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Decarbonising home heating: can the new market mechanism work?

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Aerial view of homes in suburban England. Decarbonising home heating is key for UK homes.
Aerial view of homes in suburban England. Decarbonising UK home heating is key for achieving net zero. Photo via Adobe.

The UK government’s proposed low carbon mandate on heating appliance manufacturers is quietly ambitious and could generate real movement in a sector that is lagging on decarbonisation.

The soberly named “market-based mechanism for low carbon heat” did not make headlines when it was announced in the Heat and Buildings Strategy. Nevertheless, it has the potential to be one of the most significant of the government’s recent net-zero policies.

Clean heating faces market barriers that the mechanism seeks to address

14% of UK emissions come from heating our homes with fossil fuels, particularly gas. The best solution to decarbonising home heating is to electrify domestic heating by installing heat pumps instead.

Heat pumps have historically struggled to compete with gas boilers. Gas is much cheaper than electricity and the upfront costs of switching over to a heat pump are high (with average installation costs of between £8,000 and £10,000). The government has pledged to review the relative costs of gas and electricity in 2022, and to work with industry to bring the upfront cost of heat pumps down.

A heat pump sales mandate could drive innovation in the market

The new proposal is to oblige companies that sell fossil fuel appliances – like gas and oil boilers – to sell more heat pumps. The number of heat pumps they would have to sell would be based on a proportion of their overall appliance sales, which would rise every year in line with government targets (600,000 heat pumps per year by 2028). This would create a strong incentive to innovate and provide better consumer offers for net-zero compatible appliances.

The policy would also incorporate credit trading, like the EU Emissions Trading Scheme or the Zero Emissions Vehicle (ZEV) mandate in California (the basis for a similar mandate the government has proposed here). Heat pump sales would generate a tradable certificate. This would enable manufacturers to meet their obligation by buying excess certificates from other companies, including specialist heat pump manufacturers.

The mechanism also needs complementary policies

Just as successful electric vehicle mandates around the world have needed supporting infrastructure – like a charging network – to work, this policy will not succeed in a vacuum. Other important supporting measures to decarbonise heating include:

  • Support for upskilling and new training opportunities along the heat supply chain
  • Structural incentives in the housing market, through measures like green stamp duty
  • Lowering the relative cost of electricity in a way that protects vulnerable gas consumers
  • Reforming the retail energy market to encourage and enable demand flexibility and allow customers to benefit from the ultra-low costs of renewable electricity
  • Public support for energy efficiency

The consultation process must produce a high-ambition final proposal

Although supplier sales and production obligations are nothing new, this is the first time they have been tried in the heating market. This really could be an example of world-beating net zero delivery, with the right design in place:

  • Penalties for non-compliance must be set appropriately high. Otherwise, manufacturers may choose to accept fines as a tax on business-as-usual.
  • The government needs to be able to monitor how the mechanism is working and adjust surrounding policies – including grant, innovation, and training funding – in response. The government should expand available grant support but build in tapering mechanisms to manage costs and phase them down over time.
  • The UK government must ensure a stable investment environment by signalling its intention to keep the mechanism in place well beyond 2028. It should align with the government’s ambition is to phase-out all fossil fuel heating installations by 2035. This would mirror the zero-emissions vehicle mandate proposal, which links with the 2035 phase-out date for internal combustion engine vehicles.

Although some industry incumbents are likely to fiercely oppose the idea, BEIS deserves credit for thinking creatively about how to induce a mass market for heat pumps. Their challenge now is to see this policy through and put in place the complementary measures it needs to succeed.

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