Financing for low carbon home heating
We are grateful to the European Climate Foundation for supporting this research.
Executive summary
The transition to electrified heating is a critical step in the UK government’s strategy for achieving energy security and net zero. For most households this will involve the installation of a heat pump to replace their gas or oil boiler [1]. Despite the rising number of heat pump installations, progress to date is still significantly below the rate required to meet the level the Climate Change Committee (CCC) has said is needed [2]. One of the barriers for homeowners is the high upfront costs that are often involved. The UK government Boiler Upgrade Scheme (BUS) currently offers most households a grant of £7,500 towards the cost of a heat pump but with average installation costs just below £13,000 [3] this means many households will still be paying a few thousand pounds more than it costs to replace a gas or oil boiler [4].
The government in its manifesto committed to working with the private sector to introduce new financial products to improve the affordability of heat pumps. The market is now at an important point where a number of relatively traditional financial products, such as mortgages and loans, are available; and more innovative products, such as Third Party Ownership (TPO) agreements and Property Linked Finance (PLF) are either beginning to enter the market or are awaiting government decisions [5]. The government would also continue to offer grants for low income households.
While many consumers may prefer the straightforward nature of a low priced loan [6], more innovative proposals including TPO may appeal to households that are looking for greater peace of mind. Whilst there are already some issues for consumers around the availability of information and advice and providers’ concerns about liability risks, these issues will become more complex with the arrival of the more innovative products.
The extent to which financial products meet homeowners’ needs and have robust consumer protections will be critical to supporting the transition to low carbon heating. Effective protections should apply to any financial product that a homeowner uses to purchase a heat pump (or other clean heating systems) regardless of whether the financing is used alongside government funding or not. This will ensure that self-funding households also have robust protections in place, which will become increasingly important if the BUS is scaled back in the future. The Financial Conduct Authority’s Consumer Duty will go some way to achieving this aim through its requirement on regulated companies to ensure good consumer outcomes. However, providing companies with clear requirements or guidance, particularly in relation to the features of more innovative products, can help to provide certainty around the best approaches in order to support consumers and avoid additional risk.
Finally, it is important to note that the success of heat pump financing is reliant on there being strong consumer demand for heat pumps. We have made a number of recommendations for how UK and national governments and businesses can support consumers in the transition to low carbon heating [7]. These include addressing affordability barriers as well as providing good quality independent information and advice, and ensuring all heat pump installations meet high technical and consumer protection standards.
In order to support a market for heat pump financing that meets consumers needs, we have developed a framework with eight tests. Where possible we have also assessed the extent to which current regulations and products are meeting these tests. Based on this framework we have made the following recommendations to the government and business.
Eight tests for ensuring heat pump financing works for consumers | |
| 1. A clear regulatory framework | 5. Clear and fair contract terms |
| 2. Access to finance for different groups of homeowners | 6. Clear options and pricing of bundled services |
| 3. Good quality information and advice | 7. Protection in the event of a default |
| 4. Good quality products, installations and services | 8. Effective handling of complaints and disputes |
Measures to support consumer confidence in financial products for heat pump installations.
Addressing the complex regulatory and standards landscape
- The government should develop guidance for businesses and consumers that clearly sets out the regulations and requirements under consumer protection law, Financial Conduct Authority (FCA) rules and the Microgeneration Certification Scheme (MCS) that are relevant to financial products in this area.
- Consumer hire (leasing) agreements offer lower levels of protection compared to other TPO agreements. Until the government has effectively addressed these gaps, consumer hire (leasing) agreements should not be allowed in this market.
- Heat as a Service options that include the installation of all the necessary equipment and charge a subscription for an agreed level of warmth should not be allowed until there are effective solutions to the competition and choice issues that would result from consumers being locked in to long contracts for tariffs and other services.
Ability to make an informed choice
- The government should develop mandatory key information sheets to support easy comparison of different financial packages. This should include precontractual information that is required for all consumer credit products under FCA rules.
- Comparison sites and brokers that support consumer choice in this sector should be transparent in relation to how much of the market they cover and any commissions they receive from the companies that have products included on their site.
- The availability of a simple, low interest rate loan would be a straightforward option for homeowners that are put off by the complexity of other offers.
Transparent and fair contract terms
- Government guidance should establish requirements for transparent and fair contract terms, including the rights and responsibilities of each party in relation to events that may occur over the course of a 10 to 20 year contract.
- Any fees or charges relating to the above should be reasonable, and transparent at the point the contract is agreed. Companies should not have the ability to unilaterally change key aspects of the agreement.
- Where heat pumps are sold as part of a bundle with other products and services, consumers should not be locked into the use of tariffs, or services such as optimisation, repair and maintenance plans for more than two years. Consumers should have a choice of providers for these services without invalidating guarantees.
Protection against poor quality installations
- Which? has called on the government to introduce mandatory certification of heat pump installers. Until this is introduced financial providers should make it a requirement that all installations funded by their products are carried out by MCS certified installers.
Protection against repossession in the event of a default
- As required under FCA regulations companies should undertake a robust affordability assessment including stress testing the consumer’s ability to pay under reasonable worst-case scenarios. There is no explicit requirement for an affordability assessment in relation to consumer hire (leasing) agreements; this gap should be addressed before these products are allowed in this sector.
- As repossession would have the effect of disconnecting a household from their source of heating, all businesses that finance the installation of heat pumps should be subject to OFGEM licensing conditions or equivalent rules that cover the process that must be followed before disconnecting a customer.
Complaints and redress
- It should be clear which complaint handling and redress processes a consumer can use if anything goes wrong. The government should designate an organisation or establish a process for resolving which alternative dispute resolution (ADR) process a consumer should use to avoid them being passed between different schemes.
- Businesses should have strong financial protections (as proposed under the MCS reforms) to cover remediation work if the business fails to comply with an ADR ruling or if the company goes out of business [8].
- Any future reform of the Consumer Credit Act, including in relation to Green Finance, should maintain important protections such as Section 75 as this provides homeowners with an important route to redress and supports consumer confidence in the sector [9].
Introduction
The use of gas and oil to heat homes accounts for 18% of UK emissions and in recent years has contributed to high and volatile energy prices with many households struggling to afford their energy bills [10]. In order to cut carbon emissions, improve energy security and cut bills, the government strategy is for households to switch to new electrified heating which will increasingly be powered by low carbon UK energy.
This transition will require more than 90% of UK households that currently rely on gas or oil heating to switch to low carbon electric heating systems, such as a heat pump [11]. The Electrification of Heat Demonstration Project run by Energy Systems Catapult [12] showed that heat pumps are suitable for most homes in the UK and can operate with good efficiency and provide positive consumer heating experiences, though other technologies such as heat networks will also have a role to play. The Climate Change Committee (CCC) recommends that half of UK households should have a heat pump by 2040 if the UK is to meet its legally binding commitment to reach net zero by 2050 [13].
Currently only around 3% of UK households have a heat pump and 33% of UK homeowners say they would or might consider installing a heat pump [14]. Consideration and ownership is likely to increase as heat pumps become more widespread and government initiatives start to influence the market. For example the government has introduced a Clean Heat Market Mechanism that requires large boiler manufacturers to increase the proportion of heat pumps they sell compared to boilers. Which? research suggests that providing homeowners with information about heat pumps when they are planning ahead for the replacement of an old boiler can dramatically increase the likelihood that they will consider installing one [15].
A significant barrier to homeowners purchasing a heat pump is the upfront cost of installation [16]. The average cost of a heat pump installation is currently £13,500, though costs vary significantly depending on the type of property. Properties that are smaller or built more recently are likely to have lower installation costs. Whilst government and businesses will be seeking to reduce the cost of a heat pump installation, the initial cost of installing one is unlikely to fall dramatically [17] and will remain more expensive than a boiler due to the cost of changing radiators and other aspects of the heating system.
To help reduce these upfront costs, most households are eligible for a grant of £7,500 from the Boiler Upgrade Scheme [18]. It is expected that the BUS will need to be reduced over time, as supporting all UK households to switch to electrified heat would put too much pressure on public finances. Under these scenarios, many more households will need suitable financing to support a heat pump purchase. Low income households may also be eligible for a grant through the Warm Homes Plan local government grant or the Energy Company Obligation scheme. These grants cover the total cost of a heat pump, heating controls and improvements to insulation.
To fund the gap between the total cost of a heat pump and the government grant, homeowners can either use their personal savings or take out a loan or use other forms of credit to fund the work. Recent research has shown that the vast majority of homeowners planning energy improvements, plan to use their own savings (81%) rather than other sources of funding [19]. This is similar to other home renovation works; 80% of homeowners said they relied on savings to fund home renovations in 2022 [20]. However, home renovations are optional and are typically done at a time when a homeowner chooses, whereas replacing a heating system is a necessity and homeowners have less choice about whether they make this change or when it happens.
This report describes the financial products that are currently available, or have been proposed, to support homeowners purchase a heat pump. It then sets out a framework with eight tests for assessing the extent to which regulations and products meet homeowners’ needs including supporting access to finance, good quality information and advice and the extent to which regulations and requirements will meet the consumer protection challenges created by innovative and more complex financial products. The review doesn’t include grants from government or energy companies.
Chapter 1 describes some of the financial products that are currently available or have been proposed. Chapter 2 sets out eight tests for assessing whether heat pump financing is working for consumers. Chapter 3 sets out our conclusions and recommendations. We have also included an annex with a brief description of some of the legislation, regulations and certification requirements that may be relevant to financial products in this sector. We do not consider consumers’ preferences for different financial products in this report. We will be conducting research on this which will be published in the coming months.
1. Financial products to support the purchase of heat pumps
Generally speaking, homeowners that want to switch to a heat pump have four options for funding the work. In most cases they will be able to combine two or more of these options depending on their preferences:
- Grants from government schemes and the Energy Company Obligation scheme.
- Personal savings.
- Regular financial products such as loan or credit products, credit card purchases etc.
- Financial products designed and marketed to fund ‘green’ purchases including loan or credit products, TPO agreements and savings products. These products can be offered by commercial and non commercial bodies such as social enterprises and co-operatives.
This report only considers the final group of products and specifically those financial products used to fund the purchase of heat pumps.
Secured loans: “Green mortgages”
Depending on how much equity homeowners have in their home, the value of their property and their financial circumstances, they can choose to increase their mortgage in order to fund the purchase of a heat pump and other home energy efficiency improvements. Mortgages generally have longer payback periods and comparatively lower interest rates than unsecured loans.
Homeowners need to provide evidence of the purchase and may also need to provide additional evidence such as an Energy Performance Certificate. There may be other requirements such as the need to use certified installers. Many green mortgages include some form of benefit such as a preferential rate, cash back or fee waiver [21]. Cashback incentives are based on the idea that consumers prefer instant rewards rather than the deferred benefits of a lower interest rate.
Today there are roughly 60 green mortgage products available, up from four in 2019 [22]. The benefits of a green mortgage can vary significantly. There are some ‘green mortgages' that offer very attractive rates or significant cash back, though the details of these products (loan to value requirements, duration of the discounted rate etc) would have to be considered to check whether they are appropriate to the homeowner's circumstances. Equally it is sometimes possible to find ‘regular’ mortgages that offer better rates than a ‘green mortgage’.
Despite the attractiveness of some ‘green mortgages’ financial providers have generally been disappointed at the level of demand [23]. This is often explained by the lack of demand for heat pumps, rather than demand for the financial product.
Secured loans: Property Linked Finance
Property Linked Finance (PLF) is a long-term loan that is linked to the property, rather than the property owner. This means that the obligation to repay the loan transfers to the new property owner on the sale or transfer of the property. Repayment effectively works as a bill, tax or service charge on the property. Proponents of PLF say that linking a loan to a property helps overcome the ‘payback period’ barrier whereby owners are deterred from making improvements as they expect to move in the near- to medium-term before the energy savings have offset the cost of purchasing and installing the heat pump.
PLF is not currently available in the UK and would require a change in financial services legislation for it to be offered. PLF is available in other countries, and this provides some lessons in terms of the protections that are needed for them to operate successfully [24].
Unsecured home improvement loans
Unsecured loans don’t require any collateral and can be used to borrow amounts, typically in the region of £10,000. As they do not have any collateral, these loans tend to have higher interest rates and shorter payback period, making them more appropriate for relatively simple and lower cost installations.
A few banks have green energy loans that are specifically available for energy improvement work. These unsecured loans offer lower rates of interest or cashback compared to other unsecured loans. Some energy providers and heat pump installers also offer unsecured loans. The rates for short term loans of two years are often very low, but are considerably higher for longer loan periods.
Third Party Ownership (TPO)
TPO can support several leasing or hire arrangements under which the heat pump remains the property of a third party and it is leased to the household for a monthly fee. These agreements typically include a maintenance and repair contract as the product is still owned by the third party. Other installation costs could be paid for upfront by the homeowner or included in the regular payments.
Although there are some hire agreements for heat pump installations in the UK they are not widely available as it is not currently possible to access a BUS grant if the heat pump is purchased by a third party. The government has recently consulted on whether TPO agreements should be allowed in the future [25]. Rental or lease models are available in other countries, for example there are three providers in Germany [26].
In their most basic form TPO agreements could fall into four categories, though innovation in product design can blur these distinctions.
- Hire agreements: the homeowner pays a monthly fee to hire the heat pump. They can return the heat pump to the third party at the end of the agreement and could potentially return the product earlier for a fee.
- Hire purchase agreements: the homeowner pays a monthly fee to hire the heat pump but owns the heat pump at the end of the agreement.
- Conditional purchase agreement: the homeowner pays a monthly fee to hire the heat pump. At the end of the agreement the homeowner can make an additional payment to purchase the heat pump or return the heat pump to the third party.
- Hire agreement plus tariff: any of the above agreements could also include an energy tariff.
There are some potential consumer benefits to these models in that they spread the cost of purchasing a heat pump, as well as providing consumers with peace of mind in relation to maintenance and repair (if that is included). This type of product could also facilitate the development of products such as salary sacrifice schemes that could unlock further savings for consumers. However, these leasing and hire agreements are unlike similar agreements in other sectors as there isn’t an expectation that the homeowner will return the heat pump as they might do with other hired products.
Salary sacrifice
Salary sacrifice schemes are another form of TPO agreement as the product remains the property of a third party. Under these schemes employers lease the item on the employees behalf and the employee pays for the item through their salary. The employee makes repayments based on pre tax wages, helping the employee to make significant savings as they won’t pay NI or tax on the pay they ‘sacrifice’. As such these schemes could deliver significant savings compared to a standard hire agreement. Salary sacrifice for a heat pump is also likely to include maintenance and repair services as the heat pump.
Salary sacrifice schemes are currently available for items such as bicycles and electric vehicles and it has been reported that the government is considering these schemes for heat pumps [27]. Under bicycle salary sacrifice schemes the bicycle becomes the property of the employee at the end of the agreement, however, under EV salary sacrifice schemes the EV is only on loan and doesn’t become the property of the employee.
Heat as a Service Agreements (HaaS)
Finally, TPO agreements could also be used to support Heat as a Service ‘subscription’ models. Under these agreements the heat pump (and potentially other equipment such as heating controls, solar panels and batteries) is owned by the third party that also provides the energy tariff and other services such as a maintenance and repair plan. The homeowner pays a monthly subscription in return for a guaranteed level of heat. These models are interesting as they not only remove the upfront cost of installing the equipment but also create an incentive for the third party to run the equipment as efficiently as possible in order to reduce their costs. Due to the costs involved the agreements are likely to be over several years.
HaaS is not available in the UK, however, it has been, and continues to be, the subject of trials funded by government and industry [28].
2. Making heat pump financing work for homeowners
Financial products will be critical to helping some households make the transition to low carbon heating. In order to make financing for heat pumps work for consumers it is important that they can access products that are suitable for their needs and are easily understood. Critically, homeowners will also want reassurance that they won’t be ‘caught out’ by features they were unaware of, or that appear unfair. Ultimately it is important that if anything does go wrong, their complaints are addressed fairly and efficiently and they have easy access to fair processes for resolving a dispute with the provider.
The following section sets out eight tests that the government should consider in regulating the market and businesses should consider when developing new products.
Eight tests for ensuring heat pump financing meets consumers needs
| Consumer protection issue | Which products this is more likely to apply to? | Cause | Potential remedies |
| 1. A clear regulatory framework. | Potentially all due to intersection between finance, installation and energy, but more likely to apply to innovative new products and packages. Currently these packages are more likely to be TPO agreements or PLF. Consumer hire (leasing)agreements currently offer a lower level of consumer protection. | Complex landscape means businesses and consumers are unclear about rules. | Review of products and relevant regulations. Business guidance on relevant rules and requirements. Consumer hire(leasing) offers should not be allowed until gaps are effectively addressed. |
| 2. Access to finance for different groups of homeowners | Potentially all commercial products. When trialled, HaaS was relatively expensive. | Commercial loans will be too expensive for some low income homeowners. | Targeted government grants and low interest loans for homeowners that can’t afford commercial rates. |
| High loan to value ratios as a result of providers’ concerns about liability. | Poor installation standards. | Action to drive up standards. Introduction of MCS financial consumer protection. | |
| Providers don’t lend on less common technology that addresses specific needs. The impact of green mortgages could increase costs for homes with poor EPCs and hard to treat homes. | The commercial case is less clear for lending on low value homes, hard to treat homes, niche technologies. | Targeted gov grants and low interest loans for homeowners that can’t afford commercial rates. Companies take an informed and flexible approach to lending. | |
| 3. Good quality information and advice. | Potentially all financial products. | Independent information and advice is not available, doesn’t cover consumers’ needs, or they are unaware of it. Companies, installers, third parties exaggerate benefits or don’t disclose elements of the product. | Gov. provides core information service and signposts other reputable providers. Good quality independent advice and comparison services (see intermediary services). A straightforward low interest loan for consumers that want a simpler offer. |
| Particular risk in relation to new and complex products(TPO and bundled products) | Contract terms, length, fees etc are not clearly displayed. The variety and complexity of products means they are difficult to understand /compare. | Companies provide key information in a standardised format. | |
| Intermediary services | Lack of transparency in intermediary services(brokers / comparison sites). | Requirements for intermediaries to be transparent in the service they offer. | |
| 4. Good quality products, installations and services. | Applies to all financial products due to joint liability. Can also have an impact on availability and pricing as providers are concerned about liability. | Lack of effective and robust installer certification requirements | MCS certification is made mandatory and gov sets standards for delivery. |
| 5. Clear and fair contract terms. | Particular risk in relation to TPO and more complex packages. | Consumers can’t make changes if their circumstances change, or changes are difficult or incur high charges. Consumers can’t make changes to the heating system (add / change /remove new or existing elements). If loan or hire agreement can’t be transferred or ended, or the fees are too high a property sale may be more difficult | Guidance for businesses and consumers on fair contract terms. Guidance on presentation of key information. |
6. Clear options and pricing of bundled services. | Products that include bundled services. | This may be as a result of mis-selling or bundled products. | Guidance and monitoring of business marketing and sales. |
| 7. Protection in the event of a default. | All financial products. | Companies don’t conduct robust affordability assessments. Companies don’t offer forbearance, repayment plans etc. | Requirements for affordability assessments are followed. |
| 8. Effective handling of complaints and disputes. | All financial products. | Lack of effective complaint processes. | Consumer hire (leasing) offers should not be allowed until gaps are effectively addressed. |
| Lack of clear and effective processes where more than one ADR scheme is available. | Protocols agreed for identifying the appropriate ADR provider. |
Eight tests for ensuring heat pump financing meets consumer needs
1. A clear regulatory framework
It is essential to ensure that financial products supporting homeowners to purchase heat pumps meet high standards and provide strong consumer protections. Where a financial product is sold to support the installation of a heat pump the lender will be jointly liable, with the trader, for the installation. From a consumer perspective, the householder will see the finance as part of a package alongside the heat pump and other services. This creates a complex set of regulations and requirements stemming from FCA rules, consumer protection legislation, and Microgeneration Certification Scheme certification. This can make it harder for businesses to understand their compliance obligations and for consumers to understand their rights [29].
This challenge is particularly acute for innovative products. Products like PLF will require new regulations to enable their introduction to the market. TPO agreements and HaaS are more complex, combining new financing models with the installation of heat pumps and related services.
The FCA Consumer Duty goes some way to addressing these issues by requiring regulated businesses to ensure good consumer outcomes. However, by itself, the Consumer Duty can lack the specificity businesses and consumers need in new markets. The government has begun addressing some regulatory gaps through the Boiler Upgrade Scheme (BUS), which requires participating companies to meet specific eligibility criteria overseen by Ofgem. For example, all installers undertaking BUS-funded work must hold MCS certification. Recent government consultations have proposed expanding BUS eligibility criteria to include measures such as mandatory information disclosure for financial products used alongside a BUS grant.
While this approach provides short term assurance, it can lead to further complexity and is unlikely to be sufficient in the long term, particularly if the BUS scheme is scaled back in the future. A more comprehensive and enduring approach will be necessary to maintain consumer protection as the sector evolves.
2. Access to finance for different groups of homeowners
In order to take part in the transition to low carbon heating, most homeowners will require financial support to spread the upfront costs of installing the equipment. Given limited public finances, the government has made the case for leveraging private finance to improve affordability, while recognising that some homeowners will still need grant funding.
New financial products that are designed to address particular barriers that homeowners experience will help to increase access. For example, PLF will enable homeowners that are considering moving home to take out a loan for a heat pump in the knowledge they could pass it on to the next owner. Similarly equity release may be appropriate for older homeowners that don’t have a steady income but have established significant capital.
However, it is less clear that current and proposed financial products will significantly address challenges faced by households with low incomes, limited savings and poor credit ratings. Citizens Advice research shows that repayments on a ten year loan for £15,500 would be unaffordable for many low income and some middle income households as the repayments would amount to a substantial proportion of the money they have left after paying for essential bills each month [30]. £15,500 is the average cost of upgrading a home to EPC C and installing a heat pump (after the BUS grant of £7,500 has been applied).
Property type can also affect the financial products that are available to consumers. “Hard to treat” properties may require significantly more work to make them energy efficient. This will potentially push the loan to value ratio higher. Similarly, properties that require energy efficiency upgrades in areas where house prices are lower may have a higher loan to value ratio. This may affect access to loans, particularly for first time buyers who typically already need loans with a higher loan to value ratio.
If green mortgages with preferential rates are only available for homes that already have a good EPC rating, this may disproportionately benefit higher income consumers. In time this may also further depress the prices of poorly insulated homes which are likely to be owned by lower income households. It also risks creating mortgage prisoners if owners of poor performing homes find it harder to re-mortgage at affordable rates [31]. This may be a particular issue for lease holders or shared ownership homes where homeowners have less control over improving the fabric of their property.
Whilst some proposed financial products can address the needs of particular groups of consumers, they are unlikely to extend access to households with lower incomes or where the loan to value is higher. In these cases the government (or potentially local authorities [32]) should consider whether additional funding should be made available for households that are not eligible for a full grant but will still struggle with the cost of installing a heat pump. This could be in the form of a subsidised loan or a more targeted approach to the BUS grant.
3. Good quality information and advice
Good quality information and advice is critical to consumers making an informed choice and can help to address behavioural biases such as risk aversion, loss aversion and present bias. Research from NESTA found that “support [in the form of advice] is equally, if not more, important than the details of the finance product itself” [33]. This will become even more critical with the availability of more financial products offering different benefits and risks.
Without good information, consumers may choose unsuitable or costly financial products or face future difficulties when terms don’t meet their needs. Poor information can also cause decision paralysis or require significant extra time if content is unclear or inaccessible. The provision of information and advice is covered by the Consumer Duty that requires financial providers to deliver good outcomes for consumers and sets standards for the information companies provide.
Accessible, accurate and comparable product information
Consumer information should be:
- Accessible: easy to find and use clear language free from jargon.
- Accurate: not misleading or missing key details.
- Comparable: consumers should be able to compare the features of different products in order to make an informed choice.
Installers, energy providers, financial providers and brokers are often the first to inform consumers about financing options for heat pumps. Under FCA rules, financial providers have to provide precontractual and post contractual information about the financial products they offer. FCA rules also require that credit products must provide a representative example that is clear and concise and prominently displayed and includes the rate of interest, the total cost of credit including any fees of charges, the total amount of credit and the representative APR [34].
However, comparing standard loans with Property Linked Finance; and standard loans with TPO agreements, and packages that include installation and other services will make comparison increasingly difficult, particularly if the information is presented in different formats. The government has proposed that companies should provide a ‘clear, simple and easy to understand summary of the contract’ and specified some of the points that should be included [35]. This proposal should be implemented to support consumer understanding and comparisons.
Independent advice
Given the complexity and unfamiliarity of these products, consumers need independent advice, but options are currently limited. As the market grows, opportunities exist for businesses to offer services ranging from comparison tools to regulated brokerage and personalised advice. While these can support decision-making, concerns around commission payments, transparency and market coverage must be addressed. Comparison sites can also overemphasise headline prices at the expense of product quality. Such services would benefit consumers, but independence, full market coverage and comprehensive information are essential.
Mis-selling
Mis-selling occurs when marketing promotes unrealistic rates or savings, omits key costs or restrictions, or exaggerates benefits. The imbalance between provider and consumer knowledge increases vulnerability and the risk of mis-selling [36]. In the past, mis-selling based on inflated savings and performance estimates has been an issue in the sale of other home energy products including the mis-selling of solar panels in the 2010s [37] and scandals associated with government schemes that resulted in negative news stories which undermine consumer trust. Similar ‘estimated savings’ could be an issue in the sale of heat pumps. undermine consumer trust. Similar ‘estimated savings’ could be an issue in the sale of heat pumps.
In particular green financial products often suggest a preferential rate or reward and it is important that this comparison is substantiated. There is a particular risk when marketing takes place in consumers’ homes as part of an installer providing a quote, as these conversations are difficult to monitor and can lend themselves to pressure selling. The CMA has produced guidance on the marketing of green heating and insulation products to help businesses comply with consumer law [38] and the MCS Consumer Code sets out standards for marketing and pre-contractual information. These should be widely promoted and enforced. Consumers can seek redress for mis-selling under Section 75 of the Consumer Credit Act.
4. Good quality products, installations and services
The quality of heat pumps, and particularly their installation, is relevant to financing because if the heat pump is purchased with a credit agreement the credit provider is jointly liable with the trader if a heat pump or its installation purchased with a loan is faulty. Banks' concerns about liability and risk can also increase the cost of financial products and limit their engagement with the market which has a direct impact on consumers.
Recent surveys show that heat pump owners are as happy with their purchase as gas boiler owners [39], however, cases of poorly installed heat pumps do have a negative impact on the households concerned and undermine confidence in the sector. Previous examples of poor quality installations and products [40], or installations of products that are not suitable for the property [41] also demonstrate the risks if standards are not maintained.
The government has sought to address these concerns by requiring installers of heat pumps, solar panels and batteries to be MCS certified if the work is funded by a government scheme. Some financial providers also make certification a requirement if the work is funded by their loans. Concerns about quality can also be addressed through better measurement and performance guarantees. MCS certification provides consumers with a level of assurance and access to redress if anything goes wrong and should be a requirement for the installation of all heat pumps and renewables, regardless of how the work is funded.
The requirement for installers to have MCS certification will go some way to tackling the risk created by rogue traders. However, consumer awareness of certification is relatively low and fraudsters can use tactics to impersonate legitimate businesses or convince a homeowner that their certification is pending or not required. If, as is likely, BUS is scaled back at some future point, and there isn’t action to make certification mandatory for all installations, then this risks opening the market to uncertified, unqualified and unreliable installers.
Local authority trading standards teams have the responsibility for tackling rogue traders and have power to investigate and prosecute individuals that are breaking the law. However, Which? research has found that Trading Standards teams are often severely under-resourced and this has reduced the number of investigations and prosecutions that are taking place.
5. Clear and fair contract terms
Contract terms are an important consideration for all financial products, however, the issues will vary depending on the type of product.
- Credit agreements. The terms and conditions for regular credit agreements are likely to be relatively straightforward and will cover repayments, any guarantees and warranties on the heat pump and requirements that the homeowner must follow in order not to invalidate the guarantee or warranty. Depending on the terms of the guarantee this may require the homeowner to regularly service the heat pump using an approved tradesperson and follow requirements if making any alteration to their heating system that may impact on the heat pump.
- Property Linked Finance (PLF). The key terms and conditions that are relevant to PLF relate to the ability of the original homeowner to transfer the loan to a new homeowner. PACE loans, a form of PLF which is available in some US states, have had some success [42] but they have resulted in some homeowners struggling to obtain mortgages on their homes because the PACE repayments have priority over other lenders in the event of a default [43]. This structure should clearly be avoided in the development of PLF in the UK.
- TPO hire agreements are likely to have more complicated terms and conditions as the heat pump remains the property of the third party for the duration of the agreement, which may be a period of ten to twenty years. During this time it is highly likely that homeowners' circumstances will change, including changes in income or the number of people in the household. Many homeowners may also want to make changes to the property or move home. Technology and the products and services that are available will also improve in this time, giving homeowners the option to make changes that improve performance and reduce bills. The extent to which homeowners can make these changes and the charges or fees that apply should be clearly set out, potentially with a minimum ‘fair’ level of flexibility based on a reasonable assumption of the changes that may be required.
The way in which TPO agreements are marketed and explained to consumers will also be important. For example consumers may assume that they will be able to return a product under a hire agreement. However, the financial cost of returning a heat pump is likely to be considerable given the businesses’ need to cover the high cost of original installation of the heat pump and the rapid depreciation in the heat pump's resale or reuse value.
Under a ‘hire purchase’ or ‘conditional sale’ agreement the homeowner’s liability would be limited to paying 50% of the total price, plus any arrears or reasonable costs if they had failed to take care of the product. However, under a consumer hire (leasing) agreement where the consumer does not own the product at the end of the agreement, the consumer's liability is defined by the contract with no limit on their liability. These agreements also do not give consumers the right to return the product within the first 18 months. These differences significantly limit the protections available to homeowners.
6. Clear options and pricing of bundled services
In some cases, financial products will be sold as part of a package that includes other products, such as solar panels and batteries, and services like optimisation, maintenance and repair plans. Bundles can benefit consumers through lower prices or convenience, but they also carry risks if they prevent consideration of better-suited equipment or lock consumers into poor-value services.
Bundles can obscure pricing and make it harder for consumers to switch when better options arise. In future, businesses may also include tariffs within these packages - either alongside credit or TPO agreements, or as part of a Heat as a Service (HaaS) offer. The government has proposed that tariffs within TPO agreements should be billed in kWh to allow comparison and that consumers must be free to change tariffs.
No similar proposals currently exist for maintaining choice under HaaS agreements. Because the tariff will be integral to the agreed price, separating them from the package is more difficult. One option under discussion is allowing consumers to switch HaaS providers rather than just tariffs.
7. Protection in the event of a default
As with other loan products, there is a risk that consumers are unable to meet repayments due to unexpected costs or changes in circumstances. This can result in additional interest or fees, and damage to their credit score. More significantly there are also concerns that failure to meet repayments on a heat pump could result in repossession and a loss of heating or hot water. Affordability checks have to be carried out for all credit agreements. The energy market presents particular challenges that may increase the risk of consumers not being able to meet repayments:
- Consumers' lack of familiarity with energy products and the complexity of some energy services increase the risk of mis-selling or consumer misunderstanding. This can lead to consumers overestimating the savings that can be achieved which will make it harder to meet repayments.
- Volatility in energy prices can also impact on the costs and savings that consumers experience. This can be as a result of international markets or changes in government policy. OFGEM has recently introduced measures to support consumers with high levels of energy debt [44].
Unlike with credit products there is no explicit requirement for companies to conduct an affordability assessment. However, wider obligations may apply, such as the FCA’s Consumer Duty, which requires all regulated companies to ensure their products are suitable for the customer.
Protection against repossession
If consumers are unable to meet repayments for a heat pump there is a risk that the provider could seek to repossess the heat pump, effectively depriving the consumer of heat and hot water. However, all providers have said that this is highly unlikely to happen for the following reasons.
Under financial regulations, if a consumer is struggling to make payments a financial provider is required to propose either a payment plan or a payment holiday. If these steps are not successful companies’ actions as a result of a default are also regulated [45]. Should a company try to reclaim a heat pump they would need a county court order which would have to be signed by a judge, who is required to consider the circumstances of the case. Providers argue that it is highly unlikely that a judge would agree to a provider depriving a consumer of an essential service if they had legitimate reasons for not being able to make payments. Though it is worth noting that court orders for the forced installations of prepayment meters had to be suspended in 2023 due to widespread concerns about the impact on vulnerable consumers [46]. This suggests that getting a court order does not necessarily provide sufficient protection in these cases.
Providers also make the case that the number of defaults tends to be very small and there is almost no advantage in companies repossessing a heat pump. In the recent consultation on BUS eligibility the government proposed that providers should be prohibited from repossessing or remotely decommissioning the system in the event of a default. Whilst this would be an effective requirement where the purchase was made as part of a government funding scheme, in the longer term the government should align requirements with those that already exist for energy providers under OFGEM licensing conditions.
8. Effective handling of complaints and disputes
Access to effective complaint handling processes and redress is critical to resolving disputes between businesses and consumers. In particular ADR processes provide consumers with an accessible and affordable means to resolve a dispute. These protections are particularly important in relation to financial products used to purchase a heat pump due to the high expense involved, the role of the heat pump in providing an essential service, and the potential financial and emotional harm of not being able to resolve a dispute related to your heating.
Complaint handling and redress processes vary depending on the cause of the complaint /dispute and the business involved:
- Under Financial Conduct Authority rules, businesses that offer financial products must ensure that consumers have access to an effective complaint handling process and, if the consumer is not able to resolve a complaint with the provider, they have access to the Financial Ombudsman Scheme which provides an alternative dispute resolution (ADR)
- In most cases the company that installs the heat pump will be MCS certified and required to have clear and accessible complaint handling procedures and offer access to ADR. MCS is also consulting on improved financial protections that will give consumers access to redress if the business has gone out of business or refuses to comply with an ADR decision.
- If the company that installs or finances the heat pump is also an energy provider then they will be licensed by OFGEM and must meet OFGEM’s licence conditions for complaint handling and redress including providing access to the Energy Ombudsman.
Where more than one company has been involved in financing and installing a heat pump there is a risk that a consumer that wants to make a complaint is passed from one company to the other. Equally where there is more than one ADR scheme a consumer could become stuck with no one taking responsibility.
Ultimately if a consumer is not able to resolve a dispute with an installer, and they have paid using credit, they can make a claim under Section 75 of the Consumer Credit Act 1974. This enables a consumer that has purchased a product or service using a credit product to make a claim of up to £30,000 against the financial provider and provides a valuable additional layer of protection that supports consumer confidence in markets. The Consumer Credit Act also includes Section 140a that empowers a court to intervene if the relationship between a creditor and a debtor is unfair. This has been used to tackle widespread cases of mis-selling, and forms another important layer of protection for consumers.
Some financial providers have indicated that they are concerned about the liability they are exposed to in this sector and these concerns have been raised in the HM Treasury consultation on the reform of the Consumer Credit Act [47]. These concerns could result in financial products that reward consumers with energy efficient homes rather than encouraging homeowners to make changes, which will benefit homeowners in properties that are already energy-efficient [48].
3. Conclusion and recommendations
Financial packages that make the upfront costs of heat pumps more affordable will be critical in helping consumers manage the transition from gas and oil heating to electric heating. In order for these packages to work they will need to avoid the pitfalls that have affected some previous ‘green’ financing products and schemes that have too often led to poor take up of financial offers, consumers being left worse off, and the sector suffering from negative coverage.
Responsible businesses will want to provide good quality products, good quality information, and seek the best outcomes for their customers, however, the complexity of some financial packages and consumers' lack of experience in this market creates risks. There is also the potential for unscrupulous businesses to take advantage of consumers. Therefore it is important to have robust systems to protect consumers and protect the reputation of the sector as a whole
Many relevant protections are in place as a result of consumer protection legislation, the FCA Consumer Duty and other FCA rules, and the increased use of MCS certification, but this creates a complex landscape and there is a risk that providers will not be aware of requirements and consumers will not be aware of their rights. Even with these requirements, there are areas where consumers would benefit from greater support, and where further regulation will be required to bring new products to market and address gaps.
The sector is at an important point in its development. The financial products that are currently available, such as green mortgages and loans, are quite traditional in what they offer. There are some challenges in relation to these products and homeowners’ access to good quality information and advice, and some concern from providers about the liability risk created by poor quality installations. However, as more innovative products come to market the government will need to address the increased complexity and gaps that emerge. PLF is a relatively traditional product but with the added ability to transfer the loan to a new property owner. In contrast, TPO agreements and HaaS will raise issues around the regulations and consumer protections that apply, and the fairness and transparency of terms and conditions included in long term agreements. The ability to combine financial products for heat pumps with the sale of other products and services will also raise issues around the transparency and fair pricing of these bundled products and services.
For this reason many consumers may prefer more familiar financial products such as low interest loans, and guarantees around the quality of the heat pump installation and its performance. More innovative products may bring additional benefits but these must not be at the expense of homeowners consumer protections. We will be undertaking further consumer research to understand consumers’ preferences in the coming months.
The government currently has considerable influence over the design of financial products in this sector as most heat pump installations in existing homes will be partly funded by government grants, such as the BUS grant. This gives the government an opportunity to influence any additional financial product that is used alongside the grant. However, the BUS is likely to be scaled back over time as the government will not be able to fund all the heat pump installations that are needed. The government should ensure that consumer protections will continue to apply for self-funding households in the event that BUS is scaled back or ended in the future.
In addition to the recommendations below we have also made recommendations for how the government can support consumers in the wider transition to low carbon heating [49]. These changes will also have a positive effect on the market for heat pump financing by building consumer confidence and demand.
Recommendations to support safe and fair financial products for the heat transition
Addressing the complex regulatory and standards landscape
- The government should develop guidance for businesses and consumers that clearly sets out the regulations and requirements under consumer protection law, FCA rules and MCS certification that are relevant to financial products in this area.
- Consumer hire (leasing) agreements offer lower levels of protection compared to other TPO agreements. Until the government has effectively addressed these gaps, consumer hire (leasing) agreements should not be allowed in this market.
- Heat as a Service options should not be allowed until the government has effectively addressed the competition and choice issues that arise from consumers being locked in to long agreements for tariffs and other services.
Ability to make an informed choice
Consumers need to be aware of the different financial products that are available and be able to make an informed choice based on accurate, accessible and comparable information.
- The government should develop mandatory key information sheets to support easy comparison of different financial packages. This should include precontractual information that is required for all consumer credit products under FCA rules.
- Comparison sites and brokers that support consumer choice in this sector should be transparent in relation to how much of the market they cover and any commissions they receive from the companies that have products included on their site.
- The availability of a simple, low interest rate loan would be a straightforward option for homeowners that are put off by the complexity of other offers.
Transparent and fair contract terms for third party agreements
- Government guidance should establish requirements for transparent and fair contract terms, including the rights and responsibilities of each party and any charges or fees.
- This should cover events such as:
- if the equipment is damaged and an insurance claim is made.
- If the homeowner needs to make changes to the property or heating system that affect the heat pump and its operation.
- The ability to pay off the outstanding amount or transfer the agreement to the new owner if the property is sold.
- If the homeowner wants to end the contract for any other reason.
- The definitions of default should be reasonable so as not to allow a minor delay to be classified as a default.
- Any fees or charges relating to the above should be reasonable, and transparent at the point the contract is agreed.
- Where heat pumps are sold as part of a bundle with other products and services, consumers should not be locked into the use of tariffs, or services such as optimisation, repair and maintenance plans for more than two years. Consumers should be able to choose alternative providers of these services without invalidating guarantees.
- Companies should not have the ability to unilaterally change key aspects of the agreement.
Protection against poor quality installations
Which? has called on the government to introduce mandatory certification of heat pump installers. Until this is introduced financial providers should make it a requirement that all installations funded by their products are carried out by MCS certified installers.
Protection against repossession in the event of a default
- As required under FCA regulations companies should undertake a robust affordability assessment including stress testing the consumer’s ability to pay under reasonable worst-case scenarios. There is no explicit requirement for an affordability assessment in relation to consumer hire (leasing) agreements; this gap should be addressed before these products are allowed in this sector.
- All businesses that finance the installation of a heat pump under a loan or hire agreement should be subject to OFGEM licensing conditions or equivalent rules that cover the process that must be followed before disconnecting a customer that cannot make their payments.
Complaints and redress
- There should be clear complaint handling and redress processes in case anything goes wrong. The government should designate an organisation or establish a process for resolving which alternative dispute resolution (ADR) process consumers should use in the event of a dispute with a provider.
- Companies should have strong financial protections (as proposed under the MCS reforms) to cover remediation work if the company fails to comply with an ADR ruling or if the company goes out of business.
- Any future reform of the Consumer Credit Act in relation to Green Finance should maintain important protections such as S75 as this provides homeowners with an important route to redress and supports consumer confidence in the sector.
Annex: Consumer protections relevant to home energy improvements
General consumer protection legislation [50]
All products and services that are sold as part of a package alongside a financial product must comply with consumer protection legislation. Key pieces of legislation include:
- the Consumer Rights Act (2015) that covers the quality of products and services and consumers rights in the event that products and services are not satisfactory quality, fit for purpose or as described.
- The Digital Markets, Competition and Consumers Act 2024 that prohibits misleading actions, misleading omissions, and aggressive sales tactics. It also includes a "blacklist" of 31 banned practices (for example false "limited time offers"). The Consumer Protection from Unfair Trading Regulations (2008) apply to conduct before 6 April 2025.
Enforcement of consumer protection legislation is the responsibility of the Competition and Markets Authority and Local Authority Trading Standards. The CMA’s enforcement powers have recently been enhanced under the Digital Markets Competition and Consumers Act and the authority now has the power to take direct enforcement action against a business and to levy administrative fines of up to 10% of turnover where companies have broken the law. However, most enforcement, particularly enforcement of smaller companies falls to Trading Standards, which can lack the structure and resources to effectively enforce the law.
Individuals also have the right to take private enforcement action through the courts, however, this can be a daunting, time consuming and expensive process. The significant barriers that consumers face to bringing their own case against a company underlines the importance of alternative dispute resolution processes such as the Financial Ombudsman and the Dispute Resolution Service which are available through companies that are FCA registered or MSC certified (see below).
Financial services consumer protection
All companies offering credit products or hire agreements in the UK must be registered with the Financial Conduct Authority (FCA) and follow FCA rules as set out in the FCA rulebook. Of particular relevance to consumer protection are:
- The Consumer Duty
- Sourcebooks with specific requirements relating to topics such as dispute resolution and complaints and consumer credit.
The Consumer Duty
The Consumer Duty was introduced in July 2022 and is one of the Principles for Businesses that all FCA registered businesses must follow. The duty requires that ‘a firm must act to deliver good outcomes for retail customers.’
The Cross cutting obligations
The Consumer Duty is supported by a set of cross cutting obligations [51]. These define what is required of firms in order to deliver good outcomes for retail consumers (each of these includes more detailed guidance)
- Act in good faith
- Avoid causing foreseeable harm
- Enable and support retail customers
Products and services
The FCA expects firms to focus on delivering good results in four key areas of the customer journey:
- Price and value - including product packages. And how to assess value. Includes the role of distributors.
- Consumer understanding - covers all communications
- Consumer support - including vulnerable consumers. To use as anticipated, to understand the product, to avoid barriers or costs in relation to switching.
- Provide an appropriate level of care based on the product and the consumer.
Additional obligations in Sourcebooks
In addition regulated companies must also meet additional specific obligations, some of which are general to all financial providers such as dispute resolution, redress and compensation and some of which are specific to the provision of certain financial products such as the Consumer Credit sourcebook [52].
Consumer Credit Act 1974
The CCA includes a number of important protections for consumers. In particular Sections 55-61 require lenders to provide clear pre-contractual information and ensure that agreements are in the prescribed form and properly executed. Improperly executed agreements may not be enforceable without a court order. Section 75 provides consumers with the ability to make a claim against the financial provider if the consumer is unable to resolve a dispute with the company that provided the product or service.
The CCA (section 99 and section 100) also gives consumers the right to terminate most hire purchase and conditional sale agreements before the final payment is due and caps the amount due based on the final price and the amount already paid.
Section 140a-c enables the courts to intervene where the relationship between a creditor and a debtor is deemed to be unfair. It has been used in relation to cases such as the mis-selling of financial services and unfair collection practices.
These obligations have led to calls from the green energy finance sector to water down consumer protections, by developing “a regime which either exempts green finance or carves out a separate set of rules for it to encourage lenders to offer finance in this space” [53]. The government has said that it is “committed to delivering this much needed overhaul of the consumer credit regime and will move at pace to implement real change which will support growth and innovation in this sector whilst ensuring consumers remain appropriately protected [54]. The overall approach is to remove duplication where a similar outcome can be achieved through existing FCA rules or other protections. Where protections aren't covered elsewhere they will either be retained through new legislation or amendments, or repealed if they are considered not to be effective.
Micro generation Certification Scheme (MCS)
The Microgeneration Scheme is a certification scheme for installers of domestic renewable technologies including heat pumps, solar panels and batteries. Installers that install a heat pump with a grant from the Boiler Upgrade Scheme must be certified by MCS or an equivalent scheme [55]. Currently this means that most property owners that are replacing a boiler with a heat pump are likely to use an MCS certified installer, however, there is no requirement for new builds to use MCS installers.
MCS is currently undergoing significant reforms. Under the new scheme structure [56] MCS certification will include:
- A customer commitment that sets out the rights of any customer receiving advice, quotes, installations, products, services, or other work carried out by an MCS certified Installer and relating to an MCS certified installation.
- MCS installer operating requirements that sets out an Installer’s responsibilities once approved to operate as MCS certified, the scope of work to be delivered through the scheme, and the Installer’s liability for installation quality and compliance with scheme requirements, including the Customer Commitment.
- MCS installation standards that set out how systems should be designed and installed.
- MCS pre-sale information and system performance estimate standards set out how these steps should be delivered.
OFGEM licence conditions
OFGEM is the energy regulator for Great Britain. OFGEM licence conditions are relevant to some aspects of heat pump installation packages [57]. In addition it oversees compliance with scheme requirements including the BUS.
- Industry licensing: any company supplying energy must follow OFGEM licence conditions.
- Administration of environmental and social schemes including publishing guidance and monitoring and enforcing compliance with the requirements of the regulations.