This briefing considers the economic gains that could be realised through the deployment of heat pumps for the decarbonisation of residential heat. Heat pumps are more efficient that gas heating systems and can ultimately lead to important energy demand reduction across the residential sector. However, under prevailing market conditions where the retail price of electricity is high relative to gas, the bills savings and wider economy benefits usually associated with substantial energy efficiency increases are not evident.
In this paper we focus on how, and to what extent, the electricity-gas price differential determines whether the energy efficiency properties of heat pumps will lead to energy bill saving for UK households. This issue becomes increasingly important when we consider how the changes in household energy bills and real spending power can drive a wide range of economy wide impacts.
Informed by our energy system modelling, we simulate a scenario where almost 50% of households use low carbon heating by 2035 and nearly all by 2050, and heat pumps are the dominant heating option analysed. In this scenario and considering the energy efficiency of heat pumps (around three times more efficient than gas boilers), the outcome is almost a 40% reduction by 2050 in energy demand across the residential sector compared to a base case where the energy use for residential heating largely remains unchanged without additional decarbonisation measures.
The energy efficiency gains enabled by households switching from gas boilers to electric heat pumps have the potential to trigger a range of wider economic gains through the increase and reallocation of real income and spending enabled by lower energy bills.
Considering a hypothetical price parity (1:1) between electricity and gas, energy efficiency gains are fully realised and can result in an average increase of £300 per household per year for the 20% of households on the lowest incomes, and over £770 per year for the 20% on the highest incomes. This extra disposable income leads to a sustained increase in total UK household consumption of approximately 1.2% (£15.9billion).
Our results show this increase in household demand driving sustained GDP gains of 0.2% (£3.8billion) in the long run, leading to the net creation of around 67,245 full-time equivalent (FTE) jobs (0.2% increase) across different sectors of the economy.
Historically, electricity has been more expensive than gas, which erodes the effect that the energy savings from using heat pumps have on households’ energy bills, real income gains and spending power, which would otherwise trigger the wider economy expansion considered above.
From our analysis, we find that the breakeven point in the price difference ratio of electricity:gas is 3.4:1. Where the ratio is greater than this, the use of heat pumps becomes more expensive than the use of gas boilers with the implication that (with no other changes or interventions in the economy), real incomes and spending power across households will fall and contractionary pressures will be triggered across the economy.
This highlights the importance of a broader rethink around how not only the absolute (monetary) but also the relative prices of electricity and gas are determined. A potential net zero strategy focus on electrification could require that electricity become comparably less expensive than the current dominant heating fuel, which is gas for most UK households. In fact, the analysis presented here could deliver insight supporting electrification in other contexts (e.g., remote areas where households currently choose other heating options over electrified ones).
This briefing is the first in a series of three. The second briefing will explore how the location of manufacturing and different funding models impact household budgets and the wider economy. The third briefing will look at the implications of the electrification of residential heat on jobs and skills across regions and sectors of the economy.