The good news is that heat pump installations in Britain are accelerating. The bad news is that we still won’t hit our target of 600,000 per year by 2028. What to do?
At a recent round table event in London, the Heat Pump Association, the manufacturers’ trade body, and Mitsubishi Electric laid the blame squarely on the price of electricity.
Under the current Ofgem tariff rules, gas is capped at 6.24p/kWh and electricity at 24.5p/kWh – almost four times higher. This ‘spark gap’ is the biggest in Europe and, according to a report from Mitsubishi, makes “running a heat pump more expensive than a gas boiler.”
The solution, argued both organisations, is to decouple the price of electricity from that of gas. In the short term, says the Mitsubishi report, this could be achieved by “removing government levies from energy bills”. Only then will heat pumps reach a “financial tipping point”.
This recommendation is hardly new but looks increasingly misguided: it’s only half the story, and highly unlikely to happen in this parliament.
Luckily, however, it doesn’t need to.
Government levies on the electricity bill include the cost of renewables support programmes such as ROCs, FiTs, and CfDs. Shifting these into general taxation would save the median duel-fuel billpayer £145 a year, and the median electricity-only billpayer £205, according to a report from energy analysts Cornwall Insight.
This would improve the economy of a heat pump, true enough. But it would also cost the Treasury £4.6 billion. That’s hard to justify when each heat pump installation is already subsidised by £7,500 and the fiscal cupboard is bare.
Even before the election Labour slashed its green spending plans by 80% and chancellor Rachel Reeves has just raised taxes by £40 billion. The IFS expects she’ll soon be back for more.
That’s why chances of electricity policy costs being lifted into general taxation in this parliament are close to zero.
Shifting them onto gas bills, as proposed by Nesta, an innovation charity, looks even less likely.
It makes perfect sense, of course, to tax the dirtier fuel rather than the cleaner one, but the optics are horrible: doing so would benefit middle class early adopters at the expense of poorer people who will remain on gas for longer.
Having rightly taken on the challenge of pylon politics, energy secretary Ed Miliband will want to avoid picking another big fight.
But removing policy costs is not the only way to improve the economics of heat pumps.
In fact, heat pumps can already undercut boilers steeply – if they have been properly installed.
People talk about heat pumps being three or four times more efficient than boilers, but this is not automatic. It depends not only on the heat pump itself, but also the design of the plumbing system that supports it. This includes things like the diameter of the main pipework, the size of the radiators and whether a buffer tank is needed – and every home is different.
So it really matters that the installers know what they are doing and are motivated to achieve levels of efficiency that will save the customer money. This is the other way to slash the cost of running a heat pump and supercharge heat pump sales.
Even with Britain’s wide spark gap, it is perfectly possible for heat pumps to undercut boilers – and steeply – provided the installation is efficient enough, as shown in the table below.
The average boiler is just 85% efficient, and under current Ofgem price caps, the spark gap is 3.9. That means the heat pump need only be 330% efficient to break even.
Achieving that level should not be too challenging. The Heat Geek installer network has averaged 430% across 150 installations, one of which made 500%.
As the table shows, at the upper end of that range you could be saving £250 per year, or £360 if you tell your energy supplier to disconnect the gas meter and therefore save an extra £110 per year on the gas standing charge.
But the average heat pump installation in Britain achieves just 280%, according to a study carried out for DESNZ by the Energy Systems Catapult, meaning it costs £110 more than a boiler to run.
By lobbying for policy costs to be removed from electricity bills, therefore, manufacturers are asking the taxpayer to pick up the tab for needlessly poor heat pump installation efficiencies – which they themselves could do something about.
It cannot be pure coincidence, for example, that the average UK installation exactly matches the minimum standard required for to qualify for the Boiler Upgrade Scheme (BUS) subsidy: 280%.
Manufacturers could instead lobby government to raise the threshold to – say – 380%, at which level every unit sold should cost the customer significantly less to run than a boiler. That in turn should boost their sales volumes.
Just raising the standard does not necessarily mean it will be achieved, of course, because nobody is obliged to measure the efficiency of a heat pump once installed.
But some installers already show off their work by publishing live performance data at https://heatpumpmonitor.org, where many installations demonstrate 400% or more.
Aira, which both manufactures and installs heat pumps, routinely monitors the efficiency of its installations and plans to make that information visible to customers through its app in future. Heat Geek installations are also monitored to support their efficiency guarantees.
Traditional manufacturers could also gather this data if they all made their heat pumps wifi-enabled as standard, instead of requiring customers to buy a separate connector. They could also make the data much more easily accessible through an API (application programming interface) or their own apps.
Manufacturers could then offer retrospective discounts to installers who demonstrate higher efficiencies. Publishing the performance at https://heatpumpmonitor.org or elsewhere – while protecting customer privacy – would stimulate competition and raise average efficiency.
Manufacturers should agree a common standard for measurement and calculation of heat pump efficiencies to allow like-for-like comparison between different makes and installations. No doubt there are some technical challenges here but nothing the industry could not overcome.
All this would raise confidence among potential customers that a new heat pump would be cheaper to run than their old boiler and therefore boost sales.
Another easy fix would be to offer heat pump optimisers as standard. These recently developed apps cut a heat pump’s costs by running it smartly with a 24-hour local weather forecast and time-of-use tariff such as Agile Octopus.
Optimisers from Homely, PassivUK and HavenWise claim additional savings of between 20% and 50%, which can help overcome poor installation efficiency – turning a money-losing heat pump into a money-saving one – and increase the savings from a well-installed unit.
Own-brand heat pumps from Octopus Energy and Aira already come with this kind of intelligence built-in. Why not all manufacturers?
In short, the industry needs to recognise that heat pump subsidies are more likely to fall than rise as the rollout accelerates. If Britain hits its 2028 installation target, the cost of the current BUS subsidy would swell to £4.5 billion, although Rachel Reeves is hardly likely to let it reach that level.
Praying that the Treasury will double its heat pump bill by taking on the electricity policy costs as well looks like seriously wishful thinking.
If manufacturers instead lobbied and worked to raise installation efficiencies, and incorporated optimisers as standard, they could reduce heat pump running costs by far more than the subsidy they seek.
Nesta calculates that if optimisers can reduce running costs by 30% then it makes heat pumps cheaper than boilers on a lifecycle basis – including purchase, installation, maintenance and 15 years’ fuel bills.
If so, the industry could stop telling everybody its product is more expensive to run than a gas boiler – a curious marketing strategy – and start shifting units. Perhaps we might even hit that 600,000 target.
The top twelve UK energy suppliers have just agreed to spend £500 million to help relieve energy poverty this winter. It’s time for heat pump manufacturers to step up too – and in their own interest.
If they fail to change tack, the risk is that Ed Miliband tires of being pestered for £5 billion he doesn’t have and makes efficiency monitoring mandatory – and devil take the hindmost.
Come to think of it, that’s not a bad idea.