Funding and Grants for Low Carbon Heat and Energy Efficiency

Introduction

This chapter provides an overview of support and incentive schemes, and the like, available to encourage and promote the decarbonisation of heating, improvements in energy efficiency, and investment in small scale renewable energy technologies. Given the number and variety of the schemes and initiatives across the UK, and their different geographical areas of application, and the pace of change, the summary which follows, whilst covering a lot of ground, is not intended to be exhaustive.

 

Support for heat networks

• The Heat Networks Delivery Unit provides grant funding and guidance through the early stages of heat network project development.
  
  
• The Green Heat Network Fund is a capital grant fund which opened in March 2022 and supports the development of low carbon heat networks for organisations in the public, private and third sectors in England (it replaced the Heat Networks Investment Project).
  
  
• The Heat Investment Vehicle (known as BHIVE) is a dynamic purchasing system for public sector heat network owners and developers to procure funding and funding related services. BHIVE was first announced by the Department for Business, Energy and Industrial Strategy (BEIS) (the predecessor of the Department for Energy Security and Net Zero (DESNZ)) on 4 December 2020, at which time it had the name BEIS Heat Investment Vehicle (hence the abbreviation BHIVE).
  
  
• The Heat Network Efficiency Scheme (HNES) provides grant funding to public, private and third sector applicants in England and Wales to support performance improvements to existing/operational district heating and communal heating projects that are operating sub optimally. DESNZ opened HNES Round 7 on 25 March 2024 (it closes to applications on 26 July 2024).
  
  
• Information on funding for heat network projects in Scotland is available on the Scottish Government’s Renewable and low carbon energy page – this includes a link to guidance on Scotland’s Heat Network Fund.
  
  
• DESNZ maintains a number of pages in this area, including Heat networks pipelines, Heat networks collection (which includes a section on available support) and Heat network zoning. The Scottish Government has a ‘Heat in Buildings: Green Heat Finance Taskforce’.

 

Support for low carbon heat (other than networks) and energy efficiency

Boiler Upgrade Scheme: The Boiler Upgrade Scheme (BUS) was introduced by the Boiler Upgrade Scheme (England and Wales) Regulations 2022 (2022 No. 565) which apply in England and Wales. The BUS is described as being a renewable heat incentive scheme to facilitate and encourage the use of heat pumps and biomass boilers to provide space and water heating in domestic properties and small non domestic properties. It supports the installation of heat pumps and biomass boilers through a grant mechanism (provided that they do not replace an existing renewable heating system). Ofgem is the administrator for the BUS. On 23 October 2023, DESNZ announced in a press release that the grants available under the BUS (to install heat pumps) were being increased; and on 30 November 2023 DESNZ issued a press release headed ‘Heat pump applications surge after increase in government grant’. This was followed on 26 January 2024 by a press release from DESNZ headed ‘Heat pump applications up by almost 50% as families make the most of government grant increase’, and another on 28 March 2024 entitled ‘Heat pumps in demand as grant applications soar by 75%’. On 17 April 2024, the Boiler Upgrade Scheme (England and Wales) (Amendment) Regulations 2024 (2024 No. 524) were made, coming into force on 8 May 2024 – these regulations (published along with an explanatory memorandum) make amendments to the 2022 regulations regarding the BUS.

Green Gas Support Scheme: The Green Gas Support Scheme (GGSS) opened on 30 November 2021 pursuant to the Green Gas Support Scheme Regulations 2021 (2021 No. 1335) (as amended). The GGSS (which applies in Great Britain) is a renewable heat incentive scheme to facilitate and encourage the production of biomethane by anaerobic digestion (a green gas), for injection into the gas grid (to that extent, it replaces the Renewable Heat Incentive Scheme which closed to new applicants on 31 March 2021). The scheme is funded by the Green Gas Levy, also introduced by the above regulations, which applies to all licensed fossil fuel gas suppliers. On 30 November 2023, the Green Gas Support Scheme (Amendment) Regulations 2023 (2023 No. 1317) were made, which came into force on 1 December 2023 – they were published together with an explanatory memorandum. There is further information available on Ofgem’s ‘Green Gas Support Scheme and Green Gas Levy’ page (Ofgem is the scheme administrator).

Low Carbon Heat Scheme: The Low Carbon Heat Scheme is provided for in Chapter 1 (Low carbon heat schemes) of Part 4 (New technology) of the Energy Act 2023. Sections 143 to 152 of the 2023 Act contain provisions to introduce this scheme with a view to creating a market incentive for the sale and installation of low‑carbon heating technologies, such as heat pumps. The scheme, when introduced in 2024, will require manufacturers of fossil fuel heating appliances to meet a rising standard for low carbon heat pump sales as a proportion of their total appliance sales. Manufacturers will be able to meet the new standard either through sales of their own heat pumps, or by purchasing credits from other heat pump manufacturers, or a mix of both. This market based scheme has been the subject of a DESNZ ‘Clean heat market mechanism’ consultation launched on 30 March 2023. On 30 November 2023, DESNZ published the outcome of the consultation in a document entitled ‘Clean Heat Market Mechanism Consultation: Summary of responses received and government response’ (an addendum regarding the scheme start date was published on 14 March 2024). The ‘Next steps’ section of the response document explains that the government will bring forward scheme regulations for the ‘Clean Heat Market Mechanism’ when parliamentary time allows under the powers granted by the Energy Act 2023.

Heat Pump Investment Accelerator: The Heat Pump Investment Accelerator Competition provides grant funding of up to GBP15 million per project for major investments in the manufacture of heat pumps and strategically important components. There is also the Local Net Zero Accelerator pilot project programme which is intended to allow councils/combined authorities (those which receive funding under the programme) to invest in small net zero projects (including retrofitting homes) which should then attract further private sector investment (see DESNZ’s press release headed ‘Councils pilot net zero projects with GBP19 million government backing’). The accelerator funding from government will be used to design investment models which attract the private investment.

Great British Insulation Scheme: The Electricity and Gas (Energy Company Obligation) Order 2023 (2023 No. 873) was made on 24 July 2023 and applies in Great Britain (it was published together with an explanatory memorandum). This Order established an Energy Company Obligation scheme (ECO4A) for the period from Spring 2023 to March 2026 for the promotion of measures for reducing the cost to individuals of heating their homes – the scheme is administered by Ofgem and has been given the name the ‘Great British Insulation Scheme’. See the consultation outcome document entitled ‘Energy Company Obligation: Great British Insulation Scheme (2023 2026) & Amendments to ECO4 regulations – Government Response’ which was published by DESNZ on 30 March 2023. The principal objectives of the Great British Insulation Scheme are to: (i) deliver energy efficiency measures to a greater pool of households now challenged by higher energy bills; (ii) help alleviate fuel poverty and accelerate progress to meet fuel poverty targets; (iii) contribute to carbon reduction targets in the domestic sector; and (iv) reduce the costs of meeting the UK’s net zero target through promoting more efficient energy use. Those suppliers required to participate in the ECO4 scheme (see below) are also required to participate in the Great British Insulation Scheme. On 5 April 2024, Ofgem published the ‘Great British Insulation Scheme: Delivery Guidance’.

Energy Company Obligation Grant Scheme (Phase 4): The Great British Insulation Scheme (ECO4A) (see above) is a different scheme to phase 4 of the Energy Company Obligation grant scheme (ECO4) as created under the Electricity and Gas (Energy Company Obligation) Order 2022 (2022 No. 875), which applies in Great Britain and runs to 31 March 2026 (there is an accompanying explanatory memorandum). ECO4 is a scheme aimed at delivering whole house retrofits for low income and vulnerable households, whereas the Great British Insulation Scheme referred to above is aimed at driving the rapid installation of the most cost effective mainly single insulation measures, extending support additionally to a much wider group of households in the least efficient, lower Council tax band homes.

Public Sector Decarbonisation Scheme: The Public Sector Decarbonisation Scheme provides grants for public sector bodies to fund heat decarbonisation and energy efficiency measures – it supports the aim of reducing emissions from public sector buildings by 75% by 2037, compared to a 2017 baseline. Further information is available on DESNZ’s ‘Collection: Public Sector Decarbonisation Scheme’ page.

Social Housing Decarbonisation Fund: The Social Housing Decarbonisation Fund is for local authorities, providers of social housing and charities that own social housing to bid for funding from government to install energy efficiency upgrades in their housing stock that is currently below an Energy Performance Certificate (EPC) C rating.

Home Upgrade Grant: The Home Upgrade Grant provides energy efficiency upgrades and low carbon heating via local authority funding, to households in England that are low income, off the gas grid or have an Energy Performance Certificate rating between D and G. There is also a Green Homes Grant Local Authority Delivery Scheme whereby local authorities can bid for funding to improve energy efficiency of low income households in England.

Green Deal: The Green Deal is a scheme for improving the energy efficiency of buildings in Great Britain – it is intended to help homeowners make and finance (including through a Green Deal finance plan) energy saving improvements to their homes – it was developed under Part 1 (Energy efficiency) of the Energy Act 2011.

Heat Pump Ready Programme: The Heat Pump Ready Programme (HPRP) was launched in October 2021 (it is part of the Net Zero Innovation Portfolio). The HPRP supports innovation in the heat pump sector with a view to cutting installation costs. It is split into three delivery streams: (i) Stream 1: Solutions for High Density Heat Pump Deployment; (ii) Stream 2: Development Tools and Technology; and (iii) Stream 3: Trial Support and Learning. On 23 October 2023, DESNZ launched the ‘Wave 2 Competition’ in respect of Stream 2.

Some further energy schemes (under devolved powers):

• The Northern Ireland Sustainable Energy Programme (NISEP), which operates in Northern Ireland, provides funding for energy efficiency measures (NISEP is funded by a levy on electricity customers). There is also the Affordable Warmth Scheme of the Northern Ireland Housing Executive (further information on home energy in Northern Ireland is available on the NI Direct site).
• Details of energy efficiency schemes operated by the Scottish Government can be found on its Home Energy Scotland site (the equivalent for England and Wales is Find ways to save energy in your home on Gov.UK) and the Home Energy and Fuel Poverty page, and in its ‘Heat in Buildings: progress report 2023’ published on 27 October 2023.
• The Welsh Government operates schemes for energy efficiency and low carbon technologies for the home, with details available on its ‘Nyth Nest’ site.

VAT relief – energy saving materials:

On 11 January 2024, HM Revenue & Customs announced the publication of a tax information and impact note about additional buildings and technologies that will benefit from VAT relief for the installation of energy saving materials (ESMs) – the note is entitled ‘Extension of VAT energy‑saving materials relief’ – it is relevant to businesses that install qualifying ESMs, and customers that have ESMs installed, in residential accommodation and certain charity buildings in the United Kingdom. The measure described in the note, which takes effect from 1 February 2024, does two things: (i) it extends the VAT relief for the installation of ESMs to installations of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community; and (ii) it also expands the scope of relief to include water‑source heat pumps; electrical batteries that store electricity generated by certain ESMs and from the National Grid; and diverters that allow excess electricity from certain ESMs to be used within a building where it is generated rather than exported to the grid. The day before, on 10 January 2024, the Value Added Tax (Installation of Energy‑Saving Materials) Order (2024 No. 24) was made, which came into force on 1 February 2024 – this relates to the measure described in the above VAT note.

 

Energy Act 2023

The Energy Act 2023 (2023 Act) received Royal Assent on 26 October 2023 and includes a number of provisions of relevance (directly or indirectly) to the subject matter of this chapter. As well as the Low Carbon Heat Scheme discussed above, the 2023 Act:

• makes provision in Part 8 (Heat networks) in respect of the regulation of heat networks in Great Britain and the creation and regulation of heat network zones in England; and
• contains a Part 10 (Energy Performance of Premises) which provides for the making of regulations in respect of the energy performance of premises (enabling changes to be made to the existing EU based Energy Performance Certificate (EPC) regime contained in the Energy Performance of Buildings (England and Wales) Regulations 2012 (2012 No. 3118)).

Support for small scale renewables projects

There are a number of support schemes in operation in relation to renewable electricity generation. For small scale projects (which are the focus here), there is the Smart Export Guarantee (SEG) scheme which was introduced in Great Britain on 1 January 2020 and enables small scale generators to be paid for the export of their excess low carbon electricity. The SEG requires larger licensed electricity suppliers to offer a tariff to low carbon generators (of up to 5 MW capacity, or up to 50kW for micro CHP) for the electricity exported to the grid (smaller suppliers can choose to provide this). The SEG replaced the Feed in Tariff scheme which closed to new entrants at the end of March 2019. Further information on the SEG scheme (including who the scheme is for and how it works) is available on Ofgem’s Smart Export Guarantee page.

We are available to answer any questions that you may have on funding and grants for low carbon heat, energy efficiency and related matters.

Please contact in the first instance a member of our team listed in this document.