137.Domestic, commercial and industrial heating is responsible for around a third of the UK’s overall emissions, which is unchanged from 2009. Adjusting for environmental temperature, the UK’s residential emissions have remained essentially unchanged since 2013. There are two basic technical ways to reduce the carbon emissions associated with heating, either the reduction of demand through energy efficiency measures or the replacement of fossil fuel heating systems to less carbon-intensive versions. This Chapter examines what progress has been made so far, and what more could be done on each of those fronts.
138.There are a range of low-carbon heating technologies, including:
Reviewing these different technological options, the Government said in its Clean Growth Strategy that “at present it is not certain which [low-carbon heat] approaches or combination of them will work best at scale and offers the most cost-effective long-term answer”. Many submissions to our inquiry, such as those from Energy UK and the UK Energy Research Centre, agreed that it was not clear which low-carbon heating options would be most suitable in the longer-term, and several, including from National Grid, stressed that a balance of different technologies in different situations was likely to be the most effective solution.
139.Amidst this technological uncertainty, Duncan Burt, Director of Operations, for National Grid System Operator, told us that the decarbonisation of heat was “the one big problem left to crack for the UK”, and said that there was a “need for a very clear pathway for decarbonised heat to be established”. He added that “the development of inter-seasonal storage [should be considered] alongside decarbonisation of the heat market” as “the two go intrinsically together”. Other witnesses agreed with the need for a heat decarbonisation strategy, including Professor Tim Green of the Imperial College Energy Futures Lab, who emphasised that instead of “developing a strategy and then doing trial deployments […] the first plank of the strategy is that we have to try some of these things”. The Government has recognised this need for evidence-gathering, stating in its Clean Growth Strategy that it would “need to lay the groundwork this Parliament so we are ready to make decisions in the first half of the next decade about the long term future of how we heat our homes”, and stating in 2018 that its “initial next steps” for decarbonising heating in the UK would include:
140.Despite these plans, the Committee on Climate Change argued in May 2019 that “over ten years after the Climate Change Act was passed, there is still no serious plan for decarbonising UK heating systems and no large-scale trials have begun for either heat pumps or hydrogen”. Reflecting the Committee on Climate Change’s focus on large-scale trials, we heard repeatedly of the importance of trials at scale for potential low-carbon heating technologies. Malcolm Brinded, representing the Royal Academy of Engineering and allied institutions, explained, for example, that “it is not about testing the technology but about testing a system”:
The work to understand how those options would play out in the real world with consumer resistance, behaviour, price signals and all the other demand-side management measures that might go with it, has to be done in the period to 2025 to understand which trajectory we should be on. It is not an issue of saying that it will be about hydrogen, electrification or hybrid; it is about really understanding how those systems will work at scale, and the total system around that work.
Professor Jim Watson, Director of the UK Energy Research Centre, similarly clarified that trials should involve “heating real homes in a real city”. Advocating greater Government willingness to support large-scale trials, the Aldersgate Group, an alliance of multiple UK businesses across various sectors, noted that the UK could install hybrid heat pumps in 1 million homes, heat networks in 1 million homes and hydrogen in 1 million homes and “there would still be 22m homes left to treat”.
141.Damitha Adikaari, Acting Director of Science and Innovation for Climate and Energy at the Department for Business, Energy and Industrial Strategy, conceded that the Government’s trials so far had only involved up to around a hundred homes. He acknowledged that large-scale demonstrations were “necessary” but said that they were “the most difficult” and explained that “the Government’s push at the moment is to provide sufficient funds to de-risk some of those unknown technologies towards the demonstration phase”. The National Infrastructure Commission has commented, however, that “whilst there are incremental steps that can be taken to address some aspects of the challenge, an incremental approach on its own will not be enough”. Addressing hydrogen in particular, the Committee on Climate Change has similarly said that “continuation of an incremental approach that relies on isolated, piecemeal demonstration projects may lead to hydrogen continuing to remain forever an option ‘for the future’”.
142.Heating accounts for around a third of the UK’s overall emissions, which has remained essentially unchanged since 2009. The decarbonisation of heating will be critical to the UK achieving its long-term emissions reductions targets, but there remains considerable uncertainty surrounding what mix of low-carbon heating technologies represents the best decarbonisation pathway for the UK, or what mix the Government will pursue. The Government must urgently develop a clearer strategy for decarbonising heat. This will require large-scale trials of different heating technologies operating in homes and cities to build the evidence base required for long-term decisions. The Government must commit now to large-scale trials of low-carbon heating technologies, convening relevant stakeholders to determine what evidence must be gathered and to co-ordinate existing work.
143.Professor Jim Watson, Director of the UK Energy Research Centre, noted that there was “an asymmetry of evidence about the heat pathway”, with reasonable evidence gathered on electric heating but “hardly any real-world evidence of the hydrogen route”. He argued that this made trials of hydrogen a particular priority. The Energy Systems Catapult told us that a large-scale trial of hydrogen “probably needs to take place by the early 2020s”. Malcolm Brinded and Duncan Burt similarly indicated that such trials would need to be complete by 2025, while the National Infrastructure Commission has said that community-scale trials should be conducted by 2021 followed by trials involving at least 10,000 homes by 2023.
144.The UK Hydrogen and Fuel Cell Association and Sam French, representing the Decarbonised Gas Alliance, noted that hydrogen could be used not only as a fuel for heating, but also for transport and industrial processing. The Hydrogen Council, a coalition of over 50 international companies developing hydrogen technologies, has also highlighted that “hydrogen is exceptionally well suited to store large quantities of energy for long durations”, which it said could aid in particular with the integration of increasing proportions of renewable power generation. Anglo American, a company that mines platinum (a metal used in hydrogen generation and hydrogen-powered technologies), explained that ‘surplus’ renewable power generated at times of low demand could be used to generate hydrogen instead of going to waste.
145.The UK Hydrogen and Fuel Cell Association acknowledged that there was growing recognition of the potential for hydrogen in the UK, and listed eight projects already underway. One of these is the Hy4Heat project, which received £25m from the Government to “establish if it is technically possible, safe, and convenient to replace natural gas with hydrogen in residential and commercial buildings and gas appliances”. Sam French agreed that the Government had “at least five or six reasonably large programmes looking at all the key elements down the supply chain”, and that “at this level, [the Government] does have a co-ordinated plan”. However, he said that it would be “the next step that will be critical”, and argued that this would have to involve trials an order of magnitude larger than current projects. The Energy Networks Association similarly told us that it “welcome[d] the approach being taken [by the Government] to build the evidence base around the options to decarbonise heat and transport, and would encourage increased activity in these areas”. Guy Newey, Director of Strategy and Performance at the Energy Systems Catapult, told us that although there were currently “dozens of projects going on”, the key challenge would be how to “bring those together in big demonstrations”. The Sustainable Gas Institute also stressed that “future projects should be coordinated to ensure findings from practical demonstrations inform modelling efforts, and vice versa”.
146.The Energy Systems Catapult told us that “it is unclear precisely what a comprehensive live trial(s) for the large-scale deployment of hydrogen might look like and what components are necessary or merely desirable”, and argued that “consensus is needed to ensure a live trial(s) adequately provides sufficient information to enable Government to make a decision on hydrogen”. Professor Watson outlined a “number of aspects” that a trial of hydrogen would need to cover:
One is the cost of producing the hydrogen […] There is the demonstration of converting your network to use hydrogen. Most networks can use some share of hydrogen, but another interesting question is how far you can go there. Then there is the demonstration of the end-user appliances, what you need to do in people’s homes or businesses to be able to burn hydrogen rather than methane. Attached to that are questions about the financial model, consumer acceptability and whether, with that much change, it will still be as acceptable and whether the service will be as good.
The Royal Society and EDF Energy listed similar areas for investigation, highlighting also the different potential methods for generating hydrogen as well as the storage and safety requirements that would need to be explored. Given the different sectors in which hydrogen could be used as a fuel, the UK Hydrogen and Fuel Cell Association told us that the Government should take a “holistic approach” to developing hydrogen, with support for “whole system hydrogen energy demonstrations”.
147.Proposals for significant trials of hydrogen already exist. For example, Cadent, a gas distribution network operator, has proposed a ‘Liverpool-Manchester hydrogen cluster’ that would blend hydrogen at 10–20% into the gas supply and cost around £600m. The H21 Leeds City Gate project has developed plans to incrementally convert the gas network in Leeds to 100% hydrogen over three years. It said that this would use existing technologies and could support decarbonisation across heating, transport and power generation, with a total cost of around £2bn. Both projects indicated that funding could potentially be secured through Ofgem’s network price controls framework, depending upon the details of its next phase. Sam French indicated that private investment could be pulled in to supplement public funding for hydrogen demonstration projects, with industry seeking “a provision for the next competition that is going to build some of these projects that are currently being designed”. Amanda Lyne, Chair of the UK Hydrogen and Fuel Cell Association, added that developing a hydrogen system at scale would help to make the costs more competitive.
148.In a report examining potential options for decarbonising the UK’s gas networks, the Sustainable Gas Institute noted that “choosing areas of the existing gas network to convert to hydrogen will be a significant policy consideration”:
Consumers in the area of conversion will not have the option to continue using natural gas. A number of policy considerations will arise as a result, including: who decides what areas are to be converted and how; who pays for appliance replacement; and what rights do consumers have if they do not want hydrogen?
These are important considerations that must be included in any future trial of hydrogen. However, high levels of engagement and support from homeowners involved in the HyDeploy project near Stoke-on-Trent suggests that public support can be achieved.
149.The Energy and Clean Growth Minister, Claire Perry MP, acknowledged that “there is a huge amount of enthusiasm for hydrogen heating”, but warned that “there is a question about public perception and how much you can blend [hydrogen into the grid], and currently we do not have hydrogen-powered appliances”. Damitha Adikaari, Acting Director of Science and Innovation for Climate and Energy at the Department for Business, Energy and Industrial Strategy, correspondingly stated that the “Government’s push at the moment is to provide sufficient funds to de-risk some of those unknown technologies towards the demonstration phase”, focusing on the safety of hydrogen and the availability of appliances. However, Sam French and the Energy and Utilities Alliance both told us that manufacturers were developing hydrogen boilers that were at the point of being ready for use. The H21 Leeds City Gate project reported in 2016 that “there are already a few models [of appliances and equipment for domestic, commercial and industrial sectors] on the market, although sales are extremely low, due to an absence of piped hydrogen”, but that “just with the knowledge of this study, several manufacturers are showing real enthusiasm for their development”:
A firm long-term plan and significant stimulus would be needed to provide the motivation to develop and produce the wide range of equipment required. This could potentially be in the form of a national heat policy.
150.The use of hydrogen as a fuel offers significant promise for low-carbon heating, transport and industrial processing, as well as for energy storage and to help manage intermittent renewable power generation. However, evidence from large-scale trials will be needed to allow the Government to make informed decisions on the UK’s future energy system. Demonstrating the safety of hydrogen as a fuel is a critical first step, and we commend the Government for its support of the Hy4Heat programme. The Government must complete the safety demonstration work for hydrogen as an urgent priority. The Government should also commit to completing at least one large-scale trial of hydrogen by 2025 conditional upon safety approval, and start developing now the terms for a competition to deliver such a trial. This should involve co-ordination of existing demonstration and modelling projects and should lead to the terms of a competition being announced no later than the end of 2020.
151.The Committee on Climate Change has said that hydrogen faces a “chicken and egg” problem in the UK as it “does not currently produce significant amounts of low-carbon hydrogen, nor does it have technologies in place that would provide a market for that hydrogen”. As one solution to this challenge, the Decarbonised Gas Alliance told us that “simply allowing the hydrogen blend [in the gas grid] to be increased up to 2%, as a first step, would help to unlock [a new market in hydrogen]”, suggesting for example that renewable energy produced at periods of surplus energy supply could be used to produce hydrogen if there were a market for it. Currently, the concentration of hydrogen in the grid is limited to 0.1%, although one trial project has received an exemption to demonstrate hydrogen concentrations of up to 20% on the Keele University campus. Increasing proportions of hydrogen have been injected into some gas grids worldwide, reaching 10% concentration in Germany, while Ofgem has stated that all gas appliances manufactured after 1993 have been required to operate with a hydrogen mix up to 23%. Randolph Brazier, Head of Innovation and Development at the Energy Networks Association, told us that the Association believed that it could supply “up to 20% hydrogen into the gas networks without affecting consumer devices in the home”. The Minister indicated to us that “changing the regulations to allow us to introduce blended hydrogen into the system […] would be a really easy thing to do”.
152.The Sustainable Gas Institute indicated that, in addition to amendments to gas regulations, “there may also be a need for modifications to market arrangements to facilitate and encourage injection of biomethane or hydrogen”. The UK Hydrogen and Fuel Cell Association suggested that feed-in tariffs might be required to help build a market for hydrogen injection. Alternative market support mechanisms could include a ‘low-carbon gas obligation’ similar to the Renewable Transport Fuel Obligation currently in place for suppliers of fuel used in transport.
153.Blending hydrogen into gas supplied via the gas grid could provide an initial market for early hydrogen production facilities. Once clear evidence is obtained on the level at which it is safe to mix hydrogen into the existing gas grid, and which is compatible with existing appliances, the Government should amend regulations to raise the proportion of hydrogen permitted in the grid. With higher blends of hydrogen permitted, the Government should act to support the development of this as a market for hydrogen, perhaps through feed-in tariffs or low-carbon obligations analogous to the Renewable Transport Fuel Obligation.
154.In addition to large-scale trials of different low-carbon heating options, David Weatherall, Head of Policy at the Energy Saving Trust, highlighted two actions that could be pursued immediately and which would be required whichever low-carbon heating technologies the Government pursued: improving energy efficiency in buildings; and raising public awareness of the need for decarbonising heat and what that might entail. The Government listed a variety of measures that could improve energy efficiency in existing homes, including:
This section explores these options, as well as other measures that could contribute to the decarbonisation of heating in the UK in the near-term.
155.Lord Deben, Chairman of the Committee on Climate Change, highlighted the inadequacy of energy standards for new homes currently being built as “the first and prime issue” for the UK’s decarbonisation. The Royal Academy of Engineering and allied institutions similarly told us that “building regulations (and their enforcement) should be strengthened”, noting that “every home that is built to lower standards locks the occupants into excessive energy demands and costs that last for decades”. The Minister for Energy and Clean Growth argued that “in the past nine years the average energy performance standard for new homes has improved by 30%”. However, the Government’s statistics on the average energy use of new homes demonstrates that almost all of this improvement occurred before 2014. Jenny Holland, Senior Public Affairs and Policy Specialist for the UK Green Building Council, noted that “it is now six years since building regulations were last upgraded—the longest period without uplift since building regulations in their current form were introduced in 1984”.
156.Building regulations were due to be updated in 2016, through the introduction of the ‘Zero Carbon Homes’ policy. This would have required all new homes to mitigate any carbon emissions produced on-site as a result of energy usage covered under building regulations (such as heating, cooling and lighting). However, the 2015 Government decided not to pursue the zero carbon homes target in order to reduce regulations on homebuilders, arguing that regulations were one reason that the “UK has been incapable of building enough homes to keep up with growing demand”. This decision was criticised at the time in an open letter to the Chancellor with over 200 signatories, including major UK homebuilders. The letter stated that:
There was a broad consensus in support of the zero carbon policy, which was designed to give industry the confidence it needs to invest and innovate, in order to drive higher energy efficiency standards and low carbon energy solutions […] There is no evidence to suggest [ending the policy] will increase housing supply or boost productivity.
Jenny Holland told us that the UK Green Building Council advocated a reinstatement of the Zero Carbon Homes Policy as a “modest start” for 2020, arguing that its “work with local authorities and developers up and down the country” suggested that this was “cost-effective and viable across a range of situations and geographical areas”. David Weatherall, Head of Policy at the Energy Saving Trust, told us that he supported this fully. Lord Deben, Chairman of the Committee on Climate Change, argued that any costs involved with reaching higher standards would quickly fall due to economies of scale, and in any case be absorbed by reductions in land price. Jenny Holland made the same argument.
157.Graham Hazell, representing the Heat Pump Association, highlighted in particular the distorting impact of out-dated building regulations on homebuilders’ actions to comply with current energy efficiency standards. He explained that, as a result of failing to reflect significant recent reductions in the carbon intensity of the UK electricity supply, current building regulations were “more than doubling the carbon intensity of a heat pump completely artificially”. This erroneously incentivises homebuilders to meet building standards requirements through the installation of solar panels, which reduce electricity consumption, over heat pumps, which use electricity to efficiently move heat to inside a building. Mr Hazell argued that rectifying the building regulations to better reflect the actual carbon intensity of electricity would be “quite a small thing to do” but would represent a “massive step” for low-carbon heating systems. The Heat Pump Association told us, however, that it did not expect changes to be made quickly “due to the process required which is a combination of the need to go to public consultation and the need to pass law within Parliament”.
158.In 2018, the Government said that it would consult on changes to Part L of the Building Regulations—the regulations that govern new building energy efficiency standards—in 2019, but no consultation has yet been launched. The 2019 Spring Statement also announced a ‘Future Homes Standard’ to be developed by 2025, to “build on the Prime Minister’s Industrial Strategy Grand Challenge mission to at least halve the energy use of new buildings by 2030” by “future-proofing new build homes with low carbon heating and world-leading levels of energy efficiency”. The Chancellor stated that this would include “mandating the end of fossil-fuel heating systems in all new houses from 2025”. The UK Green Building Council welcomed the announcement, but stressed that “it is vital that this is accompanied by truly world-leading energy efficiency standards”. Tim Lord, Director of Clean Growth at the Department for Business, Energy and Industrial Strategy, explained that the 2025 date was intended to give time for supply chains of technologies such as heat pumps to develop, but said that he expected homes to gradually meet the strengthened standards by 2025 rather than improving suddenly.
159.The Energy Saving Trust has advocated moving towards a ‘2050-ready’ set of standards so that homes built now are fit for a net-zero emissions future, and outlined what such standards should encompass. It indicated that these could be based on the Zero Carbon Homes and London’s current zero carbon homes policy, incorporating:
Graham Hazell agreed that “we are building homes right now on a number of fronts that will either be very difficult or impossible to change in the future”, noting in particular the fact that new homes tended to use small-bore heating pipes and did not incorporate sufficient room for the installation of a hot water cylinder, both of which left them incompatible with the future installation of a heat pump system. E.On argued that national adoption of tightened emissions standards modelled on London’s zero carbon homes policy could “provide a stimulus, free from subsidy, for heat networks and heat pumps, providing scale and the ability of those technologies to be industrialised to realise cost reductions”.
160.The Government’s announced future homes standard is welcome. However, regulations requiring improvements to the efficiency of new buildings must be introduced before 2025. The Government should re-introduce the zero-carbon homes standard as a matter of urgency, and no later than the end of 2019. It should additionally ensure that building regulations accurately reflect the current carbon intensity of electricity in Great Britain, and that this figure can be regularly updated (at least annually) in future.
161.The Government should launch its consultation on Part L of the building regulations by the time of the Spring Statement 2020. Beyond that, it must ensure that homes built today are compatible with a net-zero emissions future and that the ‘Future Homes Standard’ reflects this.
162.The Royal Academy of Engineering and allied institutions noted that “most of the buildings that will exist in 2050 have already been built”. Lord Deben, Chairman of the Committee on Climate Change, told us that he focused on new buildings because that it “is the stupidest part of the whole situation”, but agreed that “the biggest problem is all those houses that will still be there in 2050, when we are supposed to have reduced our emissions by 80%”.
163.The energy efficiency of a house is measured using the ‘Standard Assessment Procedure’, which assesses how much energy a building will consume when delivering a defined level of comfort and service provision, and awards the building a corresponding ‘score’ out of 100 determined by the associated energy costs per square metre. Homes are awarded an Energy Performance Certificate on the basis of the score, which categorises them from Band A (least costly to run) to Band G (most costly to run). The most recent breakdown of the proportion of homes in each EPC band is shown in Table 1.
Table 1: Proportion of English homes in each EPC Band
164.In its Clean Growth Strategy, the Government stated its ambition for:
The Committee on Climate Change has concluded that achieving these goals would be compatible with the UK’s emissions reductions targets, “provided that the limitations of ‘practical’ and ‘affordable’ do not significantly limit cost-effective uptake”. Tim Lord, Director of Clean Growth at the Department for Business, Energy and Industrial Strategy, told us that he “would not want to put a specific percentage number” on how many homes the Government’s ambition would apply to, but indicated that he “would certainly expect to be able to improve cost-effectively a very significant majority of homes”.
165.The Government should set out, in its response to this Report, the criteria that will be used to determine ‘practicality’ and ‘affordability’ in its energy efficiency targets, and provide an indicative percentage of homes that it is intending to help reach Band C by 2035.
166.David Weatherall, of the Energy Saving Trust, and Jenny Holland, of the UK Green Building Council, agreed with the Committee on Climate Change that the Government’s targets were reasonable. Instead, Ms Holland flagged that “it is the lack of policy rather than the targets being wrong”. Indeed, the most recent English Housing Survey reported a slowing in improvements in energy efficiency, with “no change in the average [energy efficiency] rating of homes between 2016 and 2017”. In its 2018 Progress Report to Parliament, the Committee on Climate Change noted that home insulation rates in 2017 were at just 5% of the peak rate achieved in 2012.
167.David Weatherall told us that in the Energy Saving Trust’s opinion, the Energy Company Obligation was “currently the only national funding scheme for energy efficiency in homes”. The Energy Company Obligation requires energy suppliers to deliver energy efficiency and heating measures to consumers’ homes, typically by paying for part or all of the installation (although suppliers are allowed to trade achieved savings amongst themselves). A national target of total home heating cost savings is periodically set in secondary legislation, and is allocated to be achieved by large energy suppliers through the installations they deliver, according to their market share. The most recent secondary legislation, made in 2018, set a target for 2018–2022 of £8.235bn. Any supplier that has not accrued the necessary savings by the end of the required period can be fined by the regulator. The Government amended the Energy Company Obligation in November 2018 so that the scheme targeted only low-income and vulnerable households. It explained that this re-focus was introduced to “[help] to meet the Government’s fuel poverty commitments”, but acknowledged that the change would “result in lower carbon emissions reductions being achieved under the scheme”. This is because fuel poor households are likely to benefit from improved efficiency by increasing the extent to which the house can be heated, rather than by reducing the amount of heating required.
168.Noting that the Energy Company Obligation is “increasingly being focused on those most in need of support”, the Government opened a call for evidence on driving energy efficiency measures in the ‘able to pay’ market in 2017. The consultation outlined several potential options for Government action, including:
However, the Government has still not responded to the consultation submissions. Tim Lord, Director of Clean Growth at the Department for Business, Energy and Industrial Strategy, told us that the Government would be “bringing forward [its] plans in response to that call for evidence and consultation later in the year”.
169.The last significant policy framework intended to encourage homeowners to improve their homes’ energy efficiency was the Green Deal. This was a scheme under which loans were made available to homeowners to finance improvements to the energy performance of their properties. Loans were available for a specific set of energy efficiency and renewable generation technologies, and individual properties had to be assessed and cost-saving opportunities identified for the property to be eligible for that improvement. The debt was taken on by the property rather than the owner and was paid back, with interest, through the property’s electricity bill. The Green Deal scheme was launched by the then Government in 2011 but was closed in 2015 due to “low take-up and concerns about industry standards”. The Government has since acknowledged that the Green Deal only addressed the financial aspect of energy efficiency improvements, which was not enough to drive widespread uptake. Jenny Holland, Senior Public Affairs and Policy Specialist for the UK Green Building Council, explained that the Green Deal falsely assumed that “thousands and thousands of householders out there were dying to make energy efficiency improvements to their homes and the only thing stopping them was a lack of available finance”, but “the results speak for themselves” in showing this not to be the case. The National Audit Office similarly reported in 2016 that initial concerns that the Green Deal would attract insufficient householder interest were well-founded, and found that “even where there has been some interest in Green Deal loans, the complex process meant many people did not complete the process of arranging a finance plan”.
170.Reflecting these previously identified problems with a lack of homeowner demand, Energy UK, a trade association covering the whole UK energy sector, recommended that the “Government should help kick-start a sustainable able-to-pay energy efficiency market via a combination of incentives and funding mechanisms to engage with different consumer groups”. The Energy Efficiency Infrastructure Group, a coalition of over twenty relevant organisations, has recommended a range of options to support this. In particular, it suggested that the Government incentivise homeowners to make energy efficiency improvements by adjusting Stamp Duty so that it would vary according to the property’s energy performance as well as its selling price. Jenny Holland, Senior Public Affairs and Policy Specialist for the UK Green Building Council, told us that she would be “extremely supportive” of such an initiative. A similar idea has been advocated by other stakeholders too, such as the Sustainable Energy Association. The Energy Efficiency Infrastructure Group specified that under such a scheme, homebuyers should be given a year after purchase to complete any improvement works and claim a retrospective reduction in Stamp Duty, as this “would allow improvements to be undertaken at the same time as general renovations that often take place shortly after purchase”.
171.Previous initiatives to encourage the installation of energy efficiency improvements in the ‘able-to-pay’ market have failed because they have focused too narrowly on providing financial support for specific interventions. The Government’s new energy efficiency policy must provide all homeowners with the incentive to make energy efficiency improvements to their property, with particular thought given to lower income households. By the time of the Spring Statement 2020, the Government should consider adjusting Stamp Duty so that it varies according to the energy performance of the home as well as the price paid for it. Homebuyers should then be able to make energy efficiency improvements within a defined time after purchasing the property, and claim back corresponding reductions in the Stamp Duty paid retrospectively. The adjustments made to Stamp Duty could be designed in order to be revenue-neutral to the Government. Robust certification of energy efficiency will need to be put in place to ensure that such a scheme is not open to exploitation and the Government should consider how best to incentivise upgrades in council, housing association and rented homes.
172.The Government’s realisation that an energy efficiency policy cannot focus on finance alone does not mean that finance is unimportant. Although energy efficiency improvements can often save costs in the long-term by reducing energy demand, homeowners still need to be able meet the upfront costs of making the improvement. The Green Deal offered loans to cover installation costs, which were repaid through the occupiers’ electricity bill (even if the original homeowner had sold the property). However, under the scheme’s ‘golden rule’, loans were only awarded for energy efficiency improvements that would deliver greater cost savings over their lifetime than total loan repayments over the same period. Jenny Holland advised that any future scheme should not adopt this rule, as it “limited the number and type of installations that you could put in”. Indeed, the National Audit Office found that, of seven common energy efficiency improvement measures, “only easy-to-treat cavity wall insulation would qualify on its own, while other measures would require some form of subsidy to be installed at zero net cost for the householder”.
173.The purpose of the Green Deal was to enable homeowners to pay for energy efficiency improvements in their homes, with the ‘golden rule’ intended to protect these homeowners from paying for energy efficiency improvements that would not deliver net cost-savings. The Energy Saving Trust has highlighted, however, that although some “home energy efficiency [improvements] may not be cost-effective for individual households, [they] may be highly cost-effective for the UK as a whole in reducing our overall energy demand and in meeting our 2050 carbon targets”, pointing out that energy efficiency improvements can be more cost-effective than other measures subsidised by the Government, such as nuclear and some renewable power generation technologies.
174.The Energy Saving Trust has suggested various potential components of a future scheme for financing energy efficiency improvements in the ‘able-to-pay’ market, such as zero- or reduced-rate loans, grants, mortgage-linked cashback schemes and equity release schemes. Bright Blue, an independent liberal conservative think tank, recommended the introduction of a ‘Help to Improve’ finance scheme for energy efficiency, in reference to the ‘Help to Buy’ scheme in place for first-time homebuyers and for purchases of new homes. This would comprise two main elements:
The Sustainable Energy Association has also recommended a ‘Help to Improve’ loan scheme, which it said was already used in other countries including Germany and France. Evidence from Germany suggests that, as a result of the tax revenue from the economic activity associated with delivering energy efficiency improvements combined with reduced welfare spending due to improved housing and employment, the Government received a net income from the scheme.
175.The Green Deal’s ‘golden rule’ heavily restricted the energy efficiency improvements that could be paid for by the scheme. Although some energy efficiency improvements may not deliver net cost-savings to homeowners, they may still represent cost-effective options for the UK to meet its emissions reductions targets. The Government’s new energy efficiency policy must enable homeowners to access the finance needed to cover the upfront costs of energy efficiency improvements that offer a cost-effective contribution to the UK’s decarbonisation, not just net cost-savings to individual homeowners. In analogy to the existing ‘Help to Buy’ scheme, the Government should establish a ‘Help to Improve’ scheme by July 2020 that offers matched funding and interest-free loans to homeowners, to cover the costs of making energy efficiency improvements.
176.Tim Lord, Director of Clean Growth at the Department for Business, Energy and Industrial Strategy, highlighted the fact that measures to improve energy efficiency could benefit from financial services innovation as well as technological innovation, noting in particular a potential role for ‘green mortgages’. The Minister explained that “people who are moving into energy-efficient homes are less likely to default on rental payments”, providing an incentive for banks to offer lower mortgage rates. However, the London School of Economics and Political Science has warned that the evidence base for this was limited, and that it was not clear whether more reliable payments were caused by energy efficiency or simply correlated. Indeed, the Government itself has acknowledged that “it can be difficult to untangle the role of the property from the homeowner in these calculations”. Nevertheless, the LENDERS group, a coalition of organisations including the UK Green Building Council, the Energy Saving Trust and the Nationwide Building Society—supported by the Government—has also noted the correlation between energy efficiency and homeowners’ capacity for mortgage repayments, and recommended that the mortgage industry reviews its current affordability calculations to take this into account. Increasing potential purchasers’ ability to secure a mortgage for homes with greater energy efficiency could help to drive demand for more energy efficient properties. The London School of Economics and Political Science has argued that this could apply to all mortgages, not just those intended to be ‘green’, and said that “this could be a safer and more flexible alternative to offering more favourable interest rates for green mortgages”. The LENDERS group indicated that the Government could support the mortgage industry in accessing “larger datasets in compatible formats to provide more accurate estimation for household expenditure”.
177.We commend the Government for supporting research into, and the development of, ‘green mortgages’. The Government should consider the case for encouraging mortgage lenders to take energy efficiency into account for all mortgage applications, and should support the industry in capturing any potential in such a system for driving a market in energy efficiency improvements.
178.The Minister for Energy and Clean Growth, Claire Perry MP, highlighted the fact that, in addition to the Energy Company Obligation, the Government had recently passed legislation targeting the “least energy-efficient part of the private rented sector”. This refers to amendments made to energy efficiency regulations under the Energy Act 2011. The amended regulations forbid private landlords from granting new tenancies to new or existing tenants in properties with energy efficiencies beneath EPC Band E, and from April 2020 landlords will not be able to continue letting a property that is already let if it falls beneath these standards (with certain exclusions, especially in the social housing sector). However, with the impact being restricted to privately-rented properties with efficiencies beneath Band E, these measures will only affect 2.5% of all English homes. Suggesting policies that could affect a wider range of households, Bright Blue recommended that “the building code could be amended to mandate builders to improve the overall energy performance of homes whenever renovations take place”:
The cost of the home energy improvements could be capped so they do not exceed a certain proportion of the overall cost of the building works. This regulation would be enforced in the same way that the building code, the regulations that govern building works, is currently enforced.
This aligns with the UK Energy Research Centre’s findings that households are much more likely to consider making energy efficiency improvements as part of wider renovations than for efficiency improvements alone.
179.We commend the Government for strengthening the requirements on landlords to improve the energy efficiency of the least efficient homes in England and Wales. However, these measures will affect only 2.5% of the housing stock. The Government should amend building regulations so that renovations to buildings must always result in an overall improvement in energy efficiency.
180.The Renewable Heat Incentive (RHI) is a Government financial incentive aimed at promoting the use of renewable heat systems. The National Audit Office has reported that, as of December 2017, the RHI had delivered just 78,000 of the 513,000 that it was projected to deliver between 2014 and 2020. The RHI scheme is due to close to new applicants in 2021, with the Government saying it “is now considering how to transition support for [low-carbon heating] technologies away from direct subsidy”. Tim Lord, Director of Clean Growth at the Department for Business, Energy and Industrial Strategy, told us that he could not yet say “ what the successor to or the future for that scheme will be”. The Renewable Heat Incentive has significantly underperformed on the Government’s expectations. With the Renewable Heat Incentive due to close to new applications in 2021, the Government must ensure that it avoids a repeat of the disruption caused by the closure of the feed-in tariff, and announces its plans for the successor scheme to the Renewable Heat Incentive no later than the Spring Statement 2020. The successor scheme must be far more effective than the Renewable Heat Incentive scheme has proven to be.
181.The Minister for Energy and Clean Growth, Claire Perry MP, told us that, following the Government’s announced intention to mandate the end of fossil-fuel heating systems in all new houses from 2025, “the hope is that through the regulatory changes we make we will kickstart a real cost reduction” in heat pumps and other existing technologies not yet deployed at scale. This echoed what we heard from E.On, who argued that “if there was sufficient confidence within the supply chain that the market [for heat pumps] could be scaled, the cost of heat pump production and installation could be reduced significantly”.
182.The Committee on Climate Change has commented that “switching to heat pumps is made more costly by the fact that the carbon costs of gas are not reflected in its price” and said that “there remain important questions to be resolved around the current balance of tax and regulatory costs across fuels, which currently weaken the private economic case for electrification”. Graham Hazell, representing the Heat Pump Association, similarly told us that “the driver [for low-carbon heating] has to be to put a cost on carbon” given that currently “the price of the fuel does not relate to the carbon content”. A 2013 report by the Centre for Climate Change Economics and Policy and the Institute for Fiscal Studies compared the variety of ‘upstream’ and ‘downstream’ policies on electricity with the fact that there were “no policies imposing a carbon price on gas use by households”, and estimated that, in 2013/14 prices, households faced a carbon price of £27/tCO2e for electricity compared to a negative cost (taking into account the VAT ‘subsidy’) on household energy consumption) of £29/tCO2e for gas. The authors of that report supported the introduction of a carbon tax on gas for domestic heating but highlighted that it would be regressive (because low-income households devote a larger portion of their spending to energy than richer households) and unpopular. They recommended that such a move be accompanied by a compensation package to address these issues, and pointed out that the tax itself would raise a significant amount of money to enable this.
183.The Government’s announcement that fossil-fuel heating systems will not be permitted in new builds after 2025 may support the growth of supply chains for low-carbon heating technologies and deliver consequent cost-reductions as well. The Government should further support the deployment of low-carbon heating technologies by setting out a clear roadmap by the time of the Spring Statement 2020 for rebalancing levies on electricity and gas, to better reflect the emissions intensities of each fuel.
467 Department for Business, Energy and Industrial Strategy, ‘’ (2018), p3
468 Department for Business, Energy and Industrial Strategy, ‘’ (2017), p9 and Department of Energy and Climate Change, ‘’ (2012), p3
469 Department for Business, Energy and Industrial Strategy, ‘’ (2019), Table 4
470 For more information, see: ‘Residential Heat Pumps’, , Parliamentary Office of Science and Technology, January 2013
471 For more information, see: ‘Decarbonising the Gas Network’, , Parliamentary Office of Science and Technology, November 2017
472 For more information, see: National Grid System Operator, ‘’ (2018), pp70–71
473 For more information, see: Department for Business, Energy and Industrial Strategy, ‘’ (2017)
474 Department for Business, Energy and Industrial Strategy, ‘’ (2017), p75
475 For example, see: National Grid (), paras 3.5–3.6; Energy UK (), para 9; Calor (), para 11; SGN (), para 1; UK Energy Research Centre (), para 18—see also: National Infrastructure Commission, ‘’ (2018), p44
479 and —see also: Drax Group plc (), para 7
481 Department for Business, Energy and Industrial Strategy, ‘’ (2017), p75
482 Department for Business, Energy and Industrial Strategy, ‘’ (2018), pp 122–123
483 Committee on Climate Change ‘’ (2019), p175
484 For example, see: Greenpeace UK (), para 7; Energy UK (), para 9; Energy Systems Catapult (), para 18; Royal Academy of Engineering and allied institutions (), para 41; UK Energy Research Centre (), para 18; and , and
487 Aldersgate Group, ‘’ (2019), p19
488 —see also: ‘’, Energy Systems Catapult, accessed 18 June 2019
490 National Infrastructure Commission, ‘’ (2018), p44
491 Committee on Climate Change, ‘’ (2018), p123
494 Energy Systems Catapult (), para 18
496 National Infrastructure Commission, ‘’ (2018), p44
497 UK Hydrogen and Fuel Cell Association (), paras 3 and 6; and and
498 Hydrogen Council, ‘’ (2017), pp58–59
499 Anglo American (), paras 4 and 7
500 UK Hydrogen and Fuel Cell Association (), para 7
501 Department for Business, Energy and Industrial Strategy, ‘’ (2018)
504 Energy Networks Association (), para 35
505 —Mr Newey was discussing demonstration projects for low-carbon heating, nuclear power and carbon capture and storage
506 Sustainable Gas Institute, ‘’ (2017), pix
507 Energy Systems Catapult (), para 18
509 EDF Energy (), para 24 and The Royal Society (), paras 9–10—see also: The Geological Society (), paras 11–12
510 UK Hydrogen and Fuel Cell Association (), paras 9–10
511 Cadent, ‘’ (2017)
512 Northern Gas Networks, Wales and West Utilities, Kiwa and Amec Foster Wheeler, ‘’ (2016)
513 Northern Gas Networks, Wales and West Utilities, Kiwa and Amec Foster Wheeler, ‘’ (2016), pp6–8
514 Cadent, ‘’ (2017), p17 and Northern Gas Networks, Wales and West Utilities, Kiwa and Amec Foster Wheeler, ‘’ (2016), p6
517 Sustainable Gas Institute, ‘’ (2017), p92
518 ‘’, HyDeploy, accessed 20 June 2019
521 Energy and Utilities Alliance (), para 20 and
522 Northern Gas Networks, Wales and West Utilities, Kiwa and Amec Foster Wheeler, ‘’ (2016), p4
523 Committee on Climate Change, ‘’ (2018), p123
524 Decarbonised Gas Alliance (), para 19—see also: and
525 Health and Safety Executive, ‘’ (2007), p49
526 ‘’, HyDeploy, accessed 19 June 2019
527 Netherlands Enterprise Agency, ‘’ (2017), p54
528 Ofgem, ‘’ (2016), p7
531 Sustainable Gas Institute, ‘’ (2017), p92
532 UK Hydrogen and Fuel Cell Association (), para 11.2
533 Department for Transport, ‘’ (2019)
535 Department for Business, Energy and Industrial Strategy, ‘’ (2017), p16
537 Royal Academy of Engineering and allied institutions (), para 38
539 Ministry of Housing, Communities and Local Government, ‘’ (2019), Table NB7
541 HM Treasury, ‘’ (2011), paras 2.297–2.300
542 Zero Carbon Hub, ‘’ (2014)
543 HM Treasury, ‘’ (2015), paras 9.1 and 9.17
544 ‘’, Construction Manager, accessed 13 June 2019
545 ‘’, Construction Manager, accessed 13 June 2019
547 ; reinstating the Zero Carbon Homes standard has been advocated by others too, such as the Energy Efficiency Infrastructure Group, a coalition of over twenty organisations—see Energy Efficiency Infrastructure Group, ‘’ (2017)
552 Heat Pump Association ()
554 Heat Pump Association ()
555 Department for Business, Energy and Industrial Strategy, ‘’ (2018), p9
556 HM Treasury, ‘’ (2019), p4
557 Rt Hon Philip Hammond MP, , 13 March 2019
558 ‘’, UK Green Building Council, accessed 14 June 2019
560 Energy Saving Trust, ‘’ (2017)
563 E.ON (), para 36
564 Royal Academy of Engineering and allied institutions (), para 38
566 ‘’, Department for Business, Energy and Industrial Strategy, accessed 17 June 2019—see also Building Research Establishment, ‘ ’ (2014)
567 ‘’, HM Government, accessed 8 February 2019
568 Department for Business, Energy and Industrial Strategy, ‘’ (2017), p77
569 Committee on Climate Change, ‘’ (2018), p58
573 Ministry of Housing, Communities and Local Government, ‘’ (2019), para 2.24
574 Committee on Climate Change, ‘’ (2018), p85
576 ‘’, Ofgem, accessed 17 June 2019; Ofgem, ‘’ (2012); and Ofgem, ‘’ (2018)
577 The Electricity and Gas (Energy Company Obligation) Order 2018 ()
578 Ofgem, ‘’ (2018), p43
579 Department for Business, Energy and Industrial Strategy, ‘’ (2019), p10—more specifically, the households covered are fuel-poor households, families receiving certain benefits or social housing with poor energy efficiency
580 Department for Business, Energy and Industrial Strategy, ‘’ (2018), p1 and para 42
581 , and
582 Department for Business, Energy and Industrial Strategy, ‘’ (2017)
583 Department for Business, Energy and Industrial Strategy, ‘’ (2017), para 56
584 ‘’, Department for Business, Energy and Industrial Strategy, accessed 17 June 2019
586 ‘’, HM Government, accessed 17 June 2019
587 Department of Energy and Climate Change, ‘’ (2013)
588 ‘’, Department of Energy and Climate Change, and Ministry of Housing, Communities and Local Government, accessed 17 June 2019—A new Green Deal scheme has since been launched by a private company, see ‘’, Green Deal Finance Company, accessed 17 June 2019
589 Department for Business, Energy and Industrial Strategy, ‘’ (2017), para 44
591 National Audit Office, ‘’ (2016), paras 3.4–3.5
592 Energy UK (), para 28
593 Energy Efficiency Infrastructure Group, ‘’ (2017)
594 Energy Efficiency Infrastructure Group, ‘’ (2017), pp11 and 53–56
595 and —see also: E.ON (), para 30
596 Sustainable Energy Association, ‘’ (2017), pp11–14—see also: Aldersgate Group, ‘’ (2018), p8
597 Energy Efficiency Infrastructure Group, ‘’ (2017), pp53–54
598 ‘’, HM Government, accessed 18 June 2019
599 Department of Energy and Climate Change, ‘’ (2010), pp11–12
601 National Audit Office, ‘’ (2016), p43
602 Energy Saving Trust, ‘’ (2017), p2
603 Energy Saving Trust, ‘’ (2017)
604 Bright Blue (), paras 6–8
605 ‘’, HM Government, accessed 18 June 2019
606 Bright Blue, ‘’ (2016), pp72–75
607 Sustainable Energy Association, ‘’ (2017), p25
608 KfW Bankengruppe, ‘’ (2012)
611 ‘’, London School of Economics and Political Science, accessed 18 June 2019
612 Department for Business, Energy and Industrial Strategy, ‘’ (2017), para 86
613 LENDERS, ‘’ (2017)
614 ‘’, London School of Economics and Political Science, accessed 18 June 2019
615 LENDERS, ‘’ (2017), p19
617 The Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2019 (SI ); The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI ); and Energy Act 2011,
618 Department for Business, Energy and Industrial Strategy, ‘’ (2019)
619 Ministry of Housing, Communities and Local Government, ‘’ (2019), Table AT2.7; Committee analysis
620 Bright Blue (), para 5
621 UK Energy Research Centre, ‘’ (2013), p8
622 ‘’, Ofgem and ‘’, Ofgem, both accessed 18 June 2019
623 National Audit Office, ‘’ (2018)
624 Department for Business Energy and Industrial Strategy, ‘’ (2018), paras 1.6–1.8
626 Rt Hon Philip Hammond MP, , 13 March 2019
628 E.ON (), paras 22–23
629 Committee on Climate Change, ‘’ (2016), p74 and Committee on Climate Change, ‘’ (2018), p86
630 and —see also: E.ON (), para 22
631 Centre for Climate Change Economics and Policy, Institute for Fiscal Studies, Esmée Fairbairn Foundation and Economic and Social Research Council, ‘’ (2013), p8
632 Centre for Climate Change Economics and Policy, Institute for Fiscal Studies, Esmée Fairbairn Foundation and Economic and Social Research Council, ‘’ (2013), p10
Published: 22 August 2019