Clean Heat Market Mechanism Regulations 2024
(Limited Text - Ministerial Extracts only)
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Lord Hunt of Kings Heath
That the Grand Committee do consider the Clean Heat Market Mechanism Regulations 2024.
Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee
The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)
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.
Lord Offord of Garvel (Con)
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.
Lord Hunt of Kings Heath (Lab)
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.
Lord Lilley (Con)
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?
Lord Hunt of Kings Heath (Lab)
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—
Lord Hunt of Kings Heath (Lab)
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.