What is Industrial Heating Oil (IHO)? A 2025 Business Guide

With UK energy prices soaring, businesses are seeking to reduce heating costs for large spaces like warehouses and factories. Industrial Heating Oil (IHO) is a specialised fuel developed as a cost-effective alternative to gas oil (red diesel) for heating applications.

This guide explains what IHO is, its intended use, and the critical legal guidelines involved. We’ll explore the financial benefits and practical steps for switching, helping you determine if IHO is the right solution for your company’s heating system.

Industrial Heating Oil is a specifically formulated fuel designed as a direct, cost-effective replacement for gas oil (red diesel) and standard diesel (DERV) in commercial heating applications only. Its primary purpose is to provide the same heating performance as diesel but at a significantly lower price point

Unlike standard diesel fuels which must adhere to strict specifications for engine use (like BS EN 590 for DERV), IHO is blended to a different standard. It is typically formulated from a variety of high-quality hydrocarbon streams that are ideal for producing heat but may not be suitable for the demands of a modern engine. This flexibility in blending is the key to its lower cost. The formulation is carefully managed to ensure it has a similar calorific value (the energy it produces when burned) and viscosity (its flow characteristics) to diesel. This means it behaves in a near-identical way within a heating system, producing the same amount of heat and flowing correctly through the burner’s fuel lines and pump.

Industrial Heating Oil (IHO) offers a significant operational advantage because it’s fully compatible with existing systems, meaning you can switch to it without costly upgrades to your boiler or tanks. This means you can switch from using gas oil or diesel to power your heating system without any expensive modifications to your equipment. You can use your existing storage tank, fuel lines, and boiler. In most cases, IHO can even be mixed with any residual gas oil left in your tank, making the transition seamless and immediate. This eliminates the two biggest barriers to adopting a new fuel: capital expenditure and operational downtime. For a busy Operations Manager, this simplicity is a crucial benefit.

The entire reason for IHO’s existence is to save businesses money on their heating bills. Because it is not intended for use in “any type of engine,” it is not subject to the same high levels of fuel duty applied to road fuels. This tax difference is the primary source of the savings. Suppliers can formulate a high-performance heating fuel without having to meet the premium specifications required for road vehicles, passing these cost savings directly on to the customer. This makes it a popular choice for businesses looking for a cheap heating oil for business without sacrificing performance.

Understanding the precise use case for IHO is essential for both maximising its benefits and ensuring legal compliance. It is a specialist product for a specific job.

IHO is designed for businesses with significant, static heating requirements. The ideal users are facilities that rely on oil-fired heating systems to maintain ambient temperatures or for industrial processes. Key examples include:

• Warehousing & Logistics: Heating large distribution centres and warehouses with cabinet heaters or warm air blowers.
• Manufacturing: Firing industrial boilers for steam generation or factory space heating.
• Agriculture: Powering grain dryers, heating livestock sheds, or warming horticultural greenhouses.
• Leisure & Hospitality: Heating large marquees, workshops, or event spaces with temporary heaters.

If your business spends a substantial amount on gas oil purely for heating, you are a prime candidate to benefit from the IHO fuel price advantage.

The rule is simple: if the equipment is designed to burn fuel to produce heat, IHO is likely a suitable option. This includes a wide range of common industrial equipment:

• Industrial Boilers
• Furnaces and Burners
• Cabinet Heaters (e.g., Powrmatic)
• Grain Dryers
• Roadstone Dryers

This is a point of common and dangerous confusion. A backup generator, while static, is powered by an engine. Using IHO to fuel engines in any vehicle or machinery is illegal; it is exclusively a heating fuel. HMRC views this as tax evasion, and the penalties can be severe. Furthermore, the IHO fuel specification is not designed for the precise tolerances of an engine’s fuel injection system and could lead to poor performance, excessive smoke, and long-term damage. This is the single most important rule to remember: IHO is for burners, not engines.

To fully appreciate IHO’s role, it helps to compare it directly with the other common fuels it competes with.

Before the 2022 red diesel rule changes, gas oil was the go-to fuel for both off-road machinery and heating. For heating applications, IHO is now the superior choice. By being specifically formulated for heating systems, it matches the performance of gas oil and can be used in the same equipment. This specialisation means it doesn’t need the costly components required for engine compatibility, making it a more economical choice. For any business still legally able to buy red diesel but using it for heating, switching that portion of their consumption to IHO offers a clear cost saving.

Many businesses forced off red diesel switched their heating systems to DERV. This is a perfectly functional but extremely expensive solution. DERV is a premium-grade fuel designed for high-performance road vehicle engines, and its price reflects the high fuel duty and strict BS EN 590 specification. Using DERV for a simple boiler is like using a surgical scalpel to cut a cardboard box—it works, but it’s vast overkill and a waste of money. The IHO vs gas oil and DERV comparison clearly shows IHO as the most financially sensible choice for heating.

Kerosene is another common heating oil, often used in domestic settings and some specific commercial boilers that are designed exclusively for it. Kerosene is a much lighter, cleaner-burning fuel than diesel or IHO. You cannot use IHO in a system designed for kerosene. IHO is specifically a replacement for systems designed to run on gas oil or diesel. Always check your boiler or heater’s manual to confirm which type of fuel it requires.