Decarbonising the UK’s housing stock is key to reducing our carbon emissions. The Seventh Carbon Budget shows that a significant uptick in the installation of low-carbon heating technologies such as heat pumps will be required to reach net zero. This demands solutions at scale.

At Nesta, we argue that to accelerate decarbonisation, a coordinated approach to help households move to low-carbon heating at street or neighbourhood level should complement the current individual pathway to switching to clean heat. We call this approach clean heat neighbourhoods.

In this blog, we explore public grants and subsidies, and how restructuring them could accelerate the heat transition, highlighting positive steps in this direction.

Imagine a street in a small town in Wales, England or Scotland. In a scenario where its residents have all acquired or are looking to acquire an air source heat pump (ASHP), they would likely take very different paths to get there.

Some might use a mix of personal finances and funding, and, perhaps, take advantage of a government-backed subsidy such as the Boiler Upgrade Scheme (BUS) or a Home Energy Scotland Grant. Others might access means-tested support, such as the Energy Company Obligation (ECO), the Nest Warm Homes Scheme (Wales) or the Home Upgrade Grant. This variability is because, like much of the user journey to heat pump adoption, subsidy options are highly individualised and complex.

These subsidies present advantages and drawbacks. They are only available to some households and not all households have the freedom to decide what’s best for them - a scheme like ECO 4 requires the landlord to apply on behalf of their tenant. Subsidies also rely on householders having the mental bandwidth and time to dedicate to researching the options available to them, with a risk of low public awareness.

Returning to the residents of our hypothetical street, in the event that their house requires additional upgrades, such as insulation, solar panels or batteries, households may require a funding top-up, which may not be straightforward or cost-effective.

Currently, subsidies remain separated across income and tenure lines that make achieving an approach such as clean heat neighbourhoods more challenging. But what would this process look like if it was done differently?

With £450 million funding, BUS is a key tool in the UK government’s suite of interventions to roll out low-carbon heating. Since its launch, more than 15,000 households have installed a heat pump. However, there have been concerns over its equitability, the type of technology it incentivises and its accessibility to smaller installer businesses.

Some of these concerns have already been addressed. The first iteration of the BUS included a limit on capacity, which disincentivised the adoption of shared infrastructure such as shared ground loops. This cap has now been lifted from 45 kWth to 300 kWth.

The first version of BUS included a requirement, now lifted, for a valid EPC with no outstanding recommendations for a loft or cavity wall insulation. However, of the householders funded by BUS, 35% reported difficulties with covering additional costs, despite 57% having a higher than average annual household income (more than £52,000, well above the median national income of £32,300).

The current, generous £7,500 allowance cannot cover additional works to their house, or higher running costs, and there is a risk that an individual approach to BUS continutes to favour early adopters.

To enable a coordinated approach to low-carbon heating, one way forward could be to allow local areas to pool subsidies such as BUS, ECO and others across tenures, allowing for economies of scale.

As governments pick up pace in their decarbonisation efforts, there is an opportunity to create a coordinated route alongside the current income-specific and owner-focused approach in order to make progress more quickly.

Using an area-based approach to subsidies would have several benefits. Giving local authorities or the most appropriate local actor to pool subsidies across an area and plan the works may help alleviate the mental load associated with individually sourcing funding. It would enable a coordinated approach that could activate supply chains, and make access to communal infrastructure for suitable areas easier.

Examples of area-based approaches already exist. In Scotland, Changeworks, Home Energy Scotland and the Scottish Government have partnered to deliver Energy Efficient Scotland: Area-based schemes. The programme helps households combine funding depending on their individual situation, prioritising fuel-poor applicants.

Local schemes such as the Levenshulme Area-Based Scheme blend grants and low-interest loans for a street-by-street approach retrofit.

Promisingly, the Cabinet Secretary for Housing and Local Government has also announced the Welsh Government’s ambition to develop an area-based approach to their means-tested Warm Homes scheme in 2025, working across the private sector and social housing.

The first two cases pool grants, loans and individual contributions from householders to propose area-based schemes, while the Welsh example shows a way to bridge the tenure divide. They sketch the way forward by simplifying householders’ journeys to heat pump adoption. But building on these positive examples at scale will require giving local authorities tools and agency.

To accelerate the transition, local authorities must be empowered to move at scale, with the ability to pool income streams into an area-based decarbonisation project and capacity to lead retrofit schemes. This would ensure better value for households and enable economies of scale.

Combining income sources across tenure for neighbourhood-scale retrofit measures may help accelerate the transition. As of April 2025 the mayoral combined authorities will receive their funding in the form of integrated settlements instead of separate grants, giving them agency over their spending and more room for neighbourhood-scale schemes.

The heat transition will require considerable upfront investment that public funding cannot meet on its own. Contracts for difference – a private law contract between a low-carbon electricity generator and the government-owned Low Carbon Contracts Company – could present a useful structure for a coordinated transition. Entities such as Low Carbon Contracts Company may play a role in derisking the heat transition.

One approach could be to give local authorities the opportunity to structure a low-carbon heating offer for a low-carbon heating manufacturer to bid into, either via a reverse auction or other forms of procurement, securing the most economical offer for householders.

In the medium term, pooling funds into projects may also help activate the supply chain and build up the heat pump market, reducing reliance on subsidies, and moving beyond early adopters to reach our decarbonisation targets.

We welcome the UK government’s current marketing campaign to increase the uptake of BUS in order to maximise its impact. But we argue that facilitating a coordinated approach to retrofit alongside the current routes may help even more households acquire a heat pump.