Briefing: The Heat and Buildings Strategy

Executive Summary

The Government is proposing to drive natural gas boilers out of the market by 2035, replacing them with heat pumps, which use electricity. Gas boilers currently provide hot water and space heating to nearly 90% of the UK’s 27.8 million households. 

This major counter-economic shift is likely to be driven by transferring the cost of subsidies paid to renewable electricity generators, currently over £10 billion per year, on to gas bills, making heat pumps artificially attractive.

Now is the worst possible time to introduce a new tax on people’s gas bills. We are experiencing exceptionally high energy prices and all efforts should be focussed on how to get bills down, not push them up further. The proposed new levy could eventually add a further £159 to the average gas bill[1].

Pilot schemes have shown the incredibly high cost of insulating all UK homes, potentially between £500bn and £2 trillion. This means energy efficiency measures should be targeted using strict value-for-money criteria. We risk spending huge amounts for a relatively small reduction in CO2 emissions. This money could be far better spent elsewhere.

Heat pumps simply aren’t up to the job. They cost about £10,000 or more to buy and install, and in many cases require significant and expensive home energy efficiency upgrades to work effectively. Even after all this expense, they may not heat homes to an acceptable standard. We should not be subsidising them.

Proposed subsidies of £5,000 for heat pumps will largely go to wealthier households, all will therefore represent a massive transfer of wealth to those rich enough to afford the significant up-front installation costs.

A gas boiler ban by 2035 would be a backwards step. Free markets naturally innovate in response to consumer choice – restricting choice will necessarily leave people poorer and misallocate resources to a technology (heat pumps) that few would choose without compulsion.

Rather than moving expensive subsidies for renewable electricity on to gas, they should be taken off consumer energy bills altogether and moved onto general taxation, a more equitable solution which also gives the Chancellor an incentive to keep the overall cost under control. Eventually, they should be wound down and abolished.

New proposals inhibiting mortgage lenders from considering properties with lower efficiency ratings could create a new class of ‘mortgage prisoners’ who can’t afford energy efficiency upgrades and therefore can’t sell their homes. The proposals could affect a large fraction of the housing stock.

Background

Policies to decarbonise housing revolve around two main approaches. One is to change the fuel source, for example moving away from gas boilers and replacing them with electrically driven heat pumps or hydrogen-fuelled boilers. The other is to improve energy efficiency and therefore, it is hoped, to lower emissions by reducing energy consumption. 

Widely varying estimates exist for the cost of decarbonising housing, but all suggest a very large capital outlay. The CCC estimate that it will only be £253 billion, but other expert bodies have put in much higher. The Energy Technologies Institute (ETI) have warned that the costs of energy efficiency retrofits could be as high at £2 trillion,[2] and a report by Inside Housing put the cost of decarbonising the UK’s social housing sector alone at £103bn,[3] which is enough to pay the rent for all social housing tenants in England for five years. If such costs are replicated across the entire UK housing stock, we are looking at a cost in excess of £500bn just for decarbonising residential buildings.

Retrofits (i.e. improving the energy efficiency of houses – cavity wall insulation, double/triple glazing, draught proofing and other measures) are predicted to be extremely expensive. The ETI carried out pilot projects to try and improve the energy efficiency of a representative selection of homes. They achieved efficiency improvements of between 23% and 45%, at a cost of £32,000 - £78,000. They concluded that the cost of very deep retrofits could be in excess of £2 trillion across the UK housing stock.

These kinds of ‘deep’ retrofits become obligatory with a technology such as air- and ground-source heat pumps, because without them people are likely to be left with unaffordable energy bills.

Even owning a modern house built to the latest energy efficiency standards may not be enough to protect you from the increased running costs of a heat pump. A couple in Herefordshire described how in the winter their upstairs rooms remain cold and their heating bills have effectively doubled, adding in excess of £1,000 to their annual bill.[4] Their average electricity bill had risen to over £200 per month. They also experienced issues with dampness.

Case studies

London 

A new report by London Councils, which represents all of London’s 32 borough councils as well as the City of London, has calculated that the cost to upgrade all of London’s 3.8 million homes to energy efficiency performance rating EPC B would be a staggering £98 billion.[5] This investment at best would only achieve a 2% reduction in the UK’s total annual CO2 emissions.

Scotland

A report that looked at converting 1m homes and a further 50,000 non-residential buildings in Scotland to zero emissions heat, estimated that the total bill would be in excess of £33 billion.[6] These figures suggest that whether it’s through alternative heating systems or through energy efficiency, the costs associated with aggressive decarbonisation targets for space heating are likely to be prohibitive. Replicated across the UK, they seem to imply a total cost of up to £1 trillion.

Proposals in the Heat and Buildings Strategy

Grants for heat pumps

The Government is planning to install 600,000 heat pumps a year by 2028.  To try and meet this objective it will introduce a £450 million boiler scrappage scheme offering people a £5,000 grant for a new air source heat pump and a £6,000 grant towards a new ground source heat pump. 

The idea is a revamp of the Clean Heat Grants, which was due to launch in April next year. Now the budget has been more than quadrupled and the proposed grants increased from £4,000. Such a large outlay is still only enough to fund 90,000 heat pumps, covering a tiny fraction of the UK’s 28 million households.

The high upfront costs of getting a heat pump installed (~£10,000) means that these grants would necessarily go to the wealthiest households. It is hard to see how such a policy fits in with the Government’s “levelling up” agenda, particularly when you consider how this money could be spent more effectively elsewhere.

Many households will be left significantly worse off after installing a heat pump. Not only does the technology struggle to heat homes adequately during winter, owners will also need to find space for large water storage tanks and commit to significant energy efficiency improvements. Even after this they could find they are left with permanently higher bills. The GMB union warned that those installing heat pumps would find their bills £250 higher per year on average[7].

Gas boiler ban by 2035

The new plan commits the Government to ending the sale of new gas boilers by 2035. This proposal is entirely at odds with the worthy objective of pursuing a ‘green industrial revolution’. Such a revolution could only be possible in the free market, where consumers actively choose greener products which improve their lives. Likewise, suppliers are incentivised to innovate in order meet this demand.

What this plan amounts to is a bid to bribe first wealthier people, and then the public at large, into purchasing sub-standard alternatives to the modern, clean and efficient gas boiler. In due course the public will then be forced into this option when the gas boiler is banned completely. No industrial revolution in history has ever come about because a government has subsidised an inferior product that people would not choose to buy without compulsion. It will also slow the transition away from the use of the gas boiler by diverting resources away from the development of potentially better alternatives.

New taxes on gas bills

The Government has chosen this moment, when we are facing an energy price crisis and gas prices are at record highs, to introduce a new levy on people’s gas bills. The proposal is to move the cost of subsidies to fund renewable electricity off electricity bills and onto gas bills, albeit over the course of 10 years.

The plan's proponents argue that this will end a distortion whereby electricity is relatively more highly taxed than gas. However, because this shifts the tax burden onto space heating, this measure will be particularly damaging for those living in fuel poverty. Many people struggling to afford their energy bills may unfortunately be encouraged to turn down the thermostat to save money. This comes with big risks; Britain sees tens of thousands of excess winter deaths each year and many of these are associated with fuel poverty.

Hydrogen

The document does not rule out significant investment in hydrogen but prevaricated on whether it could replace natural gas as a widespread source of home heating.

Major boiler manufacturers have been promoting the use of hydrogen-ready boilers as an alternative. These cost roughly the same as existing gas boilers and could fit into the same space, without the expensive and disruptive installation requirements of heat pumps. However, for hydrogen-ready boilers to deliver emissions reductions, Britain would have to develop a countrywide supply of low-carbon hydrogen and this appears to be a long way off.  

Mortgage lending requirements

Under the new proposals, it may be made harder for homes that have an inefficient energy rating to get a mortgage. Mortgage companies would be incentivised in future to focus their lending on properties that have higher energy ratings. The strategy lays out how the government intends to "require mortgage lenders to disclose energy performance across their property portfolio and on introducing voluntary targets to improve the energy performance of their portfolios to an average of EPC band C by 2030". It then raises the prospect of these voluntary targets becoming mandatory.

The proposals have already triggered a backlash from mortgage lenders who are warning that these policies may trap homeowners in negative equity, particularly those in older homes which are harder to upgrade. UK Finance, which represents banks and other mortgage lenders, warned that the plans could “cause market distortions or unintended consequences that might trap owners in poorer performing properties or create a two-tier market where borrowers pay more but have less choice.”

Alternative policy recommendation

To date, policies to support decarbonisation have been funded by levies on consumer electricity bills. This adds almost £200 to the average household energy bill as a direct cost. Consumers are also facing the indirect cost of these levies through business energy bills, which feed through to higher prices for goods and services. 

Removing these levies from consumers bills and moving them onto general taxation, rather than onto gas bills, will better protect people from steep price rises. It would also be progressive, rather than regressive - as current levies are - since energy costs form a larger part of the total expenditure of low-income households. The Treasury may also be encouraged to get a grip on the cost - £10bn and rising - of renewable energy subsidies.

Notes

[1] https://www.thesun.co.uk/news/16390592/plans-hike-gas-bills-despite-soaring-energy-costs/

[2] https://www.eti.co.uk/insights/housing-retrofits-a-new-start

[3] https://www.insidehousing.co.uk/insight/insight/the-cost-of-net-zero-social-landlords-decarbonisation-plans-revealed-68497

[4] https://www.thetimes.co.uk/article/heat-pump-howler-cost-us-thousands-on-our-bills-h6b7l2vlp

[5] https://beta.londoncouncils.gov.uk/news/2021/london-housing-plan-help-achieve-net-zero-and-unlock-ps98-billion-boost-greener-future

[6] https://www.gov.scot/publications/heat-buildings-strategy-achieving-net-zero-emissions-scotlands-buildings/

[7] https://www.edie.net/news/11/Heat-and-Buildings-Strategy--Green-economy-reacts--expressing-hopes-for-more-funding-and-tighter-deadlines/