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By Andy Hackett, Senior Policy Adviser, Centre for Net Zero (Octopus Energy Group)

Back in 1930, pioneering Scottish engineer Haldane analysed the theoretical costs of warming public baths with coal compared to a heat pump. In the hundred years or so since engineers have been praising heat pumps’ excellent efficiency, and the fact they are three to four times more efficient than gas boilers is central to their appeal today. That’s a big part of why they are the leading technology to decarbonise heat and feature in government targets, subsidies and new building standards. As we move to net zero, heat pumps are set to be a major determinant of the more than doubling of electricity demand expected by 2050, which means we need to understand their impact on both households and the grid.

However, today there remains surprisingly scant empirical evidence of the causal impact of heat pumps on demand, and even less on the impact of price to optimise demand. The Centre for Net Zero has sought to address this by analysing Octopus Energy installations of air-source heat pumps and its time-of-use tariff design for heat pumps, Cosy. You can find a summary below – and the full paper here.

Heat pumps significantly reduce households’ energy use and carbon emissions

We find an overall reduction in demand of approximately 40%, as heat pumps increase electricity demand by 61% while nearly eliminating gas demand. Heat pumps replace gas demand for space and water heating with electricity, but only need about a third of the energy to do so. This translates to a 36% reduction in carbon emissions today, or a 68% reduction over the lifetime of the heat pump (as the grid decarbonises over time).

Time-of-use pricing for heat pumps is very effective at shifting electricity demand

Heat pumps alone increase consumption throughout the day, without significantly changing the shape of demand. Adopting Octopus’s Cosy tariff results in roughly a doubling of consumption during off-peak periods (when prices drop 40%) and a halving of consumption during the evening peak (when prices increase 60%). At all other times, consumption reduces by ~28%. The tariff reduces annual energy bills by 18%, saving customers about £318 per year compared to Octopus’s standard tariff. Consumers respond to the price signals in different ways, but smart thermostats dominate.

Load-shifting away from peak periods is possible on the coldest days

We see no evidence of load-shifting diminishing on the coldest days. In fact, load-shifting is higher on these days, which has surprised some readers of the paper. The reason is actually quite intuitive: as demand on these days is higher overall, there is greater electricity load to shift. This is when flexibility is most valuable – with more to shave off peak demand for the grid and more to save for consumers. Our study suggests consumers are able and willing to provide flexibility when it’s needed most.

We see load-shifting from all types of building in our sample

We find no correlation between load-shifting and ratings from energy performance certificates (A-G). However, buildings with higher estimated heat loss show greater load-shifting (based on floor size and selected other data from the energy performance certificate), with higher demand leading to a greater impact of time-of-use pricing. Flexibility from such households is particularly important due to the impact they would otherwise have on peak demand.

The heat pump subsidy has positive welfare benefits relative to costs

We use the marginal value of public funds to assess the benefits of the Boiler Upgrade Scheme relative to government costs. Based on our assumptions, it provides £1.24 in societal benefits for every £1 of government spend, which is favourable in comparison to other energy efficiency subsidies. Benefits would increase further if, as expected, heat pump costs fall over time; if the subsidy succeeds in accelerating learning-by-doing to reduce costs, we estimate the marginal value of public funds to be an impressive £1.9.

What does it all mean?

Firstly, Haldane and other engineers are right to laud the heat pump’s efficiency, which does translate to the real world; this can inform electrification forecasts. Secondly, time-of-use pricing works very well to reduce running costs and shave peak demand; we should aim to pair smart tariffs with heat pump adoption (noting these can become more dynamic and automated over time). Thirdly, subsidising heat pumps is a good use of public money; the Boiler Upgrade Scheme should continue while the market is small.

A clear and outstanding action for UK policymakers is to lower the cost ratio of electricity to gas to ensure that heat pumps’ efficiency translates to savings for adopters, supporting affordability and deployment. This should include rebalancing the higher levies imposed on electricity compared to gas, and potentially removing the exemption of domestic gas consumption from the Emissions Trading Scheme (where electricity generation is not exempt). Addressing this issue – alongside ongoing subsidies and further efforts to drive down upfront costs and bolster supply chains – can set the heat pump on the path it’s been destined to play for over a century: electrifying heat in Britain.

This blog is by Andy Hackett, Policy Adviser at Centre for Net Zero (Octopus Energy Group). It is based on a collaborative paper with Louise Bernard Centre for Net Zero (Octopus Energy Group), Robert Metcalfe Columbia University and NBER  and Andrew Schein Centre for Net Zero (Octopus Energy Group): Decarbonising Heat: The Impact of Heat Pumps and a Time-of-Use Heat Pump Tariff on Energy Demand.