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Energy

Volume 711: debated on Wednesday 23 March 2022

I beg to move,

That the draft Boiler Upgrade Scheme (England and Wales) Regulations 2022, which were laid before this House on 22 February, be approved.

The UK is the first major economy in the world to set a legally binding target to achieve net zero greenhouse gas emissions by 2050. We are continuing to advance sustainability through the Prime Minister’s “Ten Point Plan”, the net zero strategy, and the heat and buildings strategy. Currently, heating buildings and industry is responsible for 21% of the UK’s greenhouse gas emissions. Decarbonisation of heat is recognised as one of the biggest challenges in meeting our climate targets. The Government’s ambition is to phase out the installation of new natural gas boilers beyond 2035. Heat pumps are a proven scalable option for decarbonising heat and will play a substantial role in any net zero scenario. A UK market with the capacity and capability to deploy 600,000 heat pumps per year by 2028 can keep us on track to net zero. However, the current UK market for low-carbon heat is relatively small and, due to that, these technologies are largely unable to compete on a capital cost basis with conventional heating options. Subsidy is required to mobilise and grow the market, and to bridge the cost gap between fossil fuel and low-carbon systems. The low-carbon heat market has been supported by the domestic renewable heat incentive, which will close to new applications next week, on 31 March 2022.

The boiler upgrade scheme will succeed that scheme, providing capital grants to support the installation of heat pumps and biomass boilers in homes and small non-domestic buildings in England and Wales. The scheme has a budget of £450 million over three years, as confirmed at the 2021 spending review. Grants of £5,000 will be provided for air source heat pumps and biomass boilers, and of £6,000 for ground source heat pumps. Biomass boilers will be eligible only in rural properties that are not connected to the gas grid, to minimise air quality impacts.

The application process will be installer-led and comprise two stages: applying for and redeeming a voucher. This will allow for a simple consumer journey, while maintaining certainty for installers about the availability of budget. To ensure consumer protection through the scheme, consumer consent will be sought as part of the application process. All participating installers must be certified by the microgeneration certification scheme or equivalent, and must confirm membership of a consumer code. That ensures that consumers are covered by schemes governing the products and their performance, as well as the quality of the installation and service they receive from the installer.

The scheme will support up to 30,000 installations in year 1, contributing 2.6 megatonnes of CO2 equivalent of carbon savings, and supporting 2,100 direct full-time equivalent and 1,800 indirect full-time equivalent jobs per annum over its lifetime. This supports the Government’s ambitions for levelling up, as we expect supply chains to be built and jobs to be supported across the regions. With the growth in demand encouraged under the scheme and wider market developments, we expect to see cost reductions in the technologies over the three years. This instrument therefore sets out a provision to allow the Secretary of State to review and adjust grant levels in response to market changes.

Eligible low-carbon heating systems commissioned on or after 1 May 2022 will be entitled to support under the scheme. From 11 April 2022, installers will be able to open an account for the scheme with Ofgem. We expect the draft regulations to come into force and for grant applications to open by 23 May 2022.

The scheme established by this statutory instrument will increase deployment of low-carbon heating technologies, making crucial progress towards our climate targets. Investing in this scheme will reduce our exposure to volatile prices and protect British consumers. It will also grow the retrofit market, put downward pressure on costs and expand the supply chain ahead of the introduction of regulations and market-based approaches later in the decade.

There is a great deal of agreement between us this afternoon on a number of the issues that the Minister raised about the role that heat pumps will play in the future low-carbon energy economy, including how many heat pumps we will need over the period. We need to ensure that as we transition away from heating systems predominantly run by gas—and in the domestic environment, by boilers—we can look forward to substantial replacement of those high-carbon heating measures by the low-carbon heating arrangements offered by heat pumps.

I hope hon. Members will bear in mind a very important figure that the Minister mentioned: 600,000 heat pumps to be installed a year by 2028. That figure derives from the Prime Minister’s “Ten Point Plan” and is an ambition for the number of installations that we should reach, which will continue after that point at 600,000 or so a year. That, among other things, will get us more or less in line with what the Climate Change Committee has suggested on the roll-out of heat pumps to ensure that our heat decarbonisation targets are realised. That is therefore a key figure, and it should be the yardstick against which this measure is judged.

We heard from the Minister that this is a £450 million scheme—£150 million per annum over three years. That is, by the way, a slight uprating from the initial consultation on what was the clean heat grant and now is the boiler upgrade scheme. However, that is what we have in the pot over the next three years for the installation of heat pumps. By fairly simple arithmetic, that translates—if we assume that the amount of grant per heat pump installation is £5,000—to about 30,000 heat pumps per year for those three years. That is 90,000 heat pumps installed under the scheme by the year 2025 so. So we then have three years to get another 500,000 or so heat pumps installed by 2028-29. On the basis of the report I mentioned, that is just not going to happen. Even if we assume that a number of heat pumps will be otherwise installed in new build properties—this scheme is predominantly about existing properties that can be retrofitted with heat pumps—we can see just how far from the stated ambition this scheme leaves us over this period.

I am not kicking against the scheme as it stands, because it is good that we have some underwriting for heat pumps, but it is woefully inadequate for the task that we have ahead of us. It will get us nowhere near the target figure that I mentioned, and I think we should at least quadruple the scheme to get us on a trajectory that will actually get us to the 600,000 heat pump installations we have been talking about.

However, I am afraid that it gets worse for the scheme as it stands. As the Minister mentioned, the scheme is not just for heat pumps; it is also for biomass boilers—all of that is to be included in that £450 million cash limit. Unless no boilers are installed under the scheme, there will be quite a lot fewer than 30,000 heat pumps installed per year under the scheme.

Of course, the cost of Ofgem administration of the scheme—£10 million a year—is also included in the cash limit. By the way, I am glad that the Government have decided to curtail their interest in Canadian consultancies for energy efficiency schemes and to go with Ofgem as the administrator and manager of this scheme. However, I do wonder who will be responsible for regulating and reporting on the progress of the scheme. I think it may well be Ofgem, so I will be interested to see how that potential circularity plays out in how the scheme proceeds.

Furthermore, the money for the scheme is not new. The scheme replaces the domestic renewable heat incentive scheme. The Government have trumpeted how the scheme is going to turbocharge the installation of heat pumps, sort out supply chains and various other things, but it is essentially trying to do that with no new money at all. The RHI was based not on a levy but on taxpayer funding, and there was a line in the Red Book that allocated RHI funding historically. What was that line? Well, the cost of domestic RHI last year was £150 million—exactly what is available each year for this new scheme. In other words, the same amount of money is being turned over to carry out the same sort of activity that the RHI did. It is only that, as a result of £5,000 grants, we will apparently get far more heat pumps. It was not that the RHI did not support heat pumps—it did, and it also supported biomass boilers and solar thermal, which is not included in this scheme. The scheme also does not include hybrid heat pumps, which could make a real difference in terms of heating off-grid properties.

The interesting figures for installations in 2019-20 under the RHI were 10,400 air source heat pumps, 1,175 ground source heat pumps, and small numbers of biomass boilers and solar thermal systems—in other words, 11,500 heat pumps from a similar level of funding. I wonder whether the Government are as confident as they make out that we can do so much better than those numbers, even assuming that we get near to 30,000 heat pumps in the scheme, from the same amount of money as the renewable heat incentive.

I also question whether it is a good idea to pursue heat pumps in the way that this scheme is doing without having a concomitant drive to uprate the energy efficiency of properties that are likely to be concerned with the installation of heat pumps. That is not an issue with new house building, because new houses are likely to have good enough energy efficiency to take a heat pump, but I am sure that the Minister will be aware that heat pumps simply do not work very well in poorly insulated homes, as they struggle to get the house up to its required background temperature if their long-term slow input is continually leaking out due to the energy efficiency of the property.

The predominant Government scheme for energy efficiency at the moment is the energy company obligation. ECO is moving very shortly from ECO3 to ECO4 at a similar sized budget to when it started—ECO3 at £750 million and ECO4 at £1.2 billion. That was the amount of money that was in ECO when it was first started, so the money in the ECO fund is also standing still. That fund also needs quadrupling in size in order to run alongside the proposal we are discussing, so that whole-house treatments can work for heat pumps. ECO4 also needs putting into general taxation—or at least the difference between the original budget and its new budget, so that the two schemes can work well alongside each other.

Finally, I have a small point concerning the run-on from the renewable heat incentive into the boiler upgrade scheme. The Minister mentioned the timetable by which the new scheme will come into place. At present, it looks as though there will be quite a hiatus, as no new orders under the RHI will be taken and they will effectively stop until the boiler upgrade process—the vouchers, the certification and various other things—comes in. We could lose up to six months of heat pump installation and face various other problems due to that dislocation, with the two schemes not running together seamlessly. It is also pretty bad for installers’ order books to have that hiatus in their order books between their activities under RHI and what they think they may be doing under the new boiler upgrade scheme.

The scheme should come in seamlessly alongside the phasing out of the RHI. I do not know whether the Minister considers it too late to look at running on the RHI a little bit until the new scheme is in place, so that it can have the maximum impact from the word go as it comes in and takes over.

However, as I have said, we will not be opposing this measure this afternoon because of the high degree of agreement that we have on the purpose of the scheme. What we do not particularly agree with the Government on is their low-key response to the imperative of getting those 600,000 heat pumps in by the end of decade. It apparently remains low-key in this scheme. I would be happy to hear from the Minister if he has other plans to get us further up to date with heat pumps in the future, but at the moment that seems not to be the case.

I thank the hon. Member for Southampton, Test (Dr Whitehead) for his constructive approach and his overall support for the scheme, which is most welcome.

I will deal with some of the points the hon. Gentleman raised. He is right on his first point: the ambition is to have 600,000 installations per annum from 2028. He is also right that there is £450 million allocated to the scheme over three years. It is a £5,000 grant, so he is right that that is a projected 30,000 grants per annum. I think his question, if I may repeat it, is how we get from 30,000 to 600,000 in the intervening three years between the end of the scheme and the start of the target. I think he asserted that that would not happen, so let me try to reassure him. The idea of the 600,000 figure, as I think he knows, is not that the Government will come along in 2028 and provide 600,000 heat pumps per annum; the idea of the scheme for the next three years is to pump-prime the private sector to be able to provide the alternative that we need.

So far, the private sector has responded well. Some companies have said that they welcome the Government grant scheme that is coming in and believe it is enough to allow them to bring down the cost of heat pumps to greater equivalence with conventional heating systems over that time. We believe, therefore, that we are putting in the right amount of funding, while being prudent with public finances, to provide enough support to help us to get to that 600,000 per annum target in 2028.

The hon. Gentleman asked whether biomass boilers were also within the costings. They are, but we expect the number of biomass boilers to be relatively low. We expect the vast majority of the funding to go on heat pumps. He asked about the regulation of the scheme, and he is correct to assert that it will be up to Ofgem to oversee the scheme and the market. I would add that installers also need to be certified under the microgeneration certification scheme.

On the domestic renewable heat incentive, the hon. Gentleman is right that the scheme is closing to new applications next week, on 31 March, as I laid out earlier. It has been a successful scheme: up to January, 100,398 low-carbon installations had been successfully installed due to the DRHI.

The scheme has helped both to raise consumer awareness and understanding of low-carbon technologies, and to raise the quality of low-carbon heating installations, protecting consumers and improving their experiences. It has also supported the development of both product and installer supply chains. We believe that the boiler upgrade scheme will provide a simpler offer than the previous DRHI, and the grant model will directly address the up-front capital cost of low-carbon heat technologies, which is cited as a key barrier to deployment.

The hon. Gentleman asked whether heat pumps were effective in cases where properties are less well insulated. I can tell him that current evidence suggests that heat pumps are technically suitable for most buildings; around 90% have sufficient energy efficiency and internal electrical connection capacity to accommodate a heat pump system, which is encouraging.

I think the hon. Gentleman asked about the gap between the end of the previous scheme at the end of this month and this scheme coming into place in May. We consider that a staggered approach, with installer accounts created in April and applications starting in May, will offer the best overall level of service to installers and ensure that applications can be processed promptly. Installations commissioned from 1 April will be eligible for funding, subject to the other eligibility requirements being met. I hope I have answered all his questions; if there is anything I have missed, he can contact me afterwards and I am happy to write to him.

Heat pumps will play a substantial role in any net zero scenario, so we need to build the market for them now. This targeted support will help to grow the low-carbon heat supply chain to enable the proposed introduction of regulatory and market-based measures in the mid-2020s. Not only will investment in the scheme contribute to carbon reduction targets and increase consumer awareness of low-carbon heating solutions, but the creation of high-quality jobs will help with boosting the economic recovery, levelling up across the country and ensuring that we build back better. I urge the House to support this measure.

Question put and agreed to.