‘Huge gap’ in the market for heat pump loans

There is a “huge gap” in the market for banks to offer green loans to encourage the uptake of heat pumps, an industry expert has suggested.

Andrew Sissons, deputy director at innovation charity Nesta, made the comments to Utility Week following the publication of research into consumer attitudes towards the devices.

Nesta, along with its behavioural science consultancy Behavioural Insights Team, conducted a representative survey of more than 8,000 UK homeowners who were put in a series of hypothetical situations in which their boiler needed replacing to see how their decisions were affected by the presence of different incentives.

Each participant was asked to respond to three of eight hypothetical scenarios on a randomised basis.

These included a baseline scenario which assumed that a heat pump would take ten days to install at a total of cost of £10,500 and would have running costs of £100 per month on average. Meanwhile, a new gas boiler would take about half a day to install at a cost of £2,000 and would have average monthly running costs of £75. For both technologies, the costs would paid upfront.

Only 12% of respondents said they would choose a heat pump when faced when faced with this situation.

There were also four scenarios in which there were the following adjustments were made to the baseline: a £5,000 reduction in heat pump installation costs to £5,500 through the government’s new Boiler Upgrade Scheme; a change in running costs to £60 per month for a heat pump and £80 per month for a gas boiler; interest-free loans for heat pump installations to be repaid in monthly instalments of £75; and a reduction in the installation time for heat pumps to three days.

Nesta said the change in running costs could be achieved by shifting policy levies on electricity bills onto gas.

A reduction in installation costs had the greatest impact on uptake, which rose by 10 percentage points to 21%. This was closely followed by the availability of interest-free loans, which boosted uptake by 9 percentage points to 21%.

Meanwhile, reduced running costs increased uptake by 7 percentage points to 19%. However, a reduction in installation times had almost zero effect.

Participants were also presented with scenarios in which some of the measures were combined together to gauge interaction effects.

The combination of lower installation and running costs boosted uptake by 30 percentage points to 42%. This represented an additional 13 percentage point increase over the separate effects of the measures added together.

Reduced running costs and interest-free loans raised uptake by 24 percentage point jump to 36% – an extra 8 percentage point increase above the sum of the individual effects.

However, the combination of interest-free loans and reduced installation costs only increased the proportion of responding opting for a heat pump by 16 percentage point to 28%. This was 3 percentage points less than the sum of the individual effects.

Nesta noted that the interest-free loans were assumed to be paid back over a six-year period in this situation, rather than the 12-year period assumed in the other scenarios in which they were offered.

From these figures, the charity also extrapolated to a 44 percentage point increase in uptake from the combination of reduced installation and running costs and interest-free loans to 56%. At this rate, 1 million of the 1.7 million households that replace their gas boiler annually would opt for a heat pump.

Nesta was keen to emphasise that participants were responding to hypothetical situations in an online experiment, meaning the results are likely to represent an upper bound for real-world behaviour.

The charity said an important finding from the research is that interest-free loans could be almost effective at encouraging heat pump adoption as the government’s £5,000 Boiler Upgrade Scheme grant, despite the cost of servicing these loans being “much cheaper” than the cost of the subsidies.

“We were really surprised how strong that just offering people a loan incentive was,” Sisson told Utility Week. “It really increased the uptake.”

He said that “lots of the banks who do green loans and green mortgages aren’t really touching heat pumps yet so it seems to be a huge gap in the market for someone to get in and offer good quality affordable loans for heat pumps. This suggests that is going to be a really big part of the rollout and could take off in a big way.”

The government did previously have a scheme which allowed consumers to borrow money for energy efficiency improvements and pay it back through savings on their energy bills.  However, the Green Deal was scrapped in 2015 due to low uptake.

Sissons also raised concerns over the ability of the heat pump sector keep up with demand if it can be unlocked: “Actually there is a lot of demand out there but we are really concerned about the supply side of the industry, so whether there will be enough people and companies to actually fit all of these heat pumps.

“There is a real danger that suddenly there’s a huge rush for people to try and get heat pumps but there’s not the industry to supply them and we think that’s a huge gap on the government’s side; that there has been far too little emphasis on skills and on growing the companies.”

In response, a spokesperson for the Department for Business, Energy and Industrial Strategy said: “We are incentivising millions of people into getting heat pumps by the end of the decade by slashing the price of installation by up to £5,000 and cutting VAT to 0%, and we are fully confident that we will hit our target of 600,000 installations per year by 2028, particularly as we work with industry to further bring down the cost of heat pumps by up to half by 2025 and reach parity with boilers by 2030.”