Clean Heat Market Mechanism Regulations 2024

Considered in Grand Committee

16:09:00

Moved by

That the Grand Committee do consider the Clean Heat Market Mechanism Regulations 2024. Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee

My Lords, I beg to move that these regulations, which were laid before the House on 21 November 2024, be approved. The instrument forms an important part of the Government’s commitment to make the UK a clean energy superpower and deliver warmer homes. It is the Government’s mission to make energy affordable and to strengthen the UK’s energy security. By supporting heat pump manufacturing and encouraging innovation, we are giving more consumers the choice to make the transition to low-carbon, high-efficiency heating. With over 80% of homes using fossil fuel gas for heating, there is a huge opportunity to deliver affordable and efficient heating and protect consumers from the costly vagaries of international gas markets while reducing a major source of greenhouse gas emissions. Heat pumps, which are on average three times more efficient than a gas boiler, are suitable for the overwhelming majority of UK homes, and they have a role of paramount importance role to play in delivering this ambition. That is why in November last year the Government announced a range of first policy steps under our warm homes plan, alongside investment in training and British manufacturing capability, to make it easier and more affordable for consumers to make the switch to a heat pump. The clean heat market mechanism will provide industry with the stability and confidence to scale up and invest in the heat pump supply chain. It will also ensure that British businesses can benefit from the transition to low-carbon heating as they create future-proofed skilled jobs. Importantly, the scheme protects consumer choice in when and how to upgrade to clean and efficient heating, while providing industry with the encouragement to develop a wider range of products and services for consumers to choose from as the transition gathers pace. Neither this scheme nor any other requires home owners to remove or replace their boiler against their will. For their part, we know that businesses are ready to drive innovation, build relationships with installers across the country and continue to make heat pumps more affordable and more accessible to home owners. Today’s statutory instrument establishes the scheme from 1 April this year, setting its rules, parameters and timelines under enabling powers established in the Energy Act 2023. The scheme is designed to accelerate deployment of heat pumps, thereby driving down energy demand and greenhouse gas emissions from buildings. It complements, and is complemented by, a range of other policies, such as grant funding for heat pump installations through the boiler upgrade scheme and other schemes; investment in British manufacturing through the heat pump investment accelerator competition; and support for installer training through the heat training grant, to provide wraparound support for a transformation of the low-carbon heating market over time. The scheme sets a requirement for heating appliance manufacturers to achieve the sale and installation of a proportion of heat pumps relative to their gas and oil boiler sales or to acquire equivalent credits from other heat pump manufacturers. For the first year of the scheme, starting this April, this is set at 6% of relevant boiler sales. The record number of heat pumps installed last year, a full 43% growth in certified installations in 2024 versus the previous year, would suggest that it is right to support the development of a thriving UK heat pump market and that the target of 6% is entirely achievable—and there is no reason to believe that there will be any undue costs faced by manufacturers. The proposals for the scheme were subject to three rounds of public consultation—two under the last Government, in late 2021 and mid-2023, then a third in mid-2024. These consultations sought views on, among other things, scheme targets, technologies in scope, credit trading and scheme administration. A wide range of organisations, representative and trade bodies and industry professionals, as well as individual members of the public, responded on each occasion. The Government are committed to working in partnership with industry on delivering the warm homes plan, and since coming into office have been engaging with market actors from across the supply chain to consider views on the right mix of policies and other enabling actions needed to support the expansion of the UK heat pump market that is needed. The Government have also taken steps to provide appliance manufacturers with more time and space to adapt to the introduction of this mechanism, scale up supply chains and expand heat pump operations. This includes a decision to reduce the payment in lieu for any missing heat pump credits to £500 for the first year, which is a change from the £3,000 previously proposed. We will continue to engage closely with industry both on considerations related to the future evolution of the clean heat market mechanism and, more broadly, on the development and delivery of the warm homes plan so that we can put the UK’s world-leading businesses at the heart of leading the transformation of the heating market. The clean heat market mechanism is an important part of the framework that the Government are putting in place to support a much-needed acceleration in our transition to low-carbon heating, strengthening our energy independence and delivering warmer homes for all. I beg to move.

16:15:00

My Lords, here we have it: 32 pages of regulation to introduce something that some would consider a mere mouse in terms of its impact on this market. After all, it introduces a £500 fine for selling each excess gas boiler, relative to the proportion that is prescribed in the regulation. That £500 is actually quite big relative to the cost of a gas boiler, which is typically around a couple of thousand pounds, even though it is relatively small relative to the cost of a heat pump. None the less, I ask the Minister this: will that £500 fine, which then becomes a marketable instrument, be available to importers? If I have correctly understood how the system will work, someone who exports to this country heat pumps from abroad could sell the certificate that this measure will give them to a domestic producer who has not sold enough electric heat pumps for up to £500—that is a jolly nice subsidy for importers of heat pumps into this country, even if it is not massive. It is expected that this measure will raise the number of heat pumps sold from roughly 40,500 last year, nearly 3% of the boiler market, to 77,000 pumps—6% of the expected market this year. That is not a huge increase. The Minister said that last year, without the benefit of this measure, the number of heat pumps sold increased substantially. So it will not be a huge increase in the coming year. Why do we think this measure is necessary if these things are proving so attractive and the market is growing anyway? Can the Minister confirm that the 6% target is what is introduced, and that it will continue and persist unless and until he introduces, via further legislation—I also ask him to confirm that this will require further legislation—a higher target? Failing the introduction of a higher target, any future growth in the market will depend on hopes on the cost of heat pumps coming down as manufacturers find more efficient ways of making them. When I was still in the House of Commons I had a meeting with Octopus Energy, which reckoned that the materials involved in making a heat pump cost about £2,000. Obviously, a huge amount of processing goes into making a heat pump, but it suggested that the potential for bringing down the cost over time was significant. One hopes that will happen. Failing that, the only other thing—we are stuck with the 6% target and this £500 fine—will be the lure of subsidies for consumers to buy heat pumps instead of fossil fuel boilers. The costs and benefits of the whole procedure are spelled out in the impact assessment. It says the net present value of the costs involved is £195 million. The benefits were put at £220 million, of which those that result from the main purpose of the operation, to reduce carbon, were less than the costs. The total benefit is above the costs only if you allow for the impact it will have on cleaner air. As well as reducing the amount of CO₂, which is a very clean thing that we breathe all the time, the reduction in the other impurities put in the air by fossil fuels just about brings it to a net benefit. We are talking about the costs and benefits being roughly the same order of magnitude. Once again, an almost religious fanaticism, which does not take the costs and benefits into account, is driving this policy. I will make a few observations about the situation in France, because I have a house in France and I observe what is happening there. Two of my French neighbours have installed heat pumps. One in a comparatively small cottage cost over €20,000—not for the pump but for the insulation—all paid by the French taxpayer. Bully for him. Another friend has a rather more substantial old house. It cost the French taxpayer €100,000 to install the heat pump and the necessary insulation. In his case, it would not work for a year because the installers were so busy—because it is free to users—that they would not come back and tell him how to make it work. It took him a long time to find anyone who would. I noticed, when I went round to enjoy his hospitality over the new year, that he had wood fires burning as well. I sincerely hope that we do not go down the path of subsidising something at the huge costs that the French taxpayer is having to absorb, when the costs and benefits of the whole process, even without subsidies, are so marginal. We do not want to put ourselves as near bankruptcy as the French state is.

I am grateful to the Minister for setting out the contents of the regulations before us. I am afraid that I share some of the scepticism of my noble friend Lord Lilley. I am grateful to the noble Lord, Lord Hunt, for referring to the warm homes scheme. He is aware of my disappointment that the discount is not going to be revisited, and I say that as honorary president of National Energy Action. My understanding is that the heat pumps that are the subject of this measure simply are not as efficient as oil-fired central heating. I say that as where I live in the north of England, it is all oil-fired central heating; we are off grid and we cannot use gas. I walked past a surgery in the north of England that did not have just one heat pump; it had fitted three heat pumps, which probably means that one heat pump was not sufficient to generate the heat required. My understanding—and I would be grateful if the noble Lord, Lord Hunt, could confirm this—is that, without log fires or some other secondary heating, heat pumps heat only to a top temperature of about 16 degrees. If you are retrofitting an existing building, as many of the windows may not be able to accommodate the size of the heat pump or the radiators that connect to it, substantial renovation may be required. Furthermore, I am grateful to the Secondary Legislation Scrutiny Committee, which highlighted that the starting point referred to by the noble Lord, Lord Hunt, of around 40,500 installations per year is—in its word, at paragraph 56 of its 10th report—“ambitious”. The department expects the scheme to help ensure the installation of at least 77,000 heat pumps a year in existing homes between 2024-25 and 2028-29. I ask the Minister a simple question: is that feasible and realistic? My noble friend Lord Lilley quoted £2,000 as the cost of an ordinary boiler. I recently got two quotes for a boiler. The boiler itself was not the issue. For the fitting, even that of an oil-fired boiler, you are looking at something in the region of £8,000 to £10,000. I repeat: if you live off-grid in a very rural area, it would be nice to think that heat pumps were an alternative, but, given the state of the current market, I just do not see them as feasible if they heat up to only 16 degrees when, in just the past two weeks, we have regularly had temperatures of freezing or down to minus 10. With those few remarks, I press the Minister to comment on these queries.

My Lords, we are supportive of these regulations and the other actions that this Government have already taken—particularly in removing the outdated 1-metre rule on the requirement for planning permission—since coming into office. We are hopeful that, taken together with the other measures that the Government talk about, these measures will help us begin to make progress towards the target of 600,000 heat pumps by 2028 and help us to fulfil the need to meet these same figures every year going forward. There are both supply-side actions and demand-side actions in this SI. We feel that the combination makes some valuable reforms. Most of all we welcome the work that has been done with industry after listening to concerns, making some much-needed reforms and finding ways forward on these issues. Our worry, though, is that, as welcome as these changes in the regulations are, they may not be sufficient in and of themselves to deal with the scale of the problem. In making this point, I quote the conclusion of the House of Lords Secondary Legislation Scrutiny Committee, which has already been mentioned: “The DESNZ expects the scheme to help ensure the installation of at least 77,000 heat pumps a year in existing homes between 2024/25 and 2028/29. We consider this, from a starting point of around 40,500 installations per year, to be ambitious”. Before I turn to the SI, judging by the debate on this measure in the other House, a little background information would be useful. These regulations amend and reform a system that the Conservative Government brought in but mainly failed to make work in practice. The last Government compounded these problems by failing to work alongside and with industry and others in order to find amendments to the proposals, such that industry itself was prepared fully to support them and get behind them. These problems then led to further internal discussions about the policy itself, which further derailed progress. This problem meant that the implementation never really got resolved and, as a result, we are a long way behind on these targets. In short, the Conservatives had clear targets for the installation of heat pumps but failed to deliver them. I give this background only because the Conservative Opposition spokesperson appeared to disown or not acknowledge that this is a reform of their policy. It may be that the Conservative policy has changed. If that is the case, I hope that the Conservative spokesman can make that clear.

16:30:00

The scale of the problem that we face is immense, as we have some of the worst-insulated homes in Europe and some of the highest energy bills. Some 6 million households are in fuel poverty in the UK and are having to choose between heating and eating. As stated during the debate on the SI in the other place, our reliance on foreign gas and huge fluctuations beyond our control in the international markets

“cannot be overstated: nearly half of the UK’s total natural gas consumption every year is currently used for heating buildings, producing roughly a quarter of total greenhouse gas emissions”.—[Official Report, Commons, Second Delegated Legislation Committee, 13/1/25; col. 4.]

Heat pumps will lower consumer bills, increase our energy security and reduce our carbon emissions. I put this to the noble Lord, Lord Lilley, as these are important points: heat pumps are on average three times more efficient. They will save consumers on their energy bills going forward.

They are of course three times more efficient on average—though not necessarily in cold weather. But electricity is four times as expensive as gas per therm.

I welcome the intervention and will come back to the noble Lord on his point. During this transition, it will take a huge effort across government and beyond—and beyond the scope of this instrument—to meet the scale of these changes. The regulations establish the new UK-wide heat market mechanism to promote the development of the market for retrofit installations of heat pumps in existing buildings. The CHMM is to launch on 1 April 2025 and run for an initial period of four years. In the interests of time, I will not go on too much, but there are two big changes from previous proposals. First, they propose to reduce the payment in lieu of any missing heat pump credits to £500 from the first year from the £3,000 proposed by the previous Government. Secondly, the period over which boiler sales are counted has been delayed to give the obligated parties more time to prepare. The Government have said: “As set out in the consultation response published in November … We have also aligned the periods over which boiler sales and heat pump installations will generate obligations and credits, respectively, providing manufacturers with more time to prepare”.—[Official Report, Commons, Second Delegated Legislation Committee, 13/1/25; col. 4.] The big change is that the new Minister has engaged and listened to industry and has managed to make some of the adjustments required by working in partnership. This approach has been welcomed by industry. Removing penalties and allowing more time is pivotal to finding common solutions. The approach of giving manufacturers more time to scale up the supply chain and expand sales without penalising customers is good and needs to continue while hitting some very ambitious and fast-approaching targets. The ongoing relations with manufacturers and industry are clearly key to delivering this policy. How do the Government intend to continue these better relations while making sure that targets are met and that unnecessary costs are not passed on to consumers? I want to make it clear that this is not a boiler tax. The Conservatives, when this was their policy, were very keen that those words were not used to describe it. Review mechanisms and relations with industry are crucial to delivering this policy. I note that any adjustments would require further legislation and that would change the whole impact assessment. Any increases in the target in future schemes would require further secondary legislation. I note that the Government have said that they will not force consumers and that this is about working in partnership. My worry is about the confidence that the Government have in the ability to deliver the volume of heat pumps required in the time available. I would like briefly to ask the Minister about some wider points. The cost of getting a heat pump is still a barrier to entry. I welcome the fact that the Government have continued the £7,500 grant, which, to their credit, the Conservatives not only introduced but increased. Since that increase, we have had a remarkable uptake in the number of heat pumps. But, as we have heard, installing a heat pump is about a system-wide change. It is more than just installing a heat pump; often it involves under-floor heating and changing radiators. On average, this seems to be costing consumers at least an additional £5,000. We have had some conversations as part of the GB Energy Bill about green mortgages. Are the Government considering finding ways that the additional costs, not just of heat pumps but other renewable energy technology, can be added to mortgages? Quality and innovation are clearly important as well, as is making sure that these are good-quality products. The noble Lord, Lord Lilley, intervened on electricity market reform, and to some extent I agree with him. Our electricity is still very expensive—some of the most expensive in Europe. The Government’s policy is to get people away from gas and on to electricity. What plans do they have to make sure that electricity is affordable and to introduce social tariffs for those struggling to pay their bills? On disinformation, misinformation and ignorance, according to the Government’s own policy document, only 51% of people in the UK know about heat pumps. There is disinformation and misinformation in this space—for example, that heat pumps do not warm our homes enough—so it is important that the Government have a strong public information campaign for the take-up of heat pumps, about what they are, how they work and what they do. Finally, heat pumps can save the average household £300 a year, so they would go a long way towards Labour meeting its manifesto pledge. I wish the Government well, but these things are complicated.

My Lords, the clean heat market mechanism represents a clumsy attempt by the Government to impose unrealistic and burdensome targets on the heating industry. While the overarching goal of reducing carbon emissions and decarbonising heating in the UK is commendable, the regulatory approach taken here is flawed. The mechanism requires that major boiler manufacturers—those selling more than 20,000 gas boilers or 1,000 oil boilers annually—must ensure that at least 6% of their sales consist of heat pumps by 2025-26. Although heat pumps, which run on electricity rather than gas, are often hailed as a cleaner alternative, these regulations fail to consider the practical challenges faced by both manufacturers and consumers. This mechanism promises market certainty, investment in low-carbon technologies and a reduction in heat pump costs through increased competition. However, these lofty claims are undermined by overly ambitious targets, coupled with the Government’s failure to address the considerable barriers faced by consumers. Far from facilitating a smooth transition, these regulations risk causing significant disruption to the industry. Set to run from April 2025 to March 2029, the scheme faces growing doubts about its ability to meet its long-term target of 600,000 heat pumps sold annually by 2028. This concern is further exacerbated by the fact that heat pump sales remain alarmingly low, with both the National Audit Office and the House of Lords Environment and Climate Change Committee warning that current sales levels are far too low to meet the proposed targets. Returning to the effects of this SI, this initiative imposes stringent sales targets on large boiler manufacturers, forcing them to meet heat pump quotas. If these quotas are not met, manufacturers will face damaging fines, in some cases of £3,000 for every heat pump missed. Although manufacturers can carry forward up to 35% of their annual target to the following year, this strain on the industry cannot be overstated. When the original plans for the CHMM were first announced in 2024, some manufacturers pre-emptively raised their prices to account for the anticipated fines, only to lower them after the previous Conservative Government pragmatically delayed the scheme in March to allow the industry more time to prepare. Will this Government consider doing the same? Furthermore, it is not only the industry that will face a financial burden from these regulations; the most pressing concern is the significant impact on consumers. Although environmentally beneficial, heat pumps remain expensive for many households, with installation costs ranging from £6,500 to £11,500. This is not just a challenge; it is a significant obstacle. Many families are already struggling with the cost of living, and these regulations threaten to impose yet another financial burden. The Government cannot continue to ignore the stark reality that these high costs will place heat pumps well beyond the reach of many ordinary households unless substantial and sustained financial support is provided. The burden of financing such an expensive transition should not fall squarely and only on consumers. Despite the grants available through the energy company obligation and the boiler upgrade scheme, which offer up to £7,500 in England and Wales, the high upfront cost of heat pumps remains a significant barrier. This policy risks making a greener future inaccessible to those who need it the most. Moreover, it is essential to question whether the Government have adequately considered the industry’s capacity to meet these targets. The regulation requires major manufacturers to ensure that a specific proportion of their boiler sales, 6%, consist of heat pumps. However, given that the heat pump market is still in its early stages, with many manufacturers struggling to scale up production, where is the recognition of this challenge? Lastly, the proposed scheme risks undermining the very people it aims to help. The Government’s approach, imposing fines on manufacturers that fail to meet the sales targets, could lead to price hikes for consumers. There is already evidence that some manufacturers have raised prices, as has been said before, and if that trend continues it will not be the manufacturers that bear the cost; it will simply be passed on to the consumer. In conclusion, although the Government may be well meaning, the clean heat market mechanism, as it stands, is flawed and could have serious unintended consequences for consumers, manufacturers and the wider heating industry. It is vital that the Government reconsider this approach, provide proper financial support for consumers and work with the industry to ensure that the transition to low-carbon heating is both achievable and affordable.

My Lords, I am most grateful to all noble Lords who have taken part in this interesting debate. The noble Lord, Lord Offord, says that although he understands the intent behind the regulations, we are clumsy and have overambitious targets. He asks us to repeat his Government’s actions in delaying or not going ahead with implementation. We are not going to do that. We are confident that we have a scheme that is practical. As a new Government, we have engaged in extensive discussions with industry. The noble Earl, Lord Russell, was critical of us for reducing the level of the fine. The fact that we have done so shows that we are concerned about ensuring that we introduce this in an evolutionary way, which is why we have started with the fines at the level we have set. We are confident that industry can rise to the challenge. The noble Lord, Lord Offord, said that sales of heat pumps were disappointing. I thought he might have said that in the last year, 2024, sales had an encouraging increase. We want to build on that with the incentivisation for householders plus the introduction of potential fines for manufacturers, although overall we think that manufacturers will be able to rise to that challenge. On the issue of cost, which a number of noble Lords raised, of course heat pumps cost more money than gas boilers, but as when one introduces most new technologies, or extends them, the price will come down. We think it will fall significantly, making pumps a more attractive and affordable options for UK households. As noble Lords have referred to, at the moment we are funding installations to kick-start the market, for example through schemes such as the boiler upgrade scheme and the warm homes local grant. The noble Lord, Lord Lilley, asked whether non-UK manufacturers of heat pumps could earn and sell credits under the scheme. The intention here is that any manufacturer of heat pumps sold on the UK market acquires credits and can make them available to other parties in the scheme. Of course, there is no obligation on manufacturers to acquire those credits; this is one of the various options available to them. In parallel, the Government are supporting the expansion of UK heat pump manufacturing through the heat pump investment accelerator competition. The noble Lord is absolutely right that further legislation would be required to revise targets for future years of the scheme. The instrument today sets a target for the first year. This would roll over to year 2 if there were no amendment by further legislation. Here, the Government have committed to consult further this year, before setting targets for future years, and then returning to the House if we wanted to change the target. I hope this reassures noble Lords that we are fully engaged with industry. We will obviously discuss the implications carefully before we come back with any further proposals.

16:45:00

I say to the noble Baroness, Lady McIntosh, that my understanding is that heat pumps can and do achieve temperatures well above 16 degrees and can provide the same level of comfort as boilers and other heating appliances. The noble Earl, Lord Russell, referred to what I might describe as urban myths, or maybe rural myths, around the effectiveness of heat pumps. I recognise that those are out in the ether, but the figures that I have show that there is high public confidence in heat pumps when they have been installed. I would be happy to write to the noble Baroness with more detail on the specific issue that she raised about oil boilers. I recognise that she speaks from a great deal of experience in relation to it.

I obviously welcome the support of the noble Earl, Lord Russell. I have said that we are going to engage in constructive relationships and, as I said to the noble Lord, Lord Lilley, we clearly want to see the costs come down in the future. I recognise that this is a bit of a chicken-and-egg position. We start with an increase in sales; we build on that through the introduction of this mechanism. We would then expect the costs to come down and to create the momentum required to see a big expansion in heat pumps in the future, because we have to decarbonise our housing stock.

This really is the way we have to go forward, so overall this is—how I shall put it?—an incremental process. It is being introduced in a way we think the industry will be able to respond to. We will keep it under constant review. We expect to see the cost of heat pumps come down and, of course, we will look to raise the targets in the future.

I am grateful to the Minister for letting me intervene and for answering a number of my questions. On his point about costs coming down, is he suggesting that they will come down in Britain because they are artificially high to start with, or because we will discover technological ways of producing it that have not been found in continental countries, where they already have large-volume manufacturing? That is one thing. Could the Minister also respond to another point I made, admittedly in rather garbled form, so I can excuse him for not replying? The correct figures in his document are that the costs of this process are £195 million, while the benefits from reduced carbon emissions are £187 million—less than the costs—but, fortunately, that is supplemented by £34 million of benefits from cleaner air. The whole thing is pretty marginal. Could he comment on the marginality of the cost benefits of this extraordinary regulation?

My Lords, surely the point is this: we have to decarbonise our home stock. At the moment, 80% of homes use gas for heating so, as part of our plans towards decarbonisation and moving on to net zero, this is an essential mechanism that we need to take forward. As for the cost-benefit analysis, I do expect the cost of the heat pumps to come down in relative terms, in future. I am not prepared to engage with the noble Lord on the exact whys and wherefores of how that might happen. I just look in history—

So leave it to miracles.

No. The noble Lord referred earlier to mystical or quasi-religious belief. I regard myself as a high church Anglican atheist, and I do not bring a fervour to this from belief; I think that the rational response to what we are doing, and to the risk of climate change, is so huge that we have to use these kinds of mechanisms and do something about housing and the current use of gas. This is the way that we think we need to go forward, but we will keep it under review and look closely at costs, manufacturing capacity in this country and the public’s ability to ensure that they have good installations. Overall, I commend these regulations to the Committee.

Motion agreed.