Defence, DESNZ and the £2 billion dilemma

For its contribution to help fund the defence spending plan, the Department for Energy Security and Net Zero (DESNZ) has been asked to cut £2 billion from its budget. As it is responsible for a myriad of funding pots that support whole industries, improve energy affordability, and get the country off the “fossil fuel rollercoaster” to achieve the government’s mission to increase energy security and national resilience, the choice of what to scale back on is no easy decision.

However, in advance of the budget this week, rumours have been circulating suggesting the two DESNZ funding pots most likely to be cut are related to the clean energy mission. The budget for building the second wave of carbon capture and storage (CCS) industrial clusters, and the Boiler Upgrade Scheme which is part of the Warm Homes Plan (WHP), supporting householders to reduce their energy costs.

We look at where the cuts would more fairly fall. But, first, some background on what the current spending in these areas is being used for.

CCS funding supports industries to decarbonise CCS infrastructure captures emissions from industrial plants before they are released into the atmosphere and stores them underground. Industry contributes 11 per cent of the UK’s annual emissions and, according to the Climate Change Committee’s balanced pathway to net zero greenhouse gas emissions, the UK needs CCS to bring that contribution down.

The government has decided to build CCS in ‘clusters’, initially near groups of industrial emitters. Under the first wave of funding (Track-1), two clusters have been supported and are underway, with a hefty £21.7 billion committed over 25 years. This funding is unlikely to be at risk from cuts as reducing it could open up legal issues. It would send a negative signal to the private investors and industries involved and make future CCS efforts more expensive for the government (see our recent briefing for more on Track-1 funding).

It is the two further clusters under the second wave (Track-2) and expansion to Track-1 that DESNZ maybe about to cut. Cutting the programme’s future funding would save the government about £2.3 billion over 25 years, assuming similar subsidy models as those used in Track-1, though support is expected to be frontloaded. Currently the biggest beneficiaries of the technology are industries. Cutting government support would stop CCS projects going any further without alternative funding.

The Boiler Upgrade Scheme helps create an industry that will bring down bills and reduce emissions The WHP provides money for households to become more energy efficient and switch to electric technologies. It has been allocated £15 billion over five years, and supports a range of schemes, including those aimed at supporting lower income households and tackling fuel poverty. Under the plan, the Boiler Upgrade Scheme (BUS) provides grants for the upfront costs of installing heat pumps, and the Social Housing Fund funds energy efficiency upgrades and low carbon heating in English social housing.

The BUS is rumoured to be on the chopping block. It has been given a total budget of £2.7 billion over five years, with £400 million allocated in 2026-27.  It gives grants of between £2,000 and £9,000. To date, it’s largely been used by ‘first mover’ and eligible middle to high income households. The scheme’s uptake has increased every year with over 15,000 households applying in July and August 2026 in the face of spiralling energy costs and the extreme summer heatwaves caused by climate change, though its budget has been consistently underspent, with about 79 per cent of the annual grant budget paid out between April 2025 and March 2026.

The remaining BUS budget is just under £2 billion. Scaling this back would significantly dampen demand and reduce the number of heat pumps installed. It will stifle the industry’s ability to get going, bring prices down for more people and grow the workforce.

There are three considerations the government should take into account when making the choice about which cuts to make.

1. Both CCS and the BUS support important industries

Though appropriate applications of CCS are heavily debated, it is the currently viable way to support some heavy industries, such as cement and lime, to reduce their climate impact sooner, by capturing their emissions while they invest in switching away from fossil fuels. Regions, such as the Humber, are anxious about what cutting CCS funding might mean for local jobs.

The BUS also supports jobs, such as the skilled installers to upgrade homes to modern, clean heating systems. With heat pump uptake increasing every year, the scheme has given the industry confidence to train up more installers and grow. Cutting funding now would stifle the industry just as it is getting going, with consequences for local jobs across the country.

2. Cutting the BUS would make government’s aim to reduce energy bills harder

CCS is largely funded by levies on bills, with about a quarter of the support coming from taxpayers. There are two options to reduce this cost; cutting the funding all together or placing all the costs on bills. The first would result in savings of about £9 per year per household, the latter would cost about £3 per year per household.

By contrast, the BUS is completely funded by taxpayers. Running until 2030, it aims to build the market that will eventually help to cut energy bills across Britain, by making households more energy efficient and enabling them to benefit from clean power through electrification.

A government evaluation found that 74 per cent of heat pump installations through the BUS were additional, meaning only a quarter of the households questioned would have installed them without a grant. Cutting the scheme’s budget would be cost neutral to bill payers but would stop the rest of the 400,000 households the BUS aims to support from saving £280 per year on their bills, as well as stifle the further savings for households that are set to benefit if the scheme succeeds in setting up the market.

3. Better alternatives for CCS funding exist but not for BUS

We have explored how to remove CCS costs from the public purse, by shifting them onto fossil fuel companies (the source of the problem CCS is needed to solve) instead. Designing such a policy will inevitably introduce trade-offs, but there are ways to ensure the costs are then not then passed on to consumers by the companies.

Potential alternative funders for the BUS would be energy suppliers. However, with strictly controlled profit margins, capped at 2.4 per cent, they have little flexibility to dedicate money to such schemes.

Where should the axe fall? Both CCS and the BUS are important to ramp up action to reduce climate impacts. But, given the scale of cuts being asked of DESNZ and the potential contribution of these pots to that, both these schemes are likely to be in DESNZ’s sights.

The BUS is a powerful programme which, with positive outcomes for consumers, can help to grow support for climate action. It is reducing household energy bills for people who would otherwise not have switched. In building demand, it supports jobs growth nationwide. Crucially, it has no obvious source of alternative funding support.

But CCS is a different story. Track-1 funding shouldn’t be touched. But Track-2 could be funded more fairly, by taking the burden off taxpayers and making polluters pay. Given the other ways to raise the money and the wider benefits to society such as reducing energy bills, it would be acceptable for CCS to shoulder the majority of the cuts made.