News

Clean Heat Market Mechanism

Published: 14-12-2023

On 30^th November 2023, the Government published their long-awaited response to the Clean Heat Market Mechanism (CHMM) which as of the 1^st January 2024 will become effective with some minor amendments.

The CHMM is intended to increase the slow uptake progress of Heat Pumps by placing an obligation on boiler manufacturers to increase the consumer demand for heat pumps or hybrid systems.  

Why has the Clean Heat Market Mechanism been introduced?

The CHMM was introduced to aid the UK in its commitment to achieving Net Zero CO2 emissions by 2050 and to reach this goal, the Government is targeting 600k heat pumps to be installed annually by 2028.

The CHMM has been developed to speed up the adoption of heat pumps in UK homes as the present installation rate for heat pumps is around 60,000 annually, whilst the installation rate for boilers is upwards of 1.5m.

To achieve the target of Net Zero it is necessary to use alternative technologies to heat our homes. Whilst there are several technologies being trialled and developed the most immediately available is electrically powered heat pumps or hybrid systems.

One of the highest contributors to CO2 is from home heating and hot water production which is estimated to account for 16% of the national total. Currently, natural gas-fired heating and hot water systems are presently installed in around 23m UK homes with a further 1.5m homes that are off the gas grid using Oil or LPG.

How this effects Worcester Bosch?

In year one of the scheme, manufacturers of boilers and heat pumps will have to match or substitute 4% of their boiler sales with heat pumps. This rises to 6% in year two and gradually increases year on year until around 25% of their boiler sales are matched or substituted with heat pumps or hybrid systems.

Manufacturers must submit their ‘factory gate’ boiler sales to the scheme managers so their target quota of heat pumps can be set. The quota can only be met by;

• An installed and registered heat pump via MCS, (Micro Certification Scheme).

• An installed and registered heat pump with MCS will qualify for one credit towards their target, a hybrid system qualifies for 0.5 credits.

• Heat pump sales into retrofit situations, (Heat pump installations into new build use cases are excluded).

For every heat pump or hybrid that the manufacturer is short of their target they will be fined £3,000 or alternatively they may have the opportunity to purchase a credit from a non-obligated heat pump manufacturer (that is a heat pump manufacturer who doesn’t sell boilers).

According to industry forecasts, the market for heat pumps for 2023 is likely to be around 65,000 units and central forecasts show the market increasing to around 80,000 appliances in 2024, with around half of these being installed into new build applications (and therefore not being counted towards a target quota within the CHMM).

This will result in a 2024 retrofit market of around 40,000 heat pumps for all manufacturers to compete for. Based on a boiler market of over 1,500,000, the CHMM is setting targets of around 60,000 into retrofit installations in year one (currently 50% above the forecast market size for this type of installation) and increasing to 90,000 in year two before rising to 450,000 in year four. In short, the heat pump market will not support the volume the CHMM requires, and penalties are therefore inevitable.

Achieving the Clean Heat Market Mechanism quota

We have been consulting with the Government over the past year on how the CHMM can be delivered.

The impact assessment for the CHMM was published in April 2023 and this has now changed given recent developments, namely the Prime Ministers statement in September 2023 which included the following changes:

• The deferment of the ban on Oil and LPG boilers from 2026 to 2035, (effectively reducing the market potential for heat pumps until that date by upwards of 60,000 heat pumps or hybrids annually).

• The announcement that around 20% of homes will be exempted from having a heat pump.

• The scrapping of a requirement for Landlords to raise the EPC rating of their properties to a Band Level C by 2028.

Clean Heat Market Mechanism implications to Worcester Bosch

The final CHMM scheme announced on 30^th November 2023 does not exist at sufficient scale in the UK domestic market for manufacturers to satisfy the proposed CHMM quotas and will result in significant penalties for the gas boiler industry.

Whilst the government is stating that the scheme has been designed to not penalise manufacturers with fines, the targets that have been set are clearly unachievable within the timescales allowed. Therefore, it is inevitable that manufacturers will be fined heavily which puts many of them into either a non-profit situation or even loss making from as soon as years one or two of the scheme.

Consequently, to continue as a business we are regrettably forced to pass these fines on to the market in the form of a CHMM levy on every one of our gas & oil boilers. The increase is £120 per boiler in year one of the scheme, exactly equivalent to the CHMM requirement. Worcester Bosch will not benefit in anyway and interestingly, neither will market growth for heat pumps as the revenue raised from the fines will go to the Treasury and not be used to grow demand for heat pumps. This does, however, support the governments’ overall goal of closing the price gap between a gas boiler and heat pump installation.

We will continue to monitor and observe the scheme and will remove or reduce this “CHMM levy” in line with policy changes or exponential growth in heat pump demand though both currently seem unlikely to materialise in the near future.