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Future subsidies for heat pumps: Introduction

In this project, we adopted a people-centric approach to consider how a government incentive scheme for low-carbon heating in England and Wales might be improved. The goal is to enhance the appeal and increase the uptake of subsidies, enabling more households to embrace decarbonised heating.

Our long-term objective from future phases is to work with policymakers to improve current and future subsidy schemes that increase the number of households benefiting from subsidies and adopting low-carbon heating systems.

This phase of work convened stakeholders from across the industry to build an understanding of the boiler upgrade scheme and previous low-carbon heating grants, working in the open to diagnose issues that may be preventing uptake, and highlighting any missed opportunities to increase applicability. The findings from this phase of work have been framed as a series of problem statements.

The project has stopped short of diving into in-depth recommendations for improvements to the scheme. Its aim is to highlight the problems and barriers that may be reducing the uptake of low-carbon heat subsidies, while outlining potential opportunities for further work to build towards potential new subsidy structures.

This report is part of our policy library for decarbonising home heating

Explore the library to learn more

What we did

Our work spanned 12 weeks, we engaged with stakeholders from across the decarbonisation sector, speaking to those involved in the delivery of low-carbon heat. Initially, we asked for comments and responses to four key questions.

  1. How can we incentivise the appropriate low-carbon heating tech for the appropriate home? Are there other technologies that should be included in the boiler upgrade scheme?
  2. How do we ensure that any grant is contributing to an equitable transition?
  3. How should a scheme be delivered? Is the current method of delivery fit for purpose?
  4. How should a grant be structured, what is the appropriate level of funding, and where should the money come from?

We received responses from across the home decarbonisation sector, these formed the basis of a workshop. This allowed us to convene groups of stakeholders to discuss the initial responses to the online consultation and build a more in-depth understanding of the difficulties facing those looking to deliver subsidy schemes. The workshop also acted as an opportunity to consider how subsidies may have to evolve in different future scenarios.

Figure 1. A summary of contributors who were engaged as part of this project.

This early engagement with stakeholders gave us an understanding of the main challenges around the delivery of BUS and other decarbonisation subsidies. We then ran a series of semi-structured interviews with heat pump engineers (n=3) and households(n=5) to sense-check these challenges, and to understand them from their point of view. These interviews aimed to bring those ultimately involved in the delivery and purchasing of low-carbon heat to comment on what we’d heard from others. Future phases of this work may look to build a more robust qualitative approach. These interviews also allowed us to present possible future scenarios and speculative solutions to get an initial gauge of how they may be received. Some of these speculative solutions can be found in our recommendations and concepts.

Problem statements

Statement 1

For many households that want a low-carbon heating system, they will need to upgrade their current heating system (e.g. radiators and pipework) as well as possible upgrades to the fabric of their home such as insulation. The current funding landscape separates these two aspects, with different schemes and eligibility criteria. A complex and unapproachable subsidy landscape and lack of funding to increase the efficiency of existing systems may be preventing some uptake of the current boiler upgrade scheme.

Statement 2

The administrative burden of the boiler upgrade scheme may be increasing the cost to install heat pumps, and preventing some smaller installers from registering to deliver the scheme, although this isn’t a problem for larger installers who currently deliver the bulk of the work.

  • While the current documentation and standards may be causing tension, all parties agree ensuring performance and consumer protection is important.
  • There is a discrepancy between the standards expected of low-carbon heating and fossil fuel systems that could be contributing to price differentiation and consumer journey issues.

Statement 3

The simplicity of the BUS scheme is building confidence in the heat pump market, but its narrow scope may be a barrier to innovation.

  • The scheme is very limited in terms of the technologies incentivised.
  • The structure of the subsidy may limit business models, such as those that enable a household to ‘rent’ their heat pump.

Statement 4

The scheme is generous for the ASHP and early adopter/able-to-pay market, but there are equitability concerns about how many homeowners may be able to access the grant. Even with the generous grant, some households will not be able to fund works required to install a heat pump, or may not be able to afford potentially higher running costs.

Statement 5

Awareness of the BUS scheme is currently low, and assumptions on eligibility may be reducing uptake. It is complex for households to find out which schemes they are eligible for and how schemes can work together.

Statement 1

For many households that want a low-carbon heating system, they will need to upgrade their current heating system (e.g. radiators and pipework) as well as possible upgrades to the fabric of their home such as insulation. The current funding landscape separates these two aspects, with different schemes and eligibility criteria. A complex and unapproachable subsidy landscape and lack of funding to increase the efficiency of existing systems may be preventing some uptake of the current boiler upgrade scheme.

What we've heard

The current BUS scheme is rigid in the schedule of work, where heating system upgrades are required to happen at the same time the heat source is upgraded, alongside works to the fabric of the property for some households. Complexity in funding can also be a barrier for households. Preparing homes so that they are deemed “heat pump ready” can rely on separate funding streams such as The Great British Insulation Scheme or ECO.

The current subsidy landscape can be difficult for homeowners to navigate, especially when they may be under time pressure to install a new heating system, for example, if their boiler has unexpectedly broken down.

When starting to consider heating upgrades, a household's first point of call for advice can be their existing heating engineer, who is often not incentivised to point towards low-carbon heating options.

This problem may affect a large proportion of UK homes. Analysis of EPC and English Housing Survey data by Ned Lamb and Professor David Elmes from Warwick Business School, University of Warwick, estimates “that the proportion of privately owned homes that are ‘heat pump-ready’ is only 11% of the housing stock.” They believe this presents “The risk that homeowners seek Boiler Upgrade Scheme support only to find out they need to spend significantly more than the cost of the heat pump and its installation. Alternatively, heat pump installations proceed in homes that are scheme-eligible but not ‘heat pump ready’ which leads to poor performance in service.”

During stakeholder workshops, we heard similar comments from the industry. The current BUS scheme is seen as generous in terms of covering the heat source replacement. However, the system works, labour and other rectifying work in the home tipped the balance and may result in households not proceeding with a heat pump installation.

“The BUS is generous, however, there needs to be more consideration of the preparatory work that needs to go on, but for the heat source, it is enough.”

“A subsidy could be focused on heat pump readiness or low-temp readiness, especially if networked systems took care of the upfront costs of heat supply.”

“From an industry perspective, and for customer value, it’s better for major heating system improvements to be designed with the heat pump and installed together but households should have the option to split them up.”

We also heard that for smaller businesses tying together funding for fabric improvements or other energy efficiency improvements may be beneficial for their customers. Some inspiration may be taken from the structure of subsidy schemes like ECO that enable multiple measures through a single subsidy scheme. Homes eligible for the ECO4 or Home Energy Scotland (HES) scheme do have some flexibility regarding the separation of secondary measures including heating system upgrades, fabric measures, and heat pump installation.

“To support consumers in making their home more energy efficient, we would recommend additional incentives when doing multiple measures… £1000 for loft, cavity wall, external wall, internal wall insulation, or solar PV, when done in combination with a heat pump… maximum efficiency improvement would be encouraged.”

Germany may offer some inspiration for how to incentivise the preparation of systems for low-carbon heating sources. In response to the Ukraine war and the energy crisis, Germany legislated that all property owners with a natural gas heating system must:

  • perform a heating system test to assess its efficiency
  • optimise the heating system based on the test results to improve performance and potentially reduce energy consumption.

As this policy launched in 2022, it's still too early to assess its long-term impact. However, its swift introduction in response to the energy crisis suggests potential short-term benefits. Focusing on optimising existing systems could lead to immediate carbon emission reduction and cost savings, even before widespread heat pump adoption takes hold.

During a series of semi-structured interviews, we asked UK homeowners about their views of splitting or scheduling the work involved in upgrading the system and their home. Responses were mixed.

“I'm not convinced the subsidy is the issue. It's already quite generous. The barriers are the costs, hassle and whether it is worth doing financially [If you’re coordinating other fabric or home improvement works with the same company or contractor], 3 months is not that much time. What if the builder goes on holiday in August?”

“Any work on existing heating systems should be seen as an opportunity to upgrade heating emitters. Upgrading heat emitters in existing systems should be incentivised. This provides a near-term carbon reduction as well as long-term system upgrade benefits.”

“My instinct would be to get everything done all at once as the process should be quite disruptive… would be quite intrusive.”

Existing UK building regulations now legislate that a design flow temperature of 55℃ would lend itself to low carbon heating. However, this only applies if a system is newly installed or fully replaced in an existing building, including the heating appliance, emitters and associated pipework. It also results in a marked difference between the design temperature for gas systems and the 45℃ design temperature for heat pumps.

What barriers do we need to overcome?

For households

  • There is a prescribed route to installing a heat pump under BUS that may not work for all.
  • Energy bills are an immediate concern, can bills and resultant emissions be lowered without a whole system and heating source replacement.
  • The installation of a new heat source is seen as very disruptive.
  • The subsidy landscape is seen as confusing and complex to navigate.

For Industry

  • Balancing servicing existing fossil fuel systems with promoting new low-carbon solutions creates a dilemma for engineers who might face pressure to maintain traditional systems. This could result in subsidies not being signposted.
  • Incentives to decarbonise are only currently accessible through low-carbon heating engineers. Could a wider workforce help the transition?

Concepts/recommendations

On preparing systems and separating works

  • What if the existing gas-heating workforce had a greater role in preparing systems for low-carbon heating? The existing gas workforce is a trusted source of advice for homeowners. They are currently not incentivised to point towards schemes such as BUS. Could subsidising system upgrades make gas installers more likely to lead towards LCH?
  • What if the rules around fossil fuel heating systems were tightened so that all systems headed towards low flow temperatures?
  • What if all work on existing heating systems was seen as an opportunity to upgrade heating emitters? What if, when serviced, all fossil fuel systems were to be assessed, and recommendations made for preparative work to accommodate a low-carbon heating source?
  • What if we can make distress purchases easier? Could the preparation of systems for a low-carbon heat source increase the likelihood of homeowners buying a heat pump when their gas boiler breaks?

Figure 2. Could subsidising preparatory work for low-carbon heating result in an easier switch to a heating source switch?

On improving the navigability of funding

What if...

  • The successful, focused nature of BUS was transferred to other technologies, system preparation or other energy efficiency measures?
  • There was a more approachable and user-friendly way to navigate low-carbon heating schemes?
  • Greater emphasis was placed on preparing heating systems for low carbon heat in EPC recommendations?

Statement 2

The scheme is looked on favourably by larger businesses but can be difficult for smaller installers. The documentation that surrounds LCH installs can cause friction for smaller installation companies. The accreditation process that provides access to the existing scheme may be adding friction and preventing some installers from registering for the scheme.

  • While the current documentation and standards may be causing tension, all parties agree ensuring performance and consumer protection is important.
  • There is a discrepancy between the standards expected of low-carbon heating and fossil fuel systems that could be contributing to the price differentiation and consumer journey issues.

What we've heard

The advantage of greater cash flow and access to finance inherent in larger heating businesses and SMEs is exacerbated under BUS’s ‘rebate’ delivery method, its subsidy structure, and its restrictions (technology, system and quality assurance requirements), which – alongside electricity prices – push projects for low-carbon heating installations toward higher ratios of equipment to labour costs. This may be limiting the volume of work possible by smaller businesses and sole traders, as several industry stakeholders have expressed, and discouraging some households from accessing the grant. And although MCS (the current quality assurance provider) has recently committed to redeveloping their scheme which has addressed several concerns, there is still further opportunity to reduce the barriers to access for sole traders and small businesses.

Our recent research, consisting of workshops with industry and semi-structured interviews with households consistently emphasised certain barriers. One noteworthy obstacle that may have been exacerbated by the increase of BUS to £7500, is the heightened concern among businesses about potential cash flow limitations. This is particularly relevant for sole traders.

“Turn-around time of payments – £7500 is a large portion of cash flow for a sole trader.”

Additionally, there is a notable issue of households misunderstanding the grant structure, contributing to these barriers. BUS funding was stated to be an ‘upfront capital grant’ however, in practice, it’s a ‘rebate’ to the installer with a 2-week delay. The advantage of greater cash flow and access to finance inherent in larger heating businesses and SMEs is exacerbated under this ‘rebate’ delivery method. This may be limiting the volume of work possible by smaller businesses and sole traders, as several industry stakeholders have expressed, discouraging some households from accessing the grant.

Overall the general administration of the scheme was looked on positively. Although there were differing opinions on whether a subsidy should be installer or consumer-led, the recurring theme was that the current BUS scheme is easier for larger companies to manage.

“Any grant should go to the customer, not the installer. Installers should not be middlemen… it increases the cost of the install, puts admin burden on the installer… the actual process is okay, once you get approved… all online, very simple process, 14-day turnaround on grants, works quite well… it's just, you shouldn't need the process, could all just be an app that the government centralises – upload pictures of install and any paperwork, customer signs on app and it automatically pulls up the appropriate heat pump manual.”

"(A subsidy) should be customer-led, not installer-led. It is, in the main, simple to deliver, but where Ofgem require more information the installer is piggy in the middle and it adds to the burden. You also hinder the amount of installs smaller/sole traders can do because of the impact on cash flow. They will not commit to more BUS jobs if they then are waiting for more and more £5ks. "

“The BUS is working extremely well, compared to other schemes of the past. Applications volumes were low initially as installers got used to the scheme but have jumped up 170% since the grant increased.”

“[Installer-led] is likely better, or at least have it as an option… installers will have done it several times compared to one-off for households… we need to simplify things [for households] especially for the elderly, many not comfortable online… [households] are not being educated enough by HES (consumer-led) anyways… either provide enough education or leave it to installers.”

Alongside the difficulties in managing cash flow around the grant, there may be barriers presented for existing engineers becoming eligible to access subsidy funds. For existing heating engineers, becoming a fully-qualified MCS Technical Supervisor for the air-source heat pump technology category requires a training course and/or assessment costing £600-£1,000 and requiring a few days, but 1-3 month wait times for an assessment are possible. For those starting with no qualifications and no significant previous heating or plumbing experience (less than a year full-time), this may take 1-3 years and £3,000-£6,000 (depending on course selection & availability).

“It may not seem like a lot of money to some people but for an individual contractor to be able to install heat pumps [for typical homes] themselves, it takes about £6K just to join, and then having someone come and tell me what to do and how to do it [regardless of my experience], plus hiring someone full time for the paperwork… makes it very difficult.”

Eligibility requirements to participate in the subsidy schemes (BUS, HES, ECO), specifically some of the steps to become MCS certified, favour larger companies.

“Larger companies are monopolising the [BUS and HES] grants due to the current accreditation requirements, 1-2 man-bands can’t achieve it.”

Several experienced low-carbon heating installers were previously not being sufficiently supported to become certified. These installers commonly stated the following barriers:

  • Requiring several clarifications to understand the design and business standards.
  • The increased compliance considerations and paperwork are unmanageable for a small business or sole trader.
  • The ‘first install’ dilemma. In order to become MCS accredited an install has to be completed, this customer cannot take advantage of the BUS scheme.

MCS has broadly addressed the ‘first install’ problem within their proposal to enable ‘simulated’ assessments. However, on the difficulties faced by SMEs around installation documentation and paperwork, frustrations may be compounded by the quality of installs. The procedures and paperwork required still appear greater than installers think is necessary for quality assurance.

“I can give you a SCOP rating, but then I leave the house and you change all the settings. As soon as I leave the house the paperwork becomes nonsense. All you need is the quote, heat loss, and a commissioning sheet.”

“Poor quality installations are even present within pilot schemes with several designers and lots of resources. I have corrected a few of these installations.”

A lack of trust in the existing scheme to maintain standards and offer consumer protection may compound concerns around joining accreditation schemes that in turn give access to the subsidy. The extent to which MCS has helped enable consumer protection and redress against installer non-compliance to their technology standards has been less than ideal as recognised by their own research (2022) Of the HP survey respondents from MCS research in 2022, 18% were dissatisfied with installation or performance and 16% made a claim on insurance against workmanship. We heard that installs should be monitored and there should be consumer protection, however, there may be ways to ensure this is done in a manner that works better for engineers and consumers.

“I would like to see a scheme a bit like MCS, but with more oomph to it, [regarding the auditing and consumer protection]. Either systems’ designers or a central body should have to verify the end result with detailed pictures from installers or more randomised audits to be conducted.”

“It took 2 years to go through the consumer protection of the grant to get the same MCS installer to come back, upgrade two radiators, and enable Weather Compensation for the system. It was the Furniture & Home Improvement Ombudsman who resolved the issue.”

MCS’s recent consultation recognises this and MCS has recently committed to redeveloping their scheme with new rules in an attempt to help enable more businesses to engage with the BUS scheme and to increase the consistency of high-quality outcomes for consumers. MCS has also started a new policy of contacting each homeowner following a BUS installation.

What barriers do we need to overcome?

For industry

  • The resource required to complete compliance documentation is still seen as a barrier to sole traders and microbusinesses.
  • A perceived concern around cash flow. This may be an area of the business that some engineers may not have the same level of experience in.

For policymakers and scheme administrators

  • Current quality assurance mechanisms may not be encouraging the uptake of BUS from households nor ensuring consistent installation, performance, or redress experiences for consumers.
  • Consumers may have greater trust in schemes run directly by the government rather than simply endorsed by the government.

Concepts/recommendations

What if...

  • The administrative burden required in the commissioning of a system was reduced? What would be the right balance of consumer protection, quality assurance and subsidy governance?
  • Other measures of quality were considered – either by MCS or pulled in-house by the subsidy scheme?
    • Could a digital service reduce the burden of relevant checks?
    • Could heating installations be monitored remotely to ensure quality?
  • There were different mechanisms of delivery dependent on the size of the installer business?
  • We knew what combination of accreditation may enable more engineers to access schemes, while still providing consumer protection? Could this unlock more technology types or other parts of the heating workforce?

Statement 3

The simplicity of the BUS scheme is building confidence in the heat pump market.

  • However, the scheme is very limited in terms of the technologies incentivised.
  • The structure of the subsidy may limit business models, such as those that had begun to emerge under RHI. The current BUS is only applicable when the household owns the heat pump outright after installation.

What we’ve heard

One of the most repeated comments we’ve heard from stakeholders regarding BUS is the value in its simplicity – how the limitation in eligible technologies enables a clear signal to the most relevant low-carbon heating solutions for most homes and how efficient the delivery structure is when considering the balance of administration and user requirements.

“The brilliant thing about BUS at the moment is its simplicity… uniform discount applied by the installer at point of sale, extremely easy to redeem. Adding new technologies would risk losing this simplicity for limited benefit as ASHP are the best low carbon heat solution for 80% of homes in the UK.”

Although this limitation to three, nearly self-selecting technologies is indeed an efficient format, statements from installers indicate that increased adoption could be gained by including, at minimum, solar PV as an option to be packaged – but likely also electrical or thermal storage, similar to HES. Also, nearly all installers and retrofit coordinators called for the inclusion of draught-proofing and ventilation into central grant schemes, especially considering longer heating schedules with heat pumps – to ensure quality outcomes and energy efficiency.

“Every customer has asked about solar PV. Keen to try and offset the price of them. A package with PV would likely increase adoption.”

“A whole package – PV, battery, heat pump, insulation – should be supported to… minimise the grid burden and dependency.”

“Also BUS should cover retrofit MVHR to facilitate greater air-tightness and thus massive efficiency gains, ideally BUS should cover PV installations if in conjunction with HP or MVHR,”

In December 2023, the Government published a Summary of Responses to the Call for Evidence, in which they confirmed the expansion of VAT relief to battery storage systems either retrofitted onto existing solar PV installations or standalone connected to the grid. This signals a recognition of the value of flexibility – either long-term or within a time-limited transition period – and may hint at the opportunity to include additional technologies within BUS.

Several stakeholders stated an interest in seeing higher subsidy amounts for ground-source heat pumps (GSHPs) and shared ground loops (SGLs), often indicating £9-10K as an appropriate level rather than returning to the higher levels under RHI. This group included a few general installers and homeowners but mostly came from special interest groups (suppliers of GSHPs and industry bodies). The lower uptake of GSHPs was stated as primarily driven by the low subsidy level relative to costs, rather than any market or preference changes. This is similar to views from the UK Parliament inquiry.

“There has been a marked reduction in GSHPs deployed… under the domestic RHI, 15,297 GSHP installations were accredited… an average of 1,700 a year…13% of all installations. This contrasts sharply with the BUS… 708 GSHP & SGL installations… in the first 16 months (annual average of 531), representing 3% of installations… RHI would have provided £12,780 for a GSHP installation and £6,360 for an ASHP one.”

Most respondents who were aware of shared ground loops also agreed that eligibility restrictions from the 45kW capacity limit for the loop should be addressed – either increasing the capacity limit or adjusting the subsidy structure. A few mentioned shared ground loops and district heating as a way to accelerate the adoption of low-carbon heat – as it may help to transition whole communities at one time.

“Ground [loops], multiple homes at once… the way forward… district heating to communities, whole towns fitting one plant with government subsidy supporting… [value] to households would mean no other choice worth considering… but not going to work everywhere.”

The most common alternative low-carbon heat source that is subsidised in other European countries is air-to-air heat pumps. The level of grants available for air-to-air heat pumps is typically reduced in comparison to that for air-to-water heat pumps. For example, Ireland provides €3,500 for an air-to-air heat pump compared to €6,500 for an air-to-water or ground-to-water heat pump (EHPA, 2023).

Some installer statements indicated that, compared to other countries, the UK may need more support for air-to-air, as cooling is not an effective driver at this time. However, there is likely still an opportunity to highlight any expected growth of cooling demand towards 2050 more effectively.

“I don’t see cooling as a driver towards heat pump adoption. You have to rip the house apart to put it in. They should just get air con if they want cooling.”

“The grant doesn't apply to A2A, which may be important, especially as we look towards a greater cooling regime. It’s especially viable if you haven’t got an existing wet distribution system.“

“Grant needs to be better… about £10K… and need to bring in air conditioning [air-to-air] and ventilation as well… too much to upgrade the heating systems for some homes. And should allow just heating, leaving hot water to the homeowner's choice… costs could then come down.”

When considering all stakeholder input, there is disagreement as to whether air-to-air heat pumps should receive any funding and, if so, whether to be included in BUS or a separate scheme. Most suggesting support for air-to-air stated that it’d be unnecessary in a ‘healthier’ market but that currently a strong signal is required against the air-to-water push. A few commented on the greater potential for air-to-air in specific property types.

“Air-to-air heat pumps don't need subsidising in many cases, but current BUS subsidy… distracts from healthier growth… providing a nominal subsidy for them would signal that they should be considered in more cases.”

Two respondents to our initial survey expressed a concern that although air-source heat pumps should indeed receive the strongest signalling, the lack of any level of funded incentives surrounding BUS (or ECO+) for flexible electric or thermal storage systems (Tepeo, Sunamp) is seen as preventing their consideration by most households. One installer thought we should provide additional choices to mitigate the number of homes installing solid fuel (biomass) boilers, noting a package of minimum insulation, MVHR, and advanced electric storage heating should be an option.

“... lack of diversity in supported solutions… creates the impression for consumers that hydronic heat pumps are the only technology that can decarbonise their heating… currently a barrier for ensuring appropriate low-carbon heating is achievable for every home… subsidies should cover any heating system under the Smart Heating Mandate that DESNZ is developing.”

We also heard that some limitations may be impacting innovation in the sector. Under the current BUS scheme, the homeowner must own any hardware installed. Whereas previous schemes such as the Green Homes Grant enabled lease-purchase ownership models to start to be implemented.

“Today's Boiler Upgrade Scheme requires the end user to own the product to qualify for the grant. In the rest of Europe, this is not the case. In Germany for example, various types of models exist that all qualify for subsidies – leasing or monthly subscriptions for example where the company who installs and leases the product applies and gets the subsidy in its own name. These alternative ownership models are very common to make high-cost products available for a larger population.”

Similar statements were made for hybrid and bivalent heat pumps. Bivalent and hybrid systems are heating systems that pair a heat pump with a fossil fuel boiler. There were suggestions that this technology may help to reduce emissions quicker while also attracting a level of grant that is less than that of the current BUS.

“Yes, hybrid systems should attract the same proportion of funding relative to the CHMM credit of 0.5. Therefore 0.5 of £7500 = £3750. (On the current BUS scheme)… it is time-consuming and requires a number of prerequisites to be undertaken. This will not be accepted in a boiler breakdown situation where heat and water need restoring ASAP. Hence the attraction of hybrids.”

There were some concerns that any subsidy of hybrid or bivalent systems would need to be carefully considered to reduce the risk of potential gaming of a subsidy system, and a single heating system being subsidised multiple times, above and beyond the rate of a direct switch from fossil fuel heating directly to low carbon heat. In the workshop ran as part of this project there was general agreement on “if hybrids are to be included then a grant should be proportional to decarbonisation achieved”

Considering how BUS already has an eligibility constraint for biomass boilers, a similar type of division for hybrid systems may not result in losing the essential simplicity as long as a centralised lookup is readily available.

What barriers do we need to overcome?

For installers/HP suppliers

  • Administrative or paperwork burdens on installers.
  • The lack of flexibility in technology and system design can limit engineers' ability to decarbonise certain homes.
    • For example, the 45kW limit on shared ground loop capacity is a constraint within BUS compared to the number of homes a typical networked heat pump project may require to be economical.
    • The current BUS structure can be inflexible when pairing technologies.
  • The current BUS scheme requires the household to own the heat source, this may be limiting the payment options that installers and heating manufacturers can offer.

For households

  • The simplicity of the BUS grant becomes less significant for homeowners once any household begins considering additional works or requires additional funding for a heat pump installation.
  • Lack of signalling of the importance of ventilation and draught-proofing.

For policymakers & scheme administrators

  • Towards 2030, air-source heat pumps may start competing against shared ground loop heat networks in their target market. Alongside this, heat network zoning may start to add confusion unless households have a single point of access to rely on for eligibility for all grants.
  • There was a highlighted gap in affordability predominantly low-income and medium-income households that fall outside of ECO schemes.
  • If hybrid/bivalent schemes are to be considered, uncertainty around energy costs (around reforms and universal access to relevant tariff types or flex-enabling technologies) increases the variance in carbon reduction which policymakers might expect from hybrid or bivalent systems.

Concepts/recommendations

What if...

  • A low-carbon heating system was able to be purchased using a combination of subsidy and hire purchase agreement or similar?
  • Overheating days were considered to the same extent as heating days when considering a heat source and accessing subsidies? Would this alter the appeal and selection of technology?
  • The subsidy was based on the system carbon reduction, could this be a way to fairly incentivise a broader range of technology?

Statement 4

The scheme is generous for the ASHP and early adopter/able-to-pay market, but there are equitability concerns about how many homeowners may be able to access the grant. Even with the generous grant, some households will not be able to fund the works required to install a heat pump, or may not be able to afford potentially higher running costs.

What we've heard

Innovators and early adopters are typically the first segments of a population that adopt any new technology. The high installation costs of heat pumps compared to alternatives, such as boilers, have meant that these early adopters generally fall into the able-to-pay market. The high cost of installation can mean that the boiler upgrade scheme is available only to those who can afford it.

For households who can take advantage of installations offered by larger installers (such as British Gas and Octopus), the existing BUS grant is generous. For homes that may have a slightly more complex install, or fall out of large installers' eligibility requirements, the current £7,500 still results in an unobtainable shortfall. The shortfall in the cost of the initial installation may also be amplified by concerns about running costs.

Currently, homes fitting a heat pump, not requiring any supplementary work such as new heat emitters, insulation, or piping, can do so at minimal personal cost when utilising the grant provided by the Boiler Upgrade Scheme. The £7,500 offered by BUS allows some homeowners to install a heat pump with a lower upfront cost than a replacement boiler. Analysis conducted by Nesta using MCS data found that median installation cost ranged from £9,550-£13,790 in four property types: bungalows, detached, semi-detached and flats. In this context, the BUS has been described as generous. As previously mentioned, the proportion of properties that fall into this category in the UK is quite small, with only 11% of privately owned homes being ‘heat pump-ready’. For those that don’t fall into this category, the cost of installing a heat pump can rise significantly, leaving a gap between the grant that has to be filled with personal finances.

We heard from several heat pump installers and manufacturers that they felt the grant itself was generous. The nuance in these responses was that they were referring to the size of the grant in contrast to the heat source component, rather than the cost of the installation as a whole.

“It is too high… We would like to see the grant volume reduce over time to keep the pressure on the industry to continue to bring down cost and enable more homes to benefit from low carbon heat”

“It is too high… We would like to see the grant volume reduce over time to keep the pressure on the industry to continue to bring down cost and enable more homes to benefit from low carbon heat.”

“The level of funding is reasonably generous however, it's still not enough to convert enough people to plump for a heat pump over a boiler.”

“The [grant] money is a lot compared to other countries.”

“If the heating system is already plumbed [for 55oC], then £7.5K is generous (£10K overall cost), but if not, then the grant is unlikely to convince a household towards a heat pump.”

We also conducted semi-structured interviews with homeowners to see whether they had differing views from industry stakeholders. The homeowner interviewees had a wide range of familiarity with BUS and heat pumps. Some had made use of previous schemes such as RHI and GHGs to install heat pumps in their own homes, while others were less familiar with heat pumps and their use in the UK.

The households that we interviewed had contrasting perceptions of the generosity of BUS compared to industry stakeholders. The BUS was not considered to be especially generous when compared to the total cost of a heat pump installation. Those with awareness of the £2,500 increase to the BUS were appreciative of this effort, but still aware that the remaining cost represented a considerable barrier.

“£5K was not much, but £7.5K is getting closer. I know people who have changed their mind after the increase to £7.5K.”

‘If the total cost is £10K, then yes quite generous. But if the total cost is closer to £30-40K, which I believe is more likely, then it’s not much help.”

“£7.5K for a [full] heat pump [installation] is definitely not generous.”

“I have no idea how much a heat pump is. If a heat pump is similar [to a boiler] then that seems like a good deal, if a heat pump is around 20K then it’s less attractive.”

Researchers and special interest group representatives that we spoke to felt that the current grant was generous for those who were able to pay, there was a risk that middle-income households would not be able to make use of BUS. These households may be categorised as those that fall outside of the eligibility for ECO and those that may find it difficult to fund costs above the £7,500 BUS grant.

“No… our evidence suggests there is a need for a grant scheme that covers necessary home improvements to make a home ‘heat pump ready’ as well as contributing towards the cost of adopting the technology.” “No… our evidence suggests there is a need for a grant scheme that covers necessary home improvements to make a home ‘heat pump ready’ as well as contributing towards the cost of adopting the technology.”

“I think the funding level is appropriate for higher income families, but there should be more targeted help for those on middle incomes. Lower incomes are more taken care of through the ECO schemes.”

“A guarantee of no more expensive than replacing a gas boiler should be the norm, at least for people on mid-low incomes.”

The below figure shows that only Germany and Lithuania have significantly larger grant totals for air-to-water heat pumps. In terms of the grant for the heat pump itself, the BUS is relatively generous when compared to other European countries. However, a direct comparison of grant totals does not account for differing costs of installation, purchasing power or additional funding for supplementary retrofits alongside the heat source. It is also important to note that some of these nations have varying levels of funding available for alternative technologies such as air-to-air and ground-source heat pumps. Some countries also have grant structures that are means-tested or based upon a percentage of the total cost of work that is not included in the below figure.

Figure showing grants for air to water heat pumps in European countries. Grants converted from euros to pound sterling. Data from EHPA.

To try and bridge the gap between a grant and the total cost of a heat pump installation we have heard some support for additional financing options. These additional options could be in the form of low/zero interest loans or favourable mortgages to help cover additional costs.

“Government-backed low/zero interest loans alongside the grant would help massively. The mortgage industry needs to get behind it and offer low-interest loans, could they offer payback on the sale of the house?”

“Look at Home Energy Scotland Loan and Grant Scheme – much better and has funding for fabric first/upgrades on a similar format.”

There are several low-interest loans being provided by countries such as Scotland, Germany, Netherlands and France to help make up the difference between a grant and the cost of installation. For example:

  • France: éco-PTZ zero percent interest loans of up to €50,000
  • Germany: Development bank KfW provides low-interest loans of up to €60,000
  • Netherlands: National Heat Fund provides zero/low (depending upon household income) of up to €65,000
  • Scotland: Homes Energy Scotland provides zero-interest loans of up to £7,500 for heat pumps.

We asked homeowners about their preferred forms of funding and how they felt about loans to supplement BUS. We had a mixed reception to the idea of zero/low-interest loans with some feeling that if they were expected to carry out work then it should be fully funded, some being able to finance the work privately, and others willing to re-mortgage or seek out a loan.

“I never borrow any money from anyone. Have only done so with a mortgage, as there was no other option. Would rather save and pull from savings. If the world wants me to go along with a more sustainable future, don’t ask me to pay for it because I haven't got the money.”

“I’d fund myself. Then possibly ask the bank [for a loan] or remortgage.”

Previous research carried out by Nesta found that owner-occupiers wanted green finance to help fund green upgrades to their homes. The key features of a successful finance product would be a low interest rate, flexible repayment terms, and a complementary package of support. The research consisted of a randomised control trial with 7,500 homeowners across Great Britain with 72%-85% strongly agreeing that green finance was something the government should offer. These findings were not specifically related to the use of loans for heat pump installations, but could still be indicative of homeowner’s willingness to make use of low-interest loans to bridge the gap between BUS and total installation costs.

Figure showing percentage who would install green home upgrades using finance/support offer in the next three years. From All the things I could do: financing green home upgrades, Nesta, May 2023

We also heard that the running costs of heat pumps need to be considered when designing subsidy structures. Although not directly in favour of replacing the BUS with a payment such as RHI, it is a clear signal that the running costs post installation are still an area of concern for many.

“Increasing gas prices [for household heating] may not seem fair but the government needs to do it [shifting levies and/or applying carbon tax].”

“Remove the green [levies] from electricity bills and put them onto gas bills.”

“The main problem as I see it is the running costs. Until this or future governments mandate that heat pumps have to be supplied with a reduced tariff (as in Germany) it will never be attractive to end users.”

“It [BUS] also does not address the higher running costs of heat pumps when compared with gas boilers – the government should move the green tariffs off electricity and onto gas bills to help address this.”

What barriers do we need to overcome?

For households

  • The cost gap between the BUS scheme and the total install price is still a barrier. Extra funding may be needed for larger homes or those that need high-cost preparatory work.
  • Concerns about running costs may be preventing some homeowners who may not be put off by the upfront cost.
  • The spark gap – the cost of electricity compared to gas results in concerns about running costs.
  • A lack of awareness about how much a heat pump costs with and without the current BUS scheme.

For Industry

  • Heat pump installs are still unaffordable for some customers.
  • Balancing the cost of the highest quality installations with potential running costs, to ensure that both the installation and running of the heat pump are affordable for homeowners.

Concepts/recommendations

What if…

  • For homes which are in fuel poverty, there was a social tariff to top up any grant or subsidy.
  • Green finance could be backed by the Government to help bridge the difference in cost between BUS and installation.
  • Levies were shifted from electricity and placed onto gas to increase confidence in heat pump running costs.
  • Extra funding was available to carry out preparatory or supplementary work to make homes heat pump-ready.

Statement 5

Awareness of the BUS scheme is currently low, households believe they may be ineligible as other schemes are means-tested. It can be complex for households to find out which schemes they are eligible for and how these may tie together.

If you are looking for a heat pump then you are likely to know about the BUS grant, but what if you are looking to increase the performance or get help in decarbonising your home? The various subsidy schemes can be confusing to navigate while awareness of the BUS scheme and who is eligible can be low.

Responses to our initial scoping questions uncovered a recurring theme of a perceived lack of awareness as to the existence of the BUS, what it would provide, and whether households believed that they would be eligible to access it. Subsidies can only be effectively utilised if the target audience is aware of their existence.

To try and sense-check these statements we met with industry stakeholders and interviewed household members. From our scoping research, we found that stakeholders agreed that awareness was low and increased publicity was required, while our interviews with householders seemed to corroborate this lack of awareness.

We heard from installers and industry stakeholders that currently they believe the BUS and other subsidies that could be used for other retrofit measures are not commonly known about by members of the public. They indicated that a homeowner would only become aware of BUS when they were already interested in switching to a heat pump, effectively aiding those that were already in the able-to-pay market. This would imply that BUS was acting as a subsidy for those who might have adopted a heat pump anyway, rather than encouraging those who were less aware. We also heard that, aside from BUS itself, public awareness of heat pumps was considered to be quite low. We heard that increased advertising and public awareness campaigns could be used to encourage the use of BUS and the uptake of heat pumps.

“One of the biggest problems is that [these schemes] are not widely known unless you’re already researching [on low carbon heating]. Even my neighbour or others next door to homes receiving them don’t know about the schemes.”

“An advertising and promotional campaign by the Government highlighting how good heat pumps are and the BUS Scheme. The scheme is good and works well, but there is no public awareness on TV, radio or online.”

“People are bamboozled by heat pumps - do they work, are they noisy, how can you really find a trusted supplier who will give you impartial advice?”

Homeowners that we spoke to generally understood that BUS could provide between £5,000-£7,500 to help with the installation of a heat pump. However, none of the homeowners that we spoke to believed that they would be able to access the grant themselves due to the perception that grants are typically means-tested. We were aware that a new Government campaign had been initiated to try and increase awareness of BUS during this project and it was encouraging to see that one of the homeowners had encountered some adverts on social media. However, this homeowner had still not engaged with the advert due to their assumption that grants are normally only available for those with lower incomes. Aside from the two homeowners interviewed who already possessed a heat pump, the interviewees had low awareness of the total cost that they might expect from an installation or the associated works that might be required.

“I wouldn't even imagine that I’m eligible for subsidies. Given the state of the government. I don't think they give money for anything, never mind anything that's good for the environment. I imagine they'd want double glazing and that's all I can really think of.”

“It pays £5K and that doesn’t go very far for an efficient system let alone the full installation. I assume eligibility would be means-tested.”

“I am vaguely aware that BUS exists. But I can’t imagine that I would be eligible to upgrade. Whenever I have looked into grants in the past they have been means-tested. Also, I would assume I am not eligible as my home is on the gas grid.”

“Not sure how to access it – just know it is £7,500. I had some adverts on Instagram – I didn’t click on the links though. There are always little asterisks which suggest to me that you need to qualify for the grant due to income levels.”

The findings from our interviews seemed to mirror previous concerns that had been raised during the inquiry led by the Lords Environment and Climate Change Committee. The inquiry highlighted that public awareness of low-carbon heating systems is very limited, and promotion of the BUS has been inadequate. Citizens Advice conducted a survey in August 2022 to try and quantify public awareness of BUS and found that, from 2,000 adults, only 33% were aware of the scheme with 10% fully aware and 23% partially aware. It is important to note that this survey was conducted in relatively close proximity to the initiation of BUS in April 2022 and we would expect awareness to have risen since then. A new up-to-date survey would be required to verify how public awareness has changed and whether increased efforts to raise public awareness by current campaigns have had the desired effect.

Since starting this project, DESNZ has launched a public campaign “Welcome home to energy efficiency” to raise awareness around actions that homeowners can take now to make their home more energy efficient. This signposts several subsidies that households can access including BUS. This kind of campaign will hopefully start to address some issues around awareness.

What barriers do we need to overcome?

For households

  • A lack of awareness that there is funding for low-carbon measures.
  • An assumption that they are not eligible for subsidies and access to grants is means-tested.
  • Understanding and accessing funding is seen as confusing and time-consuming.

For installers

  • Awareness of other forms of funding that householders could access to conduct supplementary works
  • A lack of awareness from the public could dampen the ability of installers to scale their businesses
  • Gas engineers are not incentivised to steer households towards low-carbon heating grants.

For advice givers

  • They need to be able to provide advice on forms of funding available and access for homeowners
  • They need to be able to provide impartial advice as to the expected cost of installation and running costs.

Concepts/recommendations

What if…

  • All quotes included the cost after the BUS or other subsidies, could this change the discourse on the cost of HPs and availability of funding?
  • The government’s public awareness campaign is expanded? Could there be a more targeted way to reach certain demographics? Maybe with an emphasis on the fact the BUS is not means-tested and is accessible for all, regardless of income.
  • There was a single place for households to receive government-backed advice on the need for heat pumps and their installation/running costs and the appropriate summaries. What would be the minimal steps required to give this accurate information?
  • There was one place homeowners could go to access green home financing information.

What's next?

Our further work will delve deeper into select problem statements. Collecting data and insights to build confidence in the underlying causes and designing, prototyping and evaluating potential solutions.


As part of working in the open, we welcome any feedback and input, especially as we consider which problem statements may form the basis of a second phase of this project.

Contact: [email protected]

Authors

Andy Marsden

Andy Marsden

Andy Marsden

Design Lead, Design & Technology

He/Him

Andy is the design lead for the sustainable future mission.

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Max Woollard

Max Woollard

Max Woollard

Analyst, sustainable future mission

Max joins Nesta as an analyst in the sustainable future mission.

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Kevin Wiley

Kevin Wiley

Kevin Wiley

Analyst, sustainable future mission

Kevin is an analyst for the sustainable future mission.

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