The economics of low carbon heat

In the next 27 years we need to convert the 22 million homes using natural gas for heat and hot water to low carbon alternatives. The undertaking is colossal, and we are starting from a very low base. The solution needs widespread consumer engagement on the choice of available options for when natural gas is turned off, and at the same time ensuring energy resilience and affordability.

The government plans to address this need through a combination of heat pumps, heat networks and potentially hydrogen. The economics of these options has been and continues to be heavily debated.

We often think about the cost of heat in terms of energy used. But the cost of heat is much more than the itemised cost of energy on a gas or electricity bill.  Other hidden costs also make up what we pay for in real terms of the heat we use. These include supplier charges, the running of networks that transport the energy, various government schemes, plus the costs associated with the heating appliance needed to turn the energy supplied into useable heat and hot water.  When all of these are included in a cost assessment of heat, working out which is the most economic low carbon heat solution is not as clear as it might seem.

Whilst electricity used in heat pumps is more expensive today than we have been used to in the past, it is expected to return to somewhere near ‘normal’ levels in the medium to long term – around 6-7p/kWh wholesale.  Low carbon hydrogen is relatively expensive today and is expected to fall to 4-5p/kWh by 2050.  The efficiency of heat pumps does mean the energy cost of running them is likely to be lower than hydrogen boilers.

For associated network costs, all will require investment in the infrastructure needed to deliver low carbon energy to peoples’ homes and businesses. The gas network will need new hydrogen storage assets and some new pipelines. Full electrification of heat could see total power demand not just double but become more erratic and less easily managed. This will be in a future where the system is going to be dependent, to a large extent, on intermittent renewables.  Investment will be needed to build capacity to fulfil demand and flexibility necessary to ensure energy system resilience.

And what about the cost of new heating appliances? A fully installed hydrogen boiler will cost about the same as a natural gas equivalent does today, around £3,000. The cost of a fully installed heat pump depends on the building’s individual characteristics but, based on numbers from BEIS and MCS, current installation costs are around £13,000.  None of these costs are easy for consumers to meet. Especially when considering that during 2020/21 in the UK around 42% of families had either no savings or investments, or less than £1,500.

Assuming an installed heat pump costs reduce by 20% over time, and the hydrogen boiler costs remain flat, the annual running costs of the heat pump would still need to be around £500/year less than a hydrogen boiler to offset the higher upfront installation expense – even before the costs of upgrading the electricity network are factored in. For some homes this will certainly be the case.  But for other homes it is unlikely. This means that, for some, hydrogen could be a cheaper alternative low carbon heating technology.

In short, the question is not a binary one of heat pumps or hydrogen, but one of how much of each technology we will need to decarbonise heat at the lowest cost to consumers and how we can make the transition affordable.

Our role at Cadent is to deliver safely and reliably the gas consumers need today whilst ensuring the network can meet the needs of the future. Working with government, electricity networks, with local and regional authorities and engaging with consumers to understand what decarbonisation looks like in each local area is central to our focus. Only by doing this, together, we can ensure delivery of net zero at the least cost to consumers.

To contact David Watson, email David.Watson1@cadentgas.com

For further information, visit: www.cadentgas.com/future