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.
