The UKโs housing stock is old, energy inefficient and heavily reliant on fossil fuel heating systems โ mainly gas boilers. With heating responsible for 17% of the UKโs carbon emissions, homes and their central heating must transform if the country is to achieve net zero by 2050.
While there isnโt a single solution that will suit every home, government advisers on the Climate Change Committee (CCC) estimate that 8 million heat pumps need to be installed in existing homes by 2035.
The CCC recently published a damning assessment of the UKโs progress towards its 2030 climate goals, saying annual emission reductions outside the power sector must nearly quadruple. Home heating is of particular concern, as heat pumps are being rolled out at one-ninth the rate they need to be by 2028, alongside falling rates of energy efficiency improvements.
Heat pumps extract heat either from the air, ground or nearby water and transfer it into a building, providing heating and hot water through pipes and radiators. Some heat pumps can even work in reverse to cool homes during the summer.
Heat pumps run on electricity and use energy three times more efficiently than gas boilers.
Better still, UK homeowners are becoming more comfortable with this technology. A survey of 2,500 households in May 2023 revealed that more than 80% that had installed a heat pump were satisfied.
Only 59,862 heat pumps were installed in the UK in 2022. Although this is an increase of 40% on 2021, itโs far from the governmentโs target of 600,000 a year by 2028. To fully replace all of its gas boilers, the UK would need to be installing 1.7 million heat pumps annually by 2036.
Heat pumps are being rolled out faster elsewhere. In Norway, 60% of buildings have heat pumps; in Sweden, over 40%. Meanwhile, less than 1% of UK buildings had a heat pump in 2021. And compare the UKโs 2022 record with other countries in Europe: France installed 462,672 heat pumps (up 20%), Germany 236,000 (up 53%) and the Netherlands 123,208 (up 80%).
European governments support heat pump installations in various ways. The Netherlands has gradually raised taxes on homes burning natural gas for heating and offered subsidies for heat pumps. France has combined a 30% tax credit on improvements to heating and home insulation costing up to โฌ16,000 with a 0% interest loan of up to โฌ30,000 for energy efficiency upgrades.
These measures address two things which prevent people from getting a heat pump: the upfront cost of installation and the renovations required to prepare a home. Heat pumps are becoming cheaper but they are still more expensive than gas boilers and many UK homes lack the double-glazed windows, insulated walls and lofts, and pipework and radiators that help them perform optimally.
Since 2012, government policy has failed to drastically improve home energy efficiency or encourage low-carbon heating.
The carbon emissions reduction target introduced by Gordon Brownโs Labour government in 2008 required energy suppliers to cut emissions by helping customers make their homes more energy efficient. When it closed in 2012, it had beaten its target of saving 293 million tonnes of carbon dioxide. 41% of these savings came from installing insulation, in turn making homes more suitable for a heat pump.
The green deal followed in 2013 and the renewable heat incentive in 2014 under David Cameronโs Conservative-led coalition government.
Green deal loans for energy-efficiency upgrades attracted just 14,000 applicants as homeowners baulked at the relatively high cost of borrowing and were unconvinced by the projected energy savings. The scheme was scrapped in 2015.
The renewable heat incentive paid homeowners quarterly over seven years for installing a heat pump but asked them to fund the installation upfront. In 2018, the government blamed high upfront costs, poor awareness and complex installations for the poor uptake. The incentive ended in 2022.
Launched in 2022 under Boris Johnson, the boiler upgrade scheme offers homeowners a ยฃ5,000 grant to replace their gas boiler with an air-source heat pump (ยฃ6,000 for a ground-source heat pump) and aims to lower the cost difference between the two. Installing a new combi-boiler costs between ยฃ600 and ยฃ2,150 whereas a heat pump is ยฃ5,000 to ยฃ8,000 after the government subsidy.
The government also plans to implement a clean heat market mechanism that will ask boiler manufacturers to sell four heat pumps for every 100 gas boilers in 2024/25, or pay for the equivalent in heat pump credits if they canโt (one heat pump credit is worth ยฃ5,000).
These measures may improve on earlier failures if the rules for industry are clear and the incentives are generous enough for consumers to consider investing in a heat pump, as examples with other low-carbon technologies have shown.
For instance, evidence suggests carmarkers are already selling more battery-electric vehicles in anticipation of a law requiring them to sell a rising proportion of zero-emission vehicles each year from 2024. And the feed-in-tariff scheme requiring energy suppliers to buy electricity from homeowners at an agreed price for 10 to 25 years helped nearly a million households install solar panels.
Beyond targets for boiler manufacturers, the UK government will ban natural gas boilers in new buildings from 2025. While Germanyโs governing coalition is implementing a ban on installing gas boilers in existing properties from 2028.
Before such a ban is tabled in the UK, there are policies that could raise the dismal heat pump installation rate. First, like the Dutch, the UK could gradually lower taxes on residential electricity and increase them on gas.
Second, the government could ensure energy performance certificates more accurately assess the energy efficiency of homes and their readiness for heat pumps. And third, the government should dismiss opposition from boiler manufacturers and implement the clean heat market mechanism.
Decarbonising heat and encouraging heat pumps is essential for achieving net zero. Tighter rules and targets for industry must sit alongside attractive incentives for consumers if the UK is to reach 600,000 installations a year in five yearsโ time.
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Ned Lamb is funded by the Engineering & Physical Sciences Research Council's Low Temperature Heat Recovery and Distribution Network Technologies (LoT-NET) programme.
Like many other countries, the UK has developed a plan for a central bank digital currency (CBDC). A digital pound would essentially act like an online form of cash suitable for everyday payments. It would not earn any interest like a standard savings account (or even some current accounts), but it could increase access to financial services in the UK.
The Bank of England recently proposed a general framework for how a digital pound would work. It has suggested an ambitious timeline for introducing one by 2025. You have until June 7 2023 to tell the bank what you think of its plan.
The success of a UK CBDC will largely depend on whether the benefits of offering a digital currency outweigh the costs of creating and rolling out the infrastructure needed to support the new payment system.
There are clear benefits to CBDCs, such as increasing financial inclusion by providing an easier way for the UKโs 1.2 million unbanked residents to register for banking services. The online wallets that would hold peopleโs digital pounds could also be used by the government to make โfiscal transfersโ such as passing tax subsidies or support payments on to households and businesses.
But the Bank of Englandโs current proposal is also seeking answers to some questions about a digital pound. In particular, how (or if) it could coexist alongside other digital currencies such as cryptocurrency assets. While the bank suggests several models, broadly speaking this could help reduce systemic risk in the crypto sector and further increase banking options for UK consumers.
Read more: What are stablecoins? A blockchain expert explains
The Bank of Englandโs CBDC consultation paper specifically mentions stablecoins. These are digital assets that are issued by private companies, unlike a traditional currency which is issued by a government. And unlike digital currencies such as bitcoin, the value of a stablecoin is pegged to a stable asset like the US dollar or British pound โ but what about a digital pound?
The bank talks about the overlap between what a stablecoin and a digital pound could offer. It argues they could โcoexistโ in a mixed payments economy. It compares this to how we use both cash and bank accounts in the same payment system right now, pointing to technology developments such as ATMs that have made this coexistence even easier over the years.
Stablecoins would need to be โfully backed with high-quality and liquid assetsโ in order to complement a digital pound, according to the bank. It adds:
In contrast to the digital pound, stablecoins, regardless of their backing asset, would be a liability of the private-sector issuer rather than a claim on the central bank. That means they would be private money, like commercial bank deposits.
It also suggests a model in which these backing assets could be โheld entirely with the central bankโ, adding that this would make the stablecoin โeconomically similar to the digital poundโ and reduce financial risk.
If the digital currency was used to back a stablecoin, this would mean that the issuer would provide holders with stablecoin tokens based on the value of digital pounds that could be used by customers for payments (both domestic and international) as well as trading in cryptocurrencies. These private forms of money would operate on the blockchain, which helps make payments easier and less costly. In some countries, stablecoins are already being used as a hedge against inflation and macroeconomic uncertainty.
This could also have benefits for the crypto industry. Currently, stablecoins are managed by private banks or organisations that are not regulated and audited. But a stablecoin backed by a digital pound in an account held with the central bank would be much more transparent and trustworthy. The central bank could regularly audit stablecoin providersโ reserves. Legislators could also impose capital requirements, for example mandating the percentage of issuersโ reserves to be kept in the account with the central bank.
But there is a trade-off here: extreme capital requirements could affect the profitability of stablecoins. Since they are typically linked to interest-bearing assets like Treasury bonds, they can make money from their holdings โ that is, the assets held against the stablecoins they issue.
In contrast, a digital pound-backed stablecoin issuer would be unlikely to earn interest on its account at the central bank. While a typical bank such as Lloyds has reserve accounts at the central bank that earns the base rate, it is unlikely that the Bank of England would give a stablecoin provider the same kind of account. This would entail being subject to the same regulations, which could affect the flexibility that crypto asset providers tend to value.
Stablecoins backed by a digital currency held at the central bank could certainly address some of the systemic issues surrounding this type of crypto asset. Over the past year, a major stablecoin has collapsed in value. This typically happens when a market event prompts holders to rush to withdraw their holdings and the issuer has difficulties fulfilling so many redemptions at once.
If issuers were holding a certain percentage of liquid digital currency reserves at the central bank, this would ensure they had funds to process redemptions or withdrawals while maintaining the coinโs value against the digital pound. And even if an issuer bankruptcy did occur, a central bank could also provide insurance to stablecoin customers to protect their assets to a certain level.
Much like cash and bank accounts, it is possible that digital assets and stablecoins could coexist and even complement each other. Further, a digital pound could shine a light on the growing role of private money in the economy. This would help to make the financial system more secure while also fostering financial inclusion.
Ganesh Viswanath-Natraj does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.