Weekend Press: High costs and uncertainties cast a chill over Britain’s heat pump market

This weekend in the national presses, commitments are made by world leaders to accelerate ending fossil fuel use; calls for a scrap on windfall taxes to incentivise new wind projects; small businesses continue to struggle with energy costs; and Thames Water urges people 'if it's yellow let it mellow'.

High costs and uncertainties cast a chill over Britain’s heat pump market

Cutting carbon emissions in the home is a key part of the UK’s drive to meet net zero climate targets and one of the most promising alternatives to a domestic gas boiler is a heat pump, which uses electricity to channel warmth from the ground or the air into the home.

Yet although heat pumps can transform 1 kilowatt of green electricity into 3kW-worth of heat, their benefits have been overshadowed by concerns about cost, and uptake has been low.

The government’s aim is to have 600,000 heat pumps a year being installed by 2028. But only 55,000 were fitted in 2021, while 1.5m gas boilers were installed.

A £450m scheme offering grants of £5,000 towards the cost of a heat pump was launched last May to a tepid response. Figures released last week by Ofgem show that by the end of March the scheme had only managed to give out slightly more than a third of the grants available for the financial year. It issued just 11,996 vouchers out of the 30,000 available, of which 9,981 were redeemed – equivalent to £50.16m of the £150m of grants on offer annually for the next three years.

So why has the UK’s home decarbonisation strategy gone cold and what can be done to restart it?

The blame for the “disappointingly low” take-up lies mostly with the government, according to a recent parliamentary report. In a letter to ministers, the House of Lords environment and climate change committee said public awareness of low-carbon heating systems was “very limited” and promotion of the scheme had been “inadequate”. A shortage of installers and “insufficient independent advice” were also hindering take-up, the committee said.

Then there is the issue of cost. Even with a £5,000 grant, households still need to pay the balance of the upfront cost of installing a pump, which is on a par with many new boilers and can be too great for households to bear. The technology works best in homes which are well insulated and warmed by wide radiators. This is true of boilers too, but a heat pump is less able to mask an inefficient heating system, meaning extra upgrades costing thousands of pounds may be required before installing the pump itself. The government’s plans to improve energy efficiency and insulation have also been sluggish and widely criticised.

Britain sold the fewest heat pumps relative to population size in Europe last year, according to the European Heat Pump Association. Such resistance runs decades deeper than recent concerns over costs and logistics, according to Dave Sowden of energy consultancy Gemserv. “The reason the UK is different from the rest of Europe is that it has got the most dense penetration of the gas network of all European countries and, with that, easy access to gas for heating and cooking,” he says. “Boilers have become really popular in the UK and that is what people have got used to. There is a fear of the unknown, and some of that fear is unfounded.”

Britain’s earliest central heating boilers, installed between the 1960s and 1980s, typically ran at very high temperatures. This has set up an expectation that a well functioning heating system should be able to deliver strong blasts of heat on demand, Sowden says. By contrast, a heat pump gently maintains the ambient temperature of a room by using more efficient, lower-temperature top-ups through the day.

The Guardian

More than 1m UK small businesses ‘trapped in high-cost energy tariffs’

More than 1m small businesses may be paying energy bills significantly above market rates after becoming trapped in long-term contracts fixed when prices reached a historical peak last year.

Trade groups representing businesses from metalworkers to convenience stores have joined forces to warn of a “perilous situation”.

They are calling on ministers to force suppliers to renegotiate unaffordable energy deals struck last summer or risk thousands of insolvencies that would hit jobs and the UK economy.

Around a quarter of the UK’s 5.5m small businesses – over 1m companies – may have been forced to renew their long-term energy supply contracts at the peak of the market, according to separate surveys from the British Chamber of Commerce (BCC) and the Federation of Small Businesses (FSB), including through coercion or mis-selling.

At the time many small firms struggled to find an energy deal because suppliers either refused to supply small businesses or demanded large financial deposits.

Since then market prices have fallen, and on 1 April the government cut its financial support for business, but companies are still locked into long-term contracts that will force them to pay inflated prices based on last year’s peak for months or even years to come.

In a letter to the business secretary, Grant Shapps, seen by the Guardian, the Confederation of British Metalformers (CBM) described the situation as the “biggest mis-selling scandal since PPI”.

Stephen Morley, the president of the CBM, said small manufacturers faced a “perilous situation” that could put “another nail in the coffin of the British manufacturing sector” while energy suppliers and brokers make “huge profits at the expense of UK competitiveness”.

The warning emerged weeks after the energy regulator, Ofgem, admitted that it was “very concerned” about the behaviour of some energy brokers and suppliers in relation to business energy customers.

In a letter to the chancellor of the exchequer last month, Ofgem said companies faced energy bills that are “higher than is explained by market conditions”, and in many cases have been forced to pay much higher deposits and standing charges.

Morley told the Guardian that a number of small manufacturers in the West Midlands had already gone bust since the government ended its original support scheme at the end of March, after just six months.

Small manufacturers are understood to be some of the worst affected due to their high energy use. The collapse of these firms, which make the components used by larger manufacturers, could have consequences for the UK’s supply chains, he said.

The BCC estimated over a quarter of the UK’s small businesses signed new energy contracts when prices were at their peak at the end of last summer. About 60% said they would face difficulties paying after March 2023.

The Guardian

G7 ministers agree to speed up phaseout of fossil fuels

G7 countries have pledged to accelerate a gradual phaseout of fossil fuels and the shift towards renewable energy, as Japan faced significant pushback on central parts of its climate strategy. The agreement reached on Sunday followed weeks of fraught negotiations between Japan and other member states as the world’s most advanced economies sought to respond to criticism that they were backtracking on climate targets following the Ukraine crisis. In its final communiqué from this weekend’s summit in Japan’s northern city of Sapporo, the G7 committed “to accelerate the phaseout of unabated fossil fuels so as to achieve net zero in energy systems by 2050”.

In earlier drafts, Japan had opposed adding the phrase, but the UK, Germany and France negotiated successfully for its inclusion. The G7 also pledged to increase collectively offshore wind capacity by 150 gigawatts by 2030 and solar capacity to more than 1 terawatt. In addition, members agreed to work together to reduce Russia’s influence on supply chains in the nuclear energy sector following its invasion of Ukraine and weaponisation of gas supplies to Europe.

Environmental groups said the final version was far more ambitious than earlier drafts on the G7’s commitment to tackling the climate crisis. But member states once again failed to set a firm timeline for phasing out coal-fired power plants amid continuing opposition from Japan, which has increased its reliance on coal, natural gas and oil following the Fukushima Daiichi nuclear disaster in 2011.

Tokyo has also argued that global climate efforts need to be supported by developing countries, and has pushed for the use of ammonia as a low-carbon energy source alongside gas or coal to reduce emissions from existing fossil fuel infrastructure. But Japan’s approach has come under fire from environmental groups and scientists, who have warned that coal needs to be rapidly phased out if the world is to meet the targets of the Paris Agreement, where countries agreed to limit global temperature rises to less than 2C and ideally to 1.5C. Temperatures have already risen by 1.1C since the pre-industrial era.

The 36-page document issued on Sunday reaffirmed the G7’s commitment “to achieving a fully or predominantly decarbonised power sector by 2035”, but the phrasing leaves open the possibility for continued use of fossil fuel-fired power.

“By failing to commit to fully decarbonising the power sector, to slashing road sector emissions and totally eliminate international fossil fuel finance, the ministers really missed an opportunity to provide leadership in addressing the climate emergency,” said Alden Meyer, senior associate at E3G, a climate consultancy. Last year, the G7 added a loophole to a previous pledge to end investments in overseas fossil fuel projects by the end of this year and said investment in liquefied natural gas was a “necessary response to the current crisis”.

The Financial Times

Community Windpower calls on government to scrap windfall tax for new projects

One of the UK’s largest onshore wind operators has called on the government to exclude new developments from its windfall tax on renewable electricity generators, claiming it has made investments “almost impossible”.

Community Windpower, a private company that operates eight wind farms in Scotland, repeated a threat to sue the government — first made in December — unless alterations were made to the Electricity Generator Levy (EGL) introduced last year. Renewable, nuclear and biomass companies face a 45 per cent levy on wholesale revenues above £75 per megawatt hour under the EGL.

The measure was announced by chancellor Jeremy Hunt in November to help pay for the subsidy scheme to partially shield households from high energy prices in the wake of Russia’s invasion of Ukraine.

Following the company’s initial threat to take legal action over the windfall tax, the government “has simply refused to engage on the EGL over recent months”, said Rod Wood, managing director at Community Windpower. He added: “Ministers seem oblivious to the very real damage that this discriminatory and regressive levy will do. Without changes to the EGL, shovel ready projects simply will not get built.”

Community Windpower is proposing to invest around £1.5bn in new onshore wind by 2025. It claimed the levy was “discriminatory” as gas and coal-fired electricity generators were excluded.

The tax was intended to capture some of the “exceptional” revenues made by renewables generators, who were unaffected by the sharp jump in input prices, as electricity prices soared.

Some low-carbon power companies, including Community Windpower, have enjoyed even higher revenues as they benefit from a longstanding government subsidy scheme called the “renewables obligation”.

Community Windpower said it had retained law firm Mishcon de Reya to explore legal options if amendments were not made to the EGL in parliament’s upcoming finance bill, which is expected in the next few weeks. An analysis commissioned by the company found that if the government excluded new developments from the levy, the Treasury would still raise more than 95 per cent of the expected revenue from the windfall tax, which will be in place until 2028.

The company wants the government to bring forward the date from which the threshold price of £75 MW/h is adjusted for inflation from January 2024. It said not doing so would exclude “the full period of high inflation and skyrocketing costs since the invasion of Ukraine”. The levy took effect in January.

The Financial Times

Don’t flush after a wee, says water executive

Britons should consider not flushing the lavatory after urinating and taking shorter showers to secure future water supplies, according to a senior water executive.

Cathryn Ross, strategy and regulatory affairs director at the UK’s biggest water company, Thames Water, said today’s water consumption levels were “unsustainable” in the long term. The average Briton uses 142 litres a day, with Ross’s customers slightly higher at 146 litres.

Despite Britain’s image as a wet and rainy country, experts are increasingly concerned that climate change, population growth and a dry southeast will risk future water supplies without significant interventions. There is a one in four chance that large numbers of households will have their water supply cut for an extended period due to drought in the next 30 years, the government’s infrastructure adviser warned last month.

Last year the government set a target of reducing average water demand by a fifth by 2038, and behaviour change by individuals is considered an essential part of the solution. Asked if people should adopt the mantra of “if it’s yellow, let it mellow, if it’s brown, flush it down”, Ross said “absolutely, yes.” She added: “The biggest thing that everybody can do to reduce their water consumption day-to-day is shorter showers and not flushing the loo every time.”

The third measure that Ross urges is a curb on hosepipe use during heatwaves. Thames Water did not impose a hosepipe ban until late August last year, amid drought conditions. A hosepipe running for ten minutes consumes as much water as the average person in a day.

“Back in July last year, that’s what people were doing. And it’s a reasonable thing to do. But if we can explain to everybody why not doing that makes a really important contribution to everybody having enough water and protecting the environment, that’s a really important message,” Ross said.

Thames Water expects water demand in its region — across London, Oxfordshire and around Guildford — to jump from 2.6 billion litres a day to 3.6 billion litres a day by 2050. As well as “massive behaviour change”, Ross said that meeting the extra consumption would require more reservoirs and transfers of water from wetter parts of the country.

She said it also meant tackling the 24 per cent of water the company loses to leakage. Smart meters, which should be in a million households on the company’s patch by 2025, are also expected to make people more conscious of water use and help detect leaks.

Ross said she agreed that the UK had failed to prioritise new reservoirs, given the most recent opening of a significant one was in 1991 and the next is not due to open until 2028. She said it was “crazy” that a global city like London only had three and a half weeks of water storage.

“We desperately need more water storage,” she said. The company wants to build a new reservoir in Oxfordshire near Abingdon, where a previous reservoir was rejected by the government in 2011.

Despite local opposition, the firm also hopes to go ahead with a scheme to draw water from the Thames near Teddington lock, pipe it to reservoirs in east London and replace it with heavily treated effluent from its Mogden sewage treatment works.

“The Thames Water plans to swap river water for treated sewage at Teddington smack of desperation,” said Magnus Grimond of the local swimming group, Teddington Bluetits.

However, Ross said people should be reassured the water “is safe, it’s treated, it’s clean”. “People need not be concerned, and if there’s more we can do to help people understand all the treatment process we go through, we’re happy to do that.” A decision on the scheme is expected in June.

The Times

Ofgem staff were ‘at home for crisis’ as figures reveal just eight per cent of staff were in the office at the height of the pricing emergency

Only eight per cent of staff at the UK’s energy watchdog were in the office at the height of the pricing crisis, figures reveal.

A Freedom of Information request has shown that just one in 12 Ofgem employees were at their desks as bills hit record highs last autumn.

In 2021, 30 energy suppliers went bust, and bill-payers have had to shoulder the £3 billion cost.

Ofgem ‘failed to act against unfit energy suppliers’, Citizens Advice said.

TaxPayers’ Alliance’s Joe Ventre commented: ‘Taxpayers will be shocked by these low occupancy rates.’

An Ofgem spokesman said: ‘Whether from home or from one of our three offices, our top priority remains to protect consumers.’

The news comes after Ofgem was forced to hand consultants millions of pounds to help clear up the mess left by the collapse of gas and electricity suppliers.

Household customers were left to foot a bill of nearly £3 billion when 31 firms went bust during 2021 and 2022, through a levy added to all bills.

Since the start of the crisis, Ofgem has spent £32 million on consultants, according to Tussell, a firm which tracks Government contracts.

Baringa recently landed a six-month deal worth £330,000 to help out with Supplier of Last Resort (SoLR) payments – costs incurred by suppliers who step in when another firm goes bust.

At least 13 other contracts have been given out by the regulator, including to KPMG, which earned almost £2.5 million for five contracts.

Daily Mail

The dangers of asset managers when it comes to long-term infrastructure

Amid all the recent turmoil in energy markets, a significant transaction went largely under the radar: the January 2023 acquisition of a controlling share of National Grid’s UK gas transmission and metering business by Macquarie Infrastructure and Real Assets, in a consortium with the British Columbia Investment Management Corporation.

MIRA, one of the world’s leading infrastructure asset managers, maintained that it would be a committed long-term investor, explicitly signalling its intent “to remain invested in the business over multiple regulatory periods”.

One of the main reasons that pension funds and insurance companies typically give for investing in infrastructure is its maturity profile.

Their liabilities are mostly long-dated, and they seek long-dated assets to match. Infrastructure fits the bill. In turn, governments around the world have welcomed pension funds and insurance companies as investors in infrastructure — from energy to water, telecommunications and transportation — because of exactly this professed long-term commitment.

But what happens when such investors invest in infrastructure not directly, but indirectly, via asset managers such as MIRA? This, it is worth noting, is the norm: some three-quarters of infrastructure investment by pension plans in terms of investment value is channelled through asset managers’ unlisted funds.

Macquarie itself has developed something of a reputation for short-termism. Under Macquarie’s control from 2006, Thames Water was repeatedly attacked for underinvesting and for the resultant water and sewage leaks. In 2018, Ofwat, the UK industry regulator, lost patience and fined it a record £120mn.

But Macquarie had no need to worry. Having sold its final shares in Thames the previous year, it, as one commentator put it, “had gone, leaving others to take its hit”.

Nor is Macquarie alone in this. Consider KKR’s controversial ownership of the municipal waterworks of the city of Bayonne in New Jersey. Lauded by investment partner United Water for its “long-term vision” upon taking control in 2012, KKR sold out to a storm of local protest just five years later.

Asset managers themselves tend to argue that these are exceptions. In the face of criticism, they insist that ordinarily they are in things for the long haul. In particular, they point to their open-ended, “permanent” or “perpetual” capital vehicles, which have no set lifespan, and which, managers maintain, allow them to plan and invest for the long term.

But most asset-manager investment in infrastructure occurs through closed-end funds with fixed lifespans (normally of 10-12 years), which necessitate asset disposal before the end of the fund’s life.

More than 90 per cent of institutional-investor commitments to unlisted infrastructure funds between 1990 and 2020, the vast bulk of which occurred after 2007, were to funds of this type.

This makes asset-manager investment in infrastructure problematic. On the one hand, infrastructure assets, such as real estate, are differentiated from other assets in which the private sector invests precisely by their long-term nature.

But on the other hand, the preponderance of closed-end funds encourages short-termism and disincentivises capital spending. Why invest for a future you will not see or profit from?

The managers of open-end funds are no less incentivised by performance fees than the managers of closed-end funds.

And to the extent that fund performance is driven by rapid asset disposals — which research indicates is clearly the case — the former will be no less focused on sale than the latter. So much for investing in infrastructure for the long term.

The Financial Times

Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.