Daniela Glocker
OECD
OECD Economic Surveys: United Kingdom 2024
OECD Economic Surveys: United Kingdom
Abstract
Decarbonising the residential housing sector is central to meet the UK’s net zero target, as it is responsible for about 14% of UK’s domestic greenhouse gas emissions. Despite substantial emission reductions in other sectors since 1990, progress in the residential housing sector has been slow since 2014. Most of these emissions originate from heating systems, indicating that a successful transition requires a shift from gas to low-carbon heat sources. Simultaneously, improving the energy efficiency of homes is crucial for cost-effectiveness and managing future energy demand. The government set out a comprehensive strategy for decarbonising the building sector in 2021, but timelines and policies have changed since. Shifting consumer behaviour towards low carbon choices requires a transparent long-term strategy, with clear pricing signals, reliable timelines for regulatory changes and financial support measures to stimulate the market.
The United Kingdom is among global leaders in reducing domestic greenhouse gas emissions. As discussed in the last Economic Survey of the United Kingdom (OECD, 2022[1]), the UK’s broad political consensus to reduce net emissions to zero by 2050 and a strong institutional framework were key to the successful emission reductions so far (Table 3.1). Since 1990, overall emissions have halved, and the United Kingdom met its first three carbon budgets (Figure 3.1, Panel A and B). But progress varies across sectors, with reductions driven mostly by the waste sector and electricity generation (Figure 3.1, Panel B). While most sectors are judged to be on track, sectors that require demand driven changes by the consumer such as transport and housing have shown only slow progress. Owing to the legislated Zero Emission Vehicle (ZEV) mandate, about 80% of new cars sold by 2030 are estimated to be zero emission and risks to meet government longer term targets are low (Climate Change Committee, 2023[2]). The residential building sector has seen a gradual reduction in emissions up to 2014 largely driven by increased energy performance of homes and improved efficiency of fossil-fuelled boilers. Since then, progress has almost stalled and emissions from residential buildings were only about 15% lower in 2021 compared to 1990 contributing to about 16% of UK’s carbon footprint. Residential emissions declined in 2022 and 2023 owing to mild winter and record high energy prices (Figure 3.1, Panel B), though it remains unclear to what extend this reduction stems from improvements in efficiency or by people having had colder homes due to unaffordable energy. Thus, the aggregate fuel poverty gap in England, which measures the total reduction in energy costs needed to take all fuel poor households out of fuel poverty, increased by an estimated 67% between 2020 and 2023 (Hinson, Bolton and Kennedy, 2024[3]). Decarbonising the residential sector will not only be crucial to meet the nation’s net zero target by 2050, but will also reduce households’ reliance on fossil fuel, improve air quality and lower heating costs.
The UK government has laid out a broad strategy for decarbonising the housing sector, with explicit emission reduction commitments for the building sector. This strategy covers residential, public and commercial buildings, but detailed policies and credible timelines to phase in regulation to achieve the ambitious targets are largely missing. Building emissions (residential and other buildings) are expected to fall 25-37% by 2030 and 47-62% by 2035 before dropping 98-100% by 2050 compared to 2019, according to the 2021 Net Zero Strategy (BEIS, 2021[4]) and the 2023 Carbon Budget Delivery Plan (HM Government, 2023[5]). In October 2023, the government clarified that electrification of heat in buildings via heat pumps will be the main route to decarbonisation, alongside heat networks (district heating) that distribute heat generated in a centralised location for residential and commercial heating (National Audit Office, 2024[6]). The government strategy to reach the target includes several measures including price incentives, stricter regulation, an obligation on boiler manufacturers selling in the UK market to gradually increase the proportion of heat pump sales compared with the number of gas boilers, standards on phasing out the installation of oil boilers in homes from 2026, and household support for heat pumps and energy efficiency improvements.
Note: Panel A: Total greenhouse gas emissions excluding land use, land-use change and forestry. Panel C: Selected sectors only. Domestic transport refers to emissions from road vehicles, domestic aviation, and shipping (including military), fishing vessels, and railways. Also includes emissions from transport related mobile machinery (e.g., at airports and ports) and F-gases from mobile air conditioning and refrigeration. International aviation and shipping emissions are not included. Sectors not depicted are Agriculture, land use and forestry, International aviation and shipping, and fuel supply. Panel A and C: Data for 2023 is preliminary.
Source: OECD (2024), Environment database; ONS, Climate Change Committee (2023), 2023 Progress report to Parliament.
Policy progress has, however, been slow creating difficulties for households and businesses to make key decisions, such as how and when to retrofit buildings, or decisions about investments in skills and supply chains (Climate Change Committee, 2023[2]). Furthermore, the government backtracked on some of the commitments laid out in the Net Zero Strategy and the Heat and Building Strategy. In September 2023, the government announced to exempt about 20% of households from the phase-out of fossil fuel boilers by 2035, delayed a ban on new oil boilers from 2026 to 2035 and scrapped the requirement of Energy Performance Certificate (EPC) band C by 2028 for private rented homes amongst others (HM Government, 2023[7]). According to the Climate Change Committee, these changes increase the long-term risk that the 2050 residential emissions target will be met (Climate Change Committee, 2023[8]).
Note: Emissions from fuel combustion. Emissions are calculated using IEA's energy balances and the 2006 IPCC Guidelines; see http://wds.iea.org/wds/pdf/WorldCo2_Documentation.pdf for more details.
Source: IEA (2024) Energy use and efficiency indicators database.
The primary source of residential emissions in the UK stems from heating, with natural gas boilers as dominant source (Figure 3.2). Phasing out emissions by 2050 in line with the net zero target will therefore require heating systems with zero emission energy carriers such as clean electricity or hydrogen in most UK homes and continuous efforts to improve energy efficiency. As such, shifting homeowners behaviour in favour of low carbon heating is essential, but this will take time.
The government needs to speed up policy development and delivery with a focus on increasing demand for low carbon heating solutions to kick-start this market, while providing financial support for less-well off households to cover high up-front cost. Updating the 2021 Heat and Building Strategy with concrete policies and reliable timelines will give clear longer-term signals providing the certainty needed for households’ and businesses’ investments in energy efficiency, growing supply chains and supporting infrastructure. This chapter focuses on policies to reduce emissions in the residential sector through improving effective carbon pricing, the role of regulation to raise energy efficiency of homes and to decarbonise heat, and the need to address high-up front costs through the financial market and government support schemes.
In the United Kingdom, low effective carbon rates in the building sector create price distortions towards gas over electricity implying high running cost for heat pumps. Electricity is taxed at the production stage via emission trading systems and explicit carbon taxes on the energy source used to generate electricity. Carbon taxation has been key in the Nordic countries to shift to electrified heating from renewables, but in the United Kingdom as well as most other OECD countries, effective carbon rates in the housing sector are low (Figure 3.3) and fossil fuels for heating are practically untaxed (OECD, 2022[1]). The price gap between gas and electricity is widened even more by a policy levy on electricity at the consumption stage undermining the installation of heat pumps (OECD, 2022[1]). In 2021, electricity was about 5.6 times more expensive than gas, and even though the UK Treasury temporarily removed policy costs from electricity bills from 2022 to 2024 as part of their consumer energy support measure, the price of electricity was still 3.7 times higher than that of gas (Climate Change Committee, 2023[2]).
The risk of higher running cost of heat pumps, together with high upfront installation cost, deter households from making the investment. Thus, while the National Infrastructure Committee (National Infrastructure Commission, 2023[9]) has judged heat pumps to be the most efficient solution to heat homes, and the government has stated that 90% of homes already have sufficient energy efficiency (EPC D) and internal electrical connection capacity to accommodate a heat pump (House of Lords Environment and Climate Change Committee, 2023[10]), uptake has been below projected necessary pathways. The government’s commitment to close the gap between electricity and gas prices as stated in its 2021 Heat and Building strategy is welcome, but it needs to outline a clear approach on how to do it, assess potential distributional effects, and pick up pace. The government should consider to permanently remove the policy levy on electricity at the consumption stage, as it has done between 2022 and 2024. To further reduce the price gap, this should be complemented with explicitly pricing emissions in the building sector by broadening the scope of the UK ETS to cover heating fuels according to their carbon content as recommended in the last Economic Survey (OECD, 2022[1]).
Estimated effective carbon rates, EUR per tonne of CO2, 2021
Source: OECD (2023[11]).
3.3.1. Energy efficiency of homes has improved, but more needs to be done
Improving the energy efficiency of homes should be complementary to policies promoting heat pumps. Even though heat pump technology continues to evolve leading to heat pumps running more efficiently, well insulated homes will allow for greater cost savings, while also ensuring that future energy demand is lowered. The recent energy crisis highlighted the benefits from a better insulated home. Estimates suggest, that families living in poorly insulated properties consume an extra 58% more gas over the course of a year, than they would in a home that meets the government’s Energy Performance Certificate (EPC) target of a C rating (Anis-Alavi et al., 2022[12]). Improving the energy efficiency of the housing stock not only reduces emissions, but also reduces the reliance on fossil fuels and lowers the energy bill for households.
Despite considerable improvements over the past decade, about 45% of rated UK homes still have an EPC of D or lower (Figure 3.4). However, as only homes rented, marketed or built since 2008 are required to have an EPC rating, the share of homes with poorer energy performance is likely higher. The cost of insulating existing buildings depends less on household income than on several factors including age, size, property type (apartment vs detached/semi-detached) and building technique (OECD, 2022[1]). Socially rented homes for example are on average more efficient, because they are generally newer, and include more flats, and housing associations also receive public funding to support upgrade costs (Anis-Alavi et al., 2022[12]).
Upgrading will help to improve the energy efficiency of the housing stock, however, upfront expenses of improving homes to the government target of EPC C are high. These ranged in 2021 from GBP 6 200 for homes with an EPC D to about GBP 14 000 for homes rated below EPC D (Department for Levelling Up,Housing and Communities, 2023[13]), and prices for insulation materials have been rising almost 50% between 2021 and 2023 (HM Government, 2024[14]). As recommended in the last Economic Survey (OECD, 2022[1]), local schemes to scale up demand could drive down cost for energy efficiency improvements and clean heating solutions. Under the Dutch Energiesprong model (Box 3.1), renovation needs are bundled up to create sufficient market size. This model, which has been started to be implemented for social housing in the United Kingdom, could be scaled up. Under such a scheme, local councils could provide a platform for homeowners or entire neighbourhoods with similar building structure to engage in competitive bidding for renovation works, ensuring strict quality controls and based on measurable results.
Note: The Energy efficiency of a property is rated from A (very efficient) to G (very inefficient), based on a score between 1-100. EPC A refers to a score of 92-100; EPC B: 81-91; EPC C: 69-80; EPC D: 55-68; EPC E-G: 1-54.
Source: Department for Levelling Up, Housing and Communities and Ministry of Housing, Communities & Local Government (2023[15]), English Housing Survey data on energy performance.
The Dutch Energiesprong model
Initiated in 2013, The Dutch Energiesprong model is a housing process that aims to create Net Zero Energy (NZE) buildings on a large scale. By bundling renovation needs in social housing and creating sufficient market size for private investment, it led to mass application of low-cost production technologies and increased financial opportunities. Using new technologies, such as prefabricated facades, insulated roofs with solar panels, smart heating and ventilation, it aims to complete renovation within 10 days and to ensure a long-term performance warranty on energy performance. Energiesprong specifies performance outcomes, which means development teams are not tied to any particular system or design. In the Netherlands, the targets include the requirement that all energy use – including plug-in appliances – must be net zero carbon. Energiesprong homes are designed to pay for themselves over 30 years. The idea is that one-off retrofitting costs are paid for by the subsequent reduction in planned maintenance and energy bills – cuts to the latter being passed on, in part, to the landlord.
Greener Neighbourhoods Pilot Program in Canada
To accelerate the retrofitting of existing buildings, Canada aims to aggregate homes and buildings in an entire neighbourhood and retrofit them all at the same time. The Government of Canada announced to invest CAD 35.5 million over five years, starting in 2022-23, for the establishment of a Greener Neighbourhoods Pilot Program to retrofit homes or units in up to six communities across the country using an aggregated deep retrofit approach based on the Dutch Energiesprong model. The objective of the programme is to accelerate the pace and scale of retrofits by aggregating similar homes and buildings in an entire neighbourhood to create mass demand for deep energy retrofits. This scale of project and the similarity of buildings can leverage new retrofit approaches, such as the use of prefabricated exterior panels, to reduce onsite labour time and overall project costs while reducing the energy use intensity and emissions from each building (Government of Canada, 2024[16]).
Source: OECD (2023[17]); Government of Canada (2024[16]).
3.3.2. Tightening energy efficiency standards for rentals and new homes
Regulation plays a crucial role in improving energy efficiency standards, especially in the rental market where split incentives create market imperfections. While enforcing energy efficiency standards in existing owner-occupied homes can be complex, the requirement for an Energy Performance Certificate (EPC) when selling homes should gradually reduce demand for inefficient housing. This reduction can occur through less favourable credit conditions if energy risks are properly considered in mortgage financing. Additionally, combining regulation to phase out fossil fuel heating with higher running costs for less energy-efficient houses can incentivise homeowners to gradually upgrade their homes’ energy efficiency. Such supporting conditions will facilitate the gradual improvement of the housing stock. Meanwhile, stricter energy efficiency standards for rentals and new homes can lead to faster improvements. The UK building code already sets minimum requirements for social and privately rented homes, but further tightening is necessary to accelerate the overall uprating of the UK housing stock.
Energy efficiency has increased in the rental sector, since the introduction of regulations in 2018 prohibiting the letting out of a property which had an energy performance rating of F or below coupled with energy labels for private and social rentals. However, landlords can be exempted from meeting the energy performance standard if the cost of installing even the cheapest recommended measure exceeds GBP 3 500 (including VAT) (HM Government, 2023[18]). The government should phase in higher minimum performance standards for rental housing and review and increase the cost threshold to reflect price developments. Decarbonising the rental sector can be challenging as landlords have weak incentives to invest in electrification and insulation as the resulting energy-bill savings accrue to tenants. Tenants also have weak incentives to invest, because rental contracts are often too short for lower future energy bills to compensate for the upfront investments (OECD, 2023[11]). Government plans to tighten the minimum standard for rental housing to band C by 2028, were scrapped in September 2023. As the private rental market accounts for about 20% of all dwelling the government should reconsider and recommit to the minimum standard to band C with a concrete timeline to support the uprating of the overall housing stock, while monitoring its impact on supply in the rental market.
Energy efficiency standards for new buildings can achieve large energy savings at limited additional investment cost. The “Future Home Standard” will ensure from 2025 that new homes produce at least 75% lower CO2 emissions compared to those built to current standards by using very high-quality building fabric (structural materials, insulation etc.), triple glazing standards and low-carbon heating through heat pumps to replace their older, less efficient counterparts (BEIS, 2021[19]). The Future Home Standard also requires new homes to be “zero-carbon-ready”. This means they use electricity from renewable energy sources, and will automatically have zero carbon emissions once the electricity grid is fully decarbonised (Department for Levelling Up, Housing and Communities, 2023[20]). As it is less disruptive to consumers, and significantly cheaper and easier to install energy efficiency and low-carbon heating measures as buildings are constructed, rather than retrofitting them afterwards, this development is welcome. However, there is also a risk the heat pump market does not grow fast enough to deliver around 200 000 heat pumps in new builds annually from 2025 (Climate Change Committee, 2023[2]). Recommitting to phase out fossil fuel boilers as described above and committing to end connections to the gas grid for new homes could support the growth of necessary supply chains, coupled with workforce upskilling, as discussed below.
3.4.1. Scaling up green financing
Financial markets can support the decarbonisation of housing by smoothing high upfront cost that often have long pay-off periods. The Department for Business, Energy and Industrial Strategy (2022[21]) estimated that up to GBP 65 billion of investment (2.9% of 2023 GDP) will be required to upgrade the UK housing stock to an average EPC band C rating by 2035. This calls for a diverse portfolio of private green finance products that will be required to meet a series of market needs ranging from the acquisition to improvement of domestic buildings to meet or exceed relevant market standards on energy efficiency, carbon emissions, material use or climate resilience.
In the United Kingdom, the green mortgage market offers marginally cheaper lending than traditional borrowing and shows signs of picking up. By the end of 2023, the Green Finance Institute registered about 60 green financing products fitting into two categories: i) for homebuyers looking to purchase an already energy efficient property; and ii) for those looking to access capital to fund improvements in their home. On top of this, some lenders are also rewarding existing mortgagors with cashbacks for specific green improvements, e.g., solar panels. However, uptake of green mortgages seems to be constrained due to their lack of competitiveness and the limited awareness among customers (Department of Energy Security and Net Zero, 2024[22]).
Scaling up the green housing finance market requires reliable, internationally comparable energy performance certification of all buildings such that conditions for benefitting from favourable financing can be clearly identified by financial institutions and customers (OECD, 2023[11]; de Mello, 2023[23]). The energy certification should be expanded to all residential buildings in the United Kingdom, not just those for sale or rent. To encourage energy performance certification for housing that is not up for sale or rent, the cost of the EPC rating could be covered by banks (e.g., through a cash back scheme), when green financing products are assessed for home improvements. This would allow financial institutions to better identify energy consumption-related risks and benefits, while supporting the gradual expansion of energy performance ratings to the existing housing stock. Advancing the development of common methodologies and ratings criteria for credit assessments in the green finance market, could further improve the competitiveness of green financing products together with incorporating energy consumption-related risks and benefits of energy efficiency improvements (de Mello, 2023[23]).
3.4.2. Supporting investments in heat pumps and energy efficiency upgrades
The UK government has several schemes to help households with energy efficiency improvements and the installation of heat pumps. Heat pumps require significant up-front investment, for instance the average cost of a heat-pump installation in 2022 amounted to about GBP 10 000 (Climate Change Committee, 2023[2]), about four times as expensive as a gas boiler (IEA, 2024[24]). To increase the demand for heat‑pumps and thereby grow this market, the government introduced grants for homeowners under the boiler upgrade scheme in 2022. In 2023, the amount available per homeowner was increased from GBP 5 000 to GBP 7 500 and the overall size of the scheme was expanded (HM Government, 2023[25]), which is a positive development. The government should consider prioritising the boiler upgrade grants based on household income in the short term, while moving to a means-tested scheme over the medium term.
Homeownership is the predominant form of tenure in the United Kingdom, encompassing households across various income levels. This diversity presents affordability challenges in progressing towards the decarbonisation of homes as about one third of homes are owned by households in the lowest income quintile (OECD, 2022[26]). High up-front costs of decarbonising heat or improving the energy efficiency of homes pose a significant financial challenge to those households, even further aggravated in the current economic context of high living cost and tightened financing conditions (Chapter 1). The UK government has several schemes in place that support especially lower income households and those with high heating needs (Table 3.2). Since its Spending Review in 2021, the government increased spending committed to measures to improve energy efficiency up until 2027-28, which is welcome (HM Government, 2024[27]). In addition, government mandated schemes place an obligation on energy suppliers to promote measures that raise the ability of low income/fuel poor households to heat their homes, including measures to improve energy efficiency.
Support for energy efficiency improvements for lower income households is also key to successfully phase in tighter energy efficiency regulation and to avoid adverse distributional effects of carbon pricing that will disproportionately affect low-income households and those with high heating needs. A portion of carbon pricing revenues should be used for schemes compensating low-income and fuel-poor households and supporting their green investments.
Growing the market for heat pumps will be essential in supporting the decarbonisation of homes. However, progress has been slow. While the government targeted 600 000 heat pump installations by 2028, current rates are only around one-ninth of this target and heat pump installations would need to accelerate 11-fold (National Audit Office, 2024[6]). Increasing demand for low carbon choices will be key for the industry to become active in increasing supply, but requires empowering and informing households and communities. Information campaigns are valuable tools to raise awareness about buildings’ thermal characteristics, energy efficiency and the actual renovation process, including administrative help or financing options (OECD, 2023[11]). The government launched an online home retrofit tool, and a phoneline service that helps provide consumers in England with tailored and impartial information about how to improve the energy performance of their homes. Consumer awareness of the benefits of heat pumps and the Boiler Upgrade Scheme is also being raised through a targeted marketing campaign (HM Government, 2023[5]). These developments are welcomed and should be continued.
Scaling up heat pump installations is also limited by a lack of skilled workers (see Chapter 4). According to the Climate Change Committee, the number of trained heat-pump installers in 2022 fell with about 4 100 significantly short of the 10 500 target. This indicates that the growth of supply chains and workforce upskilling is not keeping pace with the rates necessary to meet the government’s longer term objectives (Climate Change Committee, 2023[2]). To address the skill gap, the government introduced in September 2023 the Heat and Training Grant to support up to 10 000 heat pump and heat network training opportunities from 2023-24 to 2024-25 (National Audit Office, 2024[6]), which is welcome. To ensure that there are sufficient skilled workers to deliver, training opportunities should continue beyond 2025. Further, government action to set up more local skills accelerators in areas where the need to insulate is greatest, and a capable workforce is most lacking, would be welcome. A strong regulatory policy commitment can provide long-term certainty that industry needs to invest in training and should complement government programmes. The requirement on big boiler companies to ensure heat pumps account for 4% of their total boiler unit sales, or be penalised GBP 3 000 for every item by which they fall short was deferred from April 2024 to April 2025, although the 2025 boiler unit sales target of 6% remains. Still, this development lowers the immediate need for the industry to become active on providing training and scaling up the offer of heat-pumps themselves, the government should advance the timeline on big boiler companies and commit to it. Finland, for example has successfully expanded its heat pump market through a combination of price incentives, regulation, training and government initiatives (Box 3.2).
Finland is a world leader in heat pump sales, with over one million units installed in a country of 5.5 million people. Air-source heat pumps, particularly air-to-air, dominate the market. In 2022 alone, around 200 000 heat pumps were sold that year, a 52% increase since 2021 and the highest number of heat pumps sold in the European Union per 1 000 people.
Finland has promoted the heat pump market in several ways:
Building regulations: Changes in building regulations in 2003, 2007, 2010, and 2012 have imposed higher insulation and energy efficiency standards, propelling the construction industry towards more heat pump installations.
Carbon taxation: Finland introduced a carbon tax as early as 1990, based on the carbon content of fossil fuels, becoming the first country to use a carbon tax as an instrument for climate change mitigation. Through successive reforms, Finland increased the rates and combined the carbon tax and the energy tax.
The Finnish national heat pump association, SULPU, established in 1999, has played a crucial role in improving training, quality standards, and maintenance capacity, which has boosted the sector’s reputation and sales.
Government initiatives: In 2001, Finland introduced a tax deduction scheme for various services provided to households, including work involved in installing heat pumps. A household may deduct 50% of the provided services from its personal taxation. Heat pumps are further promoted through information and communication campaigns financed by ministries, and via development projects. Since June 2020, a grant programme has provided subsidies for replacing oil and gas boilers with heating systems that do not use fossil fuels. The current programme will have funds to support the replacement of 36 000 boilers out of the approximate national stock of 150 000. In 2022, the government lowered tax rates on electricity consumed by pumps in geothermal heating plants, and certain heat pumps and electric boilers, with the aim to further increase the attractiveness of investing in renewable heating.
Source: IEA (2018[28]; 2023[29]).
Scaling up clean electricity is needed to meet the large-scale shift to electrified, decarbonised heat. As the United Kingdom transitions to net zero, the demand for electricity is expected to increase significantly not only for the building sector, but also for surface transport and industry (Figure 3.5). About 46% of electricity generation in the United Kingdom stems from renewables, mostly from wind (IEA, 2023[30]). The Contract for difference (CfD) auctioning scheme for renewable energy licences has been key for the United Kingdom to become a leader in offshore wind projects (OECD, 2022[1]). Under the CfD, developers are paid a flat indexed rate for the electricity they produce over a 15-year period, based on the difference between the strike price and the average price in the UK market. However, in 2023, CfDs failed to attract bids for offshore wind projects due to a failure to adjust the annual price to reflect substantial increases in supply chain costs beyond inflation (Climate Change Committee, 2023[8]). The government has since reviewed its assumptions and significantly increased the budget available for the auction round in 2024, which is welcome. Given the high importance of offshore wind farms for the UK’s electricity generation and within its energy security strategy (HM Government, 2023[31]; 2022[32]), the government should ensure that underlying assumptions for the setting of the annual price properly reflect price developments to accelerate the delivery of contract awards and the commissioning of offshore wind farms.
The planning system plays a crucial role in supporting the roll-out of low carbon heat and the development of the electricity grid. The deployment of low-carbon heat must be considered within a wider strategy that ensures energy security and energy priority needs of other sectors across the United Kingdom. It is therefore welcome that the government is developing a national energy infrastructure plan and is setting out an Action Plan to halve the time to build new electricity grid infrastructure to seven years (HM Treasury, 2023[33]). Moreover, rigidities in the planning system have been holding back investment (see Chapter 2), also into low-carbon power generation. The government announced to speed up connections to reduce delays from currently five years to no more than six months (HM Treasury, 2023[33]) through a series of reforms laid out in the governments connections action plan (Department for Energy Security and Net Zero, 2023[34]), which is a positive step.
TWh
Note: Based on CCC’s Balanced Pathway for the Sixth Carbon Budget.
Source: BEIS (2022) Energy Trends; CCC (2020) The Sixth Carbon Budget.
Private investment will be crucial to meet large-scale investment needs to support the green transition. The government and the National Infrastructure Commission estimate that getting to net zero will requires additional annual investment of more than GBP 50 billion by 2030 from the private non-household sector (HM Government, 2023[35]; National Infrastructure Commission, 2023[9]), particularly to meet the necessary funding for related infrastructure. To crowd in private investment, the UK Infrastructure Bank (UKIB) was set up in 2021 to compensate the lost access to the European Infrastructure Bank (OECD, 2022[1]). Compared to international counterparts, activities are still of small scale relative to the country’s investment needs. Institutional investors lack co-investment vehicles to encourage them to invest for public policy outcomes over the long term. The government should ensure to remain competitive in attracting private sector investment from both domestic and international markets by evaluating potential obstacles to scale up green investment through the UKIB. This will be particularly important in the context of recent international policy developments where strong incentives for renewables and green technologies are being offered in the United States and the European Union (see Box 3.3). The UK Treasury set the current borrowing cap for the UKIB at GBP 1.5 billion per year, which should be regularly reviewed in terms of appropriateness in the context of international developments and funding needs.
US Inflation Reduction Act
Under the Inflation Reduction Act (IRA), the United States provides USD 38 billion a year in government support for renewables for the period 2023 to 2033. This adds to USD 25 billion a year in spending on energy-related programmes under the Bipartisan Infrastructure Bill for the period 2021 to 2025. Altogether, spending under the two Acts accounted for 0.3% of GDP in 2023, or half of EU countries’ spending on renewable energy subsidies of 0.6% of GDP in 2020. The IRA also imposes domestic content rules. In practice, domestic requirements might be less stringent as sub-components can be imported. USD 5 billion a year are allocated to the clean-vehicle credit. US consumers who purchase new electric vehicles are eligible to receive a tax credit of up to USD 7 500. This applies only to cars produced in the US, Canada, and Mexico, and essentially amounts to an import tariff of about 15% for an electric vehicle with a price of USD 50 000. The bulk of government support under IRA (USD 25 billion a year) consists of tax credits. For instance, wind installations can obtain a tax credit of USD 0.15 per kWh. If 40% of the manufacturing content of wind turbines are produced in the Unites States, the tax credit rises by 10%.
EU Green Deal Industrial Plan
The February 2023 Communication on the Green Deal Industrial Plan for the Net-Zero Age aims at scaling up the European Union’s carbon neutral manufacturing capacities and supporting the use of sustainable materials in construction and other sectors. It also proposes measures to enhance the competitiveness of Europe’s carbon neutral industries. The premise of the Plan is the need to massively increase the technological development as well as manufacturing of net-zero products and scale up the supply of renewable energy in the next decade. The Plan is based on four pillars: (i) a predictable and simplified regulatory environment, (ii) faster access to funding, (iii) skills and (iv) open trade for resilient supply chains.
Source: OECD (2023[36]); European Commission (European Commission, 2023[37]).
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