Decarbonising buildings with heat pumps – lessons from the UK
The UK launched an attractive subsidy scheme to encourage homeowners to switch to heat pumps. The take-up rate is low in spite of the grant. Installation and running costs are an important barrier but not the only reason for the low rollout rate. Heat pumps use electricity and electricity is a lot more expensive than gas in the UK. The gap between electricity and gas will have to narrow to improve the cost benefit ratio of heat pumps.
The UK launched an attractive subsidy scheme to encourage homeowners to switch to heat pumps
The take-up rate is low in spite of the grant, leading the Lords Environment and Climate Change Committee to conclude that the subsidy scheme has failed to achieve its objectives
Installation and running costs are an important barrier but not the only reason for the low rollout rate. There are important lessons around messaging, skills shortage and the design of grants that are relevant to the green transition more broadly
Heat pumps use electricity and electricity is a lot more expensive than gas in the UK. The gap between electricity and gas will have to narrow to improve the cost benefit ratio of heat pumps.
There are 28 million homes in the UK. Around 90% of these homes use fossil fuel for cooking, space heating and hot water requirements. Reducing the use of fossil fuels in residential homes is essential for achieving the statutory climate targets. The building sector in the UK which comprises residential and commercial property accounts for some 17% of total GHG emissions, which means that achieving net zero at the national level requires a substantial, if not complete, elimination of GHG emissions from this sector.
There are two technologies on offer and both involve replacing the existing fossil fuel boiler with clean fuel. The first is a heat pump. A heat pump works like a refrigerator. It uses electricity to extract heat from the air, the ground, or from water, amplifies that heat, and then transfers heat to where it is needed, which in the case of a home is for space heating and hot water. Homes will have to install a heat pump and many energy-inefficient homes will also have to invest in energy efficiencies such as double-glazing, wall cavity insulation, and even new radiators (chart below). The electricity that is used must be from renewable sources. The government has a target of achieving 600k installed heat pumps per annum by 2028 (from 54k actually installed recently).
Hydrogen as a source of heating in homes still far away
The alternative to a heat-pump is to use hydrogen instead of natural gas. Homeowners will simply have to replace their existing home appliances, including the boiler, with a like-for-like hydrogen-compatible boiler. No other adjustments are required by the homeowners. The UK is piloting projects, such as HyDeploy, HyNet and H21, where green hydrogen blended with natural gas is being supplied to homes, with the aim to increase the proportion of the renewable fuel in the blend as much as possible to eventually achieve a zero carbon emission in the heating of homes. However, the well-known issue with green hydrogen is the prohibitively high cost of production. The chart below shows the latest forecasts by Bloomberg New Energy Finance (BNEF) on renewable hydrogen produced in the UK through 2050 and compared against the wholesale natural gas price based on the 1 month forward TTF. The tipping point in an economically viable switch to green hydrogen will be reached in the first years of the next decades, unless natural gas prices somehow reach pre-Russia/Ukraine conflict levels. In that scenario the tipping point would be reached even further down the road.
Further analysis by the Hydrogen Science Coalition shows an interesting comparison of how much renewable capacity would be required to heat the UK housing stock through renewable hydrogen or heat-pumps. Renewable hydrogen would require nearly 6 times for capacity. The key driver behind this difference is that producing green hydrogen based on existing technologies results in losses in energy through electrolysis, whereas heat-pumps can actually convert heat captured from the environment to heat used for domestic purposes by a factor of 3.
Another big challenge with hydrogen is the infrastructure to manufacture and repurposing the existing gas network. The UK government will take a strategic decision on the safety and feasibility of hydrogen as a heat source by 2026. The UK cannot wait for that decision if it is to meet its climate targets.
The BUS is failing to deliver
In a green hydrogen to natural gas showdown the latter clearly has the upper-hand. But how does a heat-pump stack-up against holding on to a gas powered boiler? To support the transition, the government launched the Boiler Upgrade Scheme and earmarked GBP450 million to provide GBP5,000 subsidy to home owners for a new heat pump. In spite of the subsidy and the fact that heat pumps are more efficient that conventional boilers, only 2% of UK homes have a low-carbon heat source and just 50,000 heat pumps were installed last year, leading the House of Lords Environment and Climate Change Committee to conclude that the BUS is failing to deliver. Why has the scheme failed to deliver?
We highlight four main reasons:
Pre-requisites: only homes with a minimum EPC rating and insulation qualify for the heat pump subsidy. Many homes in the UK fail to make the grade. The government should relax this restriction.
Cost: We compare the total cost of installing and running a heat pump with the cost of a conventional boiler in the next section. The key takeaway is that heat pumps are less attractive from a cost perspective when the price of electricity is high relative to gas as is the case in the UK. The government might also consider offering grants or loans to retrofit the home to improve energy efficiency.
Skill shortage: There are around 2,000 qualified heat pump installers in the UK. Around 12,000 installers will be required to ramp up installation capacity to 600,000 per annum by 2028 and to 50,000 by 2030 to achieve the 1 million target.
Advice: Heat pumps are a new technology and therefore, unfamiliar to most homeowners. Homeowners would benefit from independent advice, which is specific to their home and their circumstances.
Hydrogen or heat pumps: Homeowners will be reluctant to make the investment in heat pumps if there is a chance that hydrogen is a viable option. The government should announce its decision on hydrogen as soon as possible to lift the uncertainty. We already show that competitiveness of hydrogen is very distant.
The switch to heat-pumps is held back by (still) cheap price levels for running gas boilers
There is a high initial cost outlay to install a heat-pump at home. A UK government website (see ) sets out how much net outlay (i.e. after subsidies) could be required for installing air source heat pumps and the resulting conversion from a typical EPC D-labelled property to a B-label. This adds up to nearly GBP 14.5k, as shown in the table below:
The financial benefits on this switch to a heat-pump would be the foregone return of the net-outlay as proxied by a 30y Gilt yield, which in this case boils down to GBP 620 annually. This would need to be made-up through a lower utility bill. We used the ‘air-source heat pump running cost calculator’ from Great-Home (see ) to provide us 1) the annual GBP 108 loss due to existing electricity and gas price levels as per the Government established price caps (top-right in table below) and 2) to see at which levels of electricity- (which need to be subsidized) and gas prices (which need to be taxed) we get to situation where a heat-pump investment would make economic sense (green cells in the bottom-left).
It turns out that when the electricity-to-gas price ratio would drop below 2 times (such as a 31.6 pence cost for electricity and 15.2 cost for gas), a heat-pump investment would be rational. Currently this electricity to gas price ratio stands at 3.4. As the electricity price is normally set by the highest marginal cost producer, perhaps the call by the aforementioned committee to reform the electricity market could be a quick gain in making heat-pumps more attractive and hence increasing the take-up. Otherwise, the take-up would only make sense if gas is taxed more and/or subsidies on heat-pumps become more generous. We have not taken the property price implications from upgrading the home from a D-label to a B-label by installing heat-pumps into consideration. However, given the limited financial benefits at existing energy price levels, perhaps this benefit would be limited anyways.