Lewis: Mortgage market key to heat decarbonisation

Making the switch to low carbon heating attractive and accessible to consumers will be a crucial part of achieving net zero. As part of our Countdown to COP series Utility Week speaks to Eon boss Michael Lewis who explains that a combination of the right financial incentives and consumer education will be key to the transition.

With heating and hot water accounting for around 30 per cent of the UK’s total greenhouse gas emissions, there is a considerable amount of work to be done before the country can achieve its net zero target.

Companies like Eon Energy, which following the acquisition of Npower is the market’s largest electricity supplier, will be on the frontline of making the decarbonisation of heat an attractive proposition to consumers.

For the power retailer’s chief executive Michael Lewis, ensuring the right financial incentives are in place is a must if the sector has any hope of achieving its aims.

“Of course customers will do the right thing to a point but if you don’t get the economics of it right they are going to be rather reluctant to adopt something. We are talking quite big capital investments here, particularly for heat pumps.

“For boilers it’s different, you can mandate simply that every boiler has to be hydrogen ready by a certain date and we know that companies like Worcester Bosch are developing hydrogen ready boilers where you can burn gas in them and then by changing out components you can burn hydrogen.”

For Lewis, the big question is how to incentivise heat pumps. The government’s 10-point plan unveiled last year committed to install 600,000 heat pumps annually by 2028. Lewis sees three key things the government needs to consider in order to achieve its goal.

One is to “pump prime” the market with grants for those in social housing and vulnerable consumers. Another is to change the tariff structure on energy bills and take all the policy costs out of electricity before gradually introducing a carbon tax onto gas – this was outlined in a recent report which Eon co-commissioned.

“The third thing is you have to cover the capital investment itself in the heat pump. We know it’s roughly three times more expensive to put a heat pump in,” he says.

Although he is in favour of schemes like ECO and home upgrade grants, Lewis says they are a “drop in the ocean” compared to the able to pay market. In his view the sector needs to start tapping into the mortgage market, to incentivise consumers to upgrade their home when they buy it. The government meanwhile needs to bring in tax incentives on home upgrades.

“It has to be a package of measures which change the economics of heat pumps versus gas boilers and you do it so it’s triggered when you are making a big investment anyway. You pay for it over a 25-year period of the mortgage and the good news is, there’s a huge £275 billion mortgage market out there.

“If you can tap into just five per cent of that market, £10-15 billion a year, that’s more than enough to deliver this job. That’s how we would see the financing of it, it’s got to be through a mechanism. This is how Germany does it, they have mechanisms in place to do this so that’s how we can square that circle. The other thing we know is that once you start to rollout heat pumps at scale, cost will come down as well.”

Asked whether this risked hiking mortgage repayments for consumers across the country, Lewis says: “In our view if you get the full package right with the tax incentives and the changes to the electricity and gas tariffs, you should see this being cost neutral over the 25-year period and any increases in mortgage payments should be offset in energy costs going down,” he explains.

“What we do know is, we need to get moving now. If we are going to get to 600,000 heat pumps a year as the government set out in their 10-point plan, we are nowhere near that today. We need to start moving now and that means taking some decisions to get that whole thing moving,” he adds.

Elsewhere, the Eon chief says improving the energy efficiency ratings of the existing housing stock is an element that should not be overlooked.

He explains: “From our perspective you’ve got to look at it as a whole package, it’s not just about converting from gas or oil to a heat pump, it’s about making your home a more comfortable environment in which to live.

“That means home insulation also has to play a major part in this transition because apart from anything else, if you just ignore the fact that we’ve got to move away from gas, UK homes are really bad in terms of home insulation.

“We have roughly 19 million homes in energy efficiency bands D,E,F and G. It’s just a no brainer to move them up to A,B and C and it makes the houses better and more comfortable. Then when you put a heat pump in you can improve the ambient temperature of the house and of course zero-carbon is a benefit in itself. So as well as a lower environmental impact from both greenhouse gasses and local air pollution, you also have a more comfortable and better insulated home.”

Education

As well as the right incentives to encourage the uptake of new heating systems, educating consumers on what these new technologies are and how they will benefit them is another vital aspect of the transition.

Smart meters are a good example of new technologies being adopted en-masse and to help with the rollout a government-backed not-for-profit campaign was established to grow awareness and understanding, as well as confidence, in the new devices.

 When asked for his thoughts on the creation of a body like Smart Energy GB for the energy transition, Lewis is not overly enthused by the idea.

“I’m not sure I would go about it like that. I think the government clearly has to take a lead but also the onus is on us. You’ll see more of that from us, as we move into really driving the transition, that we will really start to communicate with customers on this as a matter of routine.”

As a real-world example of how educating customers helps to power the transition, Lewis highlights how during one customer immersion session there were concerns raised about a district heating project run by Eon.

“A number of them were unhappy that they were locked in because it’s a district heating system and they couldn’t switch. I explained this is part of the zero-carbon transition, in these types of housing in dense urban areas, this is how we decarbonise heat.

“Once I explained that to people, they said they understood it and that it was part of a bigger plan, they were much more open to it. So I think that means when you talk to customers directly and explain it they are much more open to it, so absolutely education is a good thing.”