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    Financial Policy Incentives for Consumer Adoption of Low Carbon Heat Technologies: Lessons from the Literature

    Posted February 8, 2022


    CALUM HARVEY-SCHOLES

    RESEARCH FELLOW, UNIVERSITY OF EXETER

    Rapidly increasing uptake of low carbon heat technologies such as heat pumps, district heating, and energy efficiency measures is essential to hitting targets for household carbon emissions. A major hurdle to adoption them over other preferences remains the comparatively high initial cost of these systems, even though reduced energy consumption can lead to lower operational costs in the long term, most obviously with insulation measures but also potentially with heat pumps. Purchase subsidies such as grants, subsidies or low-interest loans can accelerate the uptake of low-carbon heat technologies such as heat pumps by households. Early action during initial stages of market development can help to stimulate more rapid adoption, allowing learning and cost benefits to be captured more quickly. This fits well with the need to get carbon emissions down urgently. These policy instruments are often implemented at national or regional scale but might also be deployed by municipal and city governments; this blog explores some instruments for incentivising consumer adoption at the local level. Effective instruments seek to apply government funding to leverage private investment by consumers or suppliers, or both, as cost-effectively as possible. The goal is to stimulate adoption in order to realise cost reductions over time, enabling subsidies to be reduced until eventually low carbon heat systems are mainstream and no government help is needed.

    Financial instruments

    Effective policy is designed to address a specific, often measurable, problem and achieve defined goals. Financial tools for heat technologies are generally deployed to tackle one of the following problems:

    • High technology or installation costs
    • Lack of access to capital
    • High cost of borrowing capital
    • Energy prices not reflecting true costs, for example, excluding environmental damage.

    For municipal governments, financial policy instruments can include issuing financial grants or subsidies, tax breaks, and low- or zero-interest loan schemes.

    Grants and subsidies

    Grant schemes offer to cover some (or even all) of the headline price of purchasing and installing a new technology. They are commonly used to overcome high capital costs of technology and can be effective in delivering improvements to a targeted group (e.g. low income households), though they can also be a way to make an expensive technology more appealing to those with capital. Grants are a simple concept which are easily understood by recipients and which can be popular. Delivering a scheme across a larger number of recipients brings economies of scale, suggesting benefits for larger cities or coordinated deployment across cities. In general, grants have proven to be a cost effective measure for increasing energy efficiency or delivering low-carbon heating with low administration and transaction costs, however, they can suffer from a degree of free-ridership (rates as high as 40% have been observed). Some form of quality control over what is installed tends to be vital to maintaining value for money for both householder and grant provider.

    Examples:

    • The municipality of Noord-Beveland, NL, offers citizens a grant towards the costs of a range of insulation and heating technology retrofits, as well as retrofit assessment services.
    • Newcastle City Council, UK, has offered grants covering the full costs of heat pump installation and energy efficiency upgrades.
    • Wallonia, BE, offers a means-tested grant to incentivise householders to install renewable heating systems.

    Tax Rebates/Credits

    Tax rebates or credits can be used to overcome high costs by reducing the cost of particular items or services, and thus make a purchase more appealing. These measures can be employed to good effect, however, in particular instances they have been associated with increases in the costs of technologies (especially where the size of the rebate depended on the cost of the technology). Tax rebates do not address the upfront capital costs of installation associated with the technology so can effectively be inaccessible to those without sufficient capital. They can be useful in encouraging investment from those with the capital. The ability of local governments to offer tax rebates is constrained by their fiscal competencies and the extent of powers granted to them by higher levels of policymakers – these are generally constrained compared to national government.

    Examples:

    • The region of Flanders, BE, offers a property tax rebate incentive for heating and energy efficiency retrofit.
    • At the national level, Italy operates a ‘Super-bonus’ scheme which repays 110% of a maximum of €100,000 of costs of retrofit works to domestic property owners which is repaid through a tax rebate over 5 years (the percentage may taper as the scheme progresses).

    ‘Soft Loan’ Schemes

    Being able to pay for the initial purchase and installation of a technology can often be a problem for households. Providing households with low- or zero-interest loans can facilitate technology uptake by those who otherwise find it hard to access capital or cannot afford to borrow at the prevailing market rate. Soft loans have the advantage of a lower impact on public funds as the costs are lower. However, loans have been reported as less popular with householders than other financial incentives due to a general debt aversion (e.g. France, USA), so these may be more effective at the commercial level. The lower cost per unit installed to the loan provider makes these more appealing for technologies as they ramp up in volume, compared to earlier days in advancing uptake of a technology. These loan schemes are considered by some to be less effective than other financial incentives, however, researchers emphasise the uncertainty arising from the lack of assessments of local scheme effectiveness.

    Examples:

    • A number of UK local governments in the South West of England offer low-interest loans through a partnership with Lendology.
    • Mechelen, BE, offers local residents zero-interest loans to cover the costs of retrofitting energy efficiency improvements in their homes.

    Considering the context

    As each policy instrument is different – designed to address a particular problem in a specific manner – there is no one ‘best’ policy for delivering low-carbon heat or even for solving a particular problem. Some policy instruments will better suit some technologies, and some may be more appropriate at different stages in the maturation process for each technology, for example, grants can be initially useful but may be less cost-effective than, say, loans as the technology is deployed at greater levels. Research shows that a combination of measures is often the best option, and considering the policy mix as well as sequential deployment is important in determining outcomes and achieving objectives: for instance, combining a grant subsidy with a loan for the same technology and demographic group is expected to lead to a lower level of total savings compared to the sum of the savings if those measures were used individually.

    As well as the heat policy mix, the effectiveness of a particular policy is dependent on the wider context. Experience with heat policy has found that sustained government commitment and a stable policy framework are important factors for successfully achieving policy objectives. Stop-start investment cycles of financial incentives have been identified as negatively impacting market development with knock on effects on training provision and consumer perceptions. A complementary spatial planning and regulatory framework can provide private and third sector actors with confidence to act, helping to justify capital expenditure. People, as consumers or householders, must be a central concern in policy design as their participation can be facilitated by raising awareness, building trust, minimising hassle or complexity and targeting policy at ‘trigger points’ (such as moments when renovation is taking place). Improving levels of trust in novel technologies and unfamiliar installers requires separate policy intervention to engage and inform communities and ensure a degree of credibility for providers (e.g. via accreditation). Not all solutions will be financial, but financial and non-financial instruments should be designed to complement each other in effect and in time. Finally, whilst the effect of each policy may be discrete and small, these effects can be cumulative and lead to ‘increasing returns’, such as scale and learning economies, swelling public confidence and technological familiarity, and through coordination effects (e.g. compatibility requirements), which help to ‘lock’ the system into a particular pathway. By identifying and seizing key decision moments, policymakers can create an environment which encourages increasing returns to adoption of fossil-free heating technologies.