This week has seen two major announcements that highlight the complexity of the energy transition. Yesterday, the Government published the first major step in the Warm Homes Plan, with ambitions that up to 300,000 homes will benefit from upgrades next year.
The announcements are undoubtedly welcome, in particular the introduction of a Clean Heat Market Mechanism to incentivise manufacturers to sell more heat pumps over time, although much weakened since the former Government’s proposals in 2022. But paired with the announcement of yet another increase in the energy price cap, this poses a fundamental challenge for policymakers; how to ensure that the energy transition means warmer homes, lower bills, and support is available for those who need it most.
Helping people to decarbonise home heating has long been a thorny issue, with relatively little progress made in recent years. These announcements are a step in the right direction, but it’s important to recognise that there are more questions than answers about what the Warm Homes Plan will look like in practice.
What do we know about the Warm Homes Plan?
At the moment, not much. The Labour Party pledged to invest an extra £6.6 billion over this Parliament, bringing the total expected spend on Warm Homes to £13.2 billion. Even the phrase ‘Warm Homes’ is broad and could conceivably include a host of energy efficiency measures or the installation of clean heat solutions. The Autumn Budget last month did include an announcement of £3.4 billion, but this was primarily a reiteration of spending that was committed by the then-Chancellor Jeremy Hunt in the 2023 Autumn Statement. There is widespread expectation that the Spending Review in late spring will provide more clarity about the funding available, and the types of capital schemes the Government will use.
Alongside funding, there remain a host of regulatory changes needed to support this agenda. These include upcoming consultations on EPC reform and minimum energy-efficiency standards; the long-lost consultation on policy cost rebalancing (promised over two years ago); and the Future Homes Standard (first announced in 2021), which has endured years of delay – during which time thousands of new homes have been built with substandard energy efficiency provisions and little installation of clean heat measures.
Regulation is important, but it can only do so much. In opposition, the Labour Party announced £20 billion of additional funding for its ‘Green Prosperity Plan’, a substantial amount of which was earmarked for Warm Homes. That commitment was scrapped last year. The result is a political conundrum that only the Government can resolve: should the remaining funding prioritise addressing fuel poverty, or decarbonisation?
It’s a difficult choice and runs contrary to the idea that bringing people with us on the journey to Net Zero means ensuring vulnerable and low-income households are supported through the transition. But there’s no need to reinvent the wheel. A scheme already exists that addresses both of these competing priorities and could be the model for the Warm Homes Plan: the Energy Company Obligation (ECO).
What’s at stake?
It’s worth reiterating why these issues are so important. As COP29 in Baku draws to a close this week, the world has received its annual reminder about the urgency of action to address climate change. The UK can justly claim some success here; we’ve roughly halved our emissions since 1990. But very little progress has been made on the decarbonisation of buildings, responsible for around a quarter of our total emissions.
Heat pumps installations are already behind schedule
In its 2024 Progress Report to Parliament, the Climate Change Committee (CCC) identified households receiving energy efficiency measures, heat pump installations and trained heat pump installers as being “significantly off track”.[1]
Figure 1: Annual domestic heat pump installations, actual and required for Sixth Carbon Budget (2020-2030)
Source: Climate Change Committee (2024) Progress to Parliament report
There were less than half the number of heat pumps installed in 2023 than were needed to keep the UK on a pathway to Net Zero. In just four years since 2020, we have installed 190,000 fewer heat pumps than required.
Energy efficiency installations are continuing to fall
The news isn’t much better in terms of energy efficiency – critical to address both fuel poverty and decarbonisation – for which installations are continuing to drop. Changes to policy under the Coalition Government led to a dramatic fall in the number of households receiving energy efficiency measures.
Figure 2: Households receiving energy effectiveness measures per year (2013-2022)
Source: Climate Change Committee (2024) Progress to Parliament report
It will be impossible for the UK to reach its climate targets, and it will continue to be exposed to volatile global fossil fuel markets for as long as its homes remain so poorly insulated. Our leaky housing stock, some of the oldest and least efficient in Western Europe, was one of the key reasons why the UK was affected so badly the energy crisis.
Despite the collapse in energy efficiency installations, one scheme has continued to deliver over the last decade; ECO. While other schemes have come and gone, ECO has maintained a reliable supply chain, skills, and a track record of delivering help for those who need it most.
How ECO is key to the Warm Homes Plan
ECO is the main driver for retrofit in Great Britain. It’s delivered by energy suppliers, regulated by Ofgem, and tends to run in cycles of a few years before the scheme is updated.
At over 10 years old ECO is the longest running fuel poverty scheme in Great Britain. The energy efficiency and heating improvements that it supports improve the comfort, health, and wellbeing of energy customers. In 2021, poor housing quality cost the NHS £1.4 billion, and wider society £18.5 billion.
Upgrading properties brings multiple benefits and drives growth across the country. The energy efficiency market – of which ECO is an integral part – is worth around £15 billion to the UK economy, and some 82,000 jobs.
The previous Government’s fuel poverty strategy notes that ECO is especially important in view of the Net Zero target, as it ‘ensures fuel poor households will not get left behind as energy efficiency standards improve across the board’. ECO has generated lifetime carbon savings amounting to 58.2 MtCO2e, which is equivalent to the amount of carbon absorbed by 264 million mature trees over 10 years.
The Sixth Carbon Budget sets out the energy efficiency measures that are necessary to reach Net Zero. ECO is the primary scheme for delivering energy efficiency measures, but last year, the UK was more than two-thirds off a Net Zero pathway. As we move into the last year of the current scheme (ECO4), energy suppliers, the supply chain, and customers need confidence as to what comes next. Meeting the UK’s carbon budget will be significantly more difficult if the supply chain and skills for the energy efficiency sector is weakened due to uncertainty over future ECO.
Figure 3: Cumulative energy efficiency measures installed under ECO and required for Sixth Carbon Budget (2021-2023)
Source: Energy UK analysis of DESNZ and CCC
Extending ECO will also support delivery of the Government’s Clean Power 2030 Mission. With intermittent renewable generation increasing, it’s more important than ever that we use energy in a smart way. Flexible low-carbon technologies such as batteries and heat pumps help shift demand around to better accommodate intermittent renewables. ECO schemes have delivered 26,000 heat pumps and 30,000 solar PV installations.[2] Reducing energy demand overall, through fabric measures and more smart and efficient technologies, is also essential to achieving Clean Power 2030.
ECO has a stronger track record of delivery than other fuel poverty schemes
The impact of ECO is particularly notable when compared to the success of other recent retrofit schemes.
The Green Homes Grant scheme upgraded fewer than 10% of the targeted 600,000 homes. It used only £314 million of the original £1.5 billion budget, of which £50 million was spent on administrative costs.
The domestic Renewable Heat Incentive (RHI) had a target of 513,000 installations of renewable heating systems, but the total number fell well short of this target at 80,000 installed systems.
ECO is also helping to build capacity and resource for retrofit delivery within local authorities. Twenty per cent of ECO measures installed since 2022 have been in households identified by local authorities as in need of support.
Figure 4: Delivery of selected energy efficiency and home upgrade schemes (2020-2024)
Source: Energy UK analysis of DESNZ
ECO as a model for future schemes
ECO is not a perfect scheme, but if we’re going to reach the ambitious targets the Government has set for the Warm Homes Plan, it’s important we learn the lessons from the only scheme that has consistently delivered over the last decade. Long-term policymaking is essential; it enables certainty for the supply chain and ensures companies can invest in a skills pipeline adequate for the job. The role of energy suppliers is also something for the Government to consider both in terms of their longevity within a sector that has seen boom and bust in energy efficiency installation companies, and their ability to understand what customers need based on energy usage, billing, and local data. The role of local authorities is also critical. Through the Local Authority Flexible Eligibility, ECO has provided a route for local authorities to use their knowledge to help households they know to be living in fuel poverty but may not qualify for the scheme via the eligibility criteria.
A good starting place for the Government would be to ensure that ECO is able to keep on delivering for households. That requires clarity as soon as possible on the post-2026 arrangements for ECO to avoid a hiatus in the delivery of retrofit, providing consumer benefits and investment in skills and supply chain. Continuity is essential to mitigate the risk of a hiatus in delivery. The conclusion of every ECO scheme has led to a rapid fall in installations.
Figure 5: The impact of ECO scheme changes on monthly delivery (2013-2024)
Source: DESNZ (2024) Household Energy Efficiency Headline Release
This volatility leads to disruption in the supply chain. It will be harder and more expensive to install energy efficiency if this is not avoided for ECO4. Ensuring that the UK learns the lessons of previous schemes and avoids a drop off in installations requires early clarity on the future of ECO from Government.
The story of energy efficiency and clean heat installation over recent years has been one of short-term approaches and disappointing results. Through the Warm Homes Plan, the Government has a huge opportunity to lower bills, reduce emissions, and bolster our energy security. But it relies on supporting households and businesses through what will at times be a messy transition. Learning the lessons of ECO is a good place to start, while guaranteeing that the only successful scheme over the last decade has a future ahead of it.
[1] Climate Change Committee (2024), 2024 Progress Report to Parliament
[2] Energy UK analysis of DESNZ (2024) Household Energy Efficiency Statistics
