The UK's Warm Homes Plan: Options for public loan schemes

Decarbonising domestic heating is one of the most challenging elements of the UK’s net zero transition. The largest single challenge is to replace around 23 million gas boilers with low-carbon heating technologies – i.e. those that use electricity generated from renewable sources rather than gas. Heat pumps are the primary tool for low-carbon heating and are central to the sector’s electrification. Although well-established internationally, the proportion of households in the UK with a heat pump is among the lowest in Europe.

This policy insight reviews different potential loan models for households purchasing heat pumps, in the context of the UK Government having allocated £5 billion of ‘financial transactions’ to the Warm Homes Plan, exploiting the flexibility offered by its new balance sheet fiscal target.

Key insights

• The analysis suggests there is no silver bullet, with important trade-offs across different models.

• Simpler options have further reach, but more targeted income-contingent loan terms could provide better value for taxpayers’ money.

• Awareness is needed of costs that would squeeze the Department for Energy Security and Net Zero’s already tight day-to-day budgets.

• A package of models that address the needs of different households might work best.

• Importantly, no model can address the fundamental challenge posed by electricity being far more expensive per unit of energy than gas. Even so, to meet the Government’s own net zero targets, the speed of heat pump deployment must increase rapidly and subsidised loans can play an important role in driving this, within a broader package of reforms.