Heat and Building Strategy- Electrification of Heat

Heat Pump

In October the Government launched its long-awaited Heat and Building Strategy. With heat for buildings accounting for 21% of the UKs annual national emissions, the strategy supports the intention to decarbonise heat, which is essential in order to meet our net zero goals, and it confirms that the Government’s preferred technology for this, at least for the foreseeable future, is the heat pump.

Although overall there was a mixed reaction to the strategy document, the heat pump industry broadly backed the Government’s policies, but in most cases, they believed the government should have gone further in its support and ambition for Heat Pumps.

Although wide ranging in its scope, there were some key topics in the document which are worth elaborating.

Boiler Upgrade Scheme

The Strategy provides in total a package of support measures amounting to £3.9bn, which includes the £ 450m fund set aside for the new Boiler Upgrade Scheme, which will be spent on grants that predominantly subsidise the cost of heat pumps. The scheme, formerly known as the Clean Heat Grant, will run from 2022 until 2025, and is set to take over from the Renewable Heat Incentive, which closes at the end of March 2022.

However, this means that the £450m fund will only serve 30,000 installations each year over three years before the fund is exhausted, and Government has shown no intention to extend it beyond 2025. The Scheme is targeted at owner -occupiers, but private landlords, and businesses requiring a heat pump up to 45kW will also be eligible, which, whilst a positive initiative, will only serve to put more pressure on the funding resources.

Market based mechanism for heat pump deployment

One of the most controversial schemes which the Government announced is the market-based mechanism, which they are consulting on, but which they intend to introduce from 2024 until at least 2028.

The focus of this policy is to support low-temperature hydronic heat pumps, (although high- temperature variants may also be considered)

In essence, from 2024 this mechanism would create an obligation on the manufacturers of fossil-fuel central heating appliances to achieve the sale of a certain number of heat pumps proportional to their fossil-fuel boiler sales in a given period. This initiative could lead to strategic partnerships being established between gas boiler manufacturers and heat pump – only manufacturers.

A potential alternative to that option would be for the obligation to achieve a certain number of low-carbon heat installations to be applied to every energy supplier rather than the manufacturers. A final decision on this mechanism will be made after the consultation closes.

Heat Pump Costs

Another contentious assumption is the Government’s expectation that Industry will be able to reduce the cost of an installed heat pump by 25-50% by 2025, and to achieve parity with a gas boiler by 2030 at the latest.

To achieve cost savings towards the upper end of this estimate over such a short timescale in a market as mature as the heat pump market is rare, unless a market disrupter manufacturing in a low-cost economy decides to compete with a proposition that offers the same benefits as the status quo brands, but at a significantly lower price, or has a significantly enhanced benefits package at the same price as the established brands.

Of course, there will be some economies of scale as heat pump sales volumes increase over time, but many industry commentators estimate that most cost reductions will come from the streamlining of the installation process, and the increase in the number of installers giving rise to greater competition and choice for the householder.

Reevaluation of the relative costs of energy

The Government has pledged that to ensure heat pumps will be no more expensive to run than gas boilers, and they will reduce the price of electricity over the next decade by shifting levies away from electricity to gas.

Industry has been asking for a rebalancing of the relative costs of fuel energy for some time, as domestic electricity prices carry a much higher share of the environmental and social obligation costs than gas. However, it remains to be seen if the rebalancing makes fuel pricing more equitable or whether it has the unintended consequence of shifting an unfair cost burden on to the fuel poor who cannot afford the capital cost of changing from a fossil-fueled boiler to a heat pump.

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