Delivering net zero in 2023

Every three months, another 2% of the time that’s available to achieve net zero elapses. After the turmoil of the Covid years, the gas crisis and the disruption caused by the Russian invasion of Ukraine, 2023 is a key year for delivery. As the Rt Hon Chris Skidmore MP says, the cost of “not zero” is higher than net zero. 

Around 23% of UK emissions arise from heating our buildings because we mainly use fossil fuels such as gas, oil and coal. We need to progress at pace to use heating technologies that exist to make the most of low carbon electricity generation. That means cracking on with electrifying heat by installing smart thermal storage and heat pumps. It also means valuing heat flexibility to minimise expensive grid investment.

During 2023, there are five major areas where the UK government can support the transition to net zero and reduce emissions from buildings. 

1. Reform incentives through the Spring Statement

The Spring Statement on 15 March 2023 provides the government with an opportunity to address incentives to install low carbon, flexible heating. 

In March 2022, the UK government reduced VAT to 0% for 5 years for those installing heat pumps. This included thermal storage when installed as ancillary to a heat pump or solar. However, the change did not apply when thermal storage is installed as the heat source, despite the energy saving benefits of flexible heating. In the Spring Statement, we recommend that the government changes the definition of “energy saving materials” in the VAT Act 1994 to zero rate the installation of smart thermal storage in all circumstances. This would encourage the transition to low carbon technologies and provide parity between low carbon electric heating options such as smart thermal storage and heat pumps.

In the Spring Statement, the government could also amend tax incentives to encourage businesses to invest in their plant, infrastructure and buildings. This could include incentives to install low carbon generation such as solar, as well as improving the efficiency of heating and cooling systems. For instance, the government could extend the super-deduction tax relief scheme beyond March 2023.

These incentives are particularly important now that the government has cut back the energy bill support available to most businesses. The Energy Bill Discount Scheme will provide most businesses with very little financial support with energy bills from April 2023. While it is not the government’s role to subsidise energy bills long-term, the government cannot let high energy prices destroy businesses that are otherwise viable and successful.

2. Make progress with the Heat and Building Strategy 

The UK government published its Heat and Building Strategy in October 2021. We recommend that the government proceeds during 2023 to implement  the various regulatory changes set out in the strategy. This starts with passing the Energy Security Bill promptly and then working at pace on secondary legislation and standards.

For instance, the government consulted in October 2021 on whether to restrict the installation of new fossil fuel heating systems for properties off the gas grid from 2026. We recommend that a decision is made during 2023 about whether to proceed with this change. Providing clarity on the timing would help households, energy suppliers and manufacturers of heating appliances.

We also recommend that the government progresses at pace with the introduction of rules for Energy Smart Appliances from 2025 and a market-based mechanism for low carbon heating from 2024. Both changes require the prompt passing of the Energy Security Bill. 

3. Step up the pace on REMA

Developing an electricity market that works for the future means deep reform. The right framework will encourage the building of more renewables, ensure network upgrades are efficient by maximising flexibility and facilitate electrification of heat and transport.

The UK government consulted in July 2022 on a Review of Electricity Market Arrangements (REMA). While we recognise this is a complex project with intertwined changes, we recommend that the government proceeds at pace during 2023. In particular, we encourage BEIS to decide whether to split out the renewable generation market from the fossil fuel generation market. This reform would develop pricing signals that reflect the lower cost of renewables in the wholesale electricity market and reduce the role of imported fossil fuels in setting the marginal cost. 

4. Provide energy advice for the transition

People and businesses will need support to manage the transition to net zero over the next two decades. 

The UK government committed in the British Energy Security Strategy in April 2022 to improve energy advice for people and businesses. The strategy committed to launching additional support for homeowners (including telephone support) and local area advice for energy consumers. The strategy also committed to establish a dedicated energy advice offering for smaller businesses.

While the government has revised some of the advice available on gov.uk and launched a campaign on energy efficiency, more is needed for the net zero transition. We recommend amending the Consumers, Estate Agents and Redress Act 2007 to extend the advice role of Citizens Advice to helping people choose the best low carbon heating system for their home or business. Resourcing a respected consumer group like Citizens Advice to provide advice on heating will give people and businesses the confidence to change their heating systems and upgrade their building fabric. The Energy Saving Trust could also provide this role, as it already does in Scotland.

5. Respond to the Net Zero Review

Finally, the UK government needs to respond to the Chris Skidmore Net Zero Review and has a legal obligation to update its Net Zero Strategy by March 2023. We recommend that the government and Ofgem adopt the recommendations to encourage flexibility, including heat flexibility. 

This means valuing the flexibility provided by dedicated smart thermal storage and the thermal mass of the buildings. To incentivise take-up of heat pumps and smart thermal storage, we recommend that energy suppliers are required to provide at least one time of use tariff for electric heating, starting in December 2023.

It also means the government providing Ofgem with a clear steer to introduce mandatory half-hourly settlement, for instance, by December 2023. Half-hourly settlement ensures the charges that energy suppliers face reflect the costs and carbon intensity of energy at different times of day. This accurately values the electricity produced, improving the ability and incentive for energy retailers such as energy suppliers and aggregators to offer time of use tariffs.

We recommend that the government consults on rebalancing the policy costs of electricity and gas. The government could amend the Renewables Obligation Order 2015 to reallocate legacy policy costs such as the Renewable Obligation permanently into general taxation. This would reduce the artificial cost difference between electricity and gas and encourage the transition to low carbon electric heating and transport. 

Working together

Private sector investment, innovation and the right regulatory reforms are a powerful combination. This requires the government to make decisions, provide long-term certainty and ensure regulation does not get in the way of change.

If you have any questions or ideas about the work of Thermal Storage UK or are interested in joining us, get in touch.