Too hot to handle? How to decarbonise the way we heat our homes.
Heat is a critical and substantial part of our energy system. Overall, a total of £32 billion is spent each year heating homes and other buildings in the UK. Heat represents just under half of the energy we use and one-third of total greenhouse gas emissions in the UK.
Yet despite its significance, heat has been largely overlooked in energy policy debates for years – the so-called “Cinderella” of energy policy. The decarbonisation of heat is absolutely fundamental to the achievement of wider decarbonisation goals – such as the carbon budgets which have been set to 2032. But we are doing very little about it – Policy Exchange analysis shows that greenhouse gas emissions from domestic heating have fallen by 20% since 1990, compared to a reduction of 50% in the power sector. Gas remains by far the most common form of heating in UK homes – present in more than 80% of homes.
Today, Policy Exchange has published a major new report looking at how to decarbonise domestic heating.
The report provides a critique of the previous Government’s heat strategy (which was developed by the then Department of Energy and Climate Change in 2012 and 2013). Our assessment is that the strategy, which largely focuses on shifting homes to electric heat pumps, looks extremely expensive and difficult to achieve in practice. Heat pumps represent a very small proportion of the domestic heating market at present, despite the generous subsidies available under the Renewable Heat Incentive. They face a number of consumer challenges, such as a high up-front cost (£8,500-£13,000), high running costs (due to the increasing gap between electricity and gas prices), low consumer awareness/acceptance, and in the case of some existing installations, poor performance.
Beyond these concerns, switching a large number of households to electric heat pumps would also create significant network and supply issues. Analysis suggests that shifting 80% of homes to heat pumps would require an additional 105 Gigawatts of peak generation capacity. It would also require significant investment to upgrade and reinforce the power network – at an estimated cost of nearly £40 billion. Putting all of these costs together, we estimate that the Government’s strategy of shifting 80% of households to electric heat pumps could cost in the region of £300 billion – or £12,000 per household. These are huge sums of money, and it is clear that the consumer and network costs have not been adequately factored into the Government’s thinking.
Our report suggests that the newly created Department for Business, Energy and Industrial Strategy (DBEIS) needs to take a fresh look at its approach to decarbonising heat. But what are the alternatives, and how deliverable are they in practice?
There has been growing interest in recent months in the idea of converting the gas grid to run on hydrogen – with reports by the Leeds H21 project, KPMG, and another publication due next week by the Parliamentary Group on CCS (led by Lord Oxburgh). On face value, hydrogen conversion could be appealing from a consumer perspective, since it involves less cost and disruption to the home than say converting to an electric heat pump. However, looking further into the detail shows that hydrogen conversion also carries significant cost and challenges. The Leeds H21 report calculated that converting the city of Leeds to run on hydrogen instead of natural gas would involve an upfront cost of £2 billion and annual costs of £139 million. If these costs are simply scaled up to all 23 million UK homes on the gas grid, this implies a capital cost in the order of £180 billion and ongoing cost of £12 billion per year. The same study suggested that the cost of hydrogen delivered to consumers would be nearly double the retail price of gas. Hydrogen conversion is an interesting option, but far more research is required to assess its feasibility and cost-effectiveness before we progress down this route.
So what else?
As part of our new report, we worked with Delta Energy and Environment to develop and model some alternative approaches to decarbonise heating. The analysis shows that an 80% reduction in carbon emissions could be achieved through a combination of:
- Improving energy efficiency – for exampleby tightening standards for new build homes and for existing private rented properties, and by linking the stamp duty system to energy performance to encourage households to improve their properties.
- Making better use of gas – by tightening boiler standards and encouraging people to replace old boilers with new highly efficient boilers.
- Expanding the use of “greener gases” – for example injecting biomethane into the gas grid, and supporting the development of new technologies which convert “black bag” residual waste into synthetic biogas.
- Rolling out heat networks to millions of homes, which in the future will need to use low carbon sources of heat.
- Plus a more limited rollout of electric heat pumps
We propose that Government develops a new heat strategy (most likely as part of the forthcoming Carbon Plan) based on the following broad principles:
- Make a long term commitment to decarbonizing heat – this is a multi-decadal infrastructure challenge, and will require significant political vision and commitment.
- Put consumers back at the heart of the heat strategy – the new heat strategy needs to be more consumer-friendly – working with the grain of consumer preferences, and minimising the costs and burdens placed on consumers.
- Avoid “picking winners”: Government should avoid setting technology specific targets and “picking winners” and instead create a set of market conditions which encourage the most cost effective routes to decarbonise heating. To that end,we recommend that the (technology-specific) 2020 Renewable Energy and Renewable Heat targets should be scrapped.
- Use carbon pricing to encourage lower carbon solutions: the taxes and levies placed on heating fuels should be adjusted to better reflect their carbon content.
- Integrate heat, energy efficiency and fuel poverty: Improving energy efficiency is amongst the most cost-effective routes to decarbonise heat, and offers co-benefits such as reducing fuel poverty. These agendas need to be far more integrated.
- A national strategy with a localist approach: The decarbonisation of heat will require a mix of technologies, rather than “one size fits all” solutions, and the best course of action will vary by location and over time. This raises questions about governance and decision-making.
- Tackle technology and system challenges: The decarbonisation of heat presents significant challenges for the operation of gas and electricity systems. The availability of storage will be key to the deployment of alternative heat technologies. The Government needs to focus more research funding on developing and piloting heat and energy efficiency technologies.
The full Policy Exchange report is available here.