Who pays? Future heat and the elephant in the room

In 2019, the UK passed a new law to reduce all emissions to net zero by 2050. This means that all homes will need very low / zero carbon heating. Currently, only 1-2% meet these standards. As most of us keep our gas boilers for 15 years, the target implies that we need to stop installing these by 2035.

This now gives us just 14 years to build a supply chain capable of installing 1.6 million low carbon alternatives to gas boilers each year, to match current installation rates.

First though, there are some pretty chunky questions to be resolved – not least, What? How? and the trickiest, Who pays? We should have more clarity on the heat roadmap in the autumn when the government are expected to publish a Heat and Buildings Strategy (the strategy is now expected in Spring 2021).

The UK Government’s advisors, the Climate Change Committee (CCC) expect this to ‘take low-carbon heating from a niche market in the UK to the dominant form of new heating installation by the early-2030s’.[1] On the who pays issue, the Treasury is part way through a 12 month review into ‘how the transition to Net Zero will be funded and assess options for where the costs will fall.’

Read our first article in the series about low carbon heat, on the missing millions and the future of low carbon consultation.

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So, into this rather hazy space, arrives the Future Support for Low Carbon Heat consultation, with a £2-2.8 billion scheme funded by a new energy bill levy to support the production of biomethane (a low carbon gas) for blending into the gas grid, and a £100 million grant fund for electric heat pumps.

There are two striking things here – the first is the inadequacy of the support for heat pumps given the context outlined above. The second, is whether a new levy on gas pre-empts the formal response to the thorny who pays question – and what this might entail for ideas of a fair or just transition where no one is left behind.

The biomethane scheme is largely a continuation of existing policy, increasing biomethane levels to displace 1-2% of natural gas by 2026 (conventional boilers can work with a blend of up to 20%). While the future role of low carbon gases such as biomethane and hydrogen for heating homes is not yet clear,[2] they are likely to be essential elsewhere in the economy. Homes, via this route of gas blending, can provide a stable demand to support production.

The significant change, however, is to fund the scheme via a new energy bill levy (instead of the current exchequer funding). Low carbon gas will be more expensive than natural gas for the foreseeable future and this scheme will only support a very small amount of what will be needed.

If bill levies are going to play a significant role here, then it should be as part of a wider policy framework built on a principle of affordable heating for all. This means supporting households to reduce the amount of gas they need before measures to increase the cost. Without this, more people are likely to struggle with their heating costs.

Two thirds of UK homes are currently below an adequate level of thermal efficiency. A decade of action to bring all these homes up to standard, would cut energy use by a quarter (an average bill saving of £270), cushioning households from any future price increases.

As this consultation focusses only on the design of the scheme, it might be that the levy will be part of a more comprehensive approach. But, as the manifesto promise of £6.3 billion for home insulation has not yet been forthcoming in either the spring budget or stimulus announcements, it is not clear that this will happen.

What we’re highlighting here is less the actual impact that this scheme might have (as a one-off scheme) and more whether the government are signalling an approach. If so, it seems to pre-empt conclusions from both the heat roadmap and Treasury review (future of the gas grid; how costs will be distributed). If not, then this impression could have been avoided by extending the exchequer-funded scheme for a further year, which is what is being proposed for heat pump support.

To date, climate policies for energy and buildings have largely been funded through a carbon price paid by (mainly) electricity generators. This price is passed to consumers via a package of levies placed on the electricity bill. While this has increased the cost of electricity, it has limited the impact on heating affordability, since most households don’t use electricity for heating.

We will need at least an equivalent level of investment for heat – so where does this come from?

Energy bill levies are tricky, especially those affecting heating, because they have a disproportionate impact on lower-income households. These households spend more of their income on energy (10% compared with the 1.5% average); face higher costs due to less efficient homes with older, higher cost heating and tend to have a lower ability to tackle this (lacking the finance, information, or rights in the case of tenants).

Thus far however, the approach has been largely accepted because the average costs are outweighed by the financial benefits. While energy efficiency measures make up only 12% of the levy[3] they have delivered an average bill saving of £290 a year since 2008 – higher than the average levy cost.

New analysis though highlights the heavy-lifting that ‘average’ is doing here[4].

In 2016, for example, low-income households contributed £271 million in levy payments but received only £220 million back. This meant that those receiving levy-funded measures, such as insulation, were effectively self-funding, and more, these measures. If funded instead by taxation, it would have reduced costs for the lowest income households by £98 a year, while raising it for the highest income households by £9 a week.

We assume that the proposed new levy would sit on the gas bill – because the electricity levies are already disincentivising take-up of clean electric heat pumps and because otherwise electric-only households would be paying to decarbonise those on gas, in reverse of the ‘polluter pays’ principle.

While levies on heating intuitively seem fairer (the ‘polluter pays’), one in ten households in England already struggle with their heating bills. There is both a personal and societal cost to this – each year the government spends £2.3 billion helping low income households pay their energy bills and the NHS in England spend between £1.4 and £2.0 billion alone treating conditions made worse by poor housing[5]. This contrasts with the £0.7 billion spent, by bill payers via the electricity bill levy, on insulating the homes of low income households to keep them warmer in the first place.

There is a currently a very small levy payment on gas: 1.6% in 2019 compared with over 20.4% for electricity levies. However, this only funds measures to reduce gas usage and therefore cost, such as insulation, heating improvements and smart meters. A new levy to fund more expensive, low carbon gas rather than to reduce usage would be a decisive shift here.

Energy Saving Trust believes that before incremental increases in the cost of heat, we should focus on bringing demand down. As an approach, this should ensure that all homes, where feasible, are upgraded to at least Energy Performance Certificate (EPC) ‘C’ by 2030 and that households struggling to afford adequate heating in the meantime, are supported financially. We hope to see this reflected in any stimulus funding.

See our views on how green stimulus could be a win-win for the economy.

[1] Committee on Climate Change, June (2020)

[2] Low carbon gas could play a valuable role in hard to treat homes and with inter-seasonal storage and reducing peak demand.

[3] 12% on demand reduction measures under ECO and 5% on reducing the cost of energy bills through the Warm Homes Discount.

[4]  Owen, A; Barrett J, (2020) ‘Reducing inequality resulting from UK low-carbon policy’ 

[5] E3G & NEA (2018) ‘Cold Homes and Excess Winter Deaths: a preventable public health epidemic’ and BRE (2015) ‘The cost of poor housing to the NHS’