Retail market may solve heat pump affordability without policy changes

Increasing competition within the retail market may be enough to reduce the cost of heat pumps without the need for policy changes.

That is according to Citizens Advice’s report which looks at the implications of transferring policy levies from electricity bills to drive the uptake of low-carbon technologies such as heat pumps.

While the report advocates for policy levies to be moved from electricity bills on to general taxation, it also suggests that signs of competition within the retail market makes it “plausible that, through a combination of smart tariffs and load shifting to off peak times, consumers may be increasingly able to run heat pumps more cheaply than gas boilers even without changes to how policy costs are recovered”.

It adds: “As we were finalising this report, Ovo launched a new tariff offering electricity for heat pump use at 15p/KWh (for comparison, the current price capped rate for electricity is 27p/KWh), making it cheaper to run one than a gas boiler.

“Other suppliers, most notably Octopus, offer a range of time of use tariffs that can reward consumers for moving their energy consumption to off peak times.

“Anecdotal feedback from existing heat pump users on social media suggest that some already calculate that they are saving money when compared to what they would be paying if using a gas boiler.”

It continues: “At present, suppliers can struggle to pass through the financial benefits of load shifting as the central systems used to calculate how much energy their customers have used is based on profiled consumption, rather than the actual consumption in any given half hour.

“But Ofgem has mandated that from December 2026 all household energy consumption will be based on half hourly data. This should unlock the potential for a much wider range of time of use tariffs.”

Despite signs of optimism that the retail market will solve the affordability problem by itself, Citizens Advice’s main recommendation is for policy levies to be moved from electricity bills and on to general taxation. This includes levies relating to Contracts for Difference, the Renewables Obligation and the Energy Company Obligation.

The report explores a number of scenarios including moving costs on to gas bills, however it says that putting these costs into general taxation is the “fairest” means.

It concludes that moving levies on to gas bills would make a heat pump cheaper to run than a gas boiler.

However, it adds that doing so “may be considered unfair” and would have a “complex […] impact on fuel poverty”.

It adds: “The government is considering whether there is a case for moving […] levies to gas bills instead, in order to make the electrification of heat more attractive. Our analysis suggests that such a change would be enough to alter the relative economics of heat pumps versus gas boilers, such that the former would be cheaper to run than the latter. But there would be significant distributional impacts associated with this, as access to the gas grid is less universal than access to the electricity grid.”

It continues: “Around 85% of the population are on the gas grid, and these households would see their bills increase slightly (by around £22/year on average) in order to fund the costs of those off-gas grid users who were now exempt (and saving around £123/year on average).

“The impacts on fuel poverty are potentially complex, as around four times as many fuel poor households are on the gas grid as off it, but the severity of fuel poverty is deeper in households that are off the gas grid.

“As more and more households move off the gas grid, the costs of policy would be spread over the increasingly small number that remain on it. This may not be politically or socially sustainable.”

Despite rowing back on a number of net zero targets in recent weeks, the government remains committed to its goal of installing 600,000 heat pumps a year by 2028.

In order to meet this target, the maximum grant available under the Boiler Upgrade Scheme has been raised from £5,000 to £7,500.