Green heat: Achieving heat and buildings decarbonisation by 2050

To succeed in meeting net zero, we now must enable local government to fulfil its potential as the partner able to locally accelerate retrofit, focused on plugging market gaps and facilitating market growth, on maximising the co-benefits for health and the economy, and on empowering communities to lead change.

Government has recognised the value of local level actors and has committed to exploring the opportunities and challenges presented by local area energy (mapping) planning, as well as outlining the vital importance of local stakeholders to the energy transition in both the Heat and Buildings Strategy and Net Zero Strategy.

Local government is considered an essential actor to the delivery of net zero, however many councils face several delivery challenges when turning plans, strategies, and climate emergencies into action. Compounding this issue is the lack of an overall governance structure to oversee progress at the local level, lack of clarity on the role and responsibilities of councils and uncertainty surrounding the value of a local approach relative to the cost of implementation. Finally, councils need long term funding certainty and coherence whether public, private or a blend.

Heat decarbonisation is a key aspect of the net zero transition challenge. In essence it is the process of replacing carbon emitting means for heating homes and water. It is a particularly complex task due to the range of stakeholders involved, the uncertainty around technology pathways, potential disruption in homes and businesses, and a lack of coordination between local, regional and national bodies.

Considered together, this makes the delivery of heat decarbonisation through national policy alone, extremely challenging. Addressing this complexity through strategies focused on statutory powers within and across regulatory frameworks may not solve the problem; it is not as straightforward as simply handing down new duties to local government. However, as seen recently with the COVID-19 response, there is real value in local delivery evidenced through tailored support, advice and guidance for citizens in different areas.

As revealed through the literature review, there is an agreement on the important contribution of councils and communities to key social and technical components of the heat and building decarbonisation transition. For example, fuel poverty, skills development, infrastructure and heat network planning. Eventually councils could have a significant role to play in energy infrastructure planning, but in the interim it is important for them to work collaboratively with central government.

In this paper we explore the critical components of heat decarbonisation and how local and central government can work together to deliver it by 2050. This research focuses on the existing duties and levers councils have available to support with key elements of heat and building decarbonisation, and outlines a partnership approach using a framework which adapts over the short, medium to long term. A successful partnership which addresses the complexity already mentioned will likely require an iterative process which adapts governance and responsibilities over time in response to achieving outcomes and learnings.

A high-level partnership framework across three stages is proposed and summarised below:

Accelerating local action on fuel poverty and social housing 2023 – 2026

By the end of 2023 the Government should agree a funding deal up to 2026 with every council to lead additional efforts to tackle fuel poverty and decarbonise social housing. Councils should be free to decide how they work towards this objective, building on their own experience and strengths. However the agreement with government should include the deliverable objectives, and an explicit focus on councils using the approach to build their in house capacity to accelerate retrofit and other measures as part of wider heat and buildings decarbonisation. The government might provide wider support to councils, for instance advice, guidance, and tools.

Accelerating local decarbonisation delivery 2026 – 2029

From 2025/2026 to 2028/2029 all areas should aim to have a plan for decarbonising heat and buildings, backed by a three-year place-based funding allocation from central government. The plans would be developed by councils, with flexibility to propose local deliverable objectives to agree with government. The objectives might include a mix of social housing retrofit, fuel poverty, public buildings, skills, advice and support to home-owners, and so on. Councils should be supported with advice, guidance, and other tools, and encouraged to bring together plans with other local agendas for skills and supply chain growth. This could be funded through consolidating a range of national budgets and funds for decarbonising social housing, private rented, and owner occupier sectors, and blended with private sector finance to support with skills and supply chain development.

Accelerating local demand aggregation 2030 - 2035

From 2029/2030 onwards, the Government should provide the funding, incentives and powers to support councils to come together to build the scale to deliver local decarbonisation strategies, including objectives to develop blended finance models. Central and local government would work together to review, adapt, and refund plans at given periods up to 2050. As part of the process central and local government might explore further how to create demand in hard-to-treat tenures and property types, and additional powers useful to councils, such as expanded zoning powers to inform network planning decisions.

A coherent, responsive, and mature local and national government partnership on heat decarbonisation will be critical to achieving our net zero objectives.

Decarbonising heat is central to the Government’s strategy for net zero. Shifting our building stock to low and zero carbon will be the biggest challenge the UK faces over the next decade as millions of individual interventions will be required in homes and businesses across the country. It will require a transformative change across society, and the potential drivers and barriers must be understood and shared to enable a system wide transition.

The multifaceted and complex nature of heat decarbonisation covers multiple policy areas across government, for example building standards, skills and planning. This will be extremely challenging from the central level alone. Different departments ultimately have different priorities, they are not always able to facilitate the leadership required for cross-department policy success and are poorly positioned to connect these objectives within the different places around the country.

Places matter. For example, the options for decarbonising heating in the UK will vary across areas and comprise a combination of heat pumps, district heat networks and in some cases hydrogen for heating with mass rollout of domestic retrofit likely to play a significant role too. Within this, questions remain around consumer awareness, demand aggregation, supply chain readiness, and delivering interventions with a sufficiently skilled workforce.

It is therefore difficult to support the right interventions for individual households from the national level. National government is critical to making the big regulatory and funding decisions, such as when and how to phase out gas boilers and how to attract private sector investment, it cannot manage the transition to different technologies across the mix of homes and households across all our cities, towns and villages without the leadership and involvement of local government.

A partnership approach should be used to serve the elements of heat decarbonisation which current grant funding and market-based approaches may fail to reach. Our research has indicated some limitations in the current approach in 3 key policy areas: siloed funding pots, a lack of strategic planning and, infrastructure uncertainty.

Siloed funding pots

The current policy approach to heat decarbonisation is focused mainly on what central government needs to do to address the problem. Therefore, the majority of heat decarbonisation related funding and grants is predicated on councils acting as the service provider for central government targets. These national targets are not able to acknowledge the challenges within local areas or respond to the needs of citizens, including fuel poverty.

Reduced energy demand is the best solution to the current energy crisis and is vital to supporting those in fuel poverty. In 2021 there were 3.26 million households meeting the governments definition of being in fuel poverty, which requires an energy efficiency rating of band D or below and a residual income below the official poverty line when spending required levels to heat their home.

There are a range of grants, funds and mechanisms which support various initiatives associated with heat and building decarbonisation, but a step change is needed to avoid falling further behind. Schemes include:

• the energy company obligation (ECO) is a market based route delivers measures in many homes
• the social housing decarbonisation fund was introduced in support of the Government’s Heat and Building Strategy. This offers a total of £3.8 billion up to 2030 and is distributed across different waves.

Other funding includes minimum energy efficiency standards (MEES) enforcement pilots, heat networks, and Local Skills Improvement Plans (LSIP). The nature and scale of the funds varies, as does the timeline for funding applications and distribution, which can lead to unequal distribution of these funds.

The allocation of funds is positive. However, requiring councils to invest in developing bids which might not be successful, allocating short-term funding based on technology and/or sector, and creating restrictive rules on use and time frames all come together to remove the opportunity to create a strategic, efficient approach driving wider co-benefits. A lack of coherence can even mean some funding interventions conflicting others. For instance, LGA research found the £179 million allocated for social housing retrofit in 2022/23 is less than the cut in government funding of £213 million through the social housing rent cap in 2023/24.

There is agreement that the nature of these grants and the council funding framework more generally is undermining local service delivery and their ability to respond to the needs of local communities.

Lack of strategic planning

At present, there is not enough demand to stimulate skills investment by local supply chains and further and higher education providers, making it difficult for local tradespeople to scale their businesses to support heat decarbonisation. For example, £53 million of grant funding was returned to central government this year due to a lack of skilled tradespeople available to support with projects.

The skills requirement will vary across the country based on not only technology adoption but the enabling infrastructure too. At the national level it is difficult to gauge what skills requirements may be needed in local areas, without involving local stakeholders – the Department for Education’s LSIPs initiative highlights this.

Heat decarbonisation will ultimately require strategic planning, that is the analysis and coordination of relationships between key local actors to understand how existing structures are either enhancing or hindering progress, to inform effective governance and innovation. This type of approach has been demonstrated in other sectors. For example, the Better Care Fund was created in 2014 and committed £7 billion in 2022-23. The fund exists to help enable more strategic coordination and working between health and social care services, across areas.

A similar approach is needed for creating strategic plans and pipelines for heat and building decarbonisation. Current grant funding pots provide a substantial amount of funding to support with public sector and social housing decarbonisation. However, these tenures are served by established main contractors who are unlikely to serve the owner occupier and private rented market. These markets are typically served by micro sized installers.

A more strategic approach will require clear incentives and clarity around funding for the creation of strategic partnership plans at the local level. This will help to marshal the decisions across different partners across a place, such as housing associations, private landlords, and homeowners, to ensure the net benefit of combining local economic development with heat decarbonisation initiatives is maximised.

Grid infrastructure uncertainty

Currently, there is no mechanism and limited ability for councils to influence or shape investments in developing the electricity grid infrastructure in line with local plans for decarbonising heat. Some progress is being made with Local Area Energy Planning (LAEP), however the maturity of local net zero strategic planning varies across the UK. Therefore, it is unlikely that councils can jump to being network actors straight away, especially given the disparity in geographical scale between councils and regulated utilities.

However, the creation of strategic decision-making boards (as discussed in previous section) gives councils the opportunity to share resources, collaborate and develop plans which approach a sub-regional scale. This would allow for variation in approaching at the local level and encourage innovative delivery models to help determine how and where public sector actions are taken. This collaborative decision making may help to address inevitable challenges of governance now and going forward – see the drop downs below.

Power in place, local delivery

Previous research has highlighted the multitude of powers available to councils to implement net zero policies, such as Power Shift from UK100. However, while some regulatory powers exist, there is often insufficient capacity, funding, or clarity for their strategic use in addressing the complex needs of heat and building decarbonisation.

The array of existing duties and levers available, coupled with the high complexity and variability of heat decarbonisation across areas makes it extremely difficult to develop a new framework (focused wholly on heat decarbonisation). Similarly, it is difficult to introduce or focus on a single lever alone as councils across the country will inevitably go about their own strategic priorities in different ways given their respective resources and maturity with heat decarbonisation delivery.

Councils can play a critical role in accelerating towards heat and buildings decarbonisation by 2050, but they are all starting in different places with different strengths, levels of experience and capacity. Therefore it is important to set an incremental and adaptive approach that builds every place towards a strategic, place-based, heat partnership funding model over time. This should be led locally, but in collaboration with central government in reviewing, adapting, developing, and re-funding plans to accelerate heat and buildings decarbonisation across places.

As part of this research a workshop was held with both local and central government officials to validate the needs of heat decarbonisation, discuss the local delivery architecture, and explore how this could be used to enable delivery at the local level. This considered several regulatory levers and duties that councils have, such as health and housing, which could be used to support a local heat decarbonisation partnership.

The feedback from the workshop indicated the existing local delivery architecture could enable clear local influence and progress, with minimal change or disruption to governance. However, issues are likely to arise where councils do not yet have full resources to execute their duties and levers strategically, or further, where they are missing the clarity of funding needed to drive local heat decarbonisation. Understanding stakeholder expectations by clarifying goals is vital to ensure a successful local heat partnership.

Enabling local innovation and change

Successful innovation and collaborative working is more likely when local areas are enabled to think creatively in response to a focused outcome and specific outputs, based on their particular circumstances. For example how best to engage with communities, methods for appraising local supply chains and understanding how to support local businesses.

It is also important to recognise that local innovation and policy will need to be created and actioned based on an understanding of how it helps meet a national vision. Given the scale and complexity of heat decarbonisation, legal duties and financial controls may need to be flexed or replaced by pre-agreed requirements and outcome-based funding agreements, relating to specific needs.

A formal local heat decarbonisation partnership between central and local government will inevitably involve and require other key stakeholders too. The knowledge base for local heat decarbonisation will often exist outside of local councils – for example in universities, local businesses, health trusts, community groups or research facilities. The relationships between these stakeholders will vary, and therefore it is important for councils to have the ability to engage in and determine participation strategies based on their own local circumstances. This makes the question of governance extremely challenging.

For example, some might progress with their heat decarbonisation strategies by using local economic development funding in view of Levelling Up objectives, or perhaps where councils have strong working relationships with the NHS Trusts in their areas, they could feasibly draw down from public health funding to address both health and heat decarbonisation concerns. Councils could use existing planning powers relating to their own building stock to meet objectives in line with national policy – for example in relation to heat pump deployment – or by building demand in social housing or public buildings. Ultimately though, partnerships are stretched and without a step change in investment there will not be a step change in action.

Recognising the scale and complexity of the challenge, a partnership should enable a gradual and adaptive approach. While remaining fixed on the overall goals for a place, adaptive governance aims to reduce uncertainty by improving the knowledge base for decision making, and allowing area-based evidence to build, deepening the quality of data, and enabling an appropriate scale of change.

Addressing the needs, opportunities and barriers

There are a range of needs, opportunities and barriers associated with heat decarbonisation which will need to be addressed to create successful partnerships which deliver value to both local and central government. There is almost unanimous agreement that a locally driven transition will be vital, but equally a recognition that councils cannot address the challenge alone.

Through a comprehensive literature review, desk-based research and expert interviews, we have identified the needs which consistently appear in the heat decarbonisation discourse. These are discussed in the next section, and a systems approach has been used to suggest the order in which the identified needs should be addressed to enable placed based funding and delivery through a gradual and iterative approach.

Demand aggregation

Demand aggregation is needed to support the market to take off. Demand for low carbon heat technologies remains low, partly because current technology targets, funding and incentives create transition bottlenecks where supply chains and investors are less likely to respond effectively. This approach also fails to develop solutions targeted to local needs.

There needs to be much more demand in local areas to drive investment choices. Clear interventions and incentives are required to create demand in hard-to-treat tenures and property types, and government should allow local discretion over localised revenue and how this can be reinvested into local areas and used to capture opportunities for blended finance models.

The nature of the demand should aim to address not only building level decarbonisation but also address the skills needs of local areas and potential future energy transition, to enable a more strategic approach to heat decarbonisation. For example, retrofit or heat switch programmes could be aligned with gas and electricity network capital programmes to ensure interventions achieve best system value for money. Here, collaboration is key.

Collaboration

Collaboration between councils and their partners, such as anchor institutions, can help to ensure that demand aggregation is achieved. For instance by combining powers and duties relating to heat decarbonisation (new housing and retrofit) with local economic development and grid networks.

Existing regulatory mechanisms such as joint strategic decision-making committees should be incentivised and used to formalise collaboration between partners. Positive outcomes generated through combing granular planning with wider economic development have been demonstrated and can be realised everywhere.

This would allow for a more discursive agreement between councils and regional utilities on how these can address specific elements of heat decarbonisation. For instance in varying the approach at the local level, encouraging innovation, helping determine how and where public sector actions are taken, and shaping investment included within Ofgem’s RIIO-ED2 final determinations. However, successful collaboration between planning, local economy and energy stakeholders will require place-based funding.

Place-based funding

Place based funding and approaches have been piloted previously and can help capture the co-benefits of heat decarbonisation, including local economic development, the potential for levelling up, and job creation. There is an ambition from government that longer term and more co-ordinated funding streams, including a blend of public and private finance could enhance innovation in local areas to drive the types of activity needed for the energy transition.

The literature highlights a clear expectation that net zero cannot be delivered entirely by the public purse. Place based funding can and should be used as a catalyst for driving investment by helping to leverage private investment (e.g. private investors and network companies) into areas alongside multi-year funding e.g. – rolling three year settlements based on outcomes. This is challenging due to the current misalignment between spatial and energy planning which makes it difficult to coordinate grant funding cycles with network investment.

The need for a multi-year funding strategy is clear and could help to make better use of underutilised funding models and innovative financing mechanisms to provide a route for investors to back heat decarbonisation initiatives at the local level. However, confidence in such investments requires evidence of coordination.

Area based technical coordination

Area based technical coordination across areas is lacking at present, and there is limited sub-national resource responsible for assessing local strategies or assisting with local decision making for heat decarbonisation. Councils need expertise and authority to liaise with electricity and gas providers and a ‘utilities infrastructure coordinator’ within the planning function, to help assure them that local plans and strategies are well formed and offer evidence to plan and secure investment. A combination of local coordination, regional technical assurance and national technical and financial support is required.

Without sufficient confidence in area-based plans, key stakeholders such as local supply chains and infrastructure providers cannot direct resources appropriately. Consequently, skills in local labour markets are not being developed to drive heat decarbonisation at scale.

Skills

Skills requirements for heat and building decarbonisation are lacking due to a combination of low demand signals and supply side profitability. Without demonstrable returns on investment there is little incentive for those in the trade to build a low carbon workforce – subsequently the services and offers needed to achieve the multiplier effects for mass low carbon heat uptake are absent.

Previous grants, to home-owners in particular, have failed to build confidence in supply chains or create the skills needed for strategic whole-house approaches to retrofit. Solving the problem of skills to support the transition to net zero requires addressing all the elements of the eco-system. Currently, each element is dealt with separately, randomly, from different funding sources, initiated by different stakeholders at various moments in time, in different places. As a consequence, these initiatives all face the law of the minimum and never fully succeed.

It is also important to consider the other reasons why only approximately 2,000 installers are accredited to work with heat pumps today compared to more than 30,000 that will be needed by 2028. Insight from districts and boroughs should be used to create regional heat and building decarbonisation skills plans, to help address the complexity of existing skills related services and programmes.

Regional skills plans are required to help develop supply chains to support heat and building decarbonisation. Authorities with responsibility for local economic development should have the ability to influence the courses and training available in their areas, aligned to the needs of heat and building decarbonisation. This will help to build capacity ahead of demand and also capture the full range of grant funding available today.

Councils can signal investment needs for local areas, making use of existing funding sources such as education budgets to upskill its labour force with an emphasis on low carbon. An understanding of the appropriate skills and supply chains required for local areas will need to be informed by insight and evidence from local areas.

Data

Data, insight, and evidence are important to underpin and address the technology uncertainty and disruption of heat decarbonisation, for instance by understanding the types of building, lifestyles of occupants and the overall use of heat across areas. This requires not only data but a process of co-creation to enable councils to better understand how to manage the change and disruption of heat decarbonisation.

It is difficult for national policies to account for local context and progress across areas. The collection and use of data should also be standardised to better enable the reporting of local insight to central policy makers, to better inform future policy decisions. Data can enable responses to local challenges to be fine-tuned but this will ultimately be reliant on engagement, feedback, and insight from within communities.

Community engagement

Community engagement and buy in to the transition is central. Current heat decarbonisation policies are framed at the national level, but delivery inherently occurs at the local level, and requires a comprehensive understanding of the needs of local communities. Communities need confidence and support, and an enabler that coordinates households, suppliers, engagement, assurance and finance options would help accelerate the able to pay market.

There are few organisations better placed than councils to address this need, given their routes into communities and businesses. They can do so by drawing on their existing duties and regulatory mechanisms. In the context of the current energy crisis, this presents an opportunity for councils to support central government in reaching out to millions of UK households.

Our research indicates the partnership should begin to address the previously highlighted needs by using an adaptive approach to deliver agreed outcomes viewed as strategically important.

The outcomes identified through this research are: fuel poverty, local labour participation, strategic pipelines and infrastructure investment. What is clear is the need for flexibility in approaches, to allow councils to prioritise how they use their own levers.

Therefore, an adaptive governance approach towards the partnership which makes best use of the existing local delivery architecture is most effective.

The partnership framework would adapt over time, making use of existing powers initially and adapting these along with the provision of new powers to councils as the partnership progresses (as highlighted in Annex A).

Councils will require both increasing autonomy through adaptive governance and increased accountability for place-based funding to enable the partnership to be effective. A successful partnership should seek to accelerate heat decarbonisation through existing duties and levers, informed by guidance and principles relating to the needs identified in Addressing the needs, opportunities, and barriers.

With adequate support the partnership can address objectives both at the local and national level, helping to build capacity, accelerate learning and project development over time. Using this approach, local government and central government can work together to enable a gradual transformation, leading to a much larger magnitude of change, to ensure delivery of optimal outcomes.

A high-level partnership framework across three stages is proposed and summarised below:

Accelerating local action on fuel poverty and social housing 2023 – 2026

By the end of 2023 the government should agree a funding deal up to 2026 with every council to lead additional efforts to tackle fuel poverty and decarbonise social housing. Councils should be free to decide how they work towards this objective, building on their own experience and strengths. However the agreement with government should include the deliverable objectives, and an explicit focus on councils using the approach to build their in house capacity to accelerate retrofit and other measures as part of wider heat and buildings decarbonisation. The government might provide wider support to councils, for instance advice, guidance, and tools.

Accelerating local decarbonisation delivery 2026 – 2029

From 2025/2026 to 2028/2029 all areas should aim to have a plan for decarbonising heat and buildings, backed by a three-year place-based funding allocation from central government. The plans would be developed by councils, with flexibility to propose local deliverable objectives to agree with government. The objectives might include a mix of, social housing retrofit, fuel poverty, public buildings, skills, advice and support to home-owners, and so on. Councils should be supported with advice, guidance, and other tools, and encouraged to bring together plans with other local agendas for skills and supply chain growth. This could be funded through consolidating a range of national budgets and funds for decarbonising social housing, private rented, and owner occupier sectors, and blended with private sector finance to support with skills and supply chain development.

Accelerating local demand aggregation 2030 - 2035

From 2029/2030 onwards, the Government should provide the funding, incentives and powers to support councils to come together to build the scale to deliver local decarbonisation strategies, including objectives to develop blended finance models. Central and local government would work together to review, adapt, and refund plans at given periods up to 2050. As part of the process central and local government might explore further how to create demand in hard-to-treat tenures and property types, and additional powers useful to councils, such as expanded zoning powers to inform network planning decisions.

Examples of previous local national partnership approaches

The examples below highlight that when designed well, partnerships can be used to deliver government priorities and policies at the local level. The success of these partnerships has in part been delivered through clear national standards and in some cases, long-term funding clarity.

In the examples below, the structures of each partnership vary given the programme length, funding value and criteria, however when considered together highlight that these partnerships were based on central government setting standards and local government using their existing powers, duties and creativity to implement and innovate. They comprise a positive evidence base to suggest that local – national heat decarbonisation partnerships can work well based on pre-determined criteria.