The Boiler Upgrade Scheme (BUS) is essential in encouraging the adoption of heat pumps for domestic space heating and hot water in the UK, however, in its current form the scheme has a number of drawbacks. There are a number of ways in which it could be improved that are discussed below.

Background

The Boiler Upgrade Scheme is paid for through general taxation. It provides grants of £7500 for Air-to-Water (A2W) and £2500 for Air-to-Air (A2A) heat pumps when they are installed as a replacement for a gas boiler. BUS grants are also available for replacing oil boilers and direct electric boilers, however, here we focus on gas.

Existing electric supplementary heaters are permitted to stay in place e.g. electric towel rails, electric immersion heaters, etc. The output of the heat pump must cover the full space heating requirements of the property, and together with any supplementary appliances, it must also cover the space heating and hot water requirements of the property.

The full regulations are here:

https://www.legislation.gov.uk/uksi/2022/565/regulation/9/made

How the scheme could be improved

Technology agnostic

At present, the amount of the BUS grant depends on the technology used rather than only on the desired outcome, i.e. low carbon heating. This situation should be avoided since it leads to a poor use of public money. As an example, consider a property with two viable alternatives: (i) an A2W system including hot water heating at a total cost of £10500, and (ii) an A2A system again including hot water heating at a total cost of £6500. In a free market (no subsidies) option (ii) would be the most economic choice. However, with the current subsidies, the household assuming that they are indifferent to the technology choice would choose option (i) as the cost to them is £3000, rather than £4000 for option (ii). In this case, the difference in subsidies creates a distortion that wastes £5000 of public money to make the householder £1000 better off, with no benefit with respect to the outcome.

The solution to this issue is to provide the same incentive independent of the technology used and hence achieve the desired outcome, the adoption of low carbon heating, at the lowest overall cost. The subsidy provided should aim to only create a market distortion with respect to gas heating, and not one between different heat-pump based systems. Air-to-water, air-to-air, air-source or ground source does not matter; they are all heat pumps capable of providing low carbon heating. If they can meet a sufficiently high SCOP, currently just 2.8, then the subsidy should be the same. This would ensure that the most cost-effective technology is deployed and that taxpayers get the best overall value for money and hence the total funds for the BUS grant go further, achieving larger reductions in CO2 emissions.

A variable grant rather than a fixed one

The BUS grant currently provides a fixed subsidy of £7500 or £2500 depending on the technology used to replace a gas boiler. The grant is the same irrespective of the size of the property, the size of the system that is replaced, and the efficiency of the technology used. This leads to the situation where the BUS grant is both over-generous and under-generous at the same time.

For a small property, replacement of a gas boiler with an A2W system might cost £8000 of which the BUS grant pays £7500 and the householder just £500. However, the householder may well have gone ahead anyway even if the cost to them was £2500, less than installation of a new gas boiler at around £3000. As a consequence, £2000 of public money has been wasted on something that would still have happened if the grant were £5500.

For a larger property, replacement of a gas boiler with an A2W system might cost £14000 of which the BUS grant pays £7500 and the householder £5500. In this case the house holder may have been willing to pay £4000 but decides that paying nearly twice the cost of a replacement gas boiler simply isn’t worth it and therefore does not go ahead. An opportunity to install low carbon heating is missed.

An additional problem caused by the price distortion is the effect on the amount of due diligence that some householders apply and the choices that they make. Three quotes of £8000, £9000, and £10000 where all the money comes from household funds needs serious consideration in terms of quality, checking installer reputation, equipment used etc. However, after the BUS grant, the costs to the householder are £500, £1500, and £2500, which may well create a race to the bottom. It would be easy to fall into the trap that the lowest price quote at 1/3^rd the cost of the middle one and 1/5^th the cost of the most expensive is the one to go for. By not caring because it is so cheap, £500 and a huge £7500 in grant, the householder sets themselves up to be exploited by cowboys out to make a fast buck. The result is a poor quality system that does not meet the householders needs, something they may come to regret in future.

The solution here is to make the grant a percentage of the overall cost up to some maximum value. This is what is done in some other European countries. As an example, the percentage could be 75% and the maximum say £10,000. This would work for the small and large property examples described above. The proportionate cost to the householder would also lead to better due diligence, since the cost to them of the different options in the example above would be proportionate to the overall costs, i.e. £2000, £2250, and £2500 in this case. Now a high quality install with better equipment appears to be what it in fact is, much better value for money.

Note, in changing to a variable rather than a fixed amount for the grant, there should also be some restrictions on what can be included in the figure that the grant is based upon. For example, the cost of radiator replacements or underfloor heating should not be included when these are at the discretion of the householder rather than an essential requirement. Only the costs necessary to install a heat pump and achieve a SCOP of at least 2.8 would qualify with respect to the grant.

The perfect is the enemy of the good

No support is currently available to install low-carbon heating alongside an existing gas boiler. It’s all or nothing as far as the BUS grant is concerned. Unfortunately, this is an example of the perfect being the enemy of the good.

Over 10 million homes have gas boilers that are less than 10 years old, i.e. potentially less than half of the way through their lives. There are ways in which partial de-carbonisation can be achieved which are of great benefit in terms of carbon emissions, without replacing the existing stock of relatively new gas boiler.

A small grant, call it the Boiler Enhancement Scheme (BES) could cover 50% of the costs, up to a maximum of £1000, of installing an A2A heat pump alongside existing gas boilers. The uptake of such A2A systems would likely be very high, since they cost as little as £1600 fully installed for a single-split system. Such a system could provide at least 3000kWh of heating in a property that has the Ofgem average gas consumption (9500 units of gas, about 8550kWh of heat). This would reduce the property’s CO2 emissions by around 1/3^rd. This is a far more efficient reduction in CO2 emissions per £1000 of public money compared to the existing BUS grant for A2W, which costs £7500 to remove 3 times as much CO2 emissions. On those figures, the BES grant would be 250% more effective than the BUS grant for the same amount of taxpayers’ money.

Would households actually use A2A for space heating? A2A systems have easily achievable SCOPs of over 5. Currently, the gas price is about 7.97p per unit and electricity 26.32p per unit. Assuming gas boiler efficiency of 0.9, an A2A heat pump with efficiency of 5 costs just below 60% the price of gas per kWh of heat delivered. People don’t need an incentive to make the maximum use of an A2A system for heating, as it is already there in the existing spark gap. They only need consider their bank balance! In Jan 2027, the argument will become even more compelling. The latest forecast based on 30^th Sept figures for wholesale gas prices put the price of gas at 9.76p and electricity at 30.28p from 1^st Jan 20207, so A2A heating will then cost only 56% the price of gas.

By introducing households to heat-pumps via the A2A route, they are much more likely to be fully onboard with an A2W replacement for their gas boiler when the latter reaches the end of its life.

Conclusions

I think there are good economic arguments for reforming the BUS grant so that it is technology agnostic, pays a variable rather than a fixed amount based on the essential upgrade cost, and also encourages hybrid upgrades as well as complete ones.

I’d be interested to hear what others think about these suggestions both for and against. What do you think of the existing BUS grant? Is it fit for purpose? Could the same amount of money be spent in a better way to encourage the transition to low carbon heating? Is a grant for hybrid / partial low carbon heating a good idea? How do you think the use of taxpayers’ money could be improved to encourage more people to make the transition to low carbon heating?