engineers serving the gas boiler market today, as well as the OFTEC installers serving the oil heating market. To achieve a net zero compatible transition, it has been estimated that we need over 200,000 installers trained to install low carbon heating systems to the right standards [Parity Projects]. So long as the number of trained low carbon heating installers remains so far behind those serving the gas and oil heating markets today, then the pace of low carbon heat take up will be undermined.
● A lack of regulation on the heating systems installed in off-gas grid properties and new build homes.
○ There are around four million homes in the UK that are not connected to the gas grid. With no targeted incentives for off-gas grid homeowners to access low carbon heating systems, and no regulation mandating a switch, the off-gas grid market is saturated with carbon intensive heating systems powered by fuels such as heating oil and coal. Similarly, there is currently no mandate on housebuilders to not connect new builds to the gas grid and install low carbon heating systems instead of gas boilers. As a result, the new build market has not been harnessed as a route to stimulating demand for low carbon heating systems and economies of scale within the supply chain, and continues to be a missed opportunity for ensuring no more homes are connected to the gas grid. The Government has plans in place to improve current building regulations for new homes from 2022 in advance of a Future Homes Standard being introduced in 2025. However, in both of the Government’s proposed options for uplifting current building standards from 2022, specifications include gas boilers but not low carbon heating systems. This does not represent an ambitious enough plan for decarbonisation, particularly for a policy aimed at lowering the carbon footprint of heating systems in new build homes.
In our response to question seven below, we provide recommendations on the regulations, incentives and other policy measures that are needed to overcome these barriers.
It is essential that a fair and just transition to net zero is achieved and that no one is left behind or unfairly punished as a result of decarbonisation of heat policy.
To drive uptake in low carbon heating and fund the transition, we support the Zero Carbon Commission’s recommendation to Government to introduce a carbon charge on all heating fuels (including gas and oil) that reaches a minimum of £75/tCO2e by 2030 and is charged on energy companies and included in energy bills. We agree that the Government should announce its trajectory for carbon pricing for domestic heating immediately to give time for homeowners to reduce their reliance on gas and other heating fossil fuels such as oil - including through the uptake of energy efficiency measures - before the charge is introduced.
To ensure that the cost of this carbon charge does not fall disproportionately on lower-income and fuel poor households, and that all households are supported in reducing their fossil fuel usage before the charge comes into place, we also support the Zero Carbon Commission’s recommendation for:
● Households in the bottom three income deciles to be compensated for increased costs above their current energy bills and;
● For all households to be supported in bringing the cost of their carbon charge down with adequate access to funding for energy efficiency measures and low carbon heating installs [Zero Carbon Commission, 2020].
Currently, Government environmental and social policy levies, including the Warm Home Discount (WHD) and Energy Company Obligation (ECO), comprise around 13% of a dual fuel and 22% of an electric-only customer’s energy bill.
While OVO is very supportive of the aims of these programmes, we are acutely aware of the fact they are, more often than not, placed on the electricity side of a customer energy bill. This is not reflective of the higher carbon intensity of gas compared to electricity and creates the perverse incentive of discouraging consumers from adopting a low carbon electricity supply for their heat demand due to higher electricity costs. Unless consumers can see a clear financial benefit in the form of lower running costs, it is unlikely that electrically powered, low carbon heating systems will be adopted at scale.
OVO therefore supports the view that policy costs on bills should be borne under general taxation instead. However, until this is the case, and to help ensure electricity and gas costs are more reflective of their individual carbon intensity, OVO advocates that the distribution of policy costs on bills be reviewed and that more policy costs be removed from electricity bills and shifted to gas.
It is also worth noting here that the eligible measures available to consumers under ECO and WHD must be reviewed and adapted to better support efforts to decarbonise heat. This is due to the fact that both electricity and gas consumers pay for ECO and WHD through their bills, but gas consumers are more likely to benefit from the scheme. This is due to two main issues.
Firstly, in the case of ECO, most of the money raised is spent on measures that save gas and very little on measures that save electricity. Secondly, in the case of WHD, the obligation is placed solely on electricity suppliers. However, the majority of WHD industry initiatives fund measures that save gas, such as heating system improvements including gas boiler replacements.
As a result, electricity consumers contribute to the ECO and WHD obligations but are less likely to be able to access energy saving measures or heating system installations through them. This issue can be addressed by ensuring the eligible measures under ECO and WHD are expanded to include smart electric heating. There are two main ways of doing this, through incentives on suppliers to deliver this particular measure type, or a requirement on suppliers to meet sub-targets on this particular measure type. Requirements would only be plausible if wider policy reform supported making low carbon heating installations as affordable as possible.
There are seven key policy measures that the Heat and Buildings Strategy should commit the Government to introducing to remove barriers to scaling up low carbon heating technologies across the UK housing stock. These include:
● Urgent review of the distribution of policy costs across electricity and gas bills.
○ Please see answer to question six above.
● The expansion of the Clean Heat Grant and reduction of VAT on heat pumps to 0%.
○ The upfront cost differential between low carbon heating systems such as heat pumps and gas boilers can be addressed by ensuring adequate grant access is available to consumers and by cutting VAT.
○ OVO is very supportive of the aims of the Government’s Clean Heat Grant. However, this specific funding pot lacks the scale and longevity needed to drive a meaningful increase in the heat pump adoption. According to the Clean Heat Grant’s impact assessment, the policy will fund only 12,500 heat pump installations a year for 2 years. If the scheme is not expanded, then for every new heat pump installed, more than 120 gas boilers will be installed.
○ To avoid this, the Government should increase the Clean Heat Grant’s grant level to £6,000 and expand the policy’s funding allocation period and budget cap to levels that better support the delivery of 600,000 heat pump installations per year by 2028.
○ We estimate that cutting VAT on heat pump installations to 0% could reduce the cost for consumers by a further £400-£500.
● The introduction of new national minimum standards for gas heating system installations and replacements.
○ Currently, gas heating systems in existing homes are installed to run at high flow temperatures. This is partly due to small radiators and inefficient building fabric, but also low quality training and standards on repairs, replacements and new installations. These high flow temperatures reduce the performance of gas boilers today (preventing ‘condensing’ which improves overall efficiency) and create another barrier to heat pump adoption - both in terms of customer experience of heating (familiarity with high temperatures) and heating system design (small radiators and pipework).
○ 1.7 million of these high flow temperature gas boilers were installed in the UK in 2019 [Energy Post EU]. We believe this volume of gas boiler installations should be harnessed as a route to making the existing building stock “heat pump ready” to help reduce consumer disruption and cost at the point of heat pump installation.
○ This can be achieved by the introduction of national minimum standards for gas boiler installations and replacements. These standards should mandate and incentivise lower flow temperatures for gas boiler installations (e.g. max 55oC) and ban the use of the ‘microbore’ central heating pipework that inevitably results in higher flow temperatures.
○ The Government should commit to this measure in the Heat and Buildings Strategy, and signal its ambition to provide financial support to households to make improvements to the home which support lower flow temperatures (including insulation and radiator upgrades).
○ The national minimum standards will help to reduce the upfront cost and disruption experienced by consumers at the point of low carbon heating system installation.
● The leadership of a national consumer awareness campaign on the need to switch to low carbon heating systems to create more comfortable, net zero ready homes.
○ To increase current low levels of consumer awareness on the need to move away from gas boilers and to low carbon heating systems, the Heat and Buildings Strategy must commit the Government to leading a national awareness campaign in partnership with the energy industry and local authorities.
○ In 1967, the Government had to launch a national consumer awareness campaign to switch the nation’s heating from coal gas to natural gas. This switch was achieved within ten years, and has shown how it is possible for the nation to switch from one dominant source of heating to another when widespread and accessible information is available.
○ The Social Market Foundation recently called on the Government to urgently launch a major campaign of public education about the need to reduce carbon emissions from British homes to avoid the costs and disruption of replacing gas boilers in millions of households creating a backlash against net zero [Social Market Foundation]. We are fully supportive of this recommendation.
● The introduction of a heat pump certification scheme for gas and oil heating system installer and smart meter installer workforces.
○ As noted above in our response to question four, it has been estimated that the UK needs around 200,000 low carbon heating installers to retrofit the housing stock in-line with net zero [Parity Projects]. We recognise that reaching this number of low carbon installers represents a huge challenge to decarbonising heat today and in the coming years.
○ Before the low carbon heating installation market grows organically in response to accelerated demand, the Government should commit within the Heat and Buildings Strategy to introducing a national training scheme for Gas Safe and OFTEC heating system installers to upskill and attain MCS heat pump certification.
○ A useful mechanism to encourage uptake of this training - beyond CPD credits, funding training programmes or other grants to allow installers to take time off to reskill - could be to provide Gas Safe or OFTEC registered installers an incentive to ensure a percentage of their work is on low carbon installations. A rebate mechanism could support this and encourage more installers to start engaging with low carbon solutions alongside their other works.
○ A national training scheme should also be made available to smart meter installers once the smart meter roll out has completed, as this workforce holds transferable skills.
● A mandate on off-gas grid homes to switch away from fossil fuel powered heating systems from 2023.
○ Off-gas grid properties should be targeted for heat pump deployment first by the Government, as these homes present the most significant decarbonisation opportunity and should be considered “low hanging fruit”. Where there are no-regrets options for switching from carbon intensive heating systems to low carbon heating systems, these should be urgently pursued.
○ To increase the uptake of heat pumps within this housing stock base, the Government should mandate that all off-gas grid homes are heated without fossil fuels from 2025, in line with plans to bring forward the Future Homes Standard.
○ Owners of existing homes off-gas grid should be supported in switching to a heat pump by the introduction of a scrappage scheme for oil and LPG boilers.
● The inclusion of specifications for smart electric heating in plans to uplift building standards for new build homes from 2022.
○ Every effort should be made by the Government to avoid installing fossil fuel driven heating in newly built properties and to ensure uplifts in standards ahead of 2025 encourage the installation of low carbon heating systems by housebuilders.
○ These low carbon heating systems should be electric and smart enabled so as to empower consumers to use off-peak electricity for their heat when cost and carbon intensity on the grid is at its lowest. The Committee on Climate Change has recommended that the exploration of new building standards should be used as a method of encouraging the adoption of technologies that support electricity peak management and demand reduction at scale in the pursuit of a decarbonised energy system [Committee on Climate Change, 2019].
○ Therefore, in the Heat and Buildings Strategy, the Government must signal its ambition to review proposals for uplifting current new building standards from 2022 and commit to the exclusion of specifications for gas boilers and the inclusion of those for smart electric heating systems.
As set out in our response to question seven above, the Heat and Buildings Strategy must commit the Government to leading a national awareness campaign on the need for consumers to switch to low carbon sources of heat to ensure households are engaged and informed during the transition to low carbon heat.
The recommendations provided in our response above, including on creating more “low carbon ready” homes through standards and upskilling existing installer workforces, would also support increasing customer engagement and minimising consumer disruption.
OVO supports the recommendation of the Association for Decentralised Energy for a framework whereby the direction of heat decarbonisation policy is decided at a national level and coordinated and delivered by a national delivery body in partnership with local authorities, manufacturers, installers, energy suppliers and energy device optimisation service providers. This approach should support certainty on the direction of travel and targets on decarbonisation policy at a national level and empower local authorities to decide the most appropriate low carbon resources for their local communities.
 Institute for Public Policy Research, Transforming the economy after Covid–19: A clean, fair and resilient recovery, July 2020.