Gas boiler firms could make over £100 million from so-called “boiler tax”

The manufacturers claim [1] the so-called “boiler tax” is required to cover the costs of any penalties incurred by failing to meet the required level of heat pump sales under the Government’s Clean Heat Market Mechanism (CHMM) [2], which is set to be implemented from 1st April. The CHMM requires gas boiler manufacturers to sell an increasing proportion of heat pumps relative to their gas boiler sales.

For example, under the CHMM between 1st April 2024 and 31st March 2025, 60,000 heat pumps are required to be sold in the UK in total, which is around 4% of the 1.8 million gas boilers currently sold every year. The top four boiler manufacturers (Worcester Bosch, Vaillant, Ideal and Baxi) collectively sell around 1.5 million gas boilers [3] per year and therefore would be required to sell around 50,000 heat pumps combined.

2023 saw record sales of heat pumps [4] at around 55,000, meaning that just 5,000 more would be required to be sold in the first year under the CHMM than were sold last year. The CHMM aims to create a mass market for heat pumps in the UK, although in other countries including France heat pumps are already being sold at a much faster rate. [5]

The analysis reveals that these four manufacturers may make tens of millions of pounds from the so-called “boiler tax” that they have imposed on each gas boiler sold. Increasing the cost of 1.5 million gas boilers by £110 (the average increase from these four manufacturers) creates a revenue of £165 million per year. The penalty for failing to meet the required number of heat pump sales is £3,000 per heat pump, so the maximum penalty amount in the first year of the scheme, if they sold no heat pumps at all, could be £150 million leaving £15 million in the first year. The Department for Energy Security and Net Zero estimates that there may be administration costs of several million, especially in the first year as the scheme gets up and running, which could reduce profits to lower levels.

However, it is highly unlikely that these gas boiler manufacturers would fail to sell any heat pumps at all, given they all currently sell heat pumps in the UK. The policy also contains both a carry forward mechanism that would allow 35% of an under-delivery of heat pumps to be carried forwards into the next year, and there would be an option to buy credits for surplus heat pump sales from other manufacturers which are likely to be sold for less than the £3,000 penalty.

Indeed, if the top four heat pump manufacturers meet two-thirds of the heat pump target but incur a fine on the one-third missed, and do not carry any forwards, they could make up to £115 million by 31st March 2025. In a scenario where they meet half the target but pay penalties on the other half, they could still make around £85 million by 31st March 2025.

Commenting on the analysis, Jess Ralston, Energy Analyst at the Energy and Climate Intelligence Unit said: “Gas boilers will increasingly be powered by foreign gas imports as the North Sea continues to decline, so if we’re to boost our energy independence the UK needs to shift to heat pumps that can run on renewable energy generated in the UK. Anyone slowing the heat pump rollout is leaving us less energy secure and at risk of higher bills as the gas price is notoriously volatile and set to remain high even after the last two years of high energy bills.

“The Government has said that the gas boiler lobby is price gouging by increasing their boiler prices when they are likely to meet the required number of heat pump sales, raising the question, would the manufacturers pocket the so-called “boiler tax” that they have imposed? Their customers, families that may already be struggling during the cost-of-living crisis, wouldn’t thank them for that.”

It has recently been reported that one trade body for the heating industry, the Energy and Utilities Alliance, has been extensively campaigning against heat pumps in the UK [6]. The gas industry was also found to have potentially mislead consumers over their claims on hydrogen boilers in an investigation by Sky News [7].

Currently, heat pump manufacturing sites in the UK include those in Cornwall, Derbyshire, Northern Ireland and Scotland [8]. Previous research has shown the UK could lose more than £65m worth of central heating boiler (and parts) exports every year by 2030, if the industry does not start switching to clean heating solutions. This could cost a total of £1.3bn in lost exports between 2030 and 2050 [9].

Over the last few years, the worldwide gas crisis has forced gas prices up and energy security concerns have been raised by Russia’s war in Ukraine. In the US, heat pumps have been dubbed ‘freedom pumps’ and sales are up 11%, overtaking sales of gas furnaces for the first time. In Europe, heat pumps sales reached a record 3 million in 2022, growing by nearly 40% on the year before. This includes some more nascent markets such as Poland and Czechia, which doubled in size in 2022 [10].

The Government recently increased grant funding under the Boiler Upgrade Scheme to £7,500 for an air source heat pump and applications tripled the week after, with applications remaining nearly 60% higher than the previously in the weeks following [11]. Before the increase to the grant, Octopus Energy and British Gas announced that they would reduce the costs of fully installed heat pumps, including the grant, to as low as £2,500 and £2,999 respectively [12] which may be even lower now. OVO energy [13] is offering a new heat pump tariff that makes heat pumps cheaper to buy and run than a gas boiler for UK households and British Gas will also offer a money back guarantee.

A study showed that heat pumps are highly efficient, typically 3x more efficient than gas boilers, in the UK even down to -6C [14]. An earlier study also found that “There is no property type or architectural era that is unsuitable for a heat pump”, “from Victorian mid-terraces to pre-WWII semis and a 1960s block of flats”. [15]

A 2023 survey of heat pump users [16] found that two-thirds of owners are satisfied with their heat pump even without extensive energy efficiency upgrades, which is slightly more than satisfaction with gas boiler owners (59%). The same survey also showed that satisfaction levels for heat pump users in Victorian or older properties was 83%, “challenging the idea that the heating technology is only suited to those in newly built homes”.