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Decarbonisation of Heat paper analysis: Market stimuli and pathways

Editor’s Pick | Regen assesses decarbonised heat market stimuli and pathways

Regen, in association with Wales and West Utilities, has published a research paper exploring the challenge of decarbonising heat in the UK. The Decarbonisation of Heat paper was published on 9 March.

Problem

In comparison to other European markets, the UK is still highly dependent on natural gas to provide heat in residential spaces (see Figure 1). In addition, the share of renewable heating and cooling remains low at 8%. The UK significantly trails the progress of nations such as Sweden, where the share of renewable heating and cooling is in excess of 60%.

Decarbonisation of heat paper by Regen

Regen explains that current heat decarbonisation policies are not working, saying that the Renewable Heat Incentive (RHI) has failed to deliver. Incentive mechanisms like the RHI or the Energy Company Obligation must be made easy for consumers to adopt and must be supported by a wider market stimulus.

Carbon levy

The absence of a real and effective carbon price is described by Regen as a “critical misalignment” in the market and is “most obvious” in the market for domestic heat. A carbon price levy will not in itself achieve the level of decarbonisation needed to become net zero by 2050, but it could be one of the crucial “making a difference” policies.

Regen’s analysis suggests that redistributing £3.8bn of the existing annual environmental levies would result in a domestic carbon levy equal to £36 per tonne of CO2. This could have an immediate impact on the domestic market. Regen predicts the introduction of this levy would reduce electricity bills by approximately 14% per kWh and increasing gas bills by 16% per kWh (see Figure 2).

A new carbon levy would help give a much stronger positive price signal to new technologies, although it will not be sufficient to overcome all cost barriers associated with them. The levy would be technology neutral and support efficiency measures alongside low carbon heat technologies. It would therefore increase the attractiveness of green gases such as biomethane and in the future potentially hydrogen.

A new levy would have several distributional impacts and would inadvertently impact low income households. In order to mitigate consumer impacts, the carbon levy could be banded or weighted. Applying zero VAT on low carbon heating and energy efficiency measures would be another option.

Building standards

Regen outlines other market-based approaches that could complement a carbon levy. These include:

  • Regulations to require minimum standards of energy efficiency and carbon emissions of rental properties.
  • Changes to rental bands and price controls that incentivise property owners to improve building material efficiencies.
  • Stamp duty or capital gains tax allowances to reward more energy efficient buildings.
  • VAT relief for all energy efficiency and low carbon technologies.
  • More favourable mortgage terms to householders or businesses greater energy efficiency.
Decarbonisation of heat paper by Regen

New business models will be required in order to deliver a more joined-up and performance-led approach to the improvement of the UK’s building stock. Regen singles out the Green Deal programme, explaining that it failed due to a lack of joined-up policies and a failure to overcome a lack of consumer trust and engagement. Public/private partnerships and performance-driven business models are now beginning to emerge to address these issues. These include the Netherlands’ Energiesprong programme and the heat as a service business model.

Electrification

The electrification of heat faces three main challenges:

  • Readying network and storage infrastructure to meet peak electricity demands.
  • Reducing the relative cost of electrical heating compared to gas and retail price distortions.
  • Convincing consumers of the need for new heating technology in the face of potential disruption to householders and businesses.

Heat pumps offer an efficient heating solution, but their performance efficiency varies. The development of shared heat source solutions, including use of waste heat and shared loop systems, should be encouraged.

Decarbonisation of heat paper by Regen

Regen believes the network impacts of heat pumps can be mitigated through “greater energy efficiency, diversity and flexibility”. More understanding is needed on how the widespread deployment of heat pumps will impact the network and how peak loads can be mitigated. BEIS is now seeking to address this question through the Electrification of Heat Demonstration Project.

Regen also explains that electricity distribution network investment is currently running significantly below its planned budget allowance in the current RIIO price control period (see Figure 3). There is therefore a strong argument that networks should be incentivised to use the current underspend to build in future proof resilience.

Alternative fuels

Regen believes that hydrogen and biomethane will have a role in future UK heating, but will be dependent on local and regional factors.

Hydrogen could be produced by electrolysis using cheaper summertime electricity, and could be purposed for inter-seasonal balancing, industrial clusters, hybrid systems and urban hydrogen networks. It remains uncertain if hydrogen’s key role will in transport and industrial processes, or if it will become a low-cost fuel with widespread use in domestic and commercial heating. If the latter transpires, then hydrogen could become “an alternative, or at least a complementary, pathway for heat decarbonisation to electrification”. However, both blue and green hydrogen face a significant cost challenge compared to the current cost of natural gas.

Biomethane is already helping to decarbonise the UK energy supply. In the short term, low level blending into the mains network is a way to encourage the development of the feedstock supply chain. In the longer term, its importance will only be enhanced if its use is incorporated into strategic planning. It could have role locally for “hard-to-treat” rural properties, rural industries and in areas of high biomethane production.

Regen presents a clear set of options for this emerging and vital sector. The 11 March Budget announcement was encouraging in this respect, with the government to consult on introducing a new grant scheme from April 2022 to help households and small businesses invest in heat pumps. The report is right to emphasise that transformation at the scale required must be accompanied by measures to protect vulnerable consumers.

Energy: Net zero

If you have enjoyed reading about the Decarbonisation of Heat paper and want to read about the latest developments in energy markets around the world, please contact the Editor, Neil Mearns, for a free month’s trial on 01603 60400 0r n.mearns@cornwall-insight.com

Energy: Net Zero (formerly Energy:2030) is a monthly publication covering relevant and interesting developments including:

  • market mechanisms and regulatory incentives
  • technological developments and their anticipated impact
  • changing policy as it evolves both in the UK and worldwide

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