The Decarbonisation of Heat - what can the UK learn from the US, Germany and the Netherlands?

Introduction

With the arrival of the Energy Act 2023 last year, an exciting time in the UK’s energy market has begun, bringing about an array of possibilities in the decarbonisation space. To further capitalise on the momentum brought about by the Energy Act 2023, it is useful to look at what the UK’s counterparts in other Western markets are doing in the heat network and heat pump space.

This article, the latest in our series on the Energy Act 2023 and the decarbonisation of heat, will focus on the steps taken in the United States, Germany and the Netherlands in terms of their approach to the decarbonisation of heat. Given the recent developments in the UK, this provides a helpful comparison for identifying areas for growth, as well as offering the chance to learn lessons from the actions already carried out in these regions. In this article, we will identify some of the key themes relevant to scaling up the development of district heat networks, including how a legislative framework needs to be combined with capital investment, political will and localised planning.

As discussed in greater detail in our previous article (click here to read that article) UK’s approach to decarbonisation of heat is comprised primarily of three elements – heat pumps, heat networks and hydrogen. For the purposes of this article, we will focus on the first two limbs, as there is greater scope to compare the approach taken in the relevant markets than when comparing hydrogen, a multi-use form of energy which is still in the relatively early stages (as regards heating) when it comes to uptake across the globe.

 

United States

When we think about the glamourous landscape and hustle and bustle of New York City, what may come to mind is the iconic steam plumes rising up over the yellow taxi filled streets and the bright lights of the Big Apple. In actual fact, this stereotypical scene is due to one of the world’s largest networks of steam pipes which operate underneath the city, and which have been providing heating and cooling to many of New York’s buildings since the late 1800s (including iconic buildings like the Empire State Building, Grand Central Terminal and the Rockefeller Centre¹). The network uses natural gas and fuel oil to heat water and produce the steam that powers the systems² – therefore, whilst the heat pumps may be postcard-perfect, their energy efficiency and “green” credentials are lacking.

There are much more modern developments that have taken place in New York in relation to the decarbonisation of heat in recent years. The city has recently purchased 30,000 heat pumps for its social housing³ in a bid to replace outdated radiators in some of the city’s older buildings with new technology that will deliver energy savings and cleaner energy. The funding (of USD70 million) to deliver these heat pumps was part of the city’s Clean Heat for All Challenge, which aims to find a product that can serve both the heating and cooling needs of the city.

The focus on decarbonised heat has been aided by former New York City Mayor Bill de Blasio, who brought in his Local Law 97 in 2019 – part of his Green New Deal for the city. This law requires homeowners and landlords to meet new energy efficiency and greenhouse gas emissions limits as of 2024, with further, stricter limits then coming into effect in 2030.⁴ As part of the Green New Deal, the former Mayor also helped shepherd in the 2020 NYC Energy Conservation Code which outlines the efficiency and sustainability requirements under which construction in all five boroughs of New York must operate. The Code includes standards such as insulation and air leakage testing requirements.⁵

There are also developments at the federal level in the United States – in recent years, the Biden government has invoked the Defense Production Act, aiming to bolster the domestic production of heat pumps. Since this, the Department of Energy has granted USD169 million for nine projects to accelerate electric heat pump manufacturing at 15 sites across the United States.⁶ This is a drop in the ocean in terms of the United States’ potential for investment in decarbonised heat, but does serve as an important example of both legislation and investment working in tandem to accelerate the decarbonisation movement – something that the UK can learn to adopt in order to better its own efforts in the decarbonisation of heat space.

Whilst New York’s district heat network is rooted in tradition and centuries old engineering, other cities across the United States are developing their own heat networks, and are increasingly doing so utilising renewable energy sources. Baltimore, for instance, has recently created its own by way of the private sector entity Vicinity Energy, which delivers steam, hot and chilled water to buildings in the central business district and the city’s trendy Harbour East District – currently, over 50% of the steam delivered to these customers is green steam (generated through zero carbon methods)⁷ . In the future, Vicinity Energy aims to increase this - in 2021 they signed an agreement with Unites States utilities company Constellation, with the aim that 100% of the electricity Vicinity Energy will be using in the future for district heating and cooling will be from renewable energy resources.⁸

Whilst Baltimore may be a shining example of utilising a green district heating network, there is not yet widespread uptake of these systems across the United States. Assessors consider this is down to a variety of factors, including high initial capital outlay, lack of a clear energy policy at a national level⁹ and even geography. The United States demonstrates in a practical sense one of the challenges in heat networks – whilst this has the potential to operate successfully in cities, in areas which are more sparsely populated, as the bulk of the United States is, district heating is a less attractive proposal. Whilst the United Kingdom is much more densely populated than the United States and heat networks are expected to be viable across many UK towns and cities, this will also be true for more sparsely populated areas of the UK.

 

Western Europe

If we cast our lens now to Western Europe, the uptake of heat networks and heat pumps is again different to that of the United States. Perhaps our closer neighbours can also offer some lessons for the UK as it moves into a new of stage of its energy transition?

Germany

Germany has steadily adopted a planned transition to low carbon based and nuclear free forms of energy -known as its “Energiewende”. Within 20 years, it has been able to change its electricity production from being 95% fossil fuel based to being almost halfway towards neutrality.¹⁰ Activists and politicians started using the term Energiewende back in 1980¹¹, and there have been many landmark moments in the following years which have exemplified how Germany is moving towards a greener future, including the passing of the Renewable Energy Act 2000 and the agreement in 2016 of the Climate Action Plan 2050, a basic framework for decarbonising Germany’s economy to reach a set of goals by 2050.¹²

Similarly to New York, there have also been more recent legislative developments in Germany which specifically aim to increase the decarbonisation of heat. Notably, on 8 September 2023, new legislation was passed by Germany’s national parliament (the Bundestag) which amends the existing Building Energy Act of 2020. The changes require:

• the phasing out of oil and gas heating systems in Germany;
• municipalities to develop heating plans by 2028 – such plans will set out how the various districts will approach heating; and
• that all systems installed in Germany after 1 January 2024 must be powered by at least 65% renewable energy.¹³

Initially, this law will only apply to new build properties, and will extend to other properties (i.e. existing or under construction) to the extent that the relevant municipality has their heat plan in place. The federal government of Germany has already pledged EUR500 million in order to support the preparation of municipal heat plans – though still a relatively small figure in the grand scheme of what needs to be invested, this is funding which should assist Germany in meeting the goals set out in the Building Energy Act.

The passing of the amendment to the Building Energy Act, whilst certainly a step in the right direction for the decarbonisation of heat in Germany, demonstrates one of the difficulties of a future looking energy policy, as the amendment was met with significant pushback. Whilst the proposals were met with enthusiasm by part of the coalition government in Germany, others were less enthusiastic¹⁴, and opposition parties (particularly the Alternative for Germany party) have been vocal about the disadvantages to consumers of heat pumps. The upheaval caused by the bill demonstrates that the decarbonisation of heat does not operate in a silo; it exists amid a political and economic landscape that can be chaotic and fractured.

The changes to the Building Energy Act were initially envisioned to be more rigorous so that all gas boilers would be completely banned. However, due to the political division, the legislation that was passed in September 2023 still accommodates fossil fuel boilers, so long as they can be switched to hydrogen in the future, with timescales for consumer uptake of more environmentally friendly heating systems also lengthened. There are clear similarities here to the UK, in terms of how initial proposals have been pared back. The UK’s own bans on gas boilers and new diesel and petrol cars were rowed back in September 2023, with timescales being stretched further to allow for further debate prior to the transition.

There is widespread adoption of building codes and regulations across Germany (e.g those developed by the Germany Energy Efficiency Association for District Heating, Cooling and CHP), which help drive investment in heat networks through setting a base set of standards.¹⁵ Where there is concern (e.g. over pricing of heat networks) consumers can take this to the competition authority. Germany does however operate an unregulated heat market, within an otherwise regulated electricity and gas market. In the future the UK will be operating a regulated heat network,¹⁶ and so a comparison from this perspective is not so helpful looking forwards – instead, we can look to other European jurisdictions for guidance on how the UK might approach a regulated heat market.

Netherlands

Finally, taking a look at the Netherlands, we can see that again there are differences in how this country has approached the transition to more efficient forms of heat. Whilst uptake of heat networks is relatively slow (a 2021 study by the Dutch Central Statistics Office found that as many as 92% of households still use gas for heating¹⁷, and the country’s industrial history means it has been heavily reliant on fossil fuels to date), the Netherlands has operated a regulated heat network market since 2014, with an arm of the government having specific responsibility for heat networks (the ACM). The ACM’s remit covers prices (with price regulation for smaller customers), licensing, profits and customer protections. The ACM also sets price caps, with the vast majority of schemes then pricing up to this cap – this ensures that all heat network businesses provide price information in a standard format, allowing for greater transparency to consumers. This is a useful example to the UK in showing how its own consumer protection regime for heat networks could operate in the future, once the regulation that has been proposed to date is put in place. However, the slow uptake of heat networks in the Netherlands, despite the regulated heat network market, does demonstrate the importance of ensuring heat network regulation is combined with capital investment.

Another key element of the Netherlands’ heat network system is compulsory connection. Municipalities are required to prepare heat plans for their respective areas (similarly to the German approach outlined above), which can specify that new buildings have to be connected to a heat network for the coming ten years. Article 6.10 of the Dutch Building Code also states that a house will get a mandatory connection to a heat network when the network is present within 40 metres, when no equivalent alternative is found.¹⁸ A recent paper by BEIS (now DESNZ), comparing the approach to heat networks across the globe concludes that:

“…whilst mandatory connection does not appear to be essential, policies which in some way result in customers being bound to heat networks are essential for investment to take place”.¹⁹

The view shared by many in the UK heat network industry is that mandatory connection will be crucial to providing certainty to investors and encouraging widespread scale up of heat networks.

Whilst the Netherlands has appropriate infrastructure and systems in place, its next step will be to decarbonise its energy sources. Positive steps have already been taken, such as the amending of the Gas Act in 2018 to ban new buildings from connecting to the gas grid, and the bringing in of a new incentive scheme (SDE+), which provides subsidies to companies which generate renewable energy or reduce their CO2 emissions on a large scale.²⁰ The Netherlands is aiming to have a CO2-neutral energy supply by 2050, and a 50% reduction compared to 1990 by 2030,²¹ and greater investment and incentivisation should assist these goals.

 

Conclusion

So, what lessons can be learnt from the efforts across the United States and Western Europe, as investigated in this article? For one, the importance of legislation cannot be overstated. This is particularly evident in the United States and Germany, where the invoking and/or passing of legislation at both the federal and municipal level in recent years looks to have spurred on developments in the decarbonisation of heat space. To this end, the passing by the UK of the Energy Act 2023 should be a step in the right direction for further analysis around the Energy Act 2023 and its potential at delivering the UK’s heat network strategy, please read our previous article.

However, alongside legislation, there needs to be targeted investment in heat pumps and heat networks in order for the possibilities set out in legislation and policy to be realised. This can be investment into heat pump manufacture (as shown in the monies to fund heat pump production in the United States) or investment into existing and new infrastructure to make this more energy efficient. If we think back to the example of heat networks that have been operating in New York City since the 1800s, these iconic networks would not be functional today without reinvestment to ensure continued efficiency and longevity.

In recent weeks the German government has put a stop to a series of subsidies (totalling 9 funding programmes) which aim to support the achievement of climate goals, including the roll out of heat pumps. Commentators now consider that due to the government seeking to make savings, the rollout of heat pumps as envisioned in the Building Energy Act is now at risk.²² Whilst the UK has made small steps in the right direction in decarbonisation investment – take for instance the Boiler Upgrade Scheme, which provides government grants per property of GBP7,500 towards a ground source or air source heat pump or GBP5,000 towards a biomass boiler – policymakers should be cautious to ensure that there is a steady stream of investment which will ensure the aims set out in the Energy Act 2023 are achievable.

It is also evident, particularly from looking at the markets in Western Europe, that the green transition cannot be extricated from the wider political, social and economic climate. Particularly in Germany, the recent upheaval in the coalition government over the Building Energy Act shows that the green transition will have to be a carefully managed process, cognisant of all interested parties, if it is to succeed. Greater stakeholder management will be crucial for this, and is something that the UK government has already sought to achieve through the desire to elongate the timescales for bans on new diesel/petrol cars, and for the phasing out of gas boilers. As DESNZ have stated in their report on the use of heat networks across the globe:

“…transparency is something that is likely to be valuable to UK consumers, and may well be an expectation given the emphasis on consumers’ ability to compare prices in the UK energy market”.²³

It will be key to get consumers, as well as the wider energy industry, on board with this energy transition, and this will be a critical component on the UK’s path to the decarbonisation of heat.