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Get the economics of heat decarbonisation right or risk failure, suppliers warn

A heat pump installed as part of a Centrica project, the energy giant is one of the suppliers backing the report. Image: Centrica.

A heat pump installed as part of a Centrica project, the energy giant is one of the suppliers backing the report. Image: Centrica.

A collection of energy suppliers have commissioned a report from consultancy Public First to tackle what they describe as unfairness in the energy market for customers wanting cleaner heating.

The suppliers – OVO Energy, E.On, EDF Energy, ScottishPower and Centrica – have placed their weight behind the reports recommendations, which focus chiefly on moving appropriate costs off electricity bills and into government expenditure and introducing a carbon tax that is levied over time across both electricity and gas.

This approach would provide the best balance for incentivising heat decarbonisation, properly pricing carbon emissions, avoiding regressing impacts on the fuel poor or the average consumers and limiting the overall impact to the Treasury.

Without changes to policy costs on both electricity and gas, there is a far higher chance the government will not meet its heat pump target - 600,000 installations per year by 2028 - and decarbonisation of heat in the UK will fail, the report warned, with UK households that opt for an air source heat pump set to be paying £305 more a year in 2030 in energy bills than those with a gas boiler.

Michael Lewis, chief executive of E.On UK, said: "Britain has a once-in-a-generation opportunity to make a positive change, reduce emissions and kickstart a new industry, but unless we get the economics right, we’ll never get the delivery right."

Heat is an integral part of the decarbonisation journey, with 21% of UK emissions coming from non-industrial heating, the majority of which is domestic. As it stands, UK households are extremely reliant on gas, with just 2% using heat networks, and over 1.6 million new boilers installer per year compared to 30,000 electricity powered heat pumps.

Four scenarios were therefore modelled by Public First examining the various impacts of different policy changes, and compared to a baseline ‘do nothing’ scenario. Across all four scenarios, efficiency costs – the Energy Company Obligation – were moved from both electricity and gas bills onto gas bills alone. Alongside this, in all scenarios there was the assumption that current carbon prices in the form of ETS and CPS costs would either remain on electricity or be replaced by a higher carbon price.

The first scenario sees the removal of domestic costs of renewable subsidies off energy bills – such as ROCs, FiTs, and CfD - onto government expenditure with no additional carbon tax, with this being described as the most straight forward change for households but also a significant increase in government expenditure.

The second scenario is largely the same, although there is an additional carbon tax introduced on electricity and gas, starting at £54/tCO2e at a consistently increasing rate up to £75/tCO2e in 2030. This scenario would be consistent with pricing carbon emissions across the economy and would provide additional revenue that could be recycled to cover the cost of legacy renewable payments.

Scenario three would see 50% of the currently anticipated ROCs, FiTs, CfD costs moved onto gas bills from electricity bills, with a carbon tax levied across electricity and gas at a consistently increasing rate up to £75/tCO2e in 2030. This would remove some of the imbalance in how current policy costs are allocated while not requiring any additional government revenue, the report said.

Lastly, in the fourth scenario all of the currently anticipated ROCs, FiTs, CfD costs would be moved onto gas bills from electricity bills with no other changes made. This would more than correct current policy cost imbalance and deliberately encourage consumers to switch from gas.

The report comes after similar findings from the Environmental Audit Committee, which warned late last year that with the cost of electricity being roughly four times more expensive than gas due to the government placing the cost of its low carbon policy with customers, adoption of heat pumps may struggle.

There have been measures to support the uptake of heat pumps in the UK from the government, with the technology expected to be the primary heating technology for new homes as part of the Future Homes Standard.

Additionally, the Green Homes Grant incentivised uptake of both heat pumps and other green technologies, however data now reveals that following its early closure less than a sixth of the initial projected 600,000 homes will receive vouchers.

In its final month, the scheme saw 971 low carbon heat installations, with solar thermal remaining the most popular technology choice with 562 installations, followed by 334 air source heat pump installations and just two ground source heat pump installations.

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