Research report
Decarbonising Home Heating: An Evidence Review of Domestic Heat Pump Installed Costs
Apr 2023
In this blog we explore the key questions, challenges and insights emerging from our initial work under the Delivering a Sustainable and Equitable Heat Transition (SEHT) project. These insights have been drawn from discussions at a roundtable event with relevant stakeholders (representing policy makers, industry and NGOs), meetings of our project steering group and preliminary energy system and economic modelling.
Heating buildings is the source of nearly a quarter of UK emissions. Thus, meeting net zero will involve virtually all heat in buildings to be decarbonised. The UK Government has published strategies to reduce emissions from buildings over the coming decades. Here, the electrification of heat is proposed to be a key action in reducing emissions from homes where the majority of emissions are associated with boilers that currently run-on methane gas. In their Heat and buildings strategy, the UK Government set out its plans to deliver at least 600,000 heat pump systems per year by 2028. The strategy also recognises the role that hydrogen might play in decarbonising heat and the UK Government are due to decide by 2026 on whether to take this option forward.
Regardless of what mix of technology options is taken forward, significant changes to the energy system – including the upgrade of the energy networks and increasing renewable energy generation capacity – will be needed alongside the installation of new heating systems in people’s homes. Understanding how these costs are distributed, where benefits might accrue and how the wider economy might be impacted is a key aim of the SEHT project.
These questions are set within a quickly changing policy environment where – for example – surging global gas prices have driven a significant increase to the energy price cap which now sits at £2500 for an average household. Combined with wider cost-of-living challenges, affordability of heating is obviously a growing concern.
Higher electricity retail prices, relative to gas, are likely to offset cost reductions due to energy savings from heat electrification.
Our initial analysis highlights key issues, such as the importance of the retail price differential between gas and electricity and how that may interact with other factors (including potential efficiency gains in shifting to electric systems) to impact the wider economy. Under an electrification scenario, we anticipate almost 40% energy savings for heating at point of consumption, largely due to the higher efficiency of heat pumps compared to gas central heating systems. However, where the electricity retail price is higher relative to that of gas, monetary savings in delivering heat/hot water services can be significantly offset or completely eliminated. Such net impacts on bills must also be set in the context of the upfront and/or financing costs of purchasing and installing a new heating system.
In the UK, around 1 in 10 households currently experience fuel poverty (1 in 4 in Scotland) – though these figures are rapidly becoming outdated given the current energy price crisis – and the transition to low carbon systems could introduce further pressure to these vulnerable groups. Such pressures involve not only the necessary expenses to replace existing heating systems (e.g. gas boilers with heat pumps), but also the need to use fuels (e.g. electricity in the case of heat pumps) that have been historically more expensive that natural gas.
Our previous research has also shown that increasing demand for electricity, along with cost recovery for electricity network upgrades, can put additional pressures on electricity prices, especially in the short to medium term while new generation becomes available to meet demand. The ongoing energy cost crisis demonstrates the critical nature of the situation, where it is expected that millions more households will fall into fuel poverty. In this context, a key consideration emerging for the heat transition, is how the productivity and the efficiency of the electricity sector can be improved in ways that act alongside household energy efficiency to deliver real reductions in energy bills and buffer against future price pressures. Linked to this, electricity market reforms, such as those put forward by UKERC and now being put forward in the Energy Prices Bill, could be used as a tool to decouple the price of electricity and gas and capitalise on the low marginal cost of renewable electricity production that could ultimately alleviate price pressures.
Hydrogen remains at the centre of heating and industrial policies in the UK. However, the extent of its potential future use for residential heating is not clear and the scenarios projecting the use of hydrogen tend to also consider other technologies, including heat pumps. Therefore, uncertainties remain around the level and location of hydrogen use, which will have implications on business models, investments, and potential costs differentials for those with access to hydrogen (requiring the development of specific networks) and those who do not. Key questions also remain around how hydrogen production supply chains will emerge, what sectors they will service and more generally to what extent this will evolve as a new sector in the UK economy.
Our initial analyses suggest that different sources of costs and benefits will play out in different parts of the economy. For instance, higher electricity demand is likely to boost the electricity production and supply industry, which could be a key source of wider economic gains, depending on the continued strength of supply chain linkages. Similarly, as we have discovered in our research linked to understanding the economy wide impacts of the transition to electric vehicles, we anticipate temporary gains in the sectors that play a role in upgrading the electricity network infrastructure (particularly UK construction activity).
However, activity and employment levels could reduce in the also heavily embedded gas distribution sector and its domestic supply chain, with upstream linkages and impacts including the domestic oil and gas extraction sector which provides part of the gas distributed through the network. These issues are likely to negatively affect the regions that rely on those sectors, particularly where there is significant oil and gas extraction and/or distribution and support activity. Here, a potentially emerging hydrogen sector could help reallocate those jobs from a range of oil and gas related activity, potentially linking to the growing offshore wind sector, in a wider ‘marine energy’ industry. However, there is still uncertainty in the composition of supply chains and size of such emerging new and/or transitioning sectors.
Sectoral changes will inevitably require skill and jobs transfer across sectors. However, these are likely to require policy support and retraining programmes. To deliver the level of heat pump installation required to meet the existing targets (600,000 per annum by 2028) a significant number of skilled workers will be necessary. Moreover, given that the transition to low carbon heat will not happen in isolation, and there will be demand for skilled labour across the economy, it is likely that the installation of heat pumps, or any other low-carbon heating systems, will compete against other decarbonisation and other infrastructure development activity for the existing (and future) pool of skilled labour.
In an economic landscape where there are constraints in the availability of skilled labour, this could translate to higher labour costs, pushing the prices upwards across the economy and leading to an economy-wide loss of competitiveness and aggravating cost-of-living challenges. Thus, distributional and ‘just transition’ challenges arise both for workers impacted by the transition and those lowest income households that are already facing fuel and/or absolute poverty.
The central objective of the SEHT project is to provide insights and evidence around the various challenges and concerns identified. This will be crucial in effectively informing public policy decision makers and other key stakeholders on the scale of the challenge, as well as the near to long term energy, economy wide and societal implications/impacts around enabling and realising heat decarbonisation.
Moving forward, the SEHT project will work with UKERC and wider research, policy and industry stakeholders to provide important insights into how strategic public and private investments and actions – operating alongside existing and new policy instruments – could support an effective and fair transition to low-carbon heating, all of which will be critical to the UK meeting its 2035 and 2050 climate ambitions. Crucially, the project will provide much needed evidence to decision makers in various Government departments, including BEIS and HM Treasury, who ultimately must make and implement key policy decisions related to heat decarbonisation in the coming years.
Findings from the project will be published in a policy brief in the coming months.