Written evidence submitted by PassivSystems (DHH0120)

About PassivSystems


Executive Summary

Main Response

Question 1:  What has been the impact of past and current policies for low carbon heat, and what lesson can be learnt, including examples from devolved administrations and international comparators

The principal policy instrument focused on incentivising the uptake of low carbon heat has been the Renewable Heat Incentive (RHI).  The RHI was introduced for non-domestic applicants in 2011 and was followed by a domestic scheme in 2014. 

Initially the domestic RHI model was based on a 7 year tariff model, with payments made to customers on a quarterly basis.  This model attracted very low consumer interest and the domestic scheme was subsequently reformed in 2018 to introduce an Assignment of Rights (AoR) model which allows third parties to receive RHI payments and offer up front financing models for customers.  This model has proven more popular with customers, as it is better aligned with customer payback preferences. It has prompted a number of innovations in the market, including financed low carbon heating propositions offered by PassivSystems in partnership with Shell and EDF (see appendices).

Even under the revised AoR model, complexity remains a challenge for customers, with RHI rules requiring the signing of long and complex customer contracts, which can be off-putting for many potential customers.

Tariff degression mechanisms have also made it hard for businesses to build business models, with there being little certainty and clarity over when and how tariff rates will be amended.  This has been an area where BEIS has needed to provide better advance communications.

Taken together, these policy design challenges, which were also recognised by the National Audit Office in its 2017[1] value for money review of the RHI, have meant that the RHI has significantly under-performed on initial expectations.  As of September 2020, there were 102,189[2] accredited domestic and non-domestic RHI installations across England, Scotland and Wales meaning the policy is on track to substantially undershoot the original installation target for 513,000 installation by end 2020.[3]

Industry commentators, including the NAO, have acknowledged that a much simpler, grant based scheme would be more attractive for customers, given clear customer preferences for simplicity and short payback periods.  Grant based models have been the lead policy route used in other countries to support low carbon heating, and represent much better value for money for the tax payer compared to more expensive, long-tail tariff models.  The challenge for policy now is to introduce a coherent grant-based model that supports all low carbon heat technologies. 

Unfortunately, the approach currently being taken under the Green Homes Grant and proposed Clean Heat Grant means different scheme rules are in place, and some technologies, which are currently supported and are beginning to prove popular (such as hybrid heat pumps) are being ruled out of scope for no clear reason.  Equally concerning is the low budget being allocated to the proposed RHI replacement scheme, the Clean Heat Grant.  The proposed spend of £50m pa significantly undershoots the c.£130m being spent annually to support the domestic RHI, and the c.£800m[4] being spent annually to support the non-domestic RHI.  With both RHI schemes set to close, the Government must commit to maintain meaningful expenditure on supporting low carbon heating technologies to allow them to reach scale, realise economies and being the scaling up needed to meet the 600,000 annual install rate target in 2028. 

Finally, it is worth noting that the RHI is a tax payer funded policy, which sets it apart from how other energy related policies are funded (e.g. levied on energy customer bills).  Tax payer funding avoids the unintended consequences which have been driven by bill payer funding (see response to question 5) and should be a key principle for any RHI replacement scheme.

Question 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 this course of this Parliament (by 2024)?

In its 2020 Progress Report to Parliament, the Committee on Climate Change (CCC)[5] clearly pointed out that the UK was not on course to meet its upcoming fourth carbon budget commitments in 2023.  The “policy gap” identified is particularly evident in respect of decarbonising buildings, which as a sector now account for 33% of all UK emissions. 

Now is the time to set a clear, forward policy trajectory for decarbonising buildings.  The step change in investment needed will only be delivered if there is long term visibility of policy intent. Government should avoid wherever possible piecemeal policy making, and instead set a coherent market framework for the transition to low carbon heat supported by targeted policy interventions.  Such an approach has proven effective elsewhere, i.e. in the electricity market reform policy of 2010, which focused on delivering billions of new investment in low carbon generation.  Policies such as the tail-pipe emissions standard, focused on decarbonising vehicles, have also helped drive manufacturer investment in hybrids and battery only EVs.

A similar market impact could be had on the heating sector under the Sustainable Energy Association’s (SEA)[6] proposal for a carbon intensity standard for manufacturers of fossil fuel heating which ratchets over time (see chart). Such an approach would help drive scale economies across the market, and provide a forward trajectory for industry which would guide investment and re-skilling decisions.  Critically, this policy approach is technology neutral, and is consistent with the deployment of heat pumps and low carbon gas.

Setting this standard will be a vital first step in demonstrating policy intent, helping reduce cost of capital for investors in low carbon heating, and therefore reducing the costs borne by customers.  Our response to question 4 details the additional, complementary policy interventions which would then be required to support the customer case for investing in low carbon technology.  Each of those should be addressed in the Government’s proposed Heat and Buildings Strategy.

Chart 1:  Carbon Intensity Standard for Heating

Source:  SEA, January 2020, carbon intensity trajectory aligned with CCC NZ recommendations

*Assuming the gas network is not injected with more green gases, such as bio-methane.


Turning to particular housing segments, we see a case to “go early” in certain sectors where the consumer case for low carbon heating is the strongest, and where scale economies can be most easily delivered.

We note that the off-grid housing sector, which includes 2m oil fired homes, presents a strong customer market for heat pump systems, including hybrid systems (which can be combined with bio-LPG), as well as green gas.  The comparatively high cost for heating oil will often make oil-based systems more expensive to run relative to heat pump alternatives.  The off-grid market should therefore be an early focus for policy.  Given the strong customer case for switching to lower carbon heating systems in off-grid properties, we believe regulation should be the key tool.  An end date for high carbon, fossil fuel only heating should be set, which would align with a ratcheting carbon intensity standard (see chart above).[7]

The new build sector also presents an ideal market segment for early deployment of heat pumps at scale.  The Government has set a public target to ensure c.300,000 homes are built a year.  With the right building regulations in place to ensure high energy efficiency standards, these homes would be ideally suited to heat pump technologies.  Regulation, not subsidy, here is key and the Government should bring forward the full Future Homes Standard (FHS) from 2025 to 2021 to drive market momentum now while also delivering carbon savings.  We note that the housing sector had been expecting to work to much tighter regulations (the Zero Carbon Home Standard) in 2016, and should therefore be well prepared for a tightening of planning rules.

Social housing also represents a distinct market sector.  Here local authorities have discretion over funding and how social housing portfolios are managed.  Some local authorities, including those in Wales (Anglesey and Vale of Glamorgan), are already taking steps to decarbonise housing stock.  PassivSystems is involved in a number of social housing projects, and has recently secured funding to target the installation of low carbon heating (hybrid heat pumps) in c.1,200 Welsh homes.  Government should encourage best practice and learnings across Local Authorities as these initiatives gather momentum now.

For the wider on gas grid market, we support targeted subsidy to deliver scale efficiencies, with a view to that subsidy being tapered off with time, in line with the approach being taken in the automotive sector.  The low carbon heating market broadly anticipates that significant scale economies (in installation costs and product costs) will be delivered once 1m heat pumps (hybrid, air source, ground source) have been delivered.  While timely progress in the off-grid and new build sectors will make a meaningful contribution towards this target, more needs to be done to support the deployment of heat pumps in on-grid homes.

MHCLG data[8] indicates there are more than 7m homes in England and Wales rated EPC C or higher.  It is reasonable to assume that a significant proportion of these homes would be suitable for a heat pump, and would likely adopt one were the economics sufficiently attractive.  To tap into that latent customer demand, we recommend:

Taken together with the previously mentioned policy interventions in the new build and off-grid markets, we believe this would stand to deliver c.1m heat pump installations by 2025.

Question 3:  Which technologies are the most viable to deliver the decarbonisation of heating, and what would be the most appropriate mix of technologies across the UK?

There are a number of low carbon heating technologies which are available today and scalable, including, but not limited to, air source, ground source and hybrid heat pumps in many different installation configurations (e.g. stand alone, heat networks, etc.).  It is important that regulation does not restrict the market potential for low carbon heating technologies by focusing deployment solely towards particular technologies to the detriment of others. 

At a strategic level, we, like many others in industry support a ratcheting carbon intensity standard on manufacturers of fossil fuel heating to drive up the volume of low carbon heating products in the market.  This is a technology neutral standard (see response to question 2) and mirrors the approach taken in other sectors (e.g. the tailpipe emissions standard for vehicle manufacturers).  Such an approach would help drive scale economies across the market, and provide a forward trajectory for industry which would guide re-training decisions.  Critically, this policy approach is technology neutral, and is consistent with the deployment of heat pumps and low carbon gas.  It will help drive innovation, helping bring new technologies to market.

Finally, the role of data must not be overlooked.  PassivSystems has demonstrated how combining smart meter data with in home temperature data and other data can help build a granular picture of a home’s thermal characteristics, helping guide decisions around what low carbon heating technology or combination of low carbon technologies will be most suitable for installation.

Question 4:  What are the barriers to scaling up low carbon heat technologies?  What is needed to overcome these barriers?

Demand for low carbon heating under the Green Home Grant has shown, for instance, that there is latent customer demand for different low carbon heating nationally.

Significantly scaling up low carbon technologies will require a policy framework that enables gas boiler alternatives to become more routinely cost competitive in a much wider range of home settings.

There are 4 main areas where Government should focus efforts to deliver a step change in heat pump deployment:  capital expenditure (CAPEX) barriers; operational expenditure (OPEX) barriers; planning barriers and skills/retraining.  Detail on each is provided below.

CAPEX challenges for heat pumps and integrated hybrids solutions

Heat pumps and integrated hybrids are typically 3-4 times more expensive to purchase and install than conventional gas boiler alternatives.  There is some scope for equipment costs to fall (especially installation costs), but this will take time.  The extremely low take up of policies such as the Green Deal and the 7 year RHI tariff model demonstrate a general mainstream customer aversion to receiving long-tail paybacks.  Our own customer insight reflects customers ideally want (1) an upfront grant or (2) payback within a year.


Chart 2:  Bridging the CAPEX differential between low carbon heating and boilers

Source:  PassivSystems.  NB Hybrid heat pump cost comparable to ASHP cost.



We believe that the capital cost challenge of heat pumps is best tackled through:


As the chart above indicates, a capital grant of c.£3,500 combined with a VAT reduction would be sufficient to drive cost parity between low carbon heating and gas boilers.


OPEX challenges for heat pumps - solutions


Heat pumps and hybrids typically have a co-efficient of performance (COP) of c.3-4, compared to a gas boiler COP of 0.9.  However, the efficiency advantage of heat pumps can be completely offset by the current policy cost differential between electricity and gas (with gas being c.4 times cheaper than power), driving out any operational cost savings for customers relative to gas boiler use, and in some instances, increasing bills. 


This acts as a significant barrier to heat pump adoption now.  Demonstrating the operational cost savings that could accrue from heat pump use (relative to gas boiler use) is a key selling point for customers.  We have direct experience of this based on marketing hybrid heating systems to customers with oil-based heating in the off-grid sector.


We set out in our response to question 5 proposals for how this issue can be tackled.


New markets for flexibility also present significant value opportunities for households, helping make low carbon heating cheaper for customers than existing gas-based systems.  Work undertaken by PassivSystems with Western Power Distribution in a current trial has shown that combining EV and heating flexibility as flexible demand for network operators could provide customer savings of up to £260 per year (see chart below).  More detail on this is provided in the response to question 4.


Chart 3Electricity Costs Savings and Ancillary Services Revenues

Source:  MADE Project interim report, https://www.westernpower.co.uk/innovation/projects/multi-asset-demand-execution-made.



Planning Barriers

The Energy Performance Certificate (EPC) assessment process requires urgent amendment.  The current EPC assessment framework provides no scoring uplift for properties which have installed a heat pump.  The Standard Assessment Procedure (SAP), the approach used to assess and compare the energy and environmental performance of buildings is also out of date.  The current SAP uses outdated carbon intensity values for electricity generation, which, as a result significantly understates the carbon savings that can be achieved from heat pumps when compared to fossil fuel alternatives.

Our experience of the market also demonstrates that the heat loss calculations prescribed by MCS requirements serve to erodes customer trust in retrofit upgrades, as they do not provide an accurate reflection of actual heat requirements and savings.

Skills and Training

The priority for Government must, in the first instance, be to provide sufficient market certainty for low carbon heating.  Only then will the supply chain make the investment needed in re-skilling existing heating engineers.

Much of the infrastructure needed to support re-skilling of existing heat installation engineers alreasy exists.  For instance, a number of the major boiler manufacturers and energy suppliers have training academies for heating engineers.  While few of these currently are specifically focused on supporting low carbon heat technologies, but could easily pivot towards providing that training if there were sufficient clarity about the market for low carbon heat.  We note, for instance, that bodies like the Heat Pump Association (HPA) are already involved in looking at the skills programmes needed to scale up qualified installers in line with a potentially rising demand for low carbon heating.

Question 5:  How can the costs of decarbonising heat be fairly distributed 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 way the financing of existing levies is structured acts as a major barrier to the cost saving potential of heat pumps.  Heat pumps typically have a co-efficient of performance (COP) of c.3-4, compared to a gas boiler COP of 0.9.  However, the efficiency advantage of heat pumps can be completely offset by the current policy cost differential between electricity and gas (with gas being c.4 times cheaper than power), driving out any operational cost savings for customers relative to gas boiler use, and in some instances, increasing bills. 


Demonstrating the operational cost savings that could accrue from heat pump use (relative to gas boiler use) is a key selling point for customers.  We have direct experience of this based on marketing hybrid heating systems to customers with oil-based heating in the off-grid sector.


While a number of reports have argued for legacy policy costs to be rebalanced between the fuels to tackle this issue, it is worth noting that:

Simply shifting costs onto those customers who are not able to make a cost-effective alternative investment (i.e. switch away from a gas boiler) would in effect represent a tax. This could be unpopular, when public support for decarbonising heating is critical.


We propose instead focusing on those policies which can be most easily unwound, and where there is a clear rationalise for doing so:


Taken together, these changes would reduce the policy cost differential between fuels significantly, which would allow heat pumps to deliver real financial savings for customers.  While the cost burden of remaining policies, principally, CfDs and CM payments will slowly increase with time as the volume of new contracts increases, this will be mitigated by:  (1) the continually falling costs of contracts agreed under both policies; and (2) existing assets with agreements that “roll off”, i.e. reach the end of their contractual period.


Finally, we recommend that the above rationale is applied to considering the funding of any new levies introduced by Government. The RHI is a tax payer funded policy, and as such, the £1bn annual spend on RHI payments does not contribute to the unintended consequences set out above.  However, the proposed Green Gas Levy, which will replace the bio-methane tariffs under the current non- domestic RHI when that scheme closes next year, will be levied as a standing charge on gas bills.  While levying the GGL on gas will make a small impact on redressing the fuel cost differential, unless wider reforms are put in place (in line with the recommendations made above), it will simply act as a tax on customers unable to switch away from fossil fuel use cost effectively.


Question 6:  What incentives and regulatory measures should be employed to encourage and ensure households take up low carbon heat, and how will these vary for different household types?

Our response to question 2 set out how a mix of standard setting and financial incentives is needed to drive low carbon heat adoption in different housing segments.  In summary:

Question 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 and to maintain customer choice?

Public awareness and support for net zero is high, and has remained constant over the COVID period.  Quarterly BEIS public attitude tracker surveys show that 80% of people surveyed in August of this year supported net zero while only 2% of people opposed it.[9]

Chart 4:  Attitudes to Low Carbon Heating

Data extrapolated from Transforming Heat, Public Attitudes Research[10]


A report published by BEIS in September of this year, also charted public attitudes in relation to greener heating.  Of those surveyed around 90% supported a move to greener heating technologies.  The report further demonstrated that while awareness of low carbon heating technologies was low, it was rising.  Other market experience suggests (i.e. the surge in customer demand for solar panels from 2010), that with the right market framework, companies will develop attractive customer propositions and campaigns that will drive up demand for low carbon heating.

It is also worth understanding that the customer case for the adoption of low carbon heating should not be viewed in isolation to the decarbonisation of the other aspects of the home and personal transport.  Linking low carbon heating systems to time of use tariffs, and optimising low carbon heat operation in line with network services, will all strengthen the customer case for low carbon heat, through enabling material cost savings.

We also observe that a number of large energy suppliers are already promoting low carbon heating through on-line marketing and via their websites, with Vaillant, one of the largest traditional boiler manufacturers launching a TV advertising campaign in November 2020 featuring both gas boilers and heat pumps.

The main role for Government in supporting public information on low carbon heating should be to ensure there is a robust, up to date, data set on all low carbon heating technologies.  For instance, the SEA website and other public data sources must include correct information on carbon savings, based on accurate carbon intensity data for the grid.  In safeguarding choice, Government also has a role to play in not discriminating against particular technologies as it develops support schemes, e.g. hybrid heat pumps (see Annex).

Finally, in ensuring the right standards are set in the market, and customers benefit from quality heating installations, Government should ensure:

Question 8:  Where should responsibility lie for the governance, co-ordination and delivery of low carbon heating?  What will these organisations need in order to deliver such responsibilities?

The response to this question focuses on electrified heating technologies, which will be the dominant technology for deployment over the 2020s.

We believe that transition to low carbon heating should not be treated as a discrete, stand-alone transition.  It sits alongside the decarbonisation of transport, the wider electrification of the home and the continuing growth in intermittent, renewable power generation.  These all represent fundamental shifts in the demand for power and the way power is generated.

From a system governance perspective, the joint BEIS and Ofgem Smart Systems and Flexibility Plan (SSFP) is an example of how the inter-relatedness of this decarbonisation journey should be managed.  In identifying the synergies between the different sectors, it needs also to identify the opportunities, for instance, in the contribution domestic flexibility (of which low carbon heating can be a source) can make to cost effectively balancing supply and demand requirements locally and nationally.  Our response to question 4 showed the potential annual savings that could accrue to customers if such an integrated approach is taken.

The SSFP is currently being reviewed by BEIS and Ofgem with a new document expected next year.  We believe that a more robust SSFP should be a key route through which the delivery of low carbon heating is managed.  Based on the current document which was published in 2017, it is critical that steps are now taken to identify issues which have beset progress to date, principally:


A reformed Smart Systems and Flexibility Plan, based on the above, should play a key role in helping govern and support the transition to low carbon heating.



4 December 2020






















ANNEX:  The role of Hybrid Heat Pumps

A hybrid heat pump is an integrated heating system comprising an electric heat pump and a gas or oil fueled boiler.  The system is designed to switch between the heat pump and boiler as heating sources based on which is most efficient at a given time – the boiler can be used at lower temperatures when the heat pump becomes less efficient or during periods of peak electricity prices when electricity is at its highest carbon intensity.

A number of heat networks are also effectively hybrid systems, containing both heat pump and gas CHP units working in tandem.

The Committee on Climate Change (CCC) has recognized on a number of separate occasions, including in its last progress report to Government[11], that hybrid heating systems alongside pure heat air source and ground source heat pumps and heat networks have an important role to play in decarbonising heat in the UK.  Properly specified and managed hybrid heating systems with smart, grid-aware controls can deliver significant CO2 reductions.  For poorly insulated homes, complex buildings and off-grid buildings hybrid heating systems provide a cost-effective route to decarbonise heating while minimising disruption for households and providing grid level benefits for network operators. 

Hybrid systems are also compatible with the decarbonization of the gas grid and would support the efficient use of hydrogen in the 2030s.  More detail on these points is set out below.  The Committee on Climate Change (CCC) set out clear expectations on hybrid heat pump operation in 2019[12]:

Where a hybrid heat pump is installed with thermal storage (in the form of a hot water cylinder or hot water tank), the heat pump is assumed to be able to meet 80% of both space heat and hot water demand.  Where installed without thermal storage, it is assumed to be able to service 80% of space heat only, with all hot water demand being met by the boiler.”

Based on a sample of hybrid heat pumps that have been installed by PassivSystems, we have seen that hybrids are operating in heat pump only mode to meet 81% of space heating requirements on average, achieving a seasonal performance factor (SPF) of 3.5, which is significantly higher than that of a gas only system of 0.92.  This real-life market data tells us that properly specified hybrid systems are a reliable, and customer-friendly source of carbon reduction.

Further carbon benefits will accrue as the gas network greens, i.e. through the introduction of more biomethane, supported by the upcoming Green Gas Levy, and potentially by hydrogen in the 2030s.  It is worth noting that it remains highly uncertain whether sufficient volumes of green gas will be available to decarbonise all domestic buildings, once industrial and transport requirements have been met.  Hybrid heat pumps stand to help ensure that available volumes are maximised.

Finally, in the intermediate term, while our power system remains reliant on unabated gas-fired (i.e. OCGT and CCGT) generation to meet peak demand requirements, the flexibility that can be provided by hybrid heat pump systems will deliver additional system level carbon savings (detailed below), as well as revenue opportunities for customers.

Providing System Level Flexibility

We note that the Committee on Climate Change (CCC) has reported that as much as 71 GW of flexible capacity – excluding interconnectors – will be required by 2030 to meet the challenges of increasing electrification[13] and much higher volumes of intermittent renewable generation (CCC 2018 report to Parliament, table 2.3).  This is a significant increase on the c.6GW of flexibility in existence today.

In the intermediate term, while our power system remains reliant on unabated gas-fired generation (i.e. OCGT and CCGT generation stations) to meet peak demand requirements, the flexibility that can be provided by hybrid heat pump systems will deliver additional system level carbon savings.

Table:  Carbon intensity of different fuels

Source:  2019 DUKES Energy statistics and 2018 Freedom Project

* These values do not account for transmission losses which typically reduce efficiency by c.6%.  Current regulation (2018 Boiler + regulations) require that all new gas boilers installed must be a minimum of 92% efficient, although a number of boiler manufacturers produce boilers which are 94% efficient. 

For instance, by using aggregated domestic demand to support demand side response services, the system would be relying on much less polluting gas boiler flexibility, not central gas generation.  The value of the flexibility hybrid heating systems can provide was set out in the 2018 Freedom report,[14] and has also been evidenced in the Multi Asset Demand Execution study referenced in response to question 1.








ANNEX:  Current Hybrid Heat Pump Customer Offers

Both EDF and Shell (B-SNUG) have hybrid heat pump customer offers in the market which are supported by PassivSystems.  Both schemes are supported by RHI AoR finance models where customers have little (or potentially zero) up front cost to meet.

To date, c.3,000 customer leads have been generated based on only very limited marketing activities.  Installations in homes are now well underway via a growing network of installers and surveyorsA further 1,200 hybrid heat pump installations are also expected as part of a Welsh Government programme, with work due to begin shortly.

December 2020


[1] NAO report, https://www.nao.org.uk/report/low-carbon-heating-of-homes-and-businesses-and-the-renewable-heat-incentive/


[2] Monthly RHI deployment data, https://www.gov.uk/government/statistics/rhi-monthly-deployment-data-september-2020-quarterly-edition

[3] DECC 2012 RHI Impact Assessment


[5] CCC: Reducing UK emissions: 2020 Progress Report to Parliament - Climate Change Committee (theccc.org.uk)

[6] Sustainable Energy Association (SEA), https://www.sustainableenergyassociation.com/wp-content/uploads/2020/01/SEA_Achieving-net-zero_Regulating-the-decarbonisation-of-heat_.pdf


[7] N.B. this will still need to ensure that bio-LPG and hybrid heating solutions can be deployed, as a significant proportion (c.50%) of off-grid properties are not suited to heat pump only installations.

[8] MHCLG public EPC data, England and Wales, November 2019

[9] BEIS quarterly attitudes tracker, https://www.gov.uk/government/collections/public-attitudes-tracking-survey




[11] Committee on Climate Change (CCC) 2020 Progress Report to Parliament, https://www.theccc.org.uk/publication/reducing-uk-emissions-2020-progress-report-to-parliament/

[12] CCC Net Zero report, technical annex, 2019

[13] The Committee on Climate Change (CCC) has reported that as much as 71 GW of flexible capacity – excluding interconnectors – will be required by 2030 to meet the challenges of increasing electrification and much higher volumes of intermittent renewable generation (CCC 2018 report to Parliament, table 2.3).

[14] Freedom Report, https://www.passivsystems.com/case-studies/freedom-the-key-to-carbon-comfort-and-cost-in-home-heating/