Ministers are preparing to slash the money available for heat pump subsidies as they search for ways to fund higher defence spending, according to sources.

Energy secretary Miatta Fahnbulleh has been tasked with finding more than £2bn in savings from her department's budget for defence investment, under a plan drawn up by the previous government. A share of the savings is expected to come from the boiler upgrade scheme (BUS) for England and Wales, which provides grants of up to £9,000 towards cleaner heating. Sources say the programme will not be abolished altogether, but hundreds of millions of pounds will be cut from its £2.7bn budget.

The £2bn savings task

The cuts were agreed when Ed Miliband was energy secretary, after he consented to the department trimming £2bn from its capital budget to help pay for the defence investment plan. The decision came as then prime minister Keir Starmer looked for ways to fund a £15bn rise in defence spending over four years.

Chancellor John Healey, who resigned as defence secretary in June under Starmer while arguing the defence uplift was not enough, must now find an additional £4.7bn in savings over a four-year period beyond what departments have already agreed. Energy officials say the cuts are small compared with the growth in the department's capital budget, one of the fastest growing in Whitehall.

What the boiler upgrade scheme pays for

The scheme has helped tens of thousands of households replace an old gas boiler with an electric heat pump since it began in 2022, subsidising nearly 80,000 heat pumps.

• •The basic grant is £7,500 towards an electric heat pump; off-grid properties can claim up to £9,000.
• •The grants cover only just over half the cost of the median heat pump, so much of the money has gone to better-off households.
• •Supporters say more than 40% of the money has gone to households with an annual income below £52,000.
• •Supporters also credit the subsidies with building a fast-growing domestic heat pump industry, expanding by more than 25% a year.

Treasury officials have long considered the scheme a subsidy used mainly by middle-class households.

Industry warns of damage

Critics say cutting the scheme would damage the nascent British heat pump industry and undermine climate commitments. Madeleine Gabriel, a director at the charity Nesta, said: "Our reliance on gas is the reason we are in an energy crisis, so cutting funding for heat pumps makes no sense." She added that the cut is "a kick in the teeth for the businesses and tradespeople who've put in time and money to build the industry".

Octopus Energy chief executive Greg Jackson said the boiler upgrade scheme is doing exactly what it was designed to do, "kicking off an industry to drive down the costs". He said heat pumps can now cost the same to install as a gas boiler after the grant, and that more than 500,000 people asked Octopus for a quote in the last 18 months. "The market is taking off. Cutting the engine now would be brutally damaging. Heat pumps are undoubtedly our energy future," he said.

For comparison, France sold four times the number of heat pumps the UK did last year.

Government response and wider cuts

A Department for Energy Security and Net Zero spokesperson said savings for the defence investment plan are a small part of the department's overall budget, "which saw a significant uplift at spending review". "We will set out how we will fund essential investment in our national security this autumn," the spokesperson said.

Bloomberg reported this month that ministers were planning to reduce spending on carbon capture and storage (CCS) and green hydrogen schemes as part of the energy department cuts. The government had been planning to spend £21.7bn on CCS from now until 2050.

Energy minister Martin McCluskey acknowledged the pressure, saying: "I'm not betraying any confidences when I say that we are having to make some difficult decisions because of what happened as a result of the defence investment plan".

Separately, ministers are expected to give the go-ahead for the Jackdaw gasfield as soon as this week. The department will set out this autumn how it will fund essential investment in national security.