Heat Pump Sector Deal Expert Advisory Group: final report

2. Executive summary

The Scottish Government has accepted that the pathway to net zero for Scotland requires a very rapid large-scale decarbonisation of heat. To facilitate this, the Heat in Buildings Strategy^[2] sets out the Scottish Government's ambition to double the number of zero emission heating systems installed in Scotland every year for the next five years and for numbers of installations to reach 200,000 per year towards the end of this decade. The very large majority of these will be individual heat pumps and connections to heat networks supplied by larger heat pumps and so the net zero pathway requires an equally fast and widespread deployment of heat pumps.

Only some 3,000 heat pumps are currently installed each year so these contrasting figures give some idea of the eye-watering acceleration required. This does not mean it can't be done but it does mean that the Scottish Government and other key stakeholders will have to devote significant resources and work closely together to succeed. The public, as end users of heat pumps, will also need to be engaged and supportive.

The Expert Advisory Group (EAG) does not consider it likely that the upstream supply chain manufacturing heat pumps will constrain their large-scale deployment in Scotland. There is a strong global supply chain manufacturing millions of heat pumps each year, with the Mitsubishi factory in Livingston alone producing 300,000 units annually. There are however, some significant economic opportunities through creating a centre of excellence for heat pumps in Scotland which could support Scottish firms in supplying more components to the local and global tier 1 manufacturers.

In contrast, the downstream supply chain of heat pump installers is limited and fragmented; 90% of installers are SMEs and the EAG believes that it is in this area that the heart of any sector deal lies. The Scottish Government needs to provide confidence to this relatively weak downstream supply chain to allow it to commit and invest in rapid expansion.

This means the Scottish Government stimulating the market. It can do so by committing to at least its doubling targets for heat pumps within its own programmes, for example its fuel poverty programmes. It will also need to work with local authorities and housing associations to build equivalent year on year doubling of heat pump installations into their work programmes.

The Scottish Government will also need to ensure that it commits the same scale of resources to supporting wider heat pump installations by increasing the support it provides through its existing loans schemes at least in line with the annual doubling requirement. It will also need to consider establishing its own grant scheme if the UK Government's replacement for the existing Renewable Heat Incentive is not sufficiently effective to drive the market.

These measures will obviously require the Scottish Government to commit significant financial resources but the other key resource it can, and must, offer is certainty. If the supply chain is certain of the direction of travel and sustained commitment it will invest and grow, if it is not, it won't. The EAG recognises the Scottish Government's commitment to doubling installations each year for five years as a significant contribution to supplying this certainty: incorporating this commitment into its own programmes will be another crucial waypoint and the commitment in the Scottish Green Party Cooperation Agreement to end public support for oil and LPG boilers is a useful initial step here.

However regulation will also be needed. The tightening of emissions standards in the new build market need to go further, faster and for the much larger retrofit market the Scottish Government needs to provide dates for the phasing out of fossil fuel boilers, initially in off-gas areas where heat pumps are already price competitive and then in on-gas areas. There are encouraging commitments in the Scottish Green Party Cooperation Agreement on these matters.

In return for these market-stimulating and regulatory measures and the certainty they provide, the downstream supply chain will need to commit to both re-skilling its existing work force and to invest in additional capacity by increasing the number of new recruits to its workforce, recruiting both young people and people with relevant skills from other sectors. Given the current state of the economy, this provides a clear green recovery opportunity.

In this expansion of the installation workforce, the college sector will be important in providing the necessary training courses and capacity and the Scottish Government can play its part by resourcing these and by incentivising heat pump installation training through attractive apprenticeship rates. However, the industry itself will also need to step up by agreeing clear re-skilling and expansion targets and by committing to creating the necessary number of apprenticeship places. It will also need to commit to diversity targets in this expansion in order both to meet the requirements of a just transition and to fish in the widest possible pool to ensure it can find sufficient recruits.

If all the above is done, then that will take the sector a long way in meeting the challenges of the net zero pathway. However there are also other areas where the market can be supported and other key constraints that must be addressed:

• There will need to be additional support and action from the Scottish Government to ensure installations in a rapidly expanding sector consistently meet high standards.
• There are some areas of technical innovation where government support can help support and increase the rate of deployment and there is also significant potential for business model innovation, especially in the areas of flexible tariffs tailored for heat pumps and of integrated smart systems incorporating energy storage and able to supply balancing services to the grid. Government supported demonstration projects could move the market on in these and other areas.
• Electricity network capacity is a significant constraint on heat pump deployment. The Scottish Government needs to ensure that Ofgem and distribution network operators (DNOs) have full appreciation of the planned very significant ramp up in heat pump installations in Scotland and Ofgem needs to ensure that the network receives sufficient investment to allow this. In addition, DNOs must ensure they have the necessary management and administrative resources to support the regulated governance processes required for connecting a heat pump to the grid, as lack of such resources is already slowing down installations in some areas.
• As building fabric insulation reduces the amount of heat needing to be supplied, it allows smaller, cheaper heat pumps to be installed. This both reduces the investment needed by the householder or building owner and reduces the demands on the electricity grid, helping reduce the grid capacity issues referenced above. Accordingly, it is essential that the Scottish Government continues to invest in support for energy efficiency measures through regulation and via loans and grants to make Scottish buildings 'heat-pump fit'.
• At present heat pumps can be cost-effective compared to fossil fuel heating systems in off-gas areas but not where a gas boiler connected to the grid is an option. The different regulatory regimes for gas and electricity are part of the reason for this; most of the regulated social and environmental levies are made on electricity rather than gas, increasing electricity's relative price. A rebalancing of these costs through action of the UK Government and Ofgem is required to provide an economic as opposed to a carbon incentive for heat pumps.

• There is a strong need for government and Industry to work together to support consumer awareness and engagement on heat pumps. Most householders don't know what a heat pump is or how it works, nor do they realise that they could well be heating their home with one within the next few years. Without a major increase in consumer awareness and understanding, which will require 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 obtained. Again, the EAG has noted the commitment in the SGP Cooperation agreement to deliver a public communication programme to encourage home upgrades, which will provide an opportunity to raise consumer awareness and engagement on heat pumps.

Although there are many areas where action is required, the Scottish Government controls or can effectively influence most of the key levers. Most actions proposed are in this report a ramping up of existing activity, albeit at considerable pace and scale and so, whilst significant effort and resources will be required, there is much to build on. The EAG is confident that, with concerted action by all stakeholders using the route map set out in this report, the Scottish Government's ambitious goals for heat pump deployment can be met.