Heat pump cost reduction target unlikely to be met

The government’s target to reduce the costs of heat pumps by 25-50% by 2025 is unlikely to be met, Delta-EE has predicted.

Responding to the recently published Heat and Buildings Strategy, the consultancy undertook research exploring two potential scenarios for cost reduction – a base case and an optimistic projection.

Both of the forecasts produced by Delta-EE look at the same cost reduction techniques, with the differences largely driven by installation numbers.

In the optimistic case, where costs are projected to fall by 35% to 40% over a 10-year period, annual sales of heat pumps number in the high hundreds of thousands. Due to these high volumes of sales, the majority of market players are able to squeeze margins to sell products at 30% less than current prices.

Furthermore, installation businesses are highly competitive and larger with lower overheads and there is full geographical coverage in distribution. New propositions like heat-as-a-service have become commonplace, whilst new entrants from outside the energy sector engage in offering heat services.

Meanwhile, the base case sees costs declining by 25% to 30% due to fewer installations and manufacturers as well as the lower availability of expertise.

In both cases, the reductions are primarily driven by market competition squeezing margins across the supply chain, by as much as 20% in the optimistic case and 15% in the base case.

Other key drivers include the optimisation of product design, system design and production processes and research and development to reduce component costs.

Heat pumps currently cost around three to four times more to install than a gas boiler on average. In its Heat and Buildings Strategy the government outlined plans for a £450 million Boiler Upgrade Scheme which will see new grants of £5,000 made available for homeowners installing low-carbon heating systems.

Delta-EE’s head of heat, Lindsay Sugden, said: “While overall the grants announced in the Heat and Building Strategy are a step in the right direction to decarbonising a crucial area in the UK’s overall emissions, these proposals are not sufficient to achieve the government’s decarbonisation goals.

“Our research suggests reaching a 25-50% cost reduction, as proposed in the Heat and Building Strategy, is unlikely to be met, especially by 2025 as is currently suggested.”

The report said even in its optimistic scenario installing a heat pump would remain around £4,000 more expensive than installing a gas boiler.

“While a reduction in upfront costs is important, heat pumps currently can’t compete with gas boilers on running costs, even with a gas crisis as the backdrop,” added Sugden.

“Our modelling suggests that current running costs for heat pumps need to be a third lower than they are today to achieve a payback against a gas boiler.

“A shift in levies from electricity to gas (as currently being discussed in the UK) could go some way to addressing this issue – for example Denmark has seen success through reducing taxation on electricity for heat. But there are also other ways to address this through for example CO2 taxes, and time of use tariffs.”