Clean Heat Market Mechanism Regulations 2024

Lord Offord of Garvel Excerpts

Monday 20th January 2025 Grand Committee

[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.