Heat Pump Or Hydrogen? A decision at last….

The good news is that the government has finally published its 'Heat and Buildings Strategy' and answered the big question about whether we will use heat pumps or hydrogen. The bad news is that it will cost us all a lot of money (but we always knew that it would)  

What Was The Question?

 

 Most houses in the UK have gas boilers for water and heating and together, they account for around 21% of the countries green house gas emissions (some measures put it as high as 28%). So, if we are to get to net zero carbon, something had to change.

The UK gas industry is a £28Bn/year grouping which has been arguing strongly that if we switch from natural gas to hydrogen, nothing needs to change other than minor components in the countries gas boilers, hobs, fires, etc in the same way as they were updated in the 60's when we changed from coal gas to natural gas.

Obviously, this is a 'no brainer' for them – switch to hydrogen and they retain £28Bn / year income PLUS they get the additional income from all the conversion costs, whereas switching to heat pumps means £28Bn / year drops very quickly to zero and everyone needing to find new jobs.So, the industry lobby position has been clear.

The other side of the coin is less clear.A typical house 'leaks' energy and needs a large boiler and very hot radiators to keep it warm and comfortable in winter. Replacing the gas boiler with a heat pump has the benefit that each house is not adding to the greenhouse gases in the atmosphere and if the electricity used comes from renewable sources as the government says it will by 2035, then no greenhouse gases are added to the total in the atmosphere. However, as the typical house 'leaks' energy, a 7kW heat pump as a replacement for a 24kW gas boiler will not leave the home warm and cosy – so much more work is required.

The Governments Conundrum

 

Choosing hydrogen would have been easy. The gas industry would have loved it and homeowners across the land would have continued as today, yet greenhouse emissions from home heating would have been fixed.

However, you either get hydrogen from water (known as 'green hydrogen') which uses quite a bit of electricity making it quite expensive to produce and is only 'green' if the energy comes from renewable sources or you get it from natural gas, which has a by-product of carbon dioxide which needs to be captured in some way, which also makes it expensive.(This is known as 'blue hydrogen').

Even ignoring the expense of producing hydrogen, from an energy efficiency perspective it is just daft. A hydrogen gas boiler will cost 4 to 6 times more to run than a heat pump (due to the cost of production, the cost of distribution and the efficiency of the boiler).

However, if the government were not to choose hydrogen and instead, were to mandate heat pumps, every household would be faced with the costs of bringing the property up to a standard of insulation that made a heat pump feasible and also, the high outlay of buying and installing the heat pump and the necessary changes to the fabric of the house.

What Did The Government Decide?

 

Building and converting to a hydrogen based solution could only be achieved with a massive investment from government. Choosing heat pumps gave the government the option of moving all of the costs to the homeowner whilst also taking the high ground of choosing the technically better solution.

This does not mean there will be no hydrogen heated homes – but the vast majority of us face having our gas supply removed by 2050.

Published following delays spanning the best part of a year, the Heat and Buildings Strategy outlines the Government's approach, in terms of timings and technologies, for decarbonising two hard-to-abate sectors that account for a significant proportion of the nation's carbon footprint. The Strategy features headline commitments to bring the upfront and operational cost of heat pumps for homes to price parity with gas boilers by 2030. This will lay the foundations for all new domestic home heating systems installed from 2035 to be fossil-fuel-free.

Energy efficiency, electric heat pumps and energy storage are all named in the Strategy as key focus areas for decarbonising domestic and commercial buildings alike in the short-term, as technologies that may play a larger role in the long-term, such as green hydrogen and carbon capture technologies, scale-up. It is worth noting that the strategy only applies, in its entirety, to England.

Overall, the Strategy details £3.9bn of funding, with the Department for Business, Energy and Industrial Strategy (BEIS) stating that the entirety of this amount is new. The Department is also touting up to £6bn in GVA for the UK economy and the creation of 175,000 skilled jobs by 2030 – we would question whether this is new value add or balances the impact on the gas industry, but to be honest, it does not matter to us as landlords.

Included in the Strategy is a £450m boiler upgrade scheme, through which homeowners will be able to claim grants of £5,000 to assist with the upfront purchase of a new heat pump if they are choosing to replace their gas boiler. The scheme will run for three years and is targeting 90,000 homes. Many green groups had hoped for a longer-running scheme, given that there are 29 million domestic properties in the UK.

A further criticism of the boiler upgrade scheme is that there is no requirement for applicants to improve the energy efficiency of their homes before installing a heat pump.

To help deliver the heat pumps and installers needed, BEIS has stated that it will work closely with the industry. The Department is hoping that, by scaling up production and making technologies more efficient, the costs of a domestic heat pump will be 25-50% lower in 2025 than today, and that they will be comparable with gas boilers by 2030. Operating costs will also be lowered by changes to the Climate Change Levy, to be phased in over a decade. Gas levies will rise as electricity levies fall, thus making electrification cheaper.

There are also updated commitments to work with local authorities to help encourage individuals to choose a heat pump when next replacing their boilers. Councils are encouraged, through the strategy, to retrofit their own buildings and lead by example, while also providing communications and tailored practical support to residents.

Additionally, local authorities are urged to identify appropriate locations for low-carbon district heating networks. This is not yet a legal requirement. BEIS has stated that it is working with Ofgem to "develop a better understanding of the opportunities and challenges presented by local area energy mapping and planning and is considering the most appropriate policy options to take forwards". For context, there are currently some 14,000 heat networks in the UK, collectively serving some 480,000 customers.

Improving Energy Efficiency

 

As mentioned above, energy efficiency has been something of an elephant in the room in buildings policies developed by the current government. The Conservative Party pledged in its 2019 General Election manifesto to spend £9bn in this field this Government, and progress has not been swift – especially due to the failure of the Green Homes Grant.

The Strategy provides some clarity, though many had been hoping for more information and a replacement for the Green Homes Grant of the same scale, if not larger – especially given that the UK's track record on home energy efficiency has been poor for far longer.

"We recommend that consumers prioritise the most cost-effective energy efficiency measures, in particular those measures that pay back within 20 years," the Strategy states. "However, we appreciate that many households and businesses will be interested in going further, for example for increased comfort or to coordinate with other planned building improvements. "

To that end, a £950m Home Upgrade Grant scheme is detailed in the Strategy. This is less than half of the funding originally promised through the Green Homes Grant. The Social Housing Decarbonisation Fund, originally launched as a £60m one-year initiative in 2020, has been extended through to 2025, with the Government pledging to invest £800m by this time.

The Strategy states that the policies it details could bring up to 70% of England's homes to Energy Productivity Certificate (EPC) band C or above by 2035, from approximately 40% at present. It adds that BEIS will explore whether minimum energy performance standards should be set for the 2030s and 2040s, but no plans for anything similar in the shorter term are outlined

In Summary, What Should A Landlord Do?

 

If you need to replace a gas boiler today, you should probably do so. For most, switching to a heat pump will incur a large capital outlay which will not be recovered in savings. However, expect this situation to reverse by 2030 – if purchase costs do drop to the same level as gas boilers and gas prices continue to rise compared to electric, by then you will be mad not to switch.

Therefore, if you plan to keep your properties for another decade or so, you need to plan to make the changes which will make heat pumps usable. First step is insulation – getting an average British property up to the standard required for a heat pump to be viable has been estimated at £26,000 by some sources and it is clear the government don't want to use your taxes to pay for that at the moment, so you will need to do so yourself.

Some of this expense may be forced upon you sooner, if EPC rating C becomes the minimum acceptable standard to let a property in 2025 as proposed – it is a shame this particular proposal appears to exclude social housing which has far bigger issues in this area.

The £26,000 estimate may also be low for many. A Canadian tenement block was recently upgraded to Passivhaus standards (this is the gold standard for insulation, with airtight dwellings and is beyond what most of us could achieve) but that cost over £100,000 per apartment even though it had economies of scale.(More here)  Plus with rules on changes to conservation areas and listed buildings currently conflicting with the changes we will all need to make, if you have an affected property you should start conversations about how you will achieve the necessary changes sooner rather than later.

Make sure you have the maximum insulation in the loft – a minimum of 270mm uncompressed (if it is flattened it will not work as well) and then focus on draught removal. If windows or doors need replacement or repair, consider upgrading ready for the higher standards needed for heat pumps. If you have major works, consider including under floor insulation, replacing a 'cold roof' with a 'warm one' and think ahead – underfloor heating is better than radiators when using a heat pump, hot water cylinders are frequently needed with heat pump setups, so if replacing your combi boiler maybe now is the time to consider a system boiler setup instead.

But the key conclusion has to be that doing nothing now and reacting 'when you have to' will probably cost you a lot more then than if you had a plan and incorporated some of the necessary changes into your current maintenance and refurbishment activities. So step 1, get educated and make a plan.