Baroness Neville-Rolfe’s speech at Policy Exchange’s Heat Summit

One of the more significant scientific developments of the last few decades has been the accumulation of evidence on climate change and on its link with burning fossil fuels for energy.

Globally we have seen growing momentum on the need to urgently tackle climate change. Last year this led to the landmark Paris Agreement, which as you will all know has now entered into force and has been ratified by the UK. This is an important sign of the continued commitment to climate action here and across most of the world.

Energy comes in many forms and has many uses. Providing power for industrial and domestic use and for transport are amongst the most obvious.

It is less well known that heat accounts for 45% of UK energy consumption and over 30% of carbon emissions. UK customers spend well over £30 billion a year on energy for heating. It is this important use of energy – heat for homes, factories and offices – that we are considering today.

The public cares a lot about having homes which are warm. We all like to be comfortable. More than that, a warm home provides important health benefits, especially for the most vulnerable in our society.

People also care about having heating and cooking appliances which are easy to live with – easy to maintain and do what they are supposed to do without fuss.

And of course people care about having affordable energy bills. As we know, heating typically accounts for the large proportion of the household energy bill. Around half of homes (10 million across England) could reduce this cost through relatively simple and low cost improvements in energy efficiency.

These consumer dynamics matter, but there are also important commercial benefits for businesses in getting heat right. They can capture heat which would otherwise be wasted – from industrial processes and cooling of data centers. Heat networks can utilise this otherwise wasted energy to heat offices, schools and hospitals in the local area.

Businesses can reduce the amount of heat that is lost from their operations and that saves money. I remember that when I was at Tesco we had a capital fund for projects expected to make rapid returns. One such use was in putting lobbies on supermarket doors. These paid back in 2 years and allowed us to promote our green credentials by putting up signs telling the story on the lobby wall.

And there are economic opportunities for U.K. companies from the global move to a lower carbon economy. In 2014 our energy efficiency and low carbon heat sectors had a total turnover of £22b and exported £624m of goods and services. This is a growing market – in services, in construction contracts and in high value manufacturing and tech.

But heat is one of the more difficult energy uses to decarbonise. The truth is there is no consensus on the best technology or mix of technologies to achieve the scale of change needed over the long-term. We see this in the different reports that have been published, some of which are being discussed here today.

We need to do three things.

We need to be clear on what the challenge is.

We need to be clear that there are things which we can start to make progress on now. But, as I have already indicated, this will only get us part of the way on our journey.

Then we need to consider the long-term direction of heat policy.

First the nature of the problem.

To deal with the most fundamental points first. In all parts of the UK acceptable life requires space heating for many months of the year.

One of the physical limitations is that heat, unlike, say, electricity or gas, cannot be moved economically over significant distances. It has to be generated near where it is consumed.

And of course much of our heat demand varies tremendously across the year, across the day and across different regions. Cold winter days mean ten or twenty times as much demand for heating as we see in the summertime, when most of us just use a bit of heat for hot water and cooking. This is so obvious that it hardly needs saying, but it has enormous consequences for how we design a reliable, affordable heating system.

So what can we do to help?

First let’s look at building and other Government Regulations. In the last Parliament we strengthened energy performance standards by over 30% for new build to require better insulation, high efficiency heating systems and so on. This has generally been a success, but many in the private rented sector – households and businesses – are paying more than they should to heat their houses. The new energy efficiency regulations which come into force in April 2018 will help tackle this for the worst performing premises by requiring landlords to make improvements to these properties. This is not an easy area because no one likes regulation, but it makes sense to take a long term view with the rented sector leading the way. We can also do more to encourage home owners to improve their properties when they buy or when they move.

We have also required more efficient boilers and better energy efficiency. On 8 December we published for consultation a set of measures to reduce emissions from domestic gas and oil heating systems. These will cut consumer bills whilst ensuring the same level of comfort in homes and buildings. We are proposing to raise the minimum standard for when a new boiler is installed or an old one replaced. And we are proposing to encourage greater use of technologies which give householders more control over their heating.

There may be more to do here, but all such housing improvements can make a positive contribution to lower carbon.

A second area of potential is creating a smarter energy system. We are rolling out smart meters, both electric and gas, to all domestic consumers [political content redacted], with every household and business to be offered a meter by the end of 2020. The potential for consumers to save on their energy consumption is significant. Or to put it more theoretically they will achieve the same level of utility with the expenditure of less energy, an attractive principle. Last month we saw an important milestone as the Data Communications Company system went live across Great Britain.

And I believe energy storage can make a crucial contribution to the challenges posed by heat decarbonisation. Electricity storage is coming down in cost, as I know from visiting a Camborne/ Tesla facility last week. Housing schemes, shops and factories will be able to use battery storage to help balance the grid by switching things off at peak demand times, reducing bills and costs. Heat networks can provide large-scale heat storage, which can also help with the big fluctuations in heat demand I mentioned earlier. And of course, we rely on the gas system today to provide crucial energy storage capacity.

A third area is heat networks utilising waste heat or some other low carbon source. The possibilities are there particularly in urban areas, but require very good management. We are making a start promoting the deployment of such heat networks with £320m in capital support under the new Heat Networks Infrastructure Project. This will soon result in many new and exciting heat projects across our towns and cities. The cost of heating flats can be more than 30% lower on a heat network compared to using individual gas boilers. And the saving is even greater when the network is replacing electric heaters, as we see in many blocks of flats.   A fourth area where we are helping is heat pumps, which we support through the Renewable Heat Incentive. Heat Pumps are already used in some homes and 80% of owners that have a heat pump under the Renewable Heat Incentive are very satisfied with the technology. However, heat pumps are not currently wide spread in the UK, with many consumers put off by the high upfront costs compared to a gas or oil boiler. One wonders, however, whether a significant cost reduction might not be possible eventually, as has happened for many other machines – mobile phones and 3D printing – when demand and production increases and fitting capacity expands. Certainly the UK, where winter temperatures are mild by the standards of most northern latitudes, seems well placed to make use of the technology. Heat pumps can also improve people’s quality of life. Compared with an oil boiler they are better for air quality and are more convenient with no need for fuel deliveries.

Homes and businesses not on the gas grid have the most potential to save on fuel bills and to decrease carbon emissions by switching to low carbon heating technologies. Today, I am launching improvements to the Renewable Heat Incentive scheme that will do more to encourage households and businesses to install electric heat pumps and indeed biomass boilers, instead of conventional fossil fuel systems. The reforms will also make sure we are improving the value for money of spend through the scheme and that consumers are protected. We have made a number of adjustments as a result of the consultation process and will continue to consider improvements for the future.

All of this offers opportunities for the UK supply chain. This is not today’s subject, but it is an important aspect of our emerging industrial strategy on which you will hear much more from us.

You will say, rightly, that while the policies I have mentioned are a strong step in the right direction, we will need to do more in the longer term as we complete our transition to a low carbon economy.

As we know, there are a wide variety of technologies which can deliver low carbon heat – ranging from the electric heat pumps and district heating networks I have already mentioned, to perhaps a more radical possibility; replacing natural gas with hydrogen in the gas grid.

But only a small portion of the country has low carbon heat at present and as we have mentioned there is no consensus on the best mix of these technologies – or you may want to suggest others – to achieve the necessary change.

We need a clearer shared understanding of the potential, the costs and the benefits of different approaches. And whether there are practical solutions to the challenges we know they involve.

It is important that we begin to do this now, so that we don’t miss the opportunity to meet our 2050 goals in the most cost-effective way. Our ambition is to be able to agree in the next few years, together, on the right long-term direction for heat policy.

As a first step we need to thoroughly re-assess the evidence, and support practical projects to test different approaches. My officials want to work closely with you – experts in this field – as we do this.

So perhaps I could end by posing four fundamental questions.

How far can the gas system adapt to meet the decarbonisation challenge?

How do we electrify heat on a much bigger scale?

How do we rise to the innovation challenge and use our R&D funds to best effect?

How do we engage consumers and markets in all of this, and manage the transition most effectively and to the greatest benefit?   I end where I began by saying that there are no easy answers, and by restating that we need to grasp these challenges now and we would like to work with you and other experts and stakeholders on the long term direction of policy.

There have been a lot of twists and turns in energy policy, but we haven’t yet addressed the issue of heat strategically. I believe we need to do that now.

Our plans on heat will feature in the Emissions Reduction Plan next year. We are determined to do more and we know that this will require determination and a clear line of sight.

Thank you for listening.