Heat in Buildings Bill consultation: business and regulatory impact assessment (partial)

Rationale for Government Intervention

6.1 We need to reduce emissions from buildings through a wide-scale transition to clean heating and, where necessary, installation of fabric efficiency measures. This section briefly describes why the presence of market failures means we are unlikely to achieve the scale of decarbonisation at the pace required to meet our climate change targets in the absence of government intervention.

Negative Externalities

6.2 The harmful greenhouse gas emissions resulting from the continued combustion of fossil fuels imposes a wider cost on society, including the cost of climate change adaptation and those associated with natural disasters and biodiversity loss resulting from rising global temperatures. These wider costs are not reflected in the price of carbon intensive fuels such as natural gas and heating oil. Therefore, action is required to align private incentives with societal goals.

Distributional impacts

6.3 The transition to clean heat will require additional investment over and above the current business-as-usual scenario, and will impose additional costs across many groups. How these costs are distributed depends on a range of factors including the energy market framework and energy prices, taxes and subsidies, the technologies deployed, and the technology displaced. Two significant distributional risks arise which require government intervention:

• Impacts on low-income households and particularly those currently in or vulnerable to fuel poverty. The transition will require significant capital costs and may also involve increased running costs, particularly for low income households where a higher proportion of income is typically spent on household energy. Government intervention is necessary to ensure that those unable to pay increased energy costs are not left behind or harmed.
• Access to the benefits of low carbon, smarter technologies – for instance, lowered costs though integrating energy storage or taking part in demand side response may be uneven due to varying ability to pay upfront costs, digital literacy or resilience to risks. Government intervention may be needed to ensure that appropriate access is available.

Imperfect information

6.4 Evidence suggests that a significant proportion of consumers are not aware of the contribution of their existing heating system to climate change.^[20]

6.5 Challenges in quantifying the health benefits or reductions in fuel bills following energy efficiency measures or a change in heating system can make it harder to persuade homeowners and landlords to take action even where the private net benefit is positive. Empirical evidence suggests that consumers find it hard to evaluate and take decisions where the costs are imposed up front but the benefits are realised over a longer time horizon.

Immature market for clean heating systems

6.6 Early adopters may face limited choice between market participants for clean heating systems due to the current and relatively low annual volumes of such installations. Government interventions, such as regulation, are needed to grow levels of demand for such systems. This will give installers confidence to invest in the equipment and skills necessary to deliver the rollout of clean heat, while also achieving economies of scale and learn-by-doing effects.

Coordinating collaborative efforts

6.7 The transition to clean heat sometimes requires coordinated action across building owners, network operators and energy generation/production facilities, which markets in their current form are unable to deliver. The need for coordination is particularly acute in the case of mixed and multi-tenure buildings as well as in the development of heat networks. Certain fabric measures such as cavity and solid wall insulation in multiple occupancy buildings require mutual consent and collective efforts from each household.