Inertia in the low-carbon heat market is driving up costs for consumers

An honest debate about low-carbon heating includes promoting its benefits

The Prime Minister kicked off this pivotal year of Parliament in the run-up to the next General Election by announcing a new approach to Net Zero. While the Prime Minister was right in his assertions that we need more space for a better, more honest conversation about securing the country’s long-term interest, the opportunity was missed for an open discussion about how our homes and buildings need to change for the better in order to reach net zero.

The Climate Change Committee estimates that ‘near total’ decarbonisation of the building stock is required under its balanced net zero pathway, meaning the way that we heat our homes needs to change.

Installing low-carbon heating is not just about reducing emissions, it’s also about people, and an opportunity to improve the quality of our housing stock and unlock more stable energy bills for customers. It’s also about prosperity, with the UK Government’s Heat Pump Investment Roadmap estimating that ‘up to £1 billion’ investment in manufacturing could be unlocked by a growing market by 2028. Finally, it’s about power, and boosting the UK’s energy security by moving away from a dependency on natural gas imports to utilising home-generated, low-carbon energy.

With public support for Net Zero and low-carbon technologies at an all-time high, the UK is primed, if effectively incentivised, to be a hub of innovation and a global leader in technologies like heat pumps and the services surrounding them.

New analysis by Energy UK shows that uncertainty about the future of low-carbon heating is increasing costs for consumers and system costs

In its 2023 Progress Report, the Climate Change Committee identified that ‘ongoing uncertainty about heat is stalling progress […] there are low- and no-regrets actions which the Government should pursue now regardless of any future decision on hydrogen’. Furthermore, in the 2023 Future Energy Scenarios (FES), the National Grid ESO wrote that ‘a decision on the use of hydrogen for residential heat is needed as soon as possible to help bring clarity’. Finally, the National Infrastructure Commission’s Second Assessment noted that ‘hydrogen heating will not be available in time to make a material contribution to the Sixth Carbon Budget emissions reduction target’, and therefore urgent action is needed in the short-term to deliver no- and low-regrets measures to decarbonise heat.

These reports make clear that the market for low-carbon heating, and in particular heat pumps, is being constrained by uncertainty.

New analysis by Energy UK finds that the different between a hydrogen-heavy and a heat pump-led scenario equates to whether or not we install 3.7 million heat pumps between 2026 and 2030.

Figure 1: Annual installs of heat pumps under the 2023 Future Energy Scenarios

Source: Future Energy Scenarios 2023

This high degree of uncertainty is increasing the cost of the energy transition by hampering future system modelling and planning, innovation in flexibility markets and demand side response, and delaying the opportunity for customers to access the benefits of low-carbon heating systems in the near-term. With manufacturers, installers and households unable to take informed decisions about their investment and business plans, the market is suffering from inertia.

If this sluggish growth amounts to delaying the rollout of heat pumps even by just two years, this will see 2.9 million fewer heat pumps in operation by 2030, and could lead to the UK having to import £3 billion more gas between 2026 and 2030 than if we create the conditions necessary to grow the market (Figure 2).[1]

Figure 2: Difference in ‘Leading the Way’ FES and delayed heat pump deployment

Source: Energy UK analysis

Uncertainty in future pathways for low-carbon heat is also causing challenges for system planning.

Constraint costs could increase as a result of delays to decisions around building out network infrastructure. For example, the National Grid ESO’s Network Options Assessment (NOA) is a process that looks at future constraint costs based on the FES. With Energy UK’s analysis showing that the range in heat pumps deployed across the different pathways varies by 3.7 million heat pumps by 2030, modelling the future energy system becomes a significant challenge. 

Similarly, in terms of distribution, uncertainty risks delaying investment decisions by distribution network operators (DNOs) on where and when to upgrade the low-voltage network. While RIIO includes an uncertainty mechanism that allows networks to acquire more investment to build or upgrade additional network, this mechanism typically operates slowly and has not been well-placed to enable a timely response to short-term changes in the market. Long-term certainty is needed in order to enable investment decisions for energy infrastructure on all levels.

Finally, providing greater clarity on the role of different technologies for heating will also help gas networks plan for the future, and enable a systems-approach to the decarbonisation of heat.

Conclusion

Uncertainty in future pathways for the decarbonisation of heat is increasing costs for energy customers and hampering future system planning.

The Government should take action to address this uncertainty, and work alongside industry to get the market moving at pace and deliver on its target for deploying 600,000 heat pumps annually by 2028.

[1] Based on comparing heat pump deployment FES “Leading the Way” scenario against the same scenario but delayed by two years. Assuming that each heat pump replaces a mains gas boiler the typical volume of gas (11,500 kWh) annually and that at the margin gas is imported rather than produced domestically. Price of gas taken at the System Average Price of gas for Q3 2023