Energy firms could make millions from gas ‘boiler tax’, analysis suggests

Energy firms could make millions from gas boiler tax

The UK’s top four gas boiler manufacturers could make millions through the so-called “boiler tax”, according to an analysis.

Concerns are growing over the industry imposing a levy on new boilers to cover the costs of penalties incurred by failing to meet new required levels of heat pump sales under the Government’s Clean Heat Market Mechanism (CHMM).

From April 2024, boiler manufacturers will be required to match, or substitute, 4% of their boiler sales with heat pumps or face a £3,000 fine for each missed installation, rising to 6% in April 2025.

It comes as part of a Government target to help phase out gas boilers and deliver 600,000 eco-friendly heat pump installations a year by 2028.

Late last year, manufacturers announced plans to increase the prices on their gas boilers in January ahead of the target coming into force.

Worcester Bosch said the price of all its gas boilers will increase by £120 in anticipation of paying penalties, adding that the target was “clearly unachievable within the timescales allowed”.

Vaillant said it is preparing to increase its prices for all boiler sales under 70 kilowatts by £95, Baxi said it will introduce a market mechanism levy of £120 on all its residential gas boilers and Ideal Heating would reportedly increase prices by £110.

But the Energy and Climate Intelligence Unit (ECIU) argued the firms could actually make a “windfall” from such levies.

The campaign group analysed an estimated number of boilers sold per year next to a price increase of £110 per boiler – the average increase from the four manufacturers.

The CHMM is imposing a target of 60,000 installations to be sold in total between April 1 2024 and March 31 2025.

The four companies would have to sell about 50,000 heat pumps combined to help meet the target, according to ECIU estimates based off research that they collectively sold about 1.5 million boilers in 2018.

Increasing the cost of 1.5 million gas boilers by £110 creates a revenue of £165 million per year, according to its analysis.

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

Jess Ralston, ECIU

Meanwhile, 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 the firms with £15 million.

The Department for Energy Security and Net Zero (DESNZ) said there may be administration costs of several million, especially in the first year as the scheme gets up and running, which would further reduce this final sum.

But the ECIU noted that it is highly unlikely that the 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.

Targets under the CHMM are realistic and achievable, and manufacturers have failed to recognise they can carry over up to 35% of their heat pump targets under the scheme into the subsequent year

Department for Net Zero spokesperson

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 March 31, 2025, the ECIU said.

Jess Ralston, ECIU energy analyst, said: “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?”

A spokesperson from Worcester Bosch said the figures are incorrect as heat pumps being sold into new build properties, which make up between 45% and 50% of the market, are not included in the CHMM target quota.

However, the ECIU said they ran the scenario where the firms only meet half the quota and found they would still make a profit of about £85 million.

The company spokesperson said: “Worcester Bosch will not benefit in anyway and, interestingly, neither will market growth for heat pumps as the revenue raised from the fines will go to the Treasury and not be used to grow demand for heat pumps.

“We will continue to monitor and observe the scheme and will remove or reduce this CHMM levy in line with policy changes or exponential growth in heat pump demand though both currently seem unlikely to materialise in the near future.”

A Baxi spokesperson said they will remove the surcharge on boilers if the Government withdraws the CHMM.

They said: “We are not profiting from the CHMM surcharge. We have always been transparent about the need to add a surcharge to residential gas boiler prices, based on anticipated penalties introduced under the CHMM.

“This is because we do not currently have market share of UK heat pump sales and it is unrealistic to suggest we could avoid CHMM penalties.”

Reports over the weekend said the Government will scrap the policy to boost clean heating in homes over concerns around the manufacturers introducing a levy.

Net Zero Secretary Claire Coutinho would not be drawn over the reports on Tuesday but told the Lords Industry and Regulators Committee that the Government was looking at the policy very carefully.

A Department for Energy Security and Net Zero spokesperson said: “We have looked into the figures from manufacturers and do not recognise their reason for raising prices for hardworking families.

“Targets under the CHMM are realistic and achievable, and manufacturers have failed to recognise they can carry over up to 35% of their heat pump targets under the scheme into the subsequent year.”

PA contacted Vaillant and Ideal Heating’s parent company Groupe Atlantic for comment.

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