Heat Pump Sector Deal Expert Advisory Group: final report

The Expert Advisory Group was formed to make recommendations to Scottish Ministers on the scope of a potential Heat Pump Sector Deal for Scotland. This final report includes the Group's recommendations and conclusions from their work.

7. Deployment

Given the screeching acceleration required by Scottish Government targets, the EAG was asked to make recommendations to support the scaling up of heat pump deployment to the necessary level over the next five years and beyond. We have identified a number of relevant factors:

7.1 Upstream supply chain capacity

The Scottish, European and global manufacturing capacity for heat pumps is large, robust and can respond quickly to increased demand. The EAG considers it unlikely that the Scottish net zero pathway will be impacted by any long-term constraints in the supply of heat pump equipment, parts and related products.

The EAG noted that there is a forecast substantial increase in demand for heat pumps across the UK and Europe in the next five years, driven by net zero requirements. There are key economic opportunities for Scotland in maximising the proportion of this demand which is sourced from Scotland.

There is a potential opportunity to persuade additional tier 1 manufacturers to locate in Scotland to supply the local, UK and European markets as these grow. There are also opportunities for tier 2 manufacturing. For example, Mitsubishi cannot source all its parts requirements in Scotland because although the capacity and capability exists to manufacture them, this is not a market on which Scottish firms are currently focused.

The global increase in demand and the projected increase in Scottish and UK installations mean these opportunities are now more attractive. The EAG also noted that the planned pace and scale of domestic heat pump deployment in Scotland will provide an attractive environment for manufacturers to develop both an early market advantage in understanding consumer issues and innovative solutions to technical and deployment challenges. The Scottish Government should use channels such as the enterprise agencies to explore and exploit these opportunities.

In particular, Scotland should consider options for creating, with heat pump industry stakeholders, a heat pump industry hub. This would bring together existing tier 1 manufacturers with a presence in Scotland, potential tier 2 partners, start-up companies in the sector and relevant academic expertise; it could also potentially include heat network stakeholders. It should have strong links to the downstream supply chain so that the latter workforce are always well trained in installing the latest technology. Such an industry-wide approach would have multiple synergies and benefits and would both directly support the large-scale roll-out of heat pumps in Scotland and ensure that this drives maximal economic opportunities and jobs for Scotland.

7.2 Downstream supply chain capacity

In contrast, if unaddressed, the downstream supply chain is likely to be a very significant constraint on heat pump deployment. The current small size and fragmented nature of this supply chain and consequent low numbers of tradespeople with the necessary skill and experience in installing and maintaining heat pumps mean that, without quick action to prepare it for the role it needs to play, this part of the supply chain will not be able to rise to the challenge of very rapid expansion.

To develop the skilled heat pump workforce required by heat decarbonisation targets is a challenge of displacement and change as well as growth. Many of the skills and capabilities involved in fitting fossil-fuel boiler heating systems are common to, or translate well to, heat pump installation. As there are c 110,000 fossil fuel boiler replacements in Scotland annually, there is very significant capacity available, if switched, to grow the heat pump sector a significant distance towards the required levels. Indeed, some programmes and initiatives are already demonstrating that this switch can be made, working closely with a number of established installation companies and providing certainty on future heat pump work volumes.

However, there are reasons why an apparently neat and balanced route, in which the heat pump installations workforce absorbs no longer needed capacity from the fossil fuel boiler workforce as heat pumps replace fossil fuel boilers, will not be possible. This is because:

  • Numbers of heat pump installations in the later years of the growth curve, at more than 200,000 annually will be greater than the current capacity of 110,000 fossil fuel installations.
  • Heat pump installation is a comparatively more labour-intensive activity than conventional heating system installs, taking more person hours per installation.
  • Fossil fuel installers may not have all the necessary skills for heat pump installation. This can be addressed by retraining but will make their transition path longer.
  • The average age of fossil fuel installers is increasing and some are likely to choose to retire rather than retrain or adjust to a new technology.

The most likely pathway is thus of both transition of the existing workforce from fossil fuel to heat pump work and absolute growth in the workforce. Measures will be required both to encourage retraining and reskilling and to increase recruitment of new capacity into the supply chain labour force. The latter presents a significant economic opportunity as well as a challenge to the sector.

Retraining existing staff and taking on and training new employees through modern apprenticeships takes time and requires investment from employers. Ensuring that the downstream supply chain does not act as a constraint on heat pump deployment will require large-scale, rapid workforce investment ahead of time by employers.

The EAG considers that such investment by the downstream supply chain will not take place without state intervention. The SME-dominated sector will simply not have the capital resources and appetite for risk to take the required action without support. This particularly applies in the current very uncertain market and economic conditions, with post-Brexit issues of a tight labour supply in the absence of European workers and very strong demand for labour in the construction industry as a whole as the economy opens up after Covid.

There is thus a need for the Scottish Government to support the necessary development of the supply chain. This can be done both through stimulating the market to provide favourable conditions for supply chain businesses to invest (covered below) and by directly supporting expansion of the workforce. These are covered in the next two sections.

7.3 Stimulating the market

The Scottish Government has significant ability to stimulate the heat pump market through a number of complementary actions:

  • Directly through its own existing programmes

The Scottish Government fuel poverty programmes already replace hundreds of domestic heating systems each year. If these programmes were reconfigured to track the trajectory the Scottish Government has committed to, by at least doubling the number of heat pumps they install each year for the next five years, this would significantly enlarge the market for domestic heat pumps and in turn stimulate investment by the supply chain.

In addition, the Scottish Government should commit to an immediate at least year on year doubling of heat pumps installed in new properties built through the Scottish Government funded affordable housing supply programme.

Similarly the Scottish Government should work with local authorities and housing associations to ensure that there is at least a year-on-year doubling of heat pumps installed in existing properties in the social rented sector.

Finally, the Scottish Government should commit to only commissioning or financially supporting new public buildings with zero carbon heating systems and to only zero carbon replacement heating systems in existing public buildings, as outlined in the Heat in Buildings strategy and in line with the Net Zero Public Sector Buildings standard and commitments in the Scottish Green Party Cooperation Agreement.

  • Indirectly through subsidy

The present state of the heat pump market, at the beginning of the market transformation curve, means that heat pumps require subsidy. The Scottish Government should increase the size of its existing interest-free loan programme for heat pumps in line with the ambition to at least double the number of installations each year. If a satisfactory replacement for the RHI does not materialise, it should introduce its own grant programme for heat pump installations. Such subsidy will underpin further market growth and this in turn will stimulate investment by the supply chain. There are commitments in the Scottish Green Party Cooperation Agreement to increase the cashback element of existing loans programmes and introduce a grant scheme to support energy efficiency and zero emission heating and these will provide an opportunity to address EAG recommendations in this area.

It is important that lessons are learned from the UK Government's previous Green Homes Grant and Green Deal schemes: the loans and grant programmes put in place must be accompanied by a commitment to maintain them for a number of years. The supply chain, particularly its large SME and micro-business components, will only invest in new and retrained staff when it is clear that there will be work for them to do over a sustained period. Any stop-start approach will do active harm to the supply chain by stimulating investment that then does not yield an economic return and will make it harder to convince supply chain businesses to invest in the future.

  • Through injecting certainty into the market through clear market signals

Subsidy through loans and grants will be crucial in the early part of the market transformation curve but the Scottish and UK Governments are unlikely to be able to provide the very large sums involved in subsidising a mass transition to heat pumps. However, what the Scottish Government can also do is to provide certainty into the heat pump market. Certainty here means guaranteeing predictable and continuing growth in the market in the long term by actions, stated policies and commitment.

The Scottish Government is already doing this for the domestic new build sector through building regulations and as we have seen this is having an effect. The EAG welcomes the new build heat standards proposed by the Scottish Government as a mechanism to drive demand for heat pumps but notes that the timescales for regulation are too distant to drive sufficient expansion of demand in the new build market segment in the next decade, as is needed. In particular, while regulation is proposed from 2024, it could take several years before all new build properties are required to comply with the standard, as many developments will have been consented under previous lower standards. The pace of regulation will need to be faster and we recommend that the Scottish Government continues to tighten emission standards for new domestic and non-domestic buildings to drive installation of heat pumps. The Scottish Government and local authorities should also work with new-build developers to encourage them to transition ahead of regulation.

However, whilst the new-build market is important, the retrofit market is by far the larger, the large majority of the heat pumps to be installed will be fitted to properties which have already been built.

The Scottish Government needs to send a clear signal of certainty into this market, similar to that given to the car market by announcing a date after which only electric cars can be sold. We recommend that the Scottish Government announce this year (i.e. in 2021) a date by which new heating systems fitted to existing properties (both domestic and non-domestic) must be zero carbon. Such a signal should be phased, with an earlier date in areas off the gas grid, where heat pumps are already economically competitive and a later one for areas on the gas grid. Such a clear end point for fossil fuel heating systems would introduce immediate certainty into the market and would result in backwards-facing 'regulatory shadow' from the moment of its announcement, providing a stimulus to the heat pump market which would increase over time as the cut-off date approaches. We note the encouraging commitments in the Scottish Green Party Cooperation Agreement to "phasing out the need to install new or replacement fossil fuel boilers, in off gas from 2025 and in on gas areas from 2030, subject to technological developments and decisions by the UK Government in reserved areas" and rapid and comprehensive implementation of these commitments could provide the necessary signal.

7.4 Skills and people

As discussed, the downstream supply chain will need to change rapidly. It will have to redirect large numbers of existing staff, currently installing fossil fuel systems, to heat pump installation and also take on and train large numbers of new staff. It is important that skilled tradespeople do not become a limiting factor in a very rapid acceleration of the heat pump sector.

Qualified plumbers have the fundamental theoretical and practical skills and may often only need relatively quick upskilling courses to enable them to install heat pumps. As many plumbing businesses already deliver heat services, they also generally have a good understanding of heat requirements for buildings. This means there can potentially be a swift initial response from the industry to support a rapid mass deployment of heat pumps through redeployment and upskilling of existing installation staff.

This will then need to be built on in later phases of the roll-out by taking on additional staff: it will be essential that new entrants can be attracted to the heating industry. Many of these will be apprentices entering the workforce but another, supplementary route is to widen the pool for recruitment by attracting and re-training people from other industries, beyond plumbing, for example from other building trades. They will have some transferable skills and may therefore require a shorter training period.

One further point is that the skills requirement is wider than the installation skillset, with significant numbers of sales and administrative staff and system designers needed. Support and development of the supply chain will need to cover this full range of roles and skills requirements.

It is also important to note that, given that heat pumps are a novel technology for most of those who will purchase them and there will inevitably be caution by householders around relying on them for heating, tradespeople, especially those working for local, trusted small businesses, have a crucial role to play as advocates for heat pumps. It is well known from the switchover to gas condensing boilers that advocacy as opposed to neutrality or even shared caution make a major difference to the speed and scale of transition, so it is vital that engagement and advocacy skills are incorporated into the skills 'offer' for the supply chain.

To meet this triple demand for reskilling, attracting and training new workers and supporting wider roles and skills will require Scottish Government support through rapid expansion of modern apprenticeships and training courses. Training providers such as the Scottish colleges will need to commit to provide the necessary capacity for learning. From the other side of the equation, retraining existing staff and taking on new employees obviously incurs costs and imposes constraints and risks, with all of these particularly significant for SMEs.

There are also specific issues with both workers coming into the heat pump installation workforce from elsewhere and with uptake of modern apprenticeships.

It is currently challenging for an installer to employ an adult transitioning into the industry as Scottish Government funding to support them is lower than that available for those aged 16-24. This is a disincentive to those considering moving to the industry from elsewhere, as they may well face a significant cut in their income whilst re-training.

The challenge for the apprenticeship route is that at present it produces relatively few tradespeople who are trained and qualified to fit heat pumps. The Scottish and Northern Irish Plumbers Federation (SNIPEF) has shared information on the modern apprenticeship (MA) pathways for new entrants to the sector. Within the plumbing MA there are four optional fuel pathways that can be selected by the employer apprentice, the selection will usually be the pathway that most suits the needs of the employer. There are pathways for each of the following fuel options: gas, oil, solid fuel and renewables. Over the last 5 years only around 20% of apprentices at SNIPEF members have taken the renewable energy pathway, with most plumbing businesses and apprentices preferring to take a conventional heating pathway. The industry view is that this will only change when both installers and trainees are convinced that there will be continuing significant demand for heat pump installations.

This lack of apprentices currently pursuing the renewables pathway represents a key risk to the future workforce capability to support heat pump deployment. On the model discussed above of initial transition of existing tradespeople followed by absolute growth in the workforce to support latter high-volume phases of the heat pump roll-out, there is a need for immediate action if the new entrants are to be available when required. The four year timescale for apprenticeships means that new apprentices must join the renewables pathway now, in order to play a meaningful role in deployment by 2025.

These various issues will require combined rapid action from both the Scottish Government and the supply chain. Government must work with the sector to:

  • Provide additional certainty for heat pump installation numbers to demonstrate the work is there, this is covered in section 7.3 above.
  • Increase the number of modern apprenticeships in the renewables pathway. Although greater certainty of work will help to persuade employers and apprentice ships to commit to this pathway, this will take time and the need to start the pipeline of qualified apprenticeships flowing is so urgent that the Scottish Government should also use provide appropriate financial incentives for both employers and apprentices choosing the renewables pathway.
  • Create training programmes that identify prior learning from other sectors to reduce the amount of training needed but still deliver high knowledge and competency and ensure appropriate financial support for those using them to avoid the disincentive of a reduced income during conversion.
  • Ensure the full range of skills required is covered by training provision, including advocacy and engagement skills.

The downstream supply chain recognises its role in supporting the transition to heat pumps and has indicated willingness to agree aspirational targets for training and upskilling on heat pumps with the Scottish Government, including targets for apprenticeship places and importantly jobs for those apprentices when they are trained. Industry bodies such as SNIPEF have a significant role to play in moving their industry away from a focus on conventional fossil fuel systems. Industry bodies can provide strong support and signposting to employers through the transition, helping to build and manage the new relationships that will be required with training providers, certification bodies, government and ultimately, consumers.

The EAG note the significant economic opportunity for a green recovery that the above issues reflect: here is a low-carbon pathway to increasing skilled, long-term employment at a time when other industries are suffering due to the pandemic.

The EAG also considered equality and diversity in the heat pump sector and within the plumbing industry more generally. It noted that there is a lack of information available on diversity but it is generally acknowledged this is an area where industry can improve. It is important that is does so as recruitment from a wider pool of entrants is part of the answer to increasing numbers. In addition, the industry will need to consider its contribution to a just transition to a low carbon economy, recruiting amongst those on the lowest incomes etc. who are most potentially at risk of adverse impacts from such a transition. The Scottish Government should agree targets with the sector in both these areas and shape its support structures accordingly.

The Warmstart scheme, managed by Warmworks, the delivery agent for the Scottish Government's Warmer Homes Scotland scheme, provides a good example of how industry can work together to attract and support new entrants into the sector. Using funding from Kickstart, Warmworks aims to provide up to 15 placements per year for young people within their established supply chain of installers and sub-contractors. The long-term aim is for the holders of these placements, if successful, to be given longer-term apprenticeships or permanent roles in the Warmworks supply chain in business administration, domestic plumbing and heating engineering, electrical installation and wider construction skills, which is in line with the Scottish Government's Young Person's Guarantee approach. If adopted widely by installers, such schemes have the potential to quickly bring significantly augment the workforce as part of a green recovery.

Finally, the EAG discussed potential issues associated with access to installers in rural areas. Current demand for heat pumps is highest in rural areas off the gas grid and there is anecdotal evidence that lack of capacity is already a problem in some of these areas. This highlights the urgency of addressing the issue and potentially offers an opportunity to trial some of the approaches above before rolling them out more widely. One important point noted by the group is that that any early action in off-gas areas has the potential to promote inclusive growth in vulnerable rural economies. If indigenous SME installers are supported to grow with the local heat pump markets, rather than additional capacity to satisfy demand being supplied to these markets from larger regional or national installers, this will strengthen local economies.

7.5 Certification and standards

Heat pumps are a relatively novel technology for most potential purchasers. Building and maintaining confidence in such a new market where consumer trust is fragile requires robust, enforceable and nationally applicable standards which consistently deliver high quality installations: any dent in confidence would have a severe effect on growth of the market. The EAG recognises the ongoing work of the Scottish Government on skills standards and also considers it important that the heat pump supply chain commits to relevant industry standards such as the Microgeneration Certification Scheme (MCS), PAS2035 etc.

At present many installers are not certified under these schemes and the EAG recommends that installers are strongly incentivised to achieve certification by requiring appropriate certification for any installer working on installations supported by public money, this is already required for the Scottish Government loans described above. The EAG notes that many smaller installers are deterred by the significant time and financial commitment required for certification and recommend that there should be Scottish Government support for small businesses with these costs in the form of grants or loans. One way of providing such support on a de-risked basis to the recipient and at lower cost to the public purse might be for repayments of the loan to be based on a fixed repayment per heat pump installation, thus the installer only repays the loan once they are generating revenue to support repayment.

7.6 Network infrastructure and connection

Heat pumps use significant amounts of electricity and their increasing deployment will put additional demands on the electricity grid and present challenges for the companies who operate it. Even at relatively low penetration levels, organisations involved in heat pump deployment projects are encountering grid constraints and the EAG's view is that electricity grid constraints are a major potential limiting factor to large-scale expansion of heat pump deployment in Scotland.

This issue is compounded because of the regulatory constraints that prevent network investment in advance of need. Domestic and local scale energy storage (electrical or thermal) and demand side management can make important contributions to mitigating the problem in the near term, these options could potentially include the deployment of smart, integrated heat pump and storage systems. Ultimately, however, major investment in networks cannot be avoided.

The need for a coordinated approach and collaboration between regulators, government and network providers is clear and the EAG has proactively engaged with Ofgem, SSEN and SPEN on the network infrastructure challenges. One point which should be noted here is that Ofgem are clear that when assessing requests for investment under RIIO-ED2 they will be influenced by the degree of certainty in forecast demand on the grid. It is just such certainty that this report argues the Scottish Government can and should provide through co-ordinated policies and commitments.

There is a further issue with grid connections due to the limited capacity of the Distribution Network Operators (DNOs) to carry out their connection governance duties. The DNO acts as a gatekeeper to the grid and is required to satisfy itself that the local grid can cope with a heat pump being installed before granting permission for connection. Experience within the EAG from heat pump pilot projects has shown that with only limited resources currently made available for this process, it is not fit even for medium volumes or moderate growth and could potentially delay heat pump roll out and impact on consumer experience. As part of any heat pump sector deal, DNOs will need to develop robust processes and commit the necessary resources to support the large numbers of heat pumps which will have to be connected to the grid as heat pump deployment gathers pace.

Finally, it is worth noting the interaction between demand on the grid and both consumer behaviour and also installation skills and standards. The former is covered briefly below but clearly consumer operation of heat pumps can vary in efficiency and this will affect total demand from a given number of systems on a given section of the grid with limited capacity. It is also important that heat pumps are installed to a high standard to ensure they operate efficiently to limit their demand on the grid.

7.7 Planning

The EAG has discussed the role of the planning system in supporting heat pump deployment. The first requirement should be that the planning system does not unnecessarily restrict deployment. While heat pumps are covered by permitted development rights (PDR), there are persistent anecdotal examples of where PDR has been applied inconsistently between local authorities, for example around noise.

The Scottish Government needs to review its guidance to local authorities in this area to ensure that it is as clear as possible whilst local authorities need to commit to a joint proactive stance towards heat pump deployment.

The planning system can also play a positive role in strategically coordinating heat pump deployment, for example master planning for new developments should now include identification of the grid and other infrastructure requirements necessary to support heat pump deployment. Planning will also be important in managing the interplay between district heating and individual heat pumps: the development of district heating systems could be held back if too many anchor loads, for example in public buildings are served by individual heat pumps, as the remaining heat demand in an area may then no longer be sufficient for a district heating system.

The EAG recommends that guidance is issued to local authorities to ensure that the planning system plays a fully strategic and proactive role in encouraging and supporting heat pump deployment and the most efficient interplay between individual heat pumps and district heating networks. In this respect the requirement on local authorities to develop local heat and energy efficiency strategies puts much of the framework in place to achieve this role and the EAG supports the proposal for a statutory duty for local authorities to develop these strategies.

7.8 Market segmentation

The required rapid acceleration of heat pump deployment will not take place uniformly across the national housing and building stocks. There will be certain geographical areas and housing and building types where there are significant opportunities now and others where there may not be an opportunity until further developments of the market through innovation, financial support or regulation.

Given the scale of the challenge and the current market barriers that limit the attractiveness of heat pumps as a solution in many settings, the Scottish Government must take decisions on what market segments can be relied upon to anchor the supply chain from an early stage. The EAG has discussed where the early opportunities for the first few doublings of heat pump numbers may be concentrated.

7.8.1 Off gas and on gas areas

MCS data shows that current demand for heat pump installations is significantly focused in off-gas areas. This reflects the fact that heat pumps are much more likely to be a cost-effective option for homes in off-gas areas. This cost effectiveness derives from the more expensive fuel choices in those areas, consumers are choosing heat pumps as a replacement for oil, LPG or solid fuel systems. In contrast, in areas on the gas grid, fuel costs for gas boilers are cheaper than for heat pumps, despite the latter's much greater thermal efficiency.

There is thus a case for going with the current state of the market and focusing efforts on off-gas areas. However, whilst there are some 420,000 homes off the gas grid, many are already heated by electricity (mainly storage radiators) and so are already low carbon systems. Only around 167,000 off-gas homes use fossil fuels and the natural rate of fossil fuel heating system turnover in off-gas areas is estimated to be as low as 9,000 installations per annum. As such, for the off-gas sector to contribute significantly to the Scottish Government's targets, deployment would need to be incentivised to encourage consumers to replace their oil and LPG heating systems ahead of time and even then, there are simply not enough homes with fossil fuel heating systems in these areas to meet the volumes of the later part of the net zero pathway. In addition, there are more issues of installation capacity in the relatively weak and undiversified economies of rural areas.

The EAG's view is that the rapidity of the heat pump deployment required for net zero and the above constraints mean that efforts to drive the market must not focus on just off-gas areas but must also extend to on-gas areas. However, it recognises that realistically, the majority of the very early 'doublings' in installation numbers will be in off-gas areas because here heat pumps already make financial sense for consumers and the market is more advanced. These areas should therefore be the first target for supply chain measures and others as appropriate.

Nevertheless, given the limited capacity for installation in off-gas areas without replacing heating systems before they reach end of life, they alone cannot sustain the planned rapid mass deployment of heat pumps to which the Scottish Government is committed: the later 'doublings' will need significant and eventually majority contributions from on-gas areas.

There is thus a parallel and urgent need to move the on-gas market forward, using all the levers detailed in this report, so that it is ready to play its part in the later doublings of installation numbers in two or three years' time. Otherwise the market growth in off-gas areas will be reach its limit and there will be no 'second stage' from on-gas areas to boost the market further. This will require the development, within three years of creative whole building solutions, combining heat pumps with energy storage, fabric efficiency improvements and on-site generation in order to make heat pumps attractive in the on-gas energy market along with appropriate financial support and regulation.

One key action which would help unlock the market for heat pumps in on-gas area would be rebalancing of gas and electricity prices, at present gas is artificially cheap compared to electricity because the majority of regulated social and environmental levies are on electricity. Clearly, if this were to change, the financial attractiveness of heat pumps would receive a significant boost and this would increase the market for them in on-gas areas. Whilst recognising that this is not a devolved area, action here is required within the above two to three year timeline and accordingly, governments and regulators need to address this point as a priority.

7.8.2 New build

The EAG have engaged with the new build housing sector in the preparation of this report. The group is clear that increasing the pace of regulation of carbon emissions from new homes is necessary to drive the heat pump market in this sector but there is also an opportunity for the new build sector to act in advance of such regulation. In our discussions with the sector it is clear that they have a direct interest in seeing the supply chain for heat pump products and services grow, so it is ready for proposed future homes standards at UK and Scottish levels. The Scottish Government should explore how they can work with the sector to incentivise it to procure greater numbers of heat pumps in advance of regulation and so drive such growth.

7.8.3 Retrofit – Social housing

The EAG believe the social rented sector has a key role in driving heat pump deployment through increasing retrofit installations in its own stock, building on the leadership that the sector has previously shown in delivering the Energy Efficiency Standard for Social Housing (EESSH). The Scottish Government should work closely with social housing providers to develop plans that support a growth in the number of heat pumps installed in existing social stock with a focus on both early action and a long-term commitment to installations. This would help provide both the stimulus and the certainty needed to drive the market and underpin the expansion of the supply chain.

7.8.4 Other segments of the retrofit market

The housing stock is of course not uniform and even in on-gas areas there are some types of dwelling where heat pumps are already cost effective. It will be important to characterise and identify these types of housing and their prevalence and location, as where there are substantial numbers and/or geographical concentration this will represent a segment of early opportunity within the overall on-gas retrofit market. It is recommended that analysis of the housing stock is commissioned to identify these key segments.

7.9 Energy efficiency

The energy efficiency of homes is a key factor in the costs of all heating and that particularly includes heat pumps because they are designed to provide a constant output of heat rather than heating up the property for those periods when it is occupied. This is good for comfort levels as the house is always at a comfortable temperature but means that if a home is not well insulated the heat pump must work hard 24/7 to maintain temperature against heat losses and working at its maximum output reduces its efficiency.

It follows that the fabric insulation standard of a home using a heat pump is very important to the energy bills of the householder occupying it and the key way to make heat pumps economically competitive in on-gas areas, short of regulatory price reform as discussed above, is to insulate homes to a high standard. Such insulation also has other advantages, it means a smaller capacity heat pump can be used for a given size of house, reducing the capital costs for the heat pump and it may avoid the need to replace the existing radiators and pipework.

At the system level, heat pumps in highly insulated homes will consume less energy to keep those homes warm and this will mean less need for reinforcing the grid capacity, making large-scale penetration of heat pumps into the market easier. For these reasons, it is important that programmes of support for heat pumps also consider how to maximise support for fabric insulation in buildings where they are to be installed. It is recommended that, wherever appropriate, the heat pump support measures proposed in this report incorporate support for parallel and maximal fabric insulation, in particular any regulation to require heat pumps must require high insulation standards as well.

7.10 Innovation

The EAG has considered whether there is any opportunity for innovation to drive the market and/or address some of the deployment issues discussed above.

7.10.1 Technical and process innovation

The majority view of the group was that there is unlikely to be major innovations in heat pump fundamental components which would make a significant impact in overcoming the barriers to deployment. This is because heat pump technology is well established and improvements will be incremental only. In addition, industry has sufficient resources for innovation because the market is driven by large manufacturers with significant research budgets and the Energy-related Products Directive is also a successful driver of technical innovation within the heat pump market in Europe. The group felt there was at present little scope for other government support or intervention regarding fundamental components.

However, there are a number of other specific technical areas where innovation could aid deployment. These include:

  • The integration of heat pumps into existing buildings and local energy systems. At present each heat pump installation is to at least some extent bespoke for the building into which it is installed. There is scope for government backed innovation programmes targeted at developing "plug-and-play" style heat pump packages with off-site fabrication. This could potentially decrease the time and cost of installation of heat pumps.
  • Further innovation to support a shift towards more environmentally friendly refrigerant gasses for use in heat pump systems. This has the potential to reduce the cost of heat pump systems which use F-Gas refrigerants that attract high levies.

In addition there are opportunities to innovate to reduce the need for disruptive radiator and internal pipework upgrades to allow compatibility with low temperature heat pumps. This adds significantly to total installation costs and the inconvenience involved is one of the key deterrents to consumers in installing a heat pump system.

One potentially fruitful area for technical innovation here is in improving system additives or de-aerators to remove microbubbles from the system and improve the efficiency of radiators. However there is also scope for process and data innovation which could have significant impacts.

Process innovation would mean moving away from the commonly used default assumption that all radiators and pipework need to be changed as part of a heat pump installation and instead considering each installation on a conservative basis, only replacing those radiators which need to be changed for efficient operation. Many existing radiators are oversized for a gas boiler system and could still offer adequate heat spacing performance with the lower water temperatures provided by heat pumps. Such an approach could be supported by manufacturers providing better technical guidance and by automated tools to assess properties, their heat losses and the suitability of their radiators and pipework for working with heat pumps.

Given that the disruption and expense of radiator replacement is one of the fundamental barriers to consumer acceptance of heat pumps, there is a case for developing archetype analysis or even a national database showing to what degree buildings are 'heat pump ready'. Industry and government should work together to scope the options here.

7.10.2 Business model/service innovation

Beyond innovation regarding the heat pump itself and its accompanying pipework and radiators, there is a clear innovation opportunity in taking advantage of an integrated smart systems approach, combining heat pumps with control systems, software, heat or battery storage and PV arrays to minimise running costs, maximise access to the cheapest electricity and offer grid flexibility services to generate additional revenue streams to offset heating costs. This has the potential to very significantly reduce the running costs of heat pumps and the EAG suggests that this is an area where government support for development and demonstration of such systems could be effective in taking the industry forward. The group also highlighted a number of artificial barriers associated with technical requirements for flexibility contracts set by the system operator and it is recommended that governments and regulators address these.

There is also a requirement for innovation regarding tariffs. There are limited market incentives for smart heat pumps currently because the vast majority of utility companies do not provide suitably flexible tariffs, although Economy 7 and Economy 10 can offer savings, there should be options beyond this. The EAG suggest that such flexible tariffs should be a key area of focus for government, suppliers and regulators.

The EAG discussed heat as a service (HaaS) as an innovative business model for heat pumps. However, the group felt that under the current energy market framework it will be challenging for business models like HaaS to make much impact, particularly in on-gas areas. However, it could become more prominent as energy markets develop and governments and regulators should ensure that there are no artificial barriers to HaaS or other innovative business models.

The group also noted that consumer protection and regulation will be increasingly important as business model innovation develops and that the Scottish Government should set clear policy on these for new business models.

7.11 Pilot projects and demonstration programmes

There has been a history of heat pump pilot projects and the EAG felt that while they had done a vital job and many useful lessons had been learnt, the key problem was now deployment at scale and at speed to achieve the net zero pathway. There is a danger of being stuck at the pilot or demonstration stage and losing precious momentum on the very demanding route to mass deployment.

The group did feel that there was a role for demonstration programmes which avoid this and add value by specifically addressing deployment or business model issues rather than showcasing technologies, for example:

  • Area-based or housing archetype-based installation programmes to assess what economies of scale can be achieved by these approaches.
  • A large-scale trial of a flexible tariff for heat pumps to demonstrate to what extent this could reduce running costs.
  • A demonstration of the costs, benefits and revenues of the integrated smart systems approach referenced above.

The Scottish Government should work with local authorities, social housing providers, energy suppliers and other key stakeholders to develop such deployment-focused demonstration programmes to facilitate and define the route map to mass deployment.

7.12 Consumers

Since the mass deployment of heat pumps requires households to both accept relatively novel technology to heat their homes and to invest their own money in witching to heat pumps, consumer engagement and support for the transition to heat pumps is an absolute requirement. Consumers in effect have a veto over the transition and thus all stakeholders need to work together to achieve their engagement and support of consumers. There are a number of key actions that are required for this to happen, as described in this section.

Government and Industry need to work together to support consumer awareness and engagement on heat pumps. Heat pumps are a largely novel technology in the UK and Scotland yet the net zero pathway implies, as discussed above, a very rapid transition to heat pumps. Most householders not yet know what a heat pump is or how it works and certainly do not realise that they are likely to be heating their home with one within the next few years. Without a major increase in consumer awareness and understanding, which will require direct support from the Scottish Government, the buy-in from householders which will be absolutely necessary for the success of the domestic roll-out of heat pumps will not be in place. The Scottish Government needs to develop and implement a strategy to engage and inform consumers about heat pumps and the communication campaign to encourage home upgrades which is included in the Scottish Green Party Cooperation Agreement is an opportunity here.

There are also clear links between consumer advice and support and efficient operation of heat pumps once installed. Experience shows that householders used to operating gas boilers (and often still using even these quite inefficiently through lack of knowledge about thermostat settings etc.) will need to adopt new behaviours, informed by a greater background knowledge of their new heating system, to maintain comfort levels and operate their systems efficiently. Accordingly, consumer information, advice and support which supports efficient use will have a dual benefit, keeping electricity bills down for heat pump owners and also minimising total electricity demand for heating, potentially reducing the need to invest in grid capacity. The Scottish Government should continue to ensure that existing advice provision in this areas through its Home Energy Scotland Network is widely available and effectively publicised.

For both the above actions, it will be important to acknowledge that consumers and householders live in a diversity of property types and vary in their resources and needs. Engagement, advice and support will need to be tailored to meet the needs of different segments of the consumer audience.

In addition, government cannot do all that is necessary for consumer engagement, advice and support. As the pace and scale of heat pump deployment expands their market into new settings and environments, heat pump manufacturers and installers will need to understand and respond to consumer concerns and experience to build confidence in heat pumps from an early stage of the roll out. Specific actions in this area that the EAG would like to see industry take are;

  • As also referenced above in section 7.4 on skills and people, it is very important that installers move to act as positive informants on heat pumps to householders who have contacted them with a view to purchasing a new boiler or heating system. At present the large majority of installers are most comfortable advising householders with information about conventional boilers and do not often present a heat pump as a viable alternative with potential benefits. Given the trust householders have in the industry, particularly in local, known firms and the fact that installers are often the first or only source of information on heating system options, appropriate, technology-neutral advice is very important to ensure that when a heat pump is a viable option it is actively and objectively considered by the householder. This is a cultural issue for the industry and will require both explicit recognition that heat pumps are the (near) future of heating in very many homes and buildings and as proposed above, appropriate training for all staff in contact with consumers so they can confidently advise and support householder choices based on their own knowledge of heat pumps.
  • Wide adoption of a common customer journey which is as simple and straightforward as possible, using common standards supported by manufacturers and installers. One thing which would be very helpful in taking this area forward would be an industry-mandated common commissioning standard for all domestic heat pumps, including coverage of key issues such as a clear, comprehensive information of effective and efficient usage of the system and a single point of contact to resolve any downstream issues. Standards for such a commissioning process could be developed by bodies such as the Heat Pump Association or the Microgeneration Certification Scheme (MCS).

Finally, the importance of fuel poverty has been discussed at length at the EAG as it is it important that the transition to heat pumps is a just transition. As referenced, whilst heat pumps can offer significant costs saving in off-gas markets on current tariffs, the situation is less favourable in on-gas areas. There is thus a risk that the heat pump roll-out will both create new and also intensify existing fuel poverty in areas on the gas grid.

This will require careful management, particularly in moving the Scottish Government's fuel poverty programmes to progressively installing more heat pumps, as is recommended in this report. One potential solution is to increase investment in energy efficiency in fuel poor homes so that their overall energy use for heating is minimised even if the unit cost of that energy rises because they are now using electricity for heat pumps rather than gas. There are also other approaches that could be used in combination with greater energy efficiency, for example installation of solar PV to generate some of the electricity load for heat pumps and/or batteries to allow the purchase of electricity when it is cheapest and its storage for later use.

It is recommended that the Scottish Government develop and pilot appropriate measures packages which can provide heat pump solutions to the fuel poor without increasing their fuel bills. Once proven, such packages can then be adopted by Scottish Government fuel poverty programmes to allow these programmes to move to progressively move to a low-carbon basis.


Email: HeatPumpSectorDeal@gov.scot

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