Energy Bill [HL]

Written evidence submitted by the Energy Utilities Alliance ( EUA ) to Public Bill Committee request for written evidence on Energy Bill (EB03)

Submission by Energy Utilities Alliance (EUA), a not-for-profit trade association. EUA provides a leading industry voice helping shape the future policy direction within the energy sector. Using its wealth of expertise and over 100 years of experience, it acts to further the best interests of its members and the wider community in working towards a sustainable, energy secure and efficient future.

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Clauses 104 to 113 of the Energy Bill allows for the provision of ‘Low-carbon heat schemes’.

The proposed ‘Clean heat market mechanism’, due to be implemented from April 2024, aims to increase the uptake of heat pumps installed by consumers by establishing a quota system for products .

Failure to reach the required numbers in this quota will result in heavy and punitive financial penalties for British boiler manufacturers of £5,000 per unit not sold . This, we believe, is an unfair and highly disruptive distortion of the market which will lead to UK job losses, a drastic reduction in research and development by companies and a widespread cut in apprenticeships and training opportunities.

Currently 90% of the 1.6 million boilers installed per year are made in Britain. Around 70% of the approximate 50,000 heat pumps installed in the UK last year were imported from foreign markets, such as China.

Given the size of the global and EU heat pump market, it is inevitable that the majority will be made in those locations and not in the UK as has been suggested by Government . Brexit has also ensured that the UK remains at a disadvantage.

This policy, as it stands, is a thinly veiled attempt to tax British boiler manufacturers while completely misunderstanding the consumer model. Consumers buy their heating products from merchants, not manufacturers. Consumers will make their decision as to their next heating product based on price (boilers cost around £2,500 vs around £13,000 for a heat pump), ease of installation (boilers can be fitted the same day vs a heat pump which take three to four days), and disruption (boilers require no additional home improvements vs heat pump s that need sufficient levels of insulation, radiator alterations and piping changes to reduce bills).

In short, the overwhelming majority of consumers will always choose a British boiler for the reasons outlined and manufacturers have little power to change those habits given it is merchants who advise consumers.

Another inevitable impact of the currently policy will be on a boiler company’s ability to innovate. Currently DESNZ are expecting the UK boiler manufacturers to develop hydrogen ready boilers, innovate smart heating controls, upgrade existing boilers, create new UK focused heat pumps and make them cheaper, whilst incorporating new interoperable smart controls. The funding for new technological advances is almost solely from the sales of British boilers but manufacturers will not have the funding to invest in the heat pump market, both in product and controls innovations and the all-important pre- and post-sale technical support with the unachievable targets an d punitive fines being proposed through this market mechanism.

It should also be noted that most installer training for heat pumps is , and will be conducted by boiler manufacturers. Installer numbers are already chronically too low to reach many of the proposed targets , and this policy direction will lead to a vicious circle of manufacturers missing targets, being fined, cutting training, leading to fewer installers, that will reduce installation capacity, which will lead to larger fines and eventually the end of the UK heating manufacturing industry and the possibility of 10,000 job losses in the UK by 2025.

There are tens of thousands of consumers employed by boiler manufacturers throughout the supply chain from small component manufactures to cleaners, delivery drivers etc. The introduction of this scheme will certainly result in businesses closing and downscaling so employment of this workforce will be significantly affected.

Furthermore, the policy currently excludes new builds from the quota targets. We do not understand why this is the case given that these houses will then have to be later retrofitted with a heat pump. House builders will choose the cheapest option available to them when initially installing a heating product. This will be a natural gas boiler.

Given that the proposed market mechanism starts in 2024, at least three years before the Future Homes Standard will have an impact on the market (due to the lag in building regulations implementation), would it not make sense to incentivise all sectors of the heating market to sell to house builders as early as possible so this reduces the number of retrofits that will be required at a later stage? We believe that all boilers and heat pumps installed into new builds should count towards the overall quotas.

It is quite clear to in dustry that the proposed target of 600,000 heat pump installations per year by 2028 is completely unachievable and we believe that DESNZ already know this. The market mechanism targets heat pumps sold into the retrofit market but not new builds, thereby making their target even harder to meet.

Moreover, as the Boiler Upgrade Scheme (BUS) has funding for just 30,000 heat pumps per year until 2028, this effectively puts a cap on the number of heat pumps installations per year at that same figure. Very few consumers will purchase a heat pump without the £5,000 Government grant. This also undermines the idea that a heat pump can cost a consumer £2,500 – this is only possible with the BUS grant and does not include any energy efficiency upgrades which are likely to be needed in the vast majority of homes . With the cost to consumers so high for a heat pump , there is little chance of manufacturers being able to sell a great number of heat pumps over 30,000.

Excluding new build, the heat pump market is not expected to be much above 50,000 units in 2024, including social housing that are ineligible to claim the BUS. However that 50,000 will be dominated by the existing heat pump manufacturers. It is frankly impossible for newer entrants to this market, even ones with supply chains already set up such as the boiler manufacturers, to outsell the projected market and sell more heat pumps than already established heat pump manufacturers next year.

To minimise the effects of the policy and to ensure that Government reach their net zero targets on time we would suggest the following be included:

Proposed amendments(s)

Existing Bill text in italics

(3) In this Chapter- "low-carbon heat target" means a target imposed by or under scheme regulations;

" relevant heating appliance" means-

(a) a heating appliance that generates heat but is incapable of burning fossil fuels or peat to do so, or

(b) a heating appliance that generates heat by burning fossil fuels or peat, but does so only as part of a wider system to supplement heat from air, water or the ground .

Insert (c) or a heating appliance that is defined as "hydrogen-ready."

106 Setting of targets etc - (3) In the case of a low-carbon heat target that is imposed by virtue of subsection (1)(c) or (d) on a scheme participant who manufactures heating appliances, the target may be set by reference to heating appliances that are supplied or installed (whether or not by the scheme participant.

Line 29 – after "reference to" insert the words "non relevant" before "heating appliances".

The first amendment would recognise hydrogen-ready appliances in the Bill. The Government plans to make a strategic decision on the role of hydrogen heating in 2026. Having hydrogen-ready identified as a "relevant heating appliance" is important for the message it sends to the UK heating industry so they can ensure these products can be brought to market as soon as that decision has been made.

The second amendment directly addresses the market mechanism and the obligation placed on manufacturers. We wish to exclude hydrogen-ready boilers from that target, so that sales of such appliances do not count towards the target (assuming hydrogen-ready boilers are mandated from 2026). Under our amendments, only heating appliances that are not "relevant heating appliances" would be counted in the market mechanism such as gas boilers.

This has the potential to bring earlier into the market hydrogen-ready boilers (ahead of 2026) and it avoids DESNZ being seen to operate a counter-productive scheme as it is currently asking industry to develop hyd rogen-ready boilers but then penalise those very same firms for doing exactly that.

May 2023


Prepared 23rd May 2023