Clean Heat Market Mechanism Regulations 2024

Lord Lilley Excerpts

Monday 20th January 2025 Grand Committee

[Lord Lilley (Con)]

My Lords, here we have it: 32 pages of regulation to introduce something that some would consider a mere mouse in terms of its impact on this market. After all, it introduces a £500 fine for selling each excess gas boiler, relative to the proportion that is prescribed in the regulation. That £500 is actually quite big relative to the cost of a gas boiler, which is typically around a couple of thousand pounds, even though it is relatively small relative to the cost of a heat pump. None the less, I ask the Minister this: will that £500 fine, which then becomes a marketable instrument, be available to importers? If I have correctly understood how the system will work, someone who exports to this country heat pumps from abroad could sell the certificate that this measure will give them to a domestic producer who has not sold enough electric heat pumps for up to £500—that is a jolly nice subsidy for importers of heat pumps into this country, even if it is not massive.

It is expected that this measure will raise the number of heat pumps sold from roughly 40,500 last year, nearly 3% of the boiler market, to 77,000 pumps—6% of the expected market this year. That is not a huge increase. The Minister said that last year, without the benefit of this measure, the number of heat pumps sold increased substantially. So it will not be a huge increase in the coming year. Why do we think this measure is necessary if these things are proving so attractive and the market is growing anyway? Can the Minister confirm that the 6% target is what is introduced, and that it will continue and persist unless and until he introduces, via further legislation—I also ask him to confirm that this will require further legislation—a higher target?

Failing the introduction of a higher target, any future growth in the market will depend on hopes on the cost of heat pumps coming down as manufacturers find more efficient ways of making them. When I was still in the House of Commons I had a meeting with Octopus Energy, which reckoned that the materials involved in making a heat pump cost about £2,000. Obviously, a huge amount of processing goes into making a heat pump, but it suggested that the potential for bringing down the cost over time was significant. One hopes that will happen. Failing that, the only other thing—we are stuck with the 6% target and this £500 fine—will be the lure of subsidies for consumers to buy heat pumps instead of fossil fuel boilers.

The costs and benefits of the whole procedure are spelled out in the impact assessment. It says the net present value of the costs involved is £195 million. The benefits were put at £220 million, of which those that result from the main purpose of the operation, to reduce carbon, were less than the costs. The total benefit is above the costs only if you allow for the impact it will have on cleaner air. As well as reducing the amount of CO₂, which is a very clean thing that we breathe all the time, the reduction in the other impurities put in the air by fossil fuels just about brings it to a net benefit. We are talking about the costs and benefits being roughly the same order of magnitude. Once again, an almost religious fanaticism, which does not take the costs and benefits into account, is driving this policy.

I will make a few observations about the situation in France, because I have a house in France and I observe what is happening there. Two of my French neighbours have installed heat pumps. One in a comparatively small cottage cost over €20,000—not for the pump but for the insulation—all paid by the French taxpayer. Bully for him. Another friend has a rather more substantial old house. It cost the French taxpayer €100,000 to install the heat pump and the necessary insulation. In his case, it would not work for a year because the installers were so busy—because it is free to users—that they would not come back and tell him how to make it work. It took him a long time to find anyone who would. I noticed, when I went round to enjoy his hospitality over the new year, that he had wood fires burning as well.

I sincerely hope that we do not go down the path of subsidising something at the huge costs that the French taxpayer is having to absorb, when the costs and benefits of the whole process, even without subsidies, are so marginal. We do not want to put ourselves as near bankruptcy as the French state is.

[Baroness McIntosh of Pickering (Con)]

I am grateful to the Minister for setting out the contents of the regulations before us. I am afraid that I share some of the scepticism of my noble friend Lord Lilley. I am grateful to the noble Lord, Lord Hunt, for referring to the warm homes scheme. He is aware of my disappointment that the discount is not going to be revisited, and I say that as honorary president of National Energy Action.

My understanding is that the heat pumps that are the subject of this measure simply are not as efficient as oil-fired central heating. I say that as where I live in the north of England, it is all oil-fired central heating; we are off grid and we cannot use gas. I walked past a surgery in the north of England that did not have just one heat pump; it had fitted three heat pumps, which probably means that one heat pump was not sufficient to generate the heat required.

My understanding—and I would be grateful if the noble Lord, Lord Hunt, could confirm this—is that, without log fires or some other secondary heating, heat pumps heat only to a top temperature of about 16 degrees. If you are retrofitting an existing building, as many of the windows may not be able to accommodate the size of the heat pump or the radiators that connect to it, substantial renovation may be required.

Furthermore, I am grateful to the Secondary Legislation Scrutiny Committee, which highlighted that the starting point referred to by the noble Lord, Lord Hunt, of around 40,500 installations per year is—in its word, at paragraph 56 of its 10th report—“ambitious”. The department expects the scheme to help ensure the installation of at least 77,000 heat pumps a year in existing homes between 2024-25 and 2028-29. I ask the Minister a simple question: is that feasible and realistic?

My noble friend Lord Lilley quoted £2,000 as the cost of an ordinary boiler. I recently got two quotes for a boiler. The boiler itself was not the issue. For the fitting, even that of an oil-fired boiler, you are looking at something in the region of £8,000 to £10,000. I repeat: if you live off-grid in a very rural area, it would be nice to think that heat pumps were an alternative, but, given the state of the current market, I just do not see them as feasible if they heat up to only 16 degrees when, in just the past two weeks, we have regularly had temperatures of freezing or down to minus 10. With those few remarks, I press the Minister to comment on these queries.

--- Later in debate ---

Heat pumps will lower consumer bills, increase our energy security and reduce our carbon emissions. I put this to the noble Lord, Lord Lilley, as these are important points: heat pumps are on average three times more efficient. They will save consumers on their energy bills going forward.

[Lord Lilley (Con)]

They are of course three times more efficient on average—though not necessarily in cold weather. But electricity is four times as expensive as gas per therm.

[Earl Russell (LD)]

I welcome the intervention and will come back to the noble Lord on his point. During this transition, it will take a huge effort across government and beyond—and beyond the scope of this instrument—to meet the scale of these changes.

The regulations establish the new UK-wide heat market mechanism to promote the development of the market for retrofit installations of heat pumps in existing buildings. The CHMM is to launch on 1 April 2025 and run for an initial period of four years. In the interests of time, I will not go on too much, but there are two big changes from previous proposals. First, they propose to reduce the payment in lieu of any missing heat pump credits to £500 from the first year from the £3,000 proposed by the previous Government. Secondly, the period over which boiler sales are counted has been delayed to give the obligated parties more time to prepare. The Government have said:

“As set out in the consultation response published in November … We have also aligned the periods over which boiler sales and heat pump installations will generate obligations and credits, respectively, providing manufacturers with more time to prepare”.—[Official Report, Commons, Second Delegated Legislation Committee, 13/1/25; col. 4.]


The big change is that the new Minister has engaged and listened to industry and has managed to make some of the adjustments required by working in partnership. This approach has been welcomed by industry. Removing penalties and allowing more time is pivotal to finding common solutions. The approach of giving manufacturers more time to scale up the supply chain and expand sales without penalising customers is good and needs to continue while hitting some very ambitious and fast-approaching targets.

The ongoing relations with manufacturers and industry are clearly key to delivering this policy. How do the Government intend to continue these better relations while making sure that targets are met and that unnecessary costs are not passed on to consumers? I want to make it clear that this is not a boiler tax. The Conservatives, when this was their policy, were very keen that those words were not used to describe it.

Review mechanisms and relations with industry are crucial to delivering this policy. I note that any adjustments would require further legislation and that would change the whole impact assessment. Any increases in the target in future schemes would require further secondary legislation. I note that the Government have said that they will not force consumers and that this is about working in partnership. My worry is about the confidence that the Government have in the ability to deliver the volume of heat pumps required in the time available.

I would like briefly to ask the Minister about some wider points. The cost of getting a heat pump is still a barrier to entry. I welcome the fact that the Government have continued the £7,500 grant, which, to their credit, the Conservatives not only introduced but increased. Since that increase, we have had a remarkable uptake in the number of heat pumps. But, as we have heard, installing a heat pump is about a system-wide change. It is more than just installing a heat pump; often it involves under-floor heating and changing radiators. On average, this seems to be costing consumers at least an additional £5,000.

We have had some conversations as part of the GB Energy Bill about green mortgages. Are the Government considering finding ways that the additional costs, not just of heat pumps but other renewable energy technology, can be added to mortgages? Quality and innovation are clearly important as well, as is making sure that these are good-quality products.

The noble Lord, Lord Lilley, intervened on electricity market reform, and to some extent I agree with him. Our electricity is still very expensive—some of the most expensive in Europe. The Government’s policy is to get people away from gas and on to electricity. What plans do they have to make sure that electricity is affordable and to introduce social tariffs for those struggling to pay their bills?

On disinformation, misinformation and ignorance, according to the Government’s own policy document, only 51% of people in the UK know about heat pumps. There is disinformation and misinformation in this space—for example, that heat pumps do not warm our homes enough—so it is important that the Government have a strong public information campaign for the take-up of heat pumps, about what they are, how they work and what they do.

Finally, heat pumps can save the average household £300 a year, so they would go a long way towards Labour meeting its manifesto pledge. I wish the Government well, but these things are complicated.

--- Later in debate ---

This really is the way we have to go forward, so overall this is—how I shall put it?—an incremental process. It is being introduced in a way we think the industry will be able to respond to. We will keep it under constant review. We expect to see the cost of heat pumps come down and, of course, we will look to raise the targets in the future.

[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 Lilley (Con)]

So leave it to miracles.

[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.