Government’s home heating plan: warm on the surface, a little cool beneath

The UK Government has announced its long-awaited plan for taking the carbon out of our home heating. It’s one of the first plans of its kind in the world, and it is admirably clear in how it is approaching the challenge. The big question is whether it has enough firepower - both financial and regulatory - to crack one of net zero’s toughest nuts.

While we were waiting for the strategy to launch, the Sustainable Future Mission team came up with a few tests we wanted it to meet.

1. A clear signal to consumers and the market that the UK is moving away from fossil fuel heating

The strategy meets this test pretty well. It's ‘ambition’ to phase out new gas boilers by 2035 is a powerful signal, which is backed by a series of approaches that signify a move towards electric heating. These include working with installers and manufacturers to cut the costs of heat pump installations by 25-50% in the next four years, and a ‘want’ to reform energy bills by moving levies from electricity to gas in the years to come. While the government rightly hasn’t written off hydrogen quite yet, the intended scenario of capacity for 600,000 heat pumps to be installed annually by 2028 remains in place, even if a role is found for hydrogen to heat certain homes.

In other words, for consumers and the market, this is certainly the clearest signal yet of the direction of travel. However, note the terms ‘want’ and ‘ambition’. None of this is yet legally binding, there are many more consultations in the pipeline, and the distant cut-off date with little in the way of stage points might lead to a certain amount of kicking the can down the road.

2. A clear plan showing how the government will both increase demand for and supply of low-carbon heating - making it more attractive, accessible, and affordable for people across the income spectrum

The government’s ambition on this is impressive, but it feels like it’s relying on a leap of faith to achieve it. The strategy aims to have 600,000 heat pumps installed a year by 2028, an almost 20-fold increase from the 30,000 or so we’re installing now. It also aims for heat pumps to cost the same as a gas boiler by 2030, which would be a brilliant outcome.

Unfortunately, the plan for getting there is less obvious. The flagship Boiler Upgrade Scheme for England and Wales, which aims to pump-prime the market with £5,000 grants, currently only has enough funding to support 30,000 heat pumps a year. To make the leap up to 600,000 heat pumps a year, the government is relying on private businesses to dramatically scale down cost and scale up production. There is a £60m innovation pot to help facilitate this, and the signal that the era of gas boilers is coming to an end may help increase demand, but it still feels like it will require a heroic effort from the private sector. Nesta will be an active player in this space, but there is an immense challenge in the decade ahead.

3. Ambition and commitments that meet the scale of the challenge and are in line with the Climate Change Committee’s recommendations

On ambition, the strategy clearly passes this test, although 2035 is the absolute latest possible date for phasing out new gas boilers. In terms of commitment, there is less to show. The logic of the strategy is good, and most of the necessary policy measures are included, such as linking mortgages to energy efficiency. But government funding is limited throughout, which leaves the burden firmly on the private sector. On heat pumps and energy efficiency, the strategy can only be delivered with huge sums of money from private investors, and it is not yet clear whether this money will materialise.

4. An indication of how it will support action on home decarbonisation at a local and regional level

Sadly, local delivery is not a strong point for the strategy. It rightly emphasises the role local authorities will play in achieving net-zero, and it commits to supporting local areas and communities with solutions that work for everyone. The accompanying Net Zero Strategy also picks up this point. It commits to setting clearer expectations, providing resources, building capacity, and taking responsibility for improving coordination with local government.

But commitments are about as far as it goes. Neither strategy goes far enough to set out clear roles, responsibilities and expectations. Furthermore, the Net Zero Strategy rules out the need for any net zero statutory targets on local authorities and communities. This is a pretty glaring omission. We know that local authorities have a big role to play in decarbonising our homes - not least as the overseer of the planning system and an owner of social housing. The government needs to use them much more effectively. Perhaps they could take inspiration from the groundbreaking Local Climate Bonds developed by the Green Finance Institute and Abundance Investment, or from the ambitious home retrofit programme set out by London Councils.

Further Observations

There were some other features of the strategy which caught our attention too, from the types of heat pump it favoured to the role of different businesses in driving the low carbon heating transformation.

A clear preference for heating water

The strategy may have put the hydrogen question off until future years, but it is emphatic on one issue: that our heat pumps should heat up water, not air. The strategy clearly references “hydronic” heat pumps, which heat up water that passes around your home in radiators or underfloor heating. It does not once mention air-to-air heat pumps, an alternative option that pumpsair directly into your home and can provide cooling as well as heating.

This caught us by surprise because recent Government-commissioned research had suggested that air-to-air heat pumps might be a more cost effective option for certain homes, especially when combined with smarter electricity use. Given that cooling will be a challenge as the climate warms, especially in city-centre flats, it is surprising that air-to-air heat pumps have attracted so little attention.

Ambitious businesses versus smaller heating engineers

One of the more striking ambitions in the strategy is that “by 2030, heat pumps should cost the same as gas boilers”. This is a vitally important goal - we really do need heat pumps to get cheaper - but it’s a challenging one, given that heat pumps currently cost at least 3 times as much as gas boilers

The Government is clearly leaning heavily on breakthroughs from innovative companies such as Octopus Energy, who announced they will offer a heat pump installation for the same price as a gas boiler from April 2022. This will rely on the £5,000 grant, so it is still some way off price equivalence, but it is a big step nonetheless. It seems likely that other energy companies will follow Octopus’ lead and step into the heat pump market, presumably aiming to drive down costs.

What’s striking, though, is that the heating sector, for both boiler and heat pump installations, is currently dominated by small businesses with only a few employees. From what we’ve seen, small installers have reacted with some scepticism to the Octopus plan for radical cost reduction. A big part of the cost of heat pumps is in the installation and home upgrades that go with it, and this can vary a lot depending on the home you need to heat. There is a considerable risk that unexpected costs make those low price promises hard to keep.

In some ways, the Octopus model probably holds the key to the future of the heat pump market, and there are two interesting dynamics to watch here. First, can a business model offering much cheaper heat pumps really work right now, in the UK’s old and draughty homes? If it succeeds, it will be a huge breakthrough, but if it fails it could set the cause of low carbon heating back some way. Second, will that shift the market towards larger energy companies, and away from the small businesses that currently dominate the world of home heating? This will have a huge bearing on the skills and the employment opportunities available to thousands of workers.

Funding falls short of ambitions on fuel poverty and energy efficiency

Within the strategy, the government has allocated additional funding to several existing programmes aimed at increasing uptake of household energy efficiency and low carbon heating initiatives. However, it does not present any new or extensive policy developments for energy efficiency, despite expecting this to account for 38% reduction in emissions through 2030. Also, while the increases are relatively substantial compared to original programme levels, they still fall short of what’s needed to meet the government’s more ambitious targets.

One example isthe now £1.1bn allocated for the Home Upgrade Grant through 2025. This is aimed at lifting ‘as many as reasonably practical’ vulnerable households and low income families living in the worst quality off-gas-grid homes in England from lower energy performance certificate bands (worse thermal efficiency) to band C (heat pump ready) by 2030. By government’s own retrofit cost estimates, this would only enable 25% of these homes to be lifted to band C, compared to the 50% required to remain on track for the target, even with hopes for additional funding in 2026.

A ground-breaking start, a lot more to do

Overall, the Heat and Buildings Strategy just about works as a minimum viable product. Given its ground-breaking nature, that is no mean feat. But there’s a lot more that will need to be done to deliver this plan, by businesses, consumers and ultimately the government. The most pressing challenge, as ever, is around money, which looks likely to be a recurring issue. But with a clear set of goals to aim at, there is plenty for everyone involved in heating our homes to be getting on with. At Nesta, we’ll be doing what we can to make the strategy a success, by exploring new ways to make low carbon heating more affordable, more convenient and more attractive to customers and installers alike.

Author

Andrew Sissons

Andrew Sissons

Andrew Sissons

Deputy Director, A Sustainable Future mission

Andrew is Deputy Director on Nesta's mission to create A Sustainable Future, which focuses on decarbonisation and economic recovery.

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Oliver Zanetti

Oliver Zanetti

Oliver Zanetti

Mission Manager, A Sustainable Future mission

Oliver is a Mission Manager for the Sustainable Future mission team.

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Codrina Cretu

Codrina Cretu

Codrina Cretu

Mission Analyst, A Sustainable Future mission

Codrina is a mission analyst for Nesta's 'A Sustainable Future' mission team.

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Kevin Wiley

Kevin Wiley

Kevin Wiley

Analyst, A Sustainable Future mission

Kevin is an Analyst for the 'A Sustainable Future' Missions Team

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