Skip to content

Climate & Energy

Three Birds, One Stone: How Greener Homes Can Solve the Energy Trilemma


Paper31st May 2022


Chapter 1

Executive Summary

Three Interlocking Crises, One Clear Solution

UK households are struggling. Our dependence on oil and gas to heat our leaky homes has hit breaking point, as spiralling fuel costs threaten to leave more than a third of us in fuel poverty. On top of that, our reliance on imports is financing despotic foreign regimes, and burning fossil fuels in our homes is contributing to runaway climate change.

Radical action is required to help households up and down the country reduce their energy consumption, insulate their homes and kick-start the transition to low-carbon heating. And yet, for the vast majority of homes, we have no clear plan for resolving this crisis.

The political prize is huge. The move to net-zero homes could halve heating bills from today’s levels while insulating us from the volatility of international markets. And with 37 of the top 40 swing seats hit hardest by the crisis due to worse-than-average energy efficiency, a credible plan that supports households and empowers them to take positive action on the climate and Russia will be rewarded at the ballot box.

But the government has so far failed to respond to the scale of the challenge. Its Energy Security Strategy talked big on long-term ambitions for offshore wind and nuclear but spurned the opportunity to reduce demand and help households take control of their bills. The opportunity for a credible plan to decarbonise our homes is wide open.

This is not easy. Public support for action on bills and climate change is high in principle, but awareness and understanding of practical options are low. Over its lifetime, energy efficiency saves more than it costs, but many cannot afford the upfront investment. And while the high costs of new heating technologies should fall rapidly, this will only occur if the market can scale up.

This impasse can and must be overcome. But big political targets alone will not do the job. Years of stop-start support, mixed signals and market distortions have undermined consumer and investor confidence.

A new, long-term, consumer-focused approach is urgently needed.

A One-Stop Shop for All Households

Households want to reduce their bills and they want to act on climate change. There is a way to do both. We estimate that households could permanently halve their heating bills by going green. And while some of these savings will take time, such as green electricity and market reforms, many can be achieved very much faster.

But households generally lack three key ingredients for making the change: a) awareness of the changes required, b) the ability to fund the upfront costs and c) reliable and low-hassle ways of getting it done.

We propose that the government establish an independent one-stop-shop Home Energy Service, combining advice, grants and interest-free loans to deliver a simple, compelling consumer offer. Plenty of policy work will be needed to ensure this simple offer stands up to the test, but the complexity should stay behind the scenes. We identify four key areas of action:

  1. Setting a clear vision: Confidence is key, and the government needs to articulate a commitment to a clear path forward. Householders need confidence to act, businesses to invest and installers to retrain. Investing now in local and national planning, transparent decision-making and clearer long-term standards is essential in building that confidence, while maintaining choice where it matters.

  2. A plan for every home: Building a new, independent advice service, the government should provide all households with simple, practical plans for reducing their bills and decarbonising their homes. These plans should be voluntary now, but the government should ensure that by 2035 every home has one. Plans should be easy to access and personalised to the household and home. They should leave room for consumer choice while being clear about the long-term direction of travel. They should spell out the benefits and provide practical support in getting the work done. And continued advice should be available and accessible as people adapt to new ways of heating their homes efficiently.

  3. Financial support that works: Advice must be supported by a bold new financial offer. Grants should be made available to cover a portion of upfront costs (or all costs for poorer households and social tenants) but should be paid to the installer and knocked off the total price to minimise consumer risk or hassle. In combination with grants, interest-free loans should be automatically available to cover the remaining upfront costs. Blending grants and loans in this way will ensure affordability and value-for-money for the government, while fully supporting households. Both should be underpinned by long-term budgets that encourage markets to invest, grow and innovate. Finally, existing price distortions and inefficiencies that hamper incentives must be urgently addressed.

  4. Building quality supply chains: Markets will react to strong demand, but the government should help ease the way. Consumer protections need to be simpler and easier to engage with. Markets need support to invest in improved skills, manufacturing and new consumer offers. And supply-side regulations and upstream incentives should be used to ensure both the quality and quantity of deployment rise.

Getting this right will leave the legacy of a healthier population, a more resilient economy and a greener future. The opportunities are massive, from NHS savings of upwards of £1 billion annually[_] and more than 200,000 skilled green jobs,[_] to energy independence, lower bills and higher disposable incomes.

Time and again, decisive political action on net zero has seen attitudes change, costs plummet and value created. It is time to apply the same logic to our homes.


Chapter 2

Britains Gas Problem

Britain’s homes are notoriously leaky and place towards the bottom of energy-efficiency rankings across Europe. We also have an almost unique dependency on natural gas to keep warm. This combination of leaky homes and fossil-fuel heating has long been a problem for the climate, accounting for no less than 20 per cent of our national carbon emissions.[_] But it is increasingly a problem for households too for reasons of security, affordability and sustainability.

Security

The UK has a gas problem. The chart below shows that our reliance on natural gas to heat our homes is highly unusual in comparison to other developed economies. Since the transition to mains gas and central heating in the 1970s, some 85 per cent of us have become used to heating our homes with cheap, reliable, natural gas – more than any other country bar the Netherlands. But dwindling domestic supplies, the drive to decarbonise and the international price crisis have turned a competitive advantage into an Achilles heel.

Gas-related energy security is increasingly a problem for the UK – both in terms of geopolitics and cost. While only 4 per cent of our gas comes from Russia,[_] we operate in an international gas market and are therefore responsible for creating demand from which Vladimir Putin ultimately profits. This exposure to international gas markets also means that we are subject to normal international supply-demand fluctuation at best, or weaponisation of gas by authoritarian regimes at worst. The result is unpredictable (and currently eye-watering) costs.

Advocates for domestic gas suggest increased domestic production could be the solution. But the reality is that limited economic and accessible gas reserves alongside lengthy lead times mean it is not a route to insulating the UK from the high prices in international markets. So while it may be true that the gas is unlikely to “run out”, if households cannot afford to pay for it, it amounts to the same thing. In short, the UK finds itself in a gas-security conundrum.

Figure 1

UK households are highly dependent on gas

Source: /www.gov.uk/government/publications/international-comparisons-of-heating-cooling-and-heat-decarbonisation-policies

Affordability

Decades of relatively cheap heating have provided little incentive for action on energy efficiency and left the UK lagging on home insulation. The result is that we use more gas than we need to – a lot more – and are therefore acutely exposed to the security issues set out above.

The astonishing rise in global energy prices since the start of the Covid-19 recovery was already driving an unprecedented increase in the cost of heating our homes. Ofgem’s energy price cap increased from £1,138 per year in April 2021 to £1,971 a year later – a 73 per cent increase year-on-year.

Russia’s invasion of Ukraine, and the geopolitical response, have sent wholesale prices spiralling higher again. And by October, the price cap will have risen once more, with Ofgem anticipating an increase to £2,800 per year,[_] plunging over one-third of UK households into fuel poverty.[_]

Sustainability

While gas prices and security levels will always fluctuate, the incompatibility of unabated gas with the UK’s net-zero target remains constant. Residential gas use is responsible for a fifth of the UK’s carbon emissions (almost double that of our power stations) and our commitment to net zero demands that we end the use of natural gas for heating by 2050.

For years policymakers have scratched their heads over how to solve the energy trilemma: how to keep bills low while keeping supply secure and making net zero a reality. But with gas prices rising rapidly and renewable costs falling beyond all expectations, the economics have fundamentally changed. Affordability, security and climate all now demand the same response: to transition our homes away from natural gas. The trilemma has turned on its head.


Chapter 3

Net-Zero Homes Provide the Solution

Net-zero homes provide a single answer to the triple threat of spiralling prices, energy security and climate change. Such a transition will not be easy, and it will come with costs of its own along the way. But the cost of action is falling fast, and the cost of inaction is rising even faster. Demand reduction is relatively quick, saving people money while reducing our imports and emissions. Switching to low-carbon heat will be a longer-term project, although it needs to start now. But combining the two – alongside continued progress in electricity policy and market reform – could see heating bills halve between now and 2035.

Demand Reduction

It is often said that the cheapest energy is the energy you no longer use. You could also say it is the cleanest energy and the safest energy. It is baffling, then, that energy-efficiency measures – measures that reduce our demand for energy in the first place – are so often ignored in policy interventions.

There are many reasons why politicians tend to treat energy efficiency in homes with caution. If it is such an economic no-brainer, the logic often goes, why aren’t people doing it for themselves? Surely people just don’t want this stuff? And when they do want it, there is never anyone to do the job for them!

These are all reasonable critiques, but they are also circular. The reason many homeowners do not invest in insulation is because the upfront costs are high and the payback is slow and steady, taking place over years or even decades. The reason they do not want it is because they lack the information required and would prefer to spend their limited capital on more immediate needs. The reason there are too few quality installers is because there is not enough demand. And so inaction becomes self-fulfilling.

Figure 2

Installation of home energy-efficiency measures in the UK, 2010–2020

Source: Climate Change Committee: Independent Assessment of UK’s Heat and Buildings Strategy

But we know that policy really works in this area. Figure 2 illustrates the collapse in investment in home energy efficiency over the past decade, underlining two conclusions: a) we have a proven ability to install energy-efficiency measures at the scale required for net zero, with installation rates of around 2 million measures per year leading up to 2013, and b) policy is crucial. Installations fell off a cliff following the Conservatives’ decision to “cut the green crap” in 2013 – a move that has cost the UK billpayer £2.5 billion, according to Carbon Brief.[_]

Some blame the collapse in installations on a lack of remaining potential. But the evidence does not support this view – 6 million lofts and 13 million cavities need filling, and new technologies are revealing additional potential, such as underfloor and solid wall insulation. On top of that, there is mounting evidence that even simpler changes, from tweaks to boiler flow temperatures to smarter thermostat use, can make substantial savings immediately at next to no cost.

The current crisis has not fundamentally changed the dynamic. Demand-reduction measures still require upfront costs that will pay back over time. But it has roughly halved the payback periods of investing in energy efficiency. Inflation may have increased the cost of some measures, but energy prices have seen potential savings double or even treble, making a compelling case stronger still.

Low-Carbon Heating

Important though it is, energy efficiency has its limits. Most of the job of transitioning away from gas and towards net-zero homes involves changing the source of heat itself.

This should generally be done at the point that households would be buying a new heating system anyway. So it makes sense that the government is committed to phasing out the sale of new natural gas boilers by 2035, as this will avoid a situation where people are buying new boilers and then being told to replace them before they reach the end of their life.

But the UK installs around 1.7 million boilers a year, which is a big market to replace. Meanwhile, the market for low-carbon alternatives is nascent. The current heat-pump installation rate languishes at around 30,000 per year. Hydrogen heating is still in the research and development stage and its projected costs are being driven higher as gas prices increase. And heat networks, while likely to play an important role in dense urban areas, for around one in five homes, won't be suitable everywhere. The scale of the challenge is immense.

Figure 3

Heat pump annual installation trajectories

Source: Climate Change Committee (Sixth Carbon Budget)

Take heat pumps. The opportunity is clear – a technology that is more than 300 per cent more efficient could slash emissions and primary energy demand, making our homes healthier and cheaper to run in the long term.

But the problem is also clear. The upfront cost of installing a heat pump is currently high (around £10,000) and so public support is unlikely to materialise without significant financial help. Meanwhile, the artificially high price of electricity relative to gas – caused by government policy costs and unequal carbon pricing – mean the bill savings that should be on offer aren’t.

The good news is that innovators believe that with the right support they can bring down the upfront costs, permanently, to £5,000, or perhaps even to parity with boilers in time (roughly £2,500). This is the government’s stated strategy: to scale up the market and bring costs down. But the Treasury has thus far been unwilling to inject the level of sustained funding required to scale the market and drive down costs, despite the successes of that model in solar and wind, or to remove its own energy-price distortions, which favour gas over electricity. Heat pumps remain a hard sell to the public.

Stable, Cheaper Bills

If we can overcome these challenges, the prize is enormous. Net-zero homes could, over time, halve the cost of heating from current levels, providing a route to bills that are both low and predictable.

Annual gas bills for a typical home have risen to £939 under the April price cap, putting enormous strain on household finances. What will happen to prices in the longer term is anyone’s guess. However, there are several indicators that point to a sustained period of high prices.

First, Russia’s invasion of Ukraine, with combat and the resultant supply disruption likely to last for months, if not years, and the economic war with sanctions on Russian supplies likely to persist for the foreseeable future. Second, continued economic growth and the rapid switch away from coal and towards gas across the developing world, and particularly in China, make it likely that gas prices will at least be volatile. At best, prices may settle back for periods at the £500 per year average seen between 2019 and 2021. At worst, we may see periods in which prices are even higher than current rates.

Figure 4

How key interventions could halve gas bills by 2035

Source: HHIC, Science Direct, Octopus Energy, CCC (Sixth Carbon Budget) and TBI workings.

The combination of demand reduction, low-carbon heating and cheaper, green electricity supply have the potential to change this dynamic permanently – cutting bills substantially from their current level. But how much could we save?

Demand Reduction: In the immediate term, simple changes can provide modest savings. Lowering boiler flow temperatures could save 6 per cent alone, and advice on thermostat use could provide further savings. We have assumed a modest average of a 5 per cent saving per household.

Efficiency: Over the next five years, millions of homes could be insulated, with poorer households given priority. Research from the Centre on Innovation and Energy Demand suggests that the remaining potential for energy-efficiency measures (not including heat source to avoid double-counting) could save UK households around 20 per cent on average,[_] most of which is now likely cost-effective against tripled gas prices. We have assumed a 20 per cent saving.

Heat Pumps: Over the next five to ten years, with investment to build the market, millions more households could switch to electric heat pumps. Government action will be needed to address distortionary policy costs on bills (roughly 8 per cent of current electricity bills) and introduce smart tariffs that allow smart technologies to shift demand to where prices are cheapest. For example, Octopus Energy[_] has found consumers are able to save up to 30 per cent through a combination of using heat pumps flexibly and smart tariffs. While evidence of such tariffs working at scale is currently limited, for the combination of action on smart tariffs and policy costs we conservatively estimate savings of 10 per cent.

Renewable Energy: Finally, over the next decade and beyond, as low-carbon electricity and market reform decouple electricity prices from gas, we will see lower, more predictable electricity bills. Using Climate Change Committee (CCC) estimates of the likely average wholesale price and additional costs of high-renewable systems, we calculate that electricity prices should be 26–38 per cent lower than those used to set the April 2022 price cap. While market design, generation mix and funding models for new capacity are all unknowns, it is difficult to predict what consumer prices would look like with any precision. We have conservatively estimated savings at 26 per cent.

Taken together, these measures could see household energy bills halved from their current levels. But making it happen requires concerted policy action rather than the current piecemeal approach.


Chapter 4

The Policy Gap

Sadly, the government is not on the right track to achieving a goal of halving household heating bills. The 2021 Heat and Buildings Strategy was broadly welcomed in terms of its assessment of the challenges, but heavily criticised for its lack of clear deliverables. In response to the strategy, the CCC highlighted that the government has no clear plan for over a third of the required carbon savings by 2035; that energy efficiency is a major gap; and that there is insufficient funding for the transition. Many expected the Energy Security Strategy, published in April 2022, to fill these gaps but were left disappointed. Perhaps most importantly of all, a fixation on phasing out boilers and home regulations without adequate consumer or market support or advice is likely to backfire – undermining support for the net-zero transition just when it is needed most.

There are three elements to the current policy failure: lack of direction, limited effort to build the case to consumers and an absence of concerted policy to drive the changes required.

No Clear Direction

Despite big targets, market uncertainty still inhibits progress. The government’s target that all homes should be at Energy Performance Certificate (EPC) rating C by 2035 is subject to the unexplained caveat “where cost-effective, affordable and practicable”. What does this mean? And where are the policies to achieve it, and the standards to enforce it? On heat, we are told that new boilers will be phased out by 2035, but households do not know if they will have hydrogen, heat pumps or heat networks available to choose as the alternative.

This uncertainty undermines the confidence of investors, businesses, installers, households and regulators alike. Clearer direction is required from the government while maintaining desirable consumer choice. This means a transparent process for making large infrastructural decisions, and targets that are meaningful to markets and consumers.

No Public Engagement

The transition to net-zero homes is inherently personal. While support for net zero is high, it is also untested when it comes to the scale of public action required. This means it is essential to ensure the public understand the positive case for change, and how they will benefit in future.

Articulating the benefits is a key part of the challenge, and there are many: cheaper, less volatile heating bills; warmer, healthier homes run on modern, smart technologies; greener homes driving green, skilled jobs.

But the public also need practical help in navigating the choices they face. The political prize here is clear: helping households take control of their energy bills and empowering them to go green in a way that suits them will speak directly to two of the most salient issues facing voters today: the environment and the cost of living.

Yet the UK is lagging behind again. Having slashed funding for the Energy Saving Trust, and with minimal investment in, or promotion of, its digital-only Simple Energy Advice website, the government is failing to reach householders with good advice when they need it most.

No Clear Policy

The CCC summarises the government’s position on energy efficiency as follows: “There is only a voluntary target for mortgage lenders to encourage borrowers to improve the energy efficiency of properties, with limited oversight and enforcement mechanisms, for the 65 per cent of the housing stock (in England) made up by owner-occupied homes.”

In other words, “there is no policy”. Years of policy missteps and a lost decade on insulation have led to this place. Top of the pile of “green crap” slashed by the former Prime Minister David Cameron was the formidably successful supplier obligation which in 2012 was responsible for well over 2 million lofts and cavities being insulated per year. A litany of failures has followed. The Green Deal attempted to present 7–8 per cent interest loans as the answer. The Green Homes Grant tried to spend billions of pounds in six months from a standing start.

The story on low-carbon heating is not much better. The government’s own interim target of 600,000 heat pumps a year by 2028 represents 20-fold market growth in just six years. So what does the government think will fill this enormous gap? Many commentators look straight to the headline Boiler Upgrade Scheme, which is admirable in its simplicity of design and level of support, but its budget of £150 million a year will only support 30,000 installations per year, meaning it is unable to do any more than sustain the existing, completely inadequate market size.

While some thousands more might come through other grant schemes for the public sector, social housing and low-income households, the government is betting the farm on regulation, including tighter regulations on new buildings; a proposed phase-out of new oil boilers by 2026; stricter minimum standards for privately-rented homes; and a market mechanism designed to mandate manufacturers to achieve a rising (tradeable) proportion of heat pumps in new heating-system sales.

The problem is that regulations and standards like these only work once the wider market conditions are right – in other words, once costs are affordable, services are reliable, and attitudes have shifted. They are the backstop to successful transitions, not the leading edge. Despite years of debate and commitments to consult, many of these regulations are still unforthcoming – and with no sign in the Queen’s Speech that they will make it into the 2022 Energy Bill, they look a long way off. In practice, details of these regulations are unlikely to be published, let alone enacted or enforced, without sustained fiscal and practical support to drive down costs, build skills and improve performance.

Fortunately, there is a better way for the government to achieve its aims. But it requires a comprehensive new approach, a more serious fiscal commitment and much closer attention to easing the consumer journey.


Chapter 5

Four Steps to Cheaper, Greener Heating

We propose a four-step plan to kick-start the transition away from high bills and natural gas, towards a cheaper, more secure and greener future:

  1. Firstly, the government should set a clearer vision for where we are going and how we will get there, taking difficult but essential decisions transparently and compellingly.

  2. Second, it should establish a single, simple consumer offer, providing all households with high-quality, practical advice on the changes they could make to reduce their bills and emissions.

  3. Third, it should provide sustainable financial support by combining modest grants and interest-free loans, and addressing existing price distortions.

  4. Finally, it should support workers and businesses in the transition through improved training, standards and consumer protections.

This is a vision that can build consumer confidence, increase volumes, improve supply chains and bring down costs. These will make it possible for the government to reduce the level of grants and introduce more regulatory levers over time.

Step 1: Setting a Clear Vision

Setting the long-term vision is essential. While consumer choice is a key component of a successful transition, the scale and speed of the net-zero transition demand clarity of approach from government for several reasons: maintaining public support, realising investment, reducing costs, and ensuring appropriate and timely infrastructure decisions.

The government has made some important steps in this direction. But political cycles, short-term budgets, business lobbying and a lack of cross-party consensus or regulatory certainty over long-term targets are a huge drag. Building an evidence-based consensus will take time, but this must start now given the climate, cost and security imperatives to get the transition moving at pace.

We recommend setting out a long-term vision that includes:

  • Setting the end goal. The government needs to set out clearly where homes need to get to by 2050. Close observers of net zero know this already, but it needs to be part of the public conversation long before consumers are forced to act. For simplicity, and technology neutrality, the government should set a clear outcome-focused goal for all homes to require an environmental EPC (or equivalent) rating of A by 2050.

  • Phasing out new boilers. The government has rightly signalled 2035 as the phase-out date for new natural-gas boilers. Regulating for this target and setting a smooth market trajectory towards it (through the market mechanism that government has recently, rightly, decided to progress[_]) will be essential. While the government has also declared ambitious plans to phase out new oil boilers from 2026, careful consideration should be given to the political implications of forcing one cohort of society to transition a decade before the rest.

  • Achieving interim milestones. The government has already implemented and consulted on tightening minimum energy-efficiency standards on privately-rented homes. Such regulations, attached to the point of sale, letting or major renovation, could be implemented across the stock with a clear lead-in time and necessary flexibilities. Increasingly, they should be based on net-zero “Home Energy Plans” rather than outdated EPCs. However, they should not be seen as the answer to driving change on their own. Such regulations will need accompanying support and incentives (such as differentiated stamp duty or council tax), a well-functioning industry and long lead-in times. They cannot be the leading edge of policy.

  • National and local planning. Setting direction – from policy to infrastructure to consumer advice – needs proper, real-world planning, from where heat networks will be available to where electricity networks need upgrading. Without it, the transition will be slower, more expensive, more disruptive and less likely to succeed. A clear framework for local, regional and national scale heat planning would pay for itself many times over but will need government leadership. Methodologies for how to do this exist and are improving, but institutional and financial solutions are required.

  • Making strategic decisions on hydrogen: Timely decisions on the future of the gas grid and hydrogen-ready appliances will be essential to steering private investment and the government must act now to enable genuine decisions in 2026. In the meantime, it should be clearer on the relative costs and benefits of hydrogen in home heating, and clarify its position on blue hydrogen in a world of high and volatile gas prices.

Step 2: A Plan for Every Home

Consumer advice is critical to ensuring homeowners are aware of the opportunities to reduce their bills and decarbonise their homes. Long-term signals and political announcements may raise broad awareness of the need for – and benefits of – acting, but navigating the options, the market and the policy landscape is a daunting proposition for even the savviest consumer.

Households need to be confident that the changes they are making to their home are the right ones. Good advice needs to set the context of long-term milestones and targets; provide personalised options specific to the home and household; give clarity on the likely costs and benefits; highlight available financial support; and advise on how to get the work done by reliable contractors.

While some countries increasingly provide this sort of information (for example through Home Energy Scotland[_]), the UK, as a whole, does not. Although it has its uses as a tool for guiding consumer choices, the current EPC framework is confusing, outdated and uninformative. More recent attempts in England (such as the Simple Energy Advice offering) are a step in the right direction but are underfunded, underpromoted and too narrow in scope. Worse, without an integrated financial offer they often serve only to highlight how little support is available to households.

Successive policies have failed due to low awareness, complexity of policy, disproportionate administrative burdens and the difficulty had by consumers in finding suitable installers or financial support. Better advice has the potential to change this dynamic and empower householders.

We recommend the introduction of free, personalised Home Energy Plans for all householders, supported by practical advice, interest-free loans and simple grants. Provision of these plans should be:

  • Independent. The service could be delivered through an existing independent body – like the Energy Savings Trust, which runs the Home Energy Scotland service to high consumer acclaim, or Citizens Advice, which runs the energy advice service in England and Wales – with a potential interface with local authorities.

  • Digital. Delivery can be largely digital, supported by phonelines and with the potential for local advice centres to ensure accessibility. This would require modest funding of around £5–10 million per year.

  • Personal. The service should empower households to create their own “plans”, with clear estimates of costs, bill savings and available financial support for different technologies based on existing data and answers to simple questions.

  • Practical. The plan should be part of a one-stop-shop that automatically guides households on how to get the work done and how to pay for it and provides practical case studies on what to expect. This should build on existing detailed industry work on Building Renovation Plans and what they should include.[_] Support should also extend beyond installation for homeowners who need help adjusting to new technologies or support with consumer protection.

  • Universal. Plans should be widely promoted and a long-term feature of the policy landscape, with the target that by 2035 all households should have accessed a plan for their property.

While improved advice should be an optional funnel for interested householders taking action to improve their homes, rather than a mandatory gateway to accessing financial support, action is imperative to build confidence, hit targets and start bringing down bills. It is important that the government is not just offering but encouraging the adoption of Home Energy Plans, with the goal that all households should have one by 2035 – a milestone that will ease the path to the government’s own 2035 targets to phase out new gas boilers and have all homes at EPC C.

At first, a growth trajectory should be established and achieved through marketing directly to consumers and through energy suppliers – as a bill-saving opportunity, energy bills should encourage households to engage. But over time nudges will need to be replaced by requirements. Home Energy Plans should replace or augment EPCs at the point of letting, sale or re-mortgage by 2028, following government decisions on the future role of the gas grid in 2026. By the early 2030s government should have options in place to enforce a backstop for all homes.

Such a service would require investment and commitment. Home Energy Scotland is currently helping more than 90,000 customers a year with a satisfaction rate of 97 per cent. The service operates broadly in line with the recommendations above, so rather than re-inventing the wheel, this is mainly a case of replicating the scheme in England and Wales. It makes sense for these schemes to be run at the national rather than local level, to avoid regional inconsistencies and ensure cost efficiency. The amount of funding required would depend on the scope of the service, but an initial, basic offering could be delivered within six months at a cost of around £4 million in the first year excluding set-up costs, according to industry estimates.

This speed of delivery means that Home Energy Plans are one of the few means of supporting customers through the immediate energy crisis, and therefore should be progressed as a matter of urgency. The main challenge facing such a scheme is scaling up advice delivery to drive the number of home-decarbonisation installations required for net zero. We would therefore recommend increased funding (an additional £5–10 million per year) once the service has demonstrated value-for-money to support widespread marketing and quality service provision, including support for households that do not have access to, or are not comfortable with a digital approach.

Case Study

A New Consumer Journey
01

Step 3: Financial Support That Works

Getting the financial incentives right is essential. Currently, consumers are faced with high capital costs, limited and expensive financing options, and distortions and inefficiencies in energy prices. In practice, this means we ask consumers to either part with a large sum of money upfront or pay high interest rates on commercial loans, all while telling them they will not save as much as they could on their bills. The financial incentives are all wrong.

So the third step in our plan for cheaper bills and greener homes must address upfront costs, while they remain high; offer cheap, simple, and reliable financing; and reward people for switching to low-carbon heating by maximising bill savings.

Upfront Costs

For social housing and low-income households, grants are the unavoidable solution. Existing government policy rightly recognises the priority of direct fully funded support for households who would otherwise be unable to act and are struggling to pay their growing energy bills. This approach should be continued and extended.

But while grants cannot be the entire solution for the able-to-pay market, they are still a vital tool to accelerate the transition. Set as a contribution to the upfront costs and tapered over time, they can drive market growth and see costs plummet, saving everyone money in the long run. This is especially true for technologies that rely heavily on local UK supply chains and has worked well for electric cars, solar and wind.

We recommend that a new grant funding model is adopted for the able-to-pay market, with a long-term budget and tapering levels of support. Provision of these grants should be:

  • Simple, easy and fair, with a long-term commitment and tapering levels over time. Prioritising simplicity over perfection, fixed, universal grant levels should apply wherever possible (such as the £5,000 boiler-upgrade grants). In some cases, where the costs of a measure are highly variable, a fixed percentage reduction could be applied (e.g. solid wall insulation could command a 30 per cent grant).

  • Paid to the installer/supplier, rather than the household, on the condition installers show it as a reduction on the invoice/quote. This will minimise household administration and anxiety about cashflow or eligibility. A similar option for including grants within financing offers or new business models could be considered.

  • Tapered, to limit government expenditure and incentivise early uptake. But a substantial commitment is required to build confidence among suppliers to invest and scale up. Current one- to three-year Treasury budget settlements are inadequate and cost the government dearly in the long run through undermining private investment. Ten-year budgets should be used, with flexibility to move at least some budget between years if required.

  • Integrated into the Home Energy Plan, so that householders are aware of the support on offer and that it will not be available forever.

Cheap Finance

Limited grant funding will play an important role in kick-starting the market, but we need further financial support to enable mass deployment. Cheap, green finance will be the most cost-effective way of doing this. While commercial loans are available, they tend to attract high rates of interest, are inaccessible to many, and have a high administrative burden and credit risk attached. Government intervention in providing low-cost green finance should be a no-brainer and has worked well for years in Germany.[_] It is now a centrepiece of policy in Scotland too.[_]

We recommend that the government underpins an offer of zero per cent interest loans for householders making a qualified range of energy efficiency improvements. Provision of these loans should be:

  • Reliable, utilising a combination of the government’s (or the UK Investment Bank’s) ability to raise low-cost green debt, subsidising the remaining (relatively small) interest payments and then acting as a guarantor for loans to minimise the default risk.

  • Flexible, allowing householders choice on the loan period – longer if minimising repayments was a priority, shorter if desired – and on whether the loan should be attached to the household or the home (through the Green Deal’s approach to tying the loan to the energy supply).

  • Integrated with grants, so that the combination of cheap finance and grant funding doubles up to become a clear consumer incentive to act, similar to the concessional lending seen in Germany’s KfW scheme.

  • Integrated into the Home Energy Plan, so that householders have a clear picture of the financial support on offer. The loans could be provided directly to householders through the home energy advice service, and/or provided to commercial lenders who use it to devise more innovative consumer offers.

Case Study

Green-Homes Finance: What Works and What Doesnt
02
Fixing Incentives

Energy bills pose the third financial barrier. Heat pumps should be cheaper to run than gas boilers. The reason they are not is a result of government policy. Using electricity is currently artificially more expensive than using gas due to the distribution of policy costs on bills: £33 per year on gas bills, £127 per year on electricity bills. The result is that consumers are being penalised for using the lower-carbon form of energy.

There are three options to fix this distortion: a) remove policy costs from bills and fund them through general taxation; b) spread policy costs equally across gas and electricity bills; or c) a combination of moving policy costs onto general taxation and paying for them through a fair and equal carbon tax on fuels (inclusion in the Emissions Trading Scheme could achieve the same results).

This is not an easy choice politically, but the status quo is unfair and unsustainable. Of £160 per year paid in policy costs on bills, only £3 is spent on existing green schemes. The rest is on social policy and legacy policies that have long since closed. It is neither efficient nor fair to internalise either into energy prices, and even less so to do it in a way that distorts relative prices and punishes low-carbon choices.

Figure 5

Figure 5 – How much do policy costs really cost households on their energy bills, and what do they pay for?

Source: Ofgem April Price Cap calculations

Finally, another important element in the economics of heat pumps (and storage and flexibility technologies) is access to real-time pricing through time of use tariffs (TOUs). TOUs allow the consumer to adjust the use of their electric assets (heat pumps, electric vehicles) to reflect the market price. The result is cheaper running costs for the consumer, a more active demand side (a crucial element of integrating high shares of intermittent renewables) and opportunities for suppliers to differentiate themselves from competitors (through home energy-optimisation service offerings).

But progress on TOUs requires structural market reform and to date has been low with only a handful of offerings on the market, often at the energy supplier’s own risk. Widespread adoption is dependent on several external factors, including Ofgem’s Settlement Reform project, which will place incentives on retailers to offer smart TOUs; the development of standards around smart-tariff offerings and comparison; and reform of energy markets to ensure that signals from the supply side (to either increase or decrease electricity use) are fed through to the demand side.

We recommend that the government takes swift action to a) address distortions in policy cost across energy bills and b) accelerate efforts to open access to TOUs. This should be done by:

  • Removing policy costs. All closed policy costs should be removed from bills and moved onto general taxation. Careful consideration should be given to ensuring social policy funding is maintained and raised fairly. Contracts for Difference (CfD) costs should remain on bills and be allowed to turn negative so that consumers can feel the financial benefit of renewables in those periods when they pay back to the consumer as part of the two-way CfD contract.

  • Pricing carbon. To pay for this, the government should signal the expansion of the UK Emissions Trading Scheme in a way that tapers in as energy prices fall. This transition may take time, but the government should be clear about its intention and publish details that can be used to inform consumers of the coming changes, enabling price signals to take effect before policy changes are implemented.

  • Introducing smarter signals. The government should work with Ofgem to accelerate the Settlement Reform project and development of TOU standards. The recently initiated Review of Electricity Market Arrangements should include a consideration of how market signals originating from the supply side (including scarcity and location) can be fed through to the demand side. This is crucial for incentivising flexible demand and will drive uptake of TOUs, which in turn will allow access to lower bills and higher shares of cheap renewable power. In 2021, we set out recommendations for steps government should take in addressing energy market reform.

Case Study

An Illustrative Costing of Grants and Loans
03

Step 4: Building Quality Supply Chains

Much of the focus of this paper has been on stimulating the demand side for home-decarbonisation measures. But readying the supply side to respond to this demand is also critical. A well-designed demand strategy will fall at the first hurdle if too few installers are on hand to deliver projects (as we saw with the Green Homes Grant). And it will also fail if consumer protections are not in place, allowing installers facing sky-high demand to cut corners and deliver poor quality installations.

The CITB estimates that an increase of around 350,000 FTE workers will be required over the next decade to deliver the volume of work required to reach net-zero buildings by 2050.[_] On energy efficiency, 12,000 workers a year would need to be trained over the first four years, rising to 30,000 between 2025 and 2030. On heat pumps, a peak of 60,000 new workers is required. And given the time required to develop and deliver high-quality training to these new workers, action must be taken immediately.

Three Key Objectives to Ensure Sustainable Supply

Naturally, the supply side will be predominantly demand-led but an acceleration in demand of the scale required for net zero will require further policy intervention to ensure smooth delivery. Any significant issues on both speed and quality of delivery will erode homeowner trust and damage uptake. It is therefore essential that the government works with industry to:

  1. Create clear signals around future pipelines of work.

  2. Ensure robust but simplified quality standards.

  3. Kick-start the training sector to deliver the right skills.

How can the government do this? Clear signals around future pipelines will mostly be delivered by stimulating long-term demand. A clear vision, which includes a regulatory backstop and interim targets, combined with a compelling consumer proposition through the combination of advice, grants and low-interest loans, will provide the supply side with confidence over a sizeable and sustained pipeline of work.

But confidence over future pipelines goes beyond demand stimulation. Industry must also have confidence in the regulatory framework surrounding supply, and the risk associated with anticipatory investment in skills and training must be addressed. In other words, objectives two and three reinforce objective one.

Quality standards are essential to ensure homeowners trust the whole home-decarbonisation plan. However, there are currently at least 12 different schemes covering the various home-decarbonisation measures that homeowners will require.[_] This creates confusion for people who are trying to determine which installers are of sufficiently high quality, as well as for installers looking for a trusted scheme. The establishment of a single accreditation and inspection system for home-decarbonisation installers would reduce confusion, increase consumer trust, and provide industry with confidence that the regulatory standards they and their competitors must meet are simple and robust. There are successful models for this in other sectors, such as the Financial Conduct Authority’s Financial Services Register.

With confidence on the future pipeline and clarity on quality standards, any supply side is well placed to react to demand. However, given the unprecedented demand trajectory required for a net-zero pathway, the government should also intervene to offer more direct support. The announcement of a £30 million Heat Pump Investment Accelerator Competition is welcome news, but unlikely to be enough. And similar interventions are needed to kick-start the training sector to ensure that the provision of skilled workers keeps pace with demand.

We have seen positive examples of such intervention in the offshore wind and battery sectors. The government’s Offshore Wind Manufacturing Investment Support Scheme provided £160 million in grant funding to support major investments in manufacturing capability by UK-registered businesses. So far, this has led to £1.6 billion of investment in major port and manufacturing infrastructure, creating and safeguarding up to 4,100 jobs by 2030, with an estimated total of 60,000 direct and indirect jobs supported by the offshore wind sector by 2030. On batteries, government went even further with the £1 billion Automotive Transformation Fund intended to establish a competitive and sustainable UK supply chain. This has only recently closed to applicants but will soon provide further evidence of its impact.

Furthermore, regulations which act as a floor to progress and transition (such as product standards or the government’s planned “market mechanism”) will be essential to ensure that competition acts to optimise rather than resist the transition. These policies should set out clear and simple targets which are outcome-focused and technology neutral where possible. Crucially, such policies will require clear and long-dated trajectories and credible enforcement procedures. Ensuring they are tradeable (where possible) will help.

We recommend that the government establishes a single accreditation and inspection system for home-decarbonisation installers, and a new fund to support industry investment in manufacturing and upskilling.

Provision of the accreditation and inspection system should be:

  • Clear and robust, with explicit standards that are monitored by a single body which has powers to audit installers and enforce standards.

  • Trusted, with a recognised Trustmark logo and which shows it is holding installers to account.

Provision of the fund should be:

  • Evidence-based, using existing examples across other sectors and industry engagement to define the appropriate level of funding to crowd-in the required industry investment. Scaling up the heat-pump installation workforce will cost in the region of £300 each for the first 5,000 installers, according to industry estimates.

  • Attractive. The market structure for home decarbonisation is different from that of offshore wind and batteries in that it is dominated by micro-businesses. The fund should therefore include tailored incentives for smaller businesses to take on trainees.

  • Competitive, to maximise the return on investment of public money.


Chapter 6

Conclusion

Decisive action to decarbonise Britain’s homes has never been so important. There is no other way to reliably and permanently bring down bills. There are no alternative routes to ending our reliance on volatile international markets. And we have no chance of meeting our climate targets without tackling emissions from our homes.

It is not an easy task. We are badly off track, with no plan for the majority of homes, nascent supply chains and limited public awareness. But for the first time the conditions for success are ripe. High gas prices, the falling cost of renewables and a cost-of-living crisis make going green the obvious choice.

It is time for a serious plan with clear vision, pace and direction. This plan meets households where they are now, not with distant promises but with good advice and a helping hand, and helps businesses innovate, re-skill and bring down costs.

Politicians and policymakers need not be afraid. It will take hard work, long-sighted decisions and adequate funding, but the prize is not just enormous; it is essential. A more secure, affordable and sustainable future is within reach.

Footnotes

  1. 1.

    https://green-alliance.org.uk/wp-content/uploads/2021/11/Balancing_the_energy_equation.pdf

  2. 2.

    https://www.theccc.org.uk/wp-content/uploads/2020/12/The-Sixth-Carbon-Budget-The-UKs-path-to-Net-Zero.pdf

  3. 3.

    https://www.gov.uk/government/statistics/provisional-uk-greenhouse-gas-emissions-national-statistics-2021

  4. 4.

    https://www.gov.uk/government/news/russia-ukraine-and-uk-energy-factsheet

  5. 5.

    https://www.bbc.co.uk/news/business-61562657

  6. 6.

    https://www.nea.org.uk/news/charities-warn-3000-energy-bill-could-leave-8-5-million-uk-households-in-fuel-poverty/

  7. 7.

    https://www.carbonbrief.org/analysis-cutting-the-green-crap-has-added-2-5bn-to-uk-energy-bills

  8. 8.

    https://www.sciencedirect.com/science/article/abs/pii/S030142151830421X

  9. 9.

    https://octopus.energy/blog/heat-pump-revolution/

  10. 10.

    https://www.gov.uk/government/consultations/market-based-mechanism-for-low-carbon-heat?utm_medium=email&utm_campaign=govuk-notifications-topic&utm_source=615a6762-b4b5-4b5f-9744-7ae3ba21ee9a&utm_content=immediately

  11. 11.

    https://www.homeenergyscotland.org/

  12. 12.

    https://www.greenfinanceinstitute.co.uk/wp-content/uploads/2021/03/GREEN-FINANCE-BUILDING-RENOVATION-final.pdf

  13. 13.

    https://www.kfw.de/About-KfW/Newsroom/Latest-News/Pressemitteilungen-Details_403200.html

  14. 14.

    https://www.homeenergyscotland.org/

  15. 15.

    https://www.citb.co.uk/media/vnfoegub/b06414_net_zero_report_v12.pdf

  16. 16.

    https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/OctFINAL%20The%20net%20zero%20protections%20puzzle_%20Helping%20people%20piece%20together%20home%20energy%20improvements.pdf

Article Tags


Newsletter

Practical Solutions
Radical Ideas
Practical Solutions
Radical Ideas
Practical Solutions
Radical Ideas
Practical Solutions
Radical Ideas
Radical Ideas
Practical Solutions
Radical Ideas
Practical Solutions
Radical Ideas
Practical Solutions
Radical Ideas
Practical Solutions