News

Clean Heat Market Mechanism

Published: 11-12-2023

The UK has committed to achieving Net Zero CO2 emissions by 2050.  One of the highest contributors to CO2 is from home heating and hot water production which is estimated to be around 16% of the total. Natural Gas-Fired heating and hot water systems are presently installed in around 23m households with a further 1.5m homes that are off the gas grid using Oil or LPG.

To achieve the target of Net Zero it will be 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. Therefore, the Government have set a target for 600,000 Heat Pumps to be installed annually by 2028. The present installation rate for Heat Pumps is around 60,000 annually whilst the installation rate for boilers is upwards of 1,500,000.

On 30^th November 2023 the Government published their long-awaited response to the Clean Heat Market Mechanism, (CHMM). The CHMM has been designed to increase the rather slow uptake progress of Heat Pumps by placing an obligation on boiler manufacturers to increase the consumer demand for Heat Pumps or Hybrid systems.

Scheme Details

In year one of the scheme, manufacturers of boilers and heat pumps will have to substitute or match 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, (Newbuild is 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).

The market for heat pumps for 2023 is likely to be around 60,000 – 70,000 with around half of these being installed into newbuild applications (these cannot be counted towards the target quota). The CHMM is setting targets of around 60,000 into retrofit installations in year one, roughly double the current market size for this type of installation increasing to 90,000 in year two and rising to 450,000 in year four.

Implications of the Clean Heat Market Mechanism

The impact assessment for the CHMM was published in April 2023 and whilst much of the detail within this was questionable, it is now seriously out of line with changes that have occurred, 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, (this will impact the total fines to manufacturers as they can now be continued to be replaced with a boiler rather than a heat pump effectively removing from the market 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.

Whilst the government are stating that the scheme has been designed to not penalise manufacturers with punitive fines or levies, it is reasonably obvious to see that the targets that have been set are impossible to meet 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 and to be able to invest into the market we have no choice but to raise the price of our gas and oil-fired boilers to pay for the fines, in effect a “Boiler Tax”. The increase is around £120 per boiler, none of which will benefit Worcester Bosch in anyway and interestingly, none of which will benefit the 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.

We will continue to monitor and observe the scheme and will remove or reduce this “Boiler Tax” should we see changes made to the scheme or exponential growth in heat pump demand however, neither of these seem likely to materialise.