Section 2: Full findings and recommendations

An uncertain future for private investment in low-carbon heating

The investment in energy efficiency and management is a promising sign as these technologies complement heating solutions and help reduce their operational costs. The data for low-carbon heating, however, begs the question as to whether investment in this area might be dormant and why that might be.

In our research project data, we saw several new large research projects in the past two years that integrate heat pumps into wider heating systems. Once the scaled-up projects have proven the value for money of this technology, we might enter a sweet spot and see an increase in private sector investment. It might also be the case that some investment is underway inside established firms, activity which would not appear in the dataset we used.

At the same time, we need to make sure that the existing business environment and business models are conducive to the extensive rollout of low-carbon heating. A recent report by PwC was less than optimistic about the opportunities of attracting capital for residential heating infrastructure, citing issues with scalability and a lack of comprehensive home energy efficiency standards.

The Green Finance Institute has proposed twelve financial solutions that could help overcome investment barriers to decarbonising heating. These include innovative business models such as heat as a service and tools that enable coordination of customers at a local level and help reach a critical mass of demand.

We have technologies to decarbonise household heating, but now need commercial pathways for deploying and scaling them. To achieve this goal, investors, businesses, funders and government should support the development of innovative business and financing models such as heat as a service or schemes that attach cost for heating decarbonisation to home mortgages. This might involve building on test beds such as the Energy Catapult’s Living Lab or ensuring the Heat Pump Ready Programme invests in new business and financial models. The wider economic, policy and social contexts in which heating technologies are developed are as important as the technologies themselves.

For the low-carbon heating sector to flourish and attract future investment the government also needs to create an attractive policy environment. A major barrier to the potential for businesses to operate at scale is the shortage of tradespeople with the right skills. According to a study by EY, there are currently about 1,200 heat pump installers. The Heat Pump Association estimates that this has to increase eightfold to almost 10,000 in order to meet the government’s ambition of 300,000 yearly installations by 2025. Installer shortages were already apparent during the recent short-lived run of the Green Homes Grant scheme. Similarly, the Heat Network Skills Review published by BEIS in 2020 also highlighted the risk to deployment of heat networks if skills-based barriers are not overcome (particularly in key technical roles or project management roles).

There are some promising new initiatives that could help fill these gaps. They include the Retrofit Academy, National Centre for the Decarbonisation of Heat, the Betateach platform to support peer learning between installers and new courses for heat pump installers. Leveraging data-driven approaches to identify transferable skills and support career transitions both within and between sectors could further help overcome skills shortages. Nesta’s Open Jobs Observatory has also made inroads here, through spotting green jobs in online job postings and monitoring how they are spread across the UK, which will be critical for helping workers to transition into these roles.

A further challenge is that the UK low-carbon heating market arguably falls into an investment gap between venture capital and private equity. We already have some fairly well-developed low-carbon heating technologies (such as heat pumps) which may make the sector less attractive to venture capitalists who more commonly support early-stage innovation. The exception may be the novel business and financing models discussed earlier. Private equity investors, on the other hand, are often more focused on scaling, installing and optimising more developed technologies but currently the UK low-carbon heating market is too small to attract this sort of capital.

The threat of the climate crisis and proportion of emissions from UK household heating justifies substantial efforts from the government to prime the market. Once the market has reached sufficient size to become self-sustaining, support can be gradually withdrawn. However, current support is not of sufficient scale: the UK Green Building Council has called the newly announced £5,000 heat pump grant a ‘drop in the ocean’. And previous efforts such as the green homes grant voucher scheme have been criticised for being poorly designed and ending too quickly.

Finally, electricity is currently subject to levies that gas is not, so consumers have less incentive to adopt low-carbon heating, which in turn disincentivises investors and businesses from focusing on low-carbon heating. The government has committed to rebalancing energy prices in its Heat and Building Strategy and this needs to be implemented.

For the low-carbon heating sector to flourish and attract investment in future the policy environment will need to be supportive. To facilitate this, the government should undertake measures such as:

• Tackling skills shortages among installers as there are currently not enough trained people to decarbonise UK heating quickly enough.
• Providing stable, well-designed consumer incentives for low-carbon heating and energy efficiency as current schemes are not substantial enough and previous approaches were too complex and short lived.
• Ensuring commitments to rebalance energy prices are implemented rapidly so that electric heating can compete with gas.

A report by Oxford Institute of Energy Studies from last year has evaluated that while hydrogen will certainly play a role in decarbonisation of the energy system – especially when it comes to industrial applications – it will be particularly challenging to use it for decarbonising residential space heating. In part, this is due to the need to adapt the existing natural gas infrastructure to work with 100 percent hydrogen gas, as well as the challenge of scaling up the production of sustainable ‘green’ hydrogen. Other experts express similar concerns about the potential of hydrogen for heating.

According to our typology, research on hydrogen heating appears to be in the emerging category. However, we have identified a rise in discourse about the so-called hydrogen economy, alongside the presence of strong institutional lobby groups. This suggests that it is important to consider the future consequences of building hype around the applications of this technology. For example, there is a possibility that consumers and investors will wait to see if the hydrogen economy matures instead of pursuing alternatives such as heat pumps that are more viable in the short term. This could put decarbonisation goals at risk if, as many studies suggest, hydrogen does not ultimately emerge as a viable means to provide home heating at scale.

Consumers should not be distracted from adopting more mature technologies (such as heat pumps) to decarbonise their homes by what appears to be early-stage hype around hydrogen heating.