How has heat decarbonisation policy changed in 2023?
The last few months of 2023 have been a busy time for heat decarbonisation policy. From Rishi Sunak’s big net zero speech in September — in which he said he wanted to slow down the shift to heat pumps — to this week’s announcement of a big increase in funding for low carbon heat, there have been a lot of important changes.
So, by way of an end of year round up, let’s take stock of everything that’s changed in policy terms over the last few months.
Heat pump subsidies: bigger and better
Let’s start with this week’s announcement from the UK government. Funding for the Boiler Upgrade Scheme (BUS) — the main subsidy in England and Wales for getting a heat pump — will increase to over £1.5 billion. That’s spread over three years from 2025/26 until 2027/28, so equates to around £500 million a year.
Back in his speech in September, the Prime Minister increased the subsidy for getting a heat pump to £7,500; it had previously been £5,000 for an air source heat pump. This makes the BUS one of the most generous cash subsidies in Europe, and seems to have resulted in an increase in applications.
Previously, there had only been money available for 20,000 subsidies, and it was presumed that once the money ran out each year, no more subsidies would be available — which would have been a potential disaster for heat pump installers. The new funding package should provide enough money for around 66,000 heat pump subsidies a year until March 2028 (this covers England and Wales; Scotland has its own subsidy scheme).
The extra funding is very welcome, and shows a degree of confidence in heat pumps from the UK government. It is quite a different message to the one Sunak gave back in September, but it is a message that matters. One thing the low-carbon heating industry needs above all else is certainty about the government’s commitment to its policies, and recent announcements should have given a lot of reassurance on this.
But however welcome this funding for subsidies is, it won’t be enough on its own to drive the switch away from boilers. The UK government still has a target of 600,000 heat pumps a year installed by 2028, and has put in place funding for just over 60,000 subsidies at the current level. If the UK is to meet that target, and scale up heat pump installations further, it will either need to find more money or find alternatives to these subsidies.
There is, of course, an election expected in 2024 which might have a bearing on these plans. Labour has previously set out plans to spend £6 billion a year on home heating, some of which would likely be directed towards heat pump subsidies. However, even with greatly increased government funding, it will be hard to subsidise every heat pump installed by £7,500. Subsidies are a crucial part of scaling up the UK’s heat pump rollout, but at some point we will need other ways to make low carbon heating affordable for everyone.
It’s also worth saying that Scotland has been ahead of the UK government on heat pump subsidies, having increased its heat pump grant to £7,500 back in December 2022, with an extra £1,500 for rural households. Scotland also offers interest-free finance alongside its subsidy, while the Home Energy Scotland scheme provides support and advice to households.
Electricity and gas prices: still unbalanced, despite promises
This leads to an area where the UK government has failed to make any progress: electricity bills. Electricity in the UK remains significantly more expensive than gas — by a ratio of just under four at present, which is one of the highest in Europe. This means heat pumps can often cost more to run than gas boilers, even though they use far less energy to generate the same amount of heat. The high relative price of electricity in the UK is a serious policy failure, and one the government is yet to fix.
The key first step is to remove or rebalance the levies that add much more to electricity bills than to gas bills — a kind of anti-carbon tax, which discourages us from switching to using cleaner electricity. The UK government has been promising action on rebalancing levies for years, but has failed to take action. A rumoured consultation this winter seems to have been pulled, which makes it unlikely that any progress will be made before the next election. This is a serious problem, which holds back the growth of heat pumps even as the government pumps in subsidies. Rebalancing levies and making electricity cheaper should be a key priority for any colour of UK government.
Phase out dates: new homes forward, old homes back
Another important policy change you might have missed has been the launch of a consultation on the Future Homes and Buildings Standard. If implemented as proposed, this would effectively ban the installation of gas boilers in new homes and buildings in England from 2025 onwards, with heat pumps or other low carbon heating systems to be used instead. This is a crucial step, which should grow the market for low carbon heating immediately, given we typically build around 200,000 new homes each year.
But while things have moved forward for new homes, the plans for phasing out new boilers in existing homes have gone backwards. The UK government had previously committed to phasing out new oil and LPG boilers — widely used in places off the gas grid — from 2026, but has now pushed this back to 2035. These off gas grid areas account for the majority of heat pump installations, and the abrupt change of direction by government could hurt the low carbon heating industry in rural areas.
The phase out date for new gas boilers remains pencilled in for 2035, but the Prime Minister announced in September that 20% of homes will be exempt from the phase out. The logic is that some homes may find it too hard to install a heat pump, but quite how this would work is unclear. It would be difficult to sustain our current gas grid if only 20% of homes are using gas, and extremely difficult for the UK to meet its net zero obligations if some fuels are allowed to continue burning fossil fuels.
Meanwhile in Wales, the Welsh Government consulted on its draft heat strategy setting out a vision that homes will be ‘served in the main by heat pumps’. The strategy also includes a timeline showing a ‘heat pump revolution’ underway by 2028. An action plan will follow next year, but householders and aspiring heat engineers in Wales now have a clear signal on the future of clean heat.
The Clean Heat Market Mechanism: an alternative to boiler phase outs?
While some of the boiler phase out dates may have been pushed back, the UK government has pressed ahead with a new policy called the Clean Heat Market Mechanism, which will come into force in April 2024. This policy will require boiler manufacturers to sell a quota of heat pumps, starting with 4 heat pumps for every 100 boilers they sell in the UK in 2024/25, rising to 6 for every 100 in 2025/26. If they’re unable to meet these quotas, they can either buy credits from companies that do sell heat pumps, or pay a fine of £3,000 per missing heat pump.
There has been a backlash against this policy from some boiler manufacturers, but behind the scenes most manufacturers are quietly getting on with developing their heat pump offers. With the widespread use of hydrogen boilers for home heating now looking less likely — reinforced by government cancelling the second hydrogen pilot in Redcar — heat pumps are becoming ever more critical to the future of heating manufacturers’ businesses.
The Clean Heat Market Mechanism is a helpful tool for government in steering the transition towards low carbon heating. Because government can specify the number of heat pumps it is aiming for each year, it can adjust the policy to help gradually ramp up heat pump installations over time. It may be that, just as has happened with the zero emission vehicle mandate, the government may be able to phase down boilers quietly, without saying much about a firm phase-out date.
Planning for low carbon heat: good progress, not much noise
Finally, the UK government has also made progress on some of the crucial planning rules that are needed to accelerate the roll out of low carbon heat. In the Autumn Statement, the Chancellor Jeremy Hunt announced that the government would aim to expand permitted development rights for installing heat pumps under the English planning system. The government has published updated research on noise from air source heat pumps, and we expect a consultation on reforming planning rules to follow soon.
The UK government has also been quietly making impressive progress with its policy work on heat networks, which are a vital aspect of low carbon heating in cities and more densely populated areas. The UK government’s latest proposals on heat network zoning in England, published this week, would enable local authorities to designate priority areas for heat networks, making it easier to coordinate investments in collective heating infrastructure.
Overall scorecard: good progress, but lacking a spark
It’s clear that the last few months of 2023 have been a very busy time for heat decarbonisation policy in the UK, in a way none of us could have expected when the Prime Minister seemed to talk down heat pumps in September. It seems clearer than ever that the UK government is backing heat pumps, even if its policies speak louder than its political pledges.
There has been a lot of progress in a lot of areas, from high profile areas like higher subsidies through to more specialist pursuits such as heat network zoning. I think it’s fair to say that the UK is on the way to having most elements of a decent heat decarbonisation policy in place. But despite this, the UK remains close to the bottom of the league on heat pump uptake, and there is one factor that stands out: expensive electricity.
Reducing the electricity to gas price ratio remains one of the critical policies for heat pump uptake, and the UK government has so far failed to take action on this. That should be a priority for the government in the new year. And if it happens, the UK should have most things in place for heat pumps and low carbon heating to take off.
