Getting warmer: UK’s Heat and Buildings Strategy

United Kingdom

On 19 October 2021, the UK Department for Business, Energy and Industrial Strategy (“BEIS”) published the long-awaited heat and buildings strategy (the “Strategy”), setting out how the UK Government plans to decarbonise homes and buildings as part of its overarching plan to reach net zero by 2050 (the “Decarbonisation Plan”). It follows the release of the Government’s transporthydrogen and industrial decarbonisation strategies and the UK’s aim to achieve the legally binding target of reducing its carbon emissions by 78% by 2035.

£3.9 billion of funding announced for decarbonising heat and buildings

Recognising that carbon emissions produced in heating and powering the 300 million buildings in the UK are responsible for around 30% of national emissions, the Strategy outlines key challenges to be addressed in order for the UK to meet its Net Zero goal.

To that end, the announcement includes £3.9 billion of funding for decarbonising heat and buildings. To efficiently distribute the budget, a number of measures including regulatory drivers, major market growth, fiscal support, evidence building, and strategic decision-making will be required at a national, sub-national, regional and local level. The table below sets out the kind of decisions to be taken at each level.

National

Sub-national and Regional

Local

  • Strategic case for using hydrogen to heat buildings
  • Carbon capture use and storage (CCUS requirements
  • Economic prioritisation if resources are constrained (e.g. biomass)
  • Major/national network infrastructure requirements
  • Fairly distributing costs and support
  • Customer protection and product standards
  • Regulatory framework
  • Regional hydrogen infrastructure requirements
  • How to best utilise regional geography and opportunities
  • Pace and timing of infrastructure and whether a regional framework is required
  • Distribution network upgrades needed (some of these decisions may also need to be taken at a sub-national level)
  • How to best utilise local geography and consider population density (informing suitability of different heat sources)
  • Suitability of local heat networks (location, size and heat sources used)
  • What local level smart and flexible solutions should be implemented (e.g. local energy storage) – some of these decisions may also need to be taken at a sub-national level

 

Source: BEIS.

Boilers no more? The Heat is on.

The Clean Heat Grant scheme has been relaunched as the £450 million Boiler Upgrade Scheme (BUS). It will launch in Spring 2022 and will offer householders and small non-domestic buildings an upfront payment to help cover the capital cost of switching from gas boilers to technologies including air and ground source heat pumps, and biomass boilers. Householders and owners of small non-domestic buildings will receive £5000 towards the cost of an air source heat pump, and £6000 towards a ground source heat pump. However, the cost of heat pump systems ranges from £6000 to over £20,000, so participants will have to contribute significantly to costs. The funding also falls short of the Government’s target of 600,000 heat pumps each year by 2028, in that it is limited to early adopters for three years and will only extend to 90,000 heat pumps.

The strategy also reaffirms the Government’s proposal to ban the installation of gas boilers in new builds, but does not include a requirement to remove gas boilers already installed. A consultation on introducing a market-based mechanism from 2024 was launched alongside the strategy (the “Market-Based Mechanism Consultation”). The mechanism is intended to create a UK-wide market incentive to increase the numbers of low-carbon heating appliances installed each year. It would see an obligation placed on manufacturers of gas and oil boilers to achieve proportional sales of heat pumps to boilers.

The Market-Based Mechanism Consultation proposes a number of potential models in respect of the scheme:

Model

 

Proposal

Proportion of sales, with pooling

A minimum proportion of manufacturers’ heating sales must be low-carbon heat pumps. There would be an option to ‘pool’ sales between companies, so that a company failing to meet its target could enter into an agreement with other companies to form a joint obligation.

 

Proportion of sales, with tradeable heat pump sales certificates

An obligation placed on boiler manufacturers to hold a certain number of certificates proportional to their fossil fuel appliance sales in a certain period. Boiler manufacturers could meet the obligation either by selling heat pumps directly and generating their own certificates, by obtaining certificates from other manufacturers, or by adopting a mixture of both approaches. Such a scheme would be similar to the Producer Responsibility Obligation to support waste recycling, and the Renewables Obligation Certificates scheme which supported growth in renewable electricity generation.

 

Minimum average product efficiency or average carbon intensity, with pooling

Companies would have to meet a target for the minimum average energy efficiency or maximum average carbon dioxide emissions of all new heating appliances sold. In order to be effective, this model would likely be introduced alongside further measures, such as product weightings. This scheme is similar to the European Union’s Vehicle Emissions Standard, which sets performance standards for vehicles sold by companies (or pools of companies).

 

Efficiency or carbon intensity standards, with credit-trading

Product weightings such as a carbon intensity or product efficiency standards would be established, alongside credits for energy efficient products. Credits could be sold by companies who have exceeded the portfolio average target to companies who have not yet met the target, to prevent the latter from ending an obligation period in deficit. In order to be effective, this model would also likely be introduced alongside further measures, such as product weightings and certain conditions. California’s Low Carbon Fuel Standard and the European Union’s Emission Trading Scheme are similar schemes.

 

An administrator (likely to be Ofgem) would be appointed to oversee administration of the scheme, compliance with the obligation, and have responsibility for the imposition of penalties (including financial penalties) to deter non-compliance. The scheme would sit alongside a range of subsidy-based and regulatory policy approaches capable of supporting a “transformation of the market.” The consultation will close on 12 January 2022 and further stages of consultation are expected in due course as the detailed policy design and framework develops over the next two years.

Homes of the Future

The strategy confirms the Government’s response to the consultation on the Future Homes Standard, published in January 2021, which set out proposed changes to Part L of the Building Regulations, as previously reported on here. The proposed changes stipulate that all new build homes in England will have low carbon heating and be zero-carbon ready by 2025. The strategy reinforces the timeline set out in the consultation response for the Future Homes Standard to be in force by 2025, with an interim uplift by 2022. BEIS also plans to consult on the appropriateness of preventing new build homes from connecting to the gas grid in England from 2025.

For existing homes, the Strategy confirms the plans set out in the Clean Growth Strategy 2017 for as many homes as possible to achieve an EPC band C by 2035, where practical, cost-effective and affordable. There are a number of proposed mechanisms to meet this target, including retrofit specifications for the supply chain, notably PAS 2030 and PAS 2035 for domestic buildings and PAS 2038 for non-domestic buildings. The Government will also target areas of greatest need by encouraging manufacturing and training to provide jobs, providing funding where appropriate, and supporting low income and fuel poor households, social housing tenants, and vulnerable consumers. It will also call on lenders to play a key role in encouraging uptake of energy efficiency measures, discussed below.

Get Yourself (Dis)connected

Alongside the strategy, the Government are have released two further consultations. The first is on proposed regulations to end the installation of fossil fuel heating in domestic off-gas-grid buildings in England from 2026 (the “Domestic Consultation”), and the second on non-domestic off-gas-grid buildings in England from 2024 (the “Non-Domestic Consultation”).

The Domestic Consultation outlines proposed regulations to encourage large scale adoption of clean heat in homes and to prevent the installation of fossil fuel heating in off-gas-grid homes from 2026. The Government’s preferred policy option is to encourage a low temperature heat pump first approach with a possible end to the use of fossil fuel heating by the late-2030s.

The Non-Domestic Consultation is similar to the Domestic Consultation, in that it proposes to drive large scale adoption of cleaner heating fuels in non-domestic off-gas-grid buildings. The Government’s preferred option is to phase out new installations of fossil fuel heating systems for large buildings (greater than 1000m2) from 2024 and remaining buildings from 2026 onwards, by using the natural replacement cycle to phase out oil, LPG or coal heating systems in off-gas-grid businesses and public buildings.

Under the proposals in both consultations, the boiler replacement cycle would be the ‘key trigger’ to install a heat pump. The Government intend to further consult on alternative heating system proposals for those households, businesses and public buildings that cannot reasonably practically install a heat pump.

The Domestic and Non-Domestic Consultations consider the appropriateness of reinforcing the regulatory framework by setting a late-2030s end date for the use of fossil fuel heating systems in off-gas-grid homes,  and an early 2040s end date for the use of fossil fuel heating systems in all buildings. However, how this will be done is not clear with open questioned aimed at gathering views from key stakeholders.

The Government is also seeking views on potential changes to Building Regulations to ensure compliance with the obligation. This would see the responsibility being placed on those carrying out the work, including agents, designers, builders, installers, and the building owners. Enforcement would either be undertaken by Local Authorities (who have a duty to enforce the Building Regulations and are able to take formal action under Sections 35 and 36 of the Building Act 1984) or potentially through the introduction of new powers and compliance measures separate to the Building Regulations. Both Consultations close on 12 January 2022, and the Government intends to launch further consultations on the technical detail of any legislation needed ahead of implementation.

Hy Time for Hydrogen in Heating?

The strategy sees hydrogen as a low-carbon alternative which will be critical to the UK’s transition to net zero. We previously examined key takeaways from the UK’s Hydrogen Strategy in our Law-Now.

The decision on the use of hydrogen in heating is notably deferred to 2026. The Government have committed to assess the use of hydrogen in the heating sector, including examining the potential to introduce hydrogen to the gas network. To this end, the £22 million Hy4Heat hydrogen innovation programme explores the safety and feasibility of using 100% hydrogen for heat in the home. The programme will conclude at the end of 2021, but the Government is committed to support industry in hydrogen heating trials.

The first neighbourhood trial will begin in Fife, Scotland by 2023, and will be followed by a village trial in 2025. BEIS and Ofgem have also written to gas network operators to seek their views on proposals to develop a hydrogen grid conversion. Plans to blend up to 20% hydrogen into the gas network will require a stringent safety and cost assessment, as well as a review of the regulatory framework set out within the Gas Act 1986. The Strategy suggests that indicative safety, cost and technical feasibility assessments will be published by Autumn 2022, with a final policy decision to be taken in 2023. The UK Government also plan to assess the feasibility of permitting new gas boilers to be hydrogen ready by 2026, thereby minimising disruption and installation costs to consumers.

Scotland’s Heat in Buildings Strategy

Whilst regulation of energy efficiency schemes is reserved, heat, energy efficiency and renewable energy incentive schemes are devolved, and the Scottish Government have announced its own Heat in Buildings strategy. Launched on 7 October 2021, it sets out the Scottish Government’s vision for reaching own Scotland’s own Net Zero targets, by ensuring that all buildings and heating systems reach zero emissions by 2045.

The strategy – which is arguably more ambitious than the UK Government’s strategy – sets out plans for a mass move from fuel systems to low and zero emissions heating for over two million homes and 100,000 non-domestic properties by 2045 and supporting energy efficiency improvements for all buildings. Scotland’s statutory emissions targets require the country to achieve net zero greenhouse gas emissions by 2045, with interim targets requiring a 75% reduction by 2030, and 90% by 2040.

Legislation, Legislation, Legislation

The Scottish Government indicate that it will introduce primary legislation, subject to consultation and limits on devolved competence, that provides the regulatory framework for zero emissions heating and energy efficiency. It commits to engaging with the UK Government ahead of introducing legislation to secure agreement on necessary changes to the energy markets in reserved areas, to ensure a just transition to zero emissions heating, or securing further devolution of the powers needed to make such changes in Scotland.

In contrast, reference to new legislation in the UK Government’s strategy is limited, save for proposed changes to the Building Regulations for new builds and potentially clean heat. It seems that the UK Government would prefer to adopt market-based models to encourage rather than mandate the decarbonisation of homes and buildings.

It’s (Not) Easy Being Green

Both UK and Scottish governments have proposed ambitious and significant changes to the heating sector in their respective strategies, and both Governments emphasise the important role green finance will have to play.

For example, the UK Government’s Heat and Buildings Strategy makes clear that lenders will have a significant role to play in building a green finance market to influence borrowers at “trigger points”, such as at the point of sale, purchase, renovation, or re-mortgage to incentivise the decarbonisation. A programme to provide grant funding to stimulate growth in the UK green home finance market will be launched in Spring 2022. It will pilot a range of financial incentives to encourage better energy efficiency and decarbonisation of residential property. The Government are working with the UK Infrastructure Bank (the “UKIB”) to design, deliver and scale-up the green home finance programme. The Scottish Government also emphasise the importance of financing the green transition, by announcing the establishment of the Green Heat Finance Task Force, which will work in partnership with the private sector to leverage the scale of investment.

Notably, however, the Scottish Government have indicated that £33 billion is needed to decarbonise heat in Scotland, but it has announced funding of just £1.6 billion. In the UK, that figure will be significantly higher, but the UK Government have announced just £3.9 billion of funding. Numbers of that scale make the targets seem even more ambitious. Substantial private investment will clearly be necessary to give the UK any hope of decarbonising at pace and scale, and ultimately reaching Net Zero targets.

Moreover, uncertainties remain; the role of hydrogen in the heating sector is still unclear, and entire industries need to be upskilled; need to get installers and supply chain on board to ensure that the market is able to cope with demand; and can in turn reduce costs. A raft of legislation is needed to support the proposals in the strategy, which will involve further consultations and legislative scrutiny. It is a task of enormous scale, but it is clearly an important one to address decarbonisation of a thus far largely untouched sector.

Article co-authored by Erin Crawley, Trainee Solicitor.