A Cold Legacy for Labour

The Conservatives' failure to make serious progress in heat decarbonisation creates a challenge for the new Government

I’m a big fan of heat pumps. I’m moving later this year, and will install a heat pump in that property. I anticipate that it will be expensive; one of the rooms is heated entirely by an enlarged copper pipe (see a rather blurry image below).

This will need to come out and be replaced with a larger emitter, adding to the cost of installation. I can get away with this because I’m extremely middle class. The Fat Copper Pipe sufferers throughout the country will not all be as lucky as me, because heat pumps and their associated costs remain expensive.

The previous Government tried two measures to reduce this cost. The first was the Renewable Heat Incentive (RHI), which operated from 2014 to 2022 and delivered about 75,000 new domestic heat pump installations and brought down the Government in Northern Ireland. It is unclear how this latter outcome was accounted for in the scheme’s impact assessment.

As of the end of 2023, payments made under the scheme to GB domestic consumers totalled about £1bn. Domestic consumers are eligible for payments for about seven years after installation, and so the final total will be higher. Heat pump upfront costs, however, have remained stubbornly high; an air source heat pump would set you back about £10k in 2014 and will still set you back the same amount in 2024.

This is despite the intervention of the RHI’s successor, the Boiler Upgrade Scheme (BUS) that was intended to build a big enough market in heat pumps to start driving cost reductions. However, as the scheme’s statistics show (Figure 1), costs have continued to remain troublingly flat.

The picture is even worse when one considers costs by capacity rather than by installation (Figure 2). Instead of lowering, costs appear to be going up.

This may be an artefact of a changing market; over the last two years there have been fewer replacements of oil boilers - i.e. older leakier houses in the countryside - and more installations into properties that previously did not have a heating system, which are likely to be self-build and more efficient than older properties.

There are a number of potential explanations for why costs have not shifted. The most likely is that the market remains incredibly small. The BUS has only installed about 40,000 devices over the last two years compared to the 1.5-2 million gas boilers installed every year. The other is a regulatory one. Installations under both the RHI and the BUS are obliged to be compliant with the Microgeneration Certification Scheme (MCS), and compliance requires installers to be trained to an MCS standard. I’ve heard many people in the sector criticise this training as not being actually helpful for installing heat pumps and overly expensive for what is essentially a package intended to show an installer how to comply with regulations. There are not enough MCS accredited installers around as a consequence, creating a closed shop and higher prices.

The Conservatives sought to expand the market by implementing the Clean Heat Market Mechanism (CHMM). This will oblige boiler sellers to sell an increasing percentage of heat pumps every year, which is a step towards the mass market. The idea is that driving production at scale will force boiler manufacturers to transfer some of the additional upfront costs of heat pumps to boiler consumers while continuing to bear down on costs across the market. Unfortunately, after pushback from boiler manufacturers, they opted to wuss out of implementing it for this year.

This leaves Labour in a terrible bind. Hitting carbon targets could mean deploying 600,000 heat pumps a year by 2028, which I must point out is three and half years away. It is inconcievable that the Government could finance the BUS at the same rate as it does now when the market hits those numbers. This would represent a cost per year of £4.5bn on this scheme alone, when the media is currently full of arguments about how a £20bn spending black hole is the end of the world. Without a path to cost reduction, the politics of heat decarbonisation start to look impossible.

But we still need to decarbonise, and we need to do it at pace. The reason why heat pumps have become so totemic in the decarbonisation debate is that modelled decarbonisation pathways deploy them in bulk on solid engineering grounds. Heat pumps can produce more heat per unit of input energy than any other heat source, because they extract heat from the environment. This means that you need less peak electricty generation and less electricity network capacity to serve the same heat demand. They therefore make total sense from a system perspective.

Crucially, consumers are exposed to neither of these costs and therefore the system upside of heat pumps is entirely absent from the debate. This is not to mention consumer preferences; the British, after all, prefer to be in charge of their home heating in a way not congruent with efficient heat pump operation. How to solve this challenge?

There are two broads strands to my thinking here. We should listen to the outputs of models inasmuch as they tell us something fundamental about the physics of the system. This helps us structure our policy to help ensure the eventual output of the system is as optimal as it can be, as cost is likely to follow physics. But we must also recognise that any model will run on limited information and especially at the domestic level can never hope to fully internalise the preferences of householders and the unique situation every family finds itself in.

We should therefore switch away from a technology target in heating and towards a carbon target, and while doing so change the incentives of the system so that they reflect its physics. This involves a number of specific changes:

• Make it much easier to access time of use tariffs tailored to a specific device’s capabilities.

• Start charging consumers in line with their peak demand on their local electricity network rather than a flat rate for everyone - ‘dynamic Distribution Use of System charges’.

• Review the entire MCS scheme with a view to making it significantly less burdensome and significantly easier to qualify under.

• Be significantly more agnostic about technologies that can count towards the CHMM sale percentages. Currently the CHMM is focused on air to water heat pumps designed for wet heating systems, reflecting the UK’s preponderance of wet central heating. Permit air to air heat pumps, electric heat batteries and hybrid systems to play a full part in the scheme.

• Hybrid systems should be awarded credit based on the amount of carbon they abate, rather than the nominal 0.5 rating they currently get. Our target must be about carbon, after all.

• Consider the role of biomethane beyond the end of the current Green Gas in 2028. For certain parts of the country, biomethane plus hybrids may be an appropriate solution.

The idea of the above is to give householders greater choice of heating supply while also confronting them with the costs of their choices. Smarter devices will be able to flex around spikier prices, offering considerable consumer value. At the same time, greater technological flexibility offers greater scope for innovation. Without the latter in particular, it is difficult to see a political pathway for heat decarbonisation that does not cost Labour dearly in 2028.