Heat Pump Grants vs Net Zero VAT: Our View
At the end of September, the government updated their net zero and sustainability strategy with a clutch of target and policy changes. Many of these are viewed negatively in the retrofit industry but there was one positive development: the small increase in the BUS grant, up from £5,000 to £7,500.
At the moment there are few grants or incentives available for property owners or tenants despite the government’s ambitious targets to achieve “Net Zero” by 2050. The one exception is the Social Housing Decarbonization Fund (SHDF) which targets social housing with poor Energy Performance Certificates (EPCs), aiming to bring them up to an EPC of C or better. The social housing sector accounts for about 17% of all housing in the UK, though figures are unavailable for the number of properties within the sector with an EPC of D or below.
Previously there have been grants linked to solar PV and other technology, available through energy providers, and a scheme assisting private owners with low-cost loans.
The Boiler Upgrade Scheme (BUS grant) essentially replaced this, aiming to deliver a very simple solution with simple rules. The BUS grant offers a one-size-fits-all £5,000 grant towards a heat pump, very recently increased to £7,500 after lower-than-anticipated take-up over the first year.
The extra £2,500 will be cheering to those home owners able to install a heat pump. It provides that little bit more to help bring this energy and carbon-saving technology into play.
We’re big advocates of heat pumps and we hope this will make the programme a success, though ironically, the apparent* increase in funding arrived at the same time that legislation mandating no new gas boilers installed in new homes was postponed by another 5 years, to 2035.
However, this is hardly going to be a game-changer.
What the increased grant amount doesn’t do is address any of the shortcomings of the grant itself. In order to be in a position to install a heat pump under this grant, homeowners face a couple of challenges. The first is that no matter how little cavity wall you may have in your property, it must be insulated. That means that if you have a tiny bathroom extension built with cavity wall that affects less than 5% of your building envelope, you have to install this upgrade first, yet no cavity wall installer will consider providing insulation on such a small area. There are other specific recommendations on your EPC which you must comply with, whether or not they will make much improvement at all. The extra £2,500 may not go far enough to fix those issues. More importantly, the number of properties that can accommodate a heat pump is limited in several key ways. Most flats cannot install an outdoor unit since the installation location will be too close to the next property. There are a few technologies that work well for smaller flats that don’t require an outdoor unit, but these are specifically excluded under the terms of the grant.
We would advocate moving to a much more equitable zero-rated VAT applied to all retrofit work rather than a limited-application grant like the BUS grant. At the moment, zero VAT can only be applied for heating controls, Air Source Heat Pumps and solar PV as well as certain insulation work. Insulation, widely seen to be the most critical of these measures, is zero-rated only under very specific rules which our clients have found nearly impossible to adhere to. Furthermore, replacement windows and doors are excluded, which is daft, considering that windows and insulation must work together seamlessly in order to install this measure safely. The current wording is so baffling that our What’s App group of highly qualified retrofit professionals cannot agree on what it all means. Zero VAT for retrofit under a simplified system would be equitable and technology-agnostic. A much broader population would benefit. Furthermore, insulation, including window upgrades, is required to make people come out of fuel poverty (last check this included over 20% of the population) whereas ASHP won’t lower most people’s fuel bills or make their homes any less leaky, damp, or unsafe.
Another “big picture” option would be for the government to remove the link between electricity price and gas which researchers have shown would significantly lower the price of electricity now that so much is generated by renewables. Though there is always a risk with lower prices that people would simply use more electricity, electricity would still be pricey so it is not clear that this would be the case. It would make electric heating a much-more budget-friendly option compared to gas so more would be encouraged to install low-carbon heating systems (not just large ASHP units but also smaller types of ASHP that work in flats) because people’s electric heating bills really would be much cheaper over the long term using these technologies. At the moment we have to encourage people to bet on the fact that electricity will continue to fall relative to gas, without having any concrete proof that this is going to be the case.
The BUS grant, though welcome in some ways, seems to fix nothing structurally or long-term. We need bolder plans if we are going to make meaningful gains in our journey to Net Zero.
Zero VAT for Retrofit is something we can get behind. It would be a small start, but a meaningful one.