Heat in buildings strategy: business and regulatory impact assessment

4. Rationale for Government Intervention

We need to reduce the demand for heat in buildings through the installation of fabric efficiency measures, and transition heating systems to zero emissions technologies. This section briefly describes why the presence of market failures means it is unlikely we will achieve the scale of decarbonisation at the pace required to meet our climate change targets in the absence of government intervention.

4.1 Negative Externalities

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.

4.2 Distributional impacts

The transition to zero emissions heat will require additional investment over and above a business-as-usual scenario. How additional costs are distributed depends on a range of factors including the energy market framework, taxes and subsidies, the technologies deployed, and those displaced.

Three significant distributional risks arise which require government intervention:

• Impacts on low-income households and those currently in or vulnerable to fuel poverty. Government intervention will be necessary to ensure those unable to pay increased energy costs are not harmed or left behind in the energy transition.
• Fairness between those who make the transition early (and so potentially face higher lifetime costs) and those who do so later. In the absence of government intervention, building owners / occupants may resist converting to zero emissions heat on grounds that delay could expose them to lower lifetime costs.
• 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.

4.3 Imperfect information

Evidence suggests a significant proportion of consumers are not aware of the contribution of their fossil fuel-based heating system to Climate Change.^[17]

Furthermore, challenges in quantifying reductions in fuel bills following energy efficiency measures or the health impacts of heat and energy efficiency can lead to inaction amongst homeowners and landlords even where the private net benefit is positive. Empirical evidence suggests that consumers can have difficulties when evaluating consumption decisions where the costs are imposed up front but the benefits are realised over a longer time horizon.

4.4 Immature market for zero emissions heating systems

Early adopters may face limited choice between market participants for zero emissions technologies due to current low annual volumes of zero emissions heat installations. Government interventions is needed to grow levels of demand for zero emission heating technologies. This will give installers confidence to invest in the equipment and skills necessary to deliver the rollout of low and zero emission heat, whilst also achieving economies of scale and learn-by-doing effects.

4.5 Coordinating collaborative efforts

The transition to low and zero emissions heat 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. Certain fabric measures such as cavity and solid wall insulation in multiple occupancy buildings require mutual consent and collective efforts from each household.