Mind The Gap The costs of moving from boilers to heat pumps - Centre for Net Zero
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Mind The Gap The costs of moving from boilers to heat pumps
Introduction
Centre for Net Zero is building an agent-based model
(ABM) for the energy transition to identify faster, fairer
and more affordable paths to net zero. The first release
of our simulation will inform a consolidated research
paper to be published in Autumn 2021. Ahead of this
paper’s release, we are publishing a series of interim
research findings to share our learnings as we leverage
our access to Octopus Energy data, and other public
datasets and research, and develop the simulation in
full.
These research findings provide a unique insight into
current domestic energy behaviours and help improve
understandings of expected future behaviours. In
creating our ABM, we want to discover how a diversity of
actors within the energy landscape make autonomous
decisions that affect one another and influence the
behaviour of the overall system. These insights will
enable decision makers to take faster, bolder and more
equitable climate action.
Mind the Gap: the costs of moving from boilers to heat pumps 1
Key points
• Air source heat pumps (ASHPs) are expected to be one of the dominant technologies to replace
gas boilers, but their higher up-front cost is a commonly cited barrier to adoption.
• While variety in Great Britain’s (GB) housing type, size and efficiency is broadly acknowledged,
debate often centres on the ‘average’ household - comparing a £10,000 investment in a heat
pump system to £2,000 for a replacement boiler.
• We looked across 30m GB properties to simply estimate the distribution of costs to retrofit an
air source heat pump.
• We found that a £4,000 subsidy, as proposed under the Clean Heat Grant consulted on by
government, could make air source heat pumps cheaper than gas boilers for 13% of GB homes.
However, three-quarters of these homes are flats, for which there are currently practical
challenges in adopting heat pumps. Excluding flats, the same subsidy will bring 3% of homes to
cost parity.
• Around 50,000 ASHPs have been deployed in GB to date. As with other energy technologies
such as solar and wind, we would expect heat pump costs to fall as more are installed. In this
way, a subsidy that affects 3% of homes in the first instance could deliver cost parity for 16% of
homes after two years. This could lead to the uptake of around 230,000 heat pumps per year.
• Subsidies could be reduced over time, but the government will need to balance fiscal
responsibility against industry and household confidence, which will be essential in
underpinning sustained innovation and demand growth. There may also be a role for the
Government in enabling wider adoption within flats, through supporting technological
innovation and review of regulation.
• Up-front cost is just one factor in household decisions about heating systems. Our next step is
to integrate this analysis into our agent-based model to consider a wider range of technologies
and factors including running costs, technical suitability and awareness. Our model will
consider both heat and transport, as two critical areas where we need fair and affordable
options for households to reduce greenhouse gas emissions.
Mind the Gap: the costs of moving from boilers to heat pumps 2
Context: why focus on heat pumps?
Homes account for 21% of total greenhouse gas (GHG) A plot of RHI installation numbers (Apr 2014 - Dec 2020) by system across property types
emissions1 and 35% of total energy consumption in the
UK in 20202. 75% of the total energy demand in the UK
20000 Air source heat pump
housing stock comes from heating3. Ground source heat pump
Biomass systems
Natural gas is the most common heating fuel in 17500 Solar thermal
domestic buildings, covering 80% of domestic heat
demand in the UK3. There are currently about 22
million households in the UK with gas boilers4, with 1.7 15000
million units sold in 2019.
12500
The UK government supports the deployment of heat
pumps: in 2020, it pledged to install 600,000 heat
pumps per year by 2028. Currently fewer than only 1000
30,000 heat pumps are being installed yearly5. One of
the major reasons for this is the high up-front costs of
7500
heat pump systems relative to gas boilers.
3068 (3.6%)
In this analysis we have focused on the difference in 5000
1867 (2.2%)
up-front cost between ASHPs and gas boilers, ignoring
1628 (1.9%)
1359 (1.6%)
1675 (2%)
1311 (1.5%)
1710 (2%)
18787 (22.2%)
other technologies and factors in decision-making.
8166 (9.6% -)
8350 (9.9%)
430 (0.5%)
616 (0.7%)
8169 (9.6% )
4758 (5.6%)
14370 (17%)
8.7% - 7387
122 ( 0.1%)
815 (1%)
80 (0.1%)
2500
ASHPs have made up more than 60% of accreditations
38 (0%)
under the UK government’s Renewable Heat Incentive
(RHI) scheme - and this trend is evident across 0
property types, from detached homes to flats and Detached house Semi - detached house Terraced house Bungalow Flat or Maisonette
maisonettes.
Figure 1: Percentage of low carbon heating technologies installed in different UK property types 6
Mind the Gap: the costs of moving from boilers to heat pumps 3
What drives the cost of a heat pump?
Heat pumps are sized according to forecast heating demand. Desired
temperature, weather conditions, insulation and dwelling size all play
a part. Proper sizing typically requires a site visit from a trained
heating engineer.
For the purpose of this analysis, we use the following rule of thumb:
• kW capacity = 0.1 * Floor Area/m2 (rounded down to the nearest
integer).
• Multiply capacity by 70% if property is ‘well insulated’ (EPC A-C).
Note that for EPC D-G, we did not explicitly consider the trade-
off between heat pump capacity and remedial energy efficiency
measures.
• Limit capacity to 20kW. Cost data from the domestic RHI is
limited for larger ASHPs (those between 20-45kW make up less
than 2% of current accreditations) so we decided to cap at a level
where the sample size is more robust.
Once the capacities of the heat pumps for each household have been
estimated, the Ofgem RHI database6 was used to estimate the range
of up-front costs. While this is an imperfect estimation, we believe it
is a significant improvement on reliance on average properties and
heating systems.
For gas boilers we split homes into three different categories based
on their floor area: small (including all flats); medium; and large. We
then allocated boiler costs according to an article on the Boiler Guide
website.
Mind the Gap: the costs of moving from boilers to heat pumps 4
Variety in the UK housing stock
A central foundation of this analysis has been The distribution of EPCs in the UK
a commercial dataset derived from the Energy
Performance Certificate (EPC) database - taking 1e7
the data from EPCs and inferring equivalent
values for properties in England, Scotland and
48.5%
1.4
Wales which do not have a certificate. An EPC
gives a property an energy efficiency rating
1.2
from A (most efficient) to G (least efficient). The
distribution of ratings in Great Britain can be
found in Figure 1. Along with these ratings, the 1.0
dataset provides information about the number
of bedrooms and the floor area of the properties. 0.8
30.5%
As illustrated in Figure 2, the most common EPC 0.6
in the GB is EPC D. Remember, an A rating is the
most energy efficient, a G rating is the least. 0.4
1.6% -1359
11.5%
0.2
2.3% 6.6%
0.5% 0.1%
0.0
G F E D C B A
EPC
Figure 2: EPC distribution of 30 million UK households
Mind the Gap: the costs of moving from boilers to heat pumps 5
Figure 3 illustrates that, as expected, houses are normally bigger than flats and bungalows.
However, there is a wide variety of floor sizes per category which we have taken into account in
estimating the costs of ASHP installations.
The distribution of floor area (sqm), split out by property type
Note: Properties with floor area greater than 300sqm are excluded from the plot. Horizontal lines indicate quartiles.
300
250
200
Floor Area (m2)
150
100
50
0
House Bungalow/Chalet Flat/Maisonette
Figure 3: Floor areas for different household types
Mind the Gap: the costs of moving from boilers to heat pumps 6
In Figure 4 you can see that flats and maisonettes are more likely to be well insulated, with
EPC C being the most common one, while houses and bungalows are mostly EPC D rated.
A count of property types, split out by EPC
1e7
EPC
G
F
1.0 E
D
C
B
0.8 A
0.6
0.4
0.2
0
House Bungalow/Chalet Flat or Maisonette
Property type
Figure 4: Distribution of EPC by household type
Mind the Gap 7
What does this mean for the distribution of costs per household?
On average, the poor insulation and larger floor space of houses will result in higher
capital costs. On the other hand, flats and maisonettes are in a much better position,
since their EPC ratings indicate that these types of households are better insulated,
have less floor space and therefore would require smaller heat pumps. Our modelling of
ASHP capacity per property type can be seen in Figure 5. In general, houses need larger
heat pumps, while bungalows and flats require more modest devices.
The distribution of recommended ASHP kW from our modelling, broken down by Property Type
1e6
3.0 Property Type
House
Bungalow/Chalet
2.5 Flat/Maisonette
2.0
1.5
1.0
0.5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
ASHP kW Recommendation
Figure 5: Distribution of recommended ASHP kW Capacity by household type
Mind the Gap: the costs of moving from boilers to heat pumps 8Across all property types, the ASHP capacity required for households is generally between
5 and 10 kW (as seen in Figure 6). On the right hand side you see the effect of our decision
to limit capacity to 20kW - for these 3.5% of households the modelled costs may be
underestimated.
The distribution of recommended ASHP kW from our modelling
1e6
3.5
3.0
2.5
2.0
755405 (2.5%)
1.5
591726 (2%)
466562 (1.6%)
375912 (1.3%)
277046 (0.9%)
249848 (0.8%)
219092 (0.7%)
1.0
3426905 (11.5%)
2995800 (10.1%)
3077910 (10.3%)
3105519 (10.4%)
2777405 (9.3%)
1938247 (6.5%)
2132296 (7.2%)
1030123 (3.5%)
1277618 (4.3%)
961558 (3.2%)
2692471 (9%)
1377767 (4.6)
28276 (0.1%)
0.5
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
ASHP kW Recommendation
Figure 6: Distribution of ASHP capacities to decarbonise heating in the UK household stock
Mind the Gap 9Using these capacities and the costs estimated using RHI data6, we reviewed the estimated ASHP costs depending on the EPC rating and the
number of rooms.
A heatmap to show the cost modelling assumptions for a given EPC and numbers of bedrooms.
The top number is the median, with the numbers in brackets being the lower and upper quartile respectively.
Bedrooms
1 2 3 4 5 6
£7020 £9030 £11330 £13930 £14910 £15200
£12,630
G
(£5470-£10180) (£6670-£12560) (£8350-£14710) (£10290-£17080) (£11130-£17500 (£10910-£17500)
£6920 £8870 £11360 £14070 £15360 £15430
£12,720
(£5470-£9670) (£6590-£12360) (£8410-£14680) (£10420-£17120) (£11470-£17500) (£11290-£17500)
F
£6990 £8990 £11110 £13600 £15140 £15270
£12,360
(£5460-£9900) (£6680-£12430) (£8300-£14320) (£10130-£16730) (£11240-£17500) (£11220-£17500)
E
£6980 £8500 £10630 £12970 £14730 £14400
£11,800
EPC
D
(£5510-£9700) (£6410-£11800) (£7960-£13790) (£9720-£16170) (£10910-£17500) (£10120-£17500)
EPC
£5000 £6610 £7860 £10900 £12910 £12600
£9,380
C
(£5000-£6900) (£5320-£8760) (£6000-£11030) (£7990-£14270) (£9380-£16250 (£7950-£16520)
£5000 £6590 £7930 £10710 £13060 £12880
£9,320
B
(£5000-£6820) (£5290-£8680) (£6060-£11020) (£7950-£13980) (£9550-£16380) (£7810-£16840)
£5000 £6670 £8180 £11380 £13790 £14490
£9,780
A
(£5000-£6970) (£5400-£9120) (£6190-£11610) (£8430-£14760) (£9920-£17170) (£10270-£17500)
£6,920 £8,500 £10,630 £12,970 £14,730 £14,490
Bedrooms
Figure 7: Costs to purchase a heat pump per EPC and number of rooms
Figure 7 shows that poorly insulated households will need to spend considerably more (between £12k and £15k) than households that are well
insulated of the same size (less than £10k). Gas boiler up-front costs are much more consistent and do not vary as much depending on the
capacity needed. In the UK, the average capital and installation cost of these boilers is around £2,0007.
Mind the Gap: the costs of moving from boilers to heat pumps 10A £4,000 subsidy would make an ASHP
the cheaper option for 13% of homes
The Clean Heat Grant is expected to be
announced shortly by the UK government, A graph showing the proportion of households and the difference between the
offering households £4,000 to reduce the up- (simulated) ASHP and Gas Boiler prices (£)
front cost of low-carbon technologies like ASHPs.
1.0
Figure 8 shows the difference between ASHP
costs and gas boilers across GB households. 0.8
Looking at the turquoise line (which reflects
median ASHP costs reported by the RHI), 13% of
Proportion of households
households have a pre-subsidy ASHP premium 0.6
less than £4,000. If average ASHP costs are
reduced to lower quartile levels, the proportion of
properties for which an ASHP is cheaper post- 0.4
subsidy rises to 40%, while it falls to 7% at upper
quartile cost levels. Variable
0.2 ashp_cost_gbh_premium_lower_quartile
ashp_cost_gbh_premium_median
ashp_cost_gbh_premium_upper_quartile
0.0
0 2500 5000 7500 10000 12500 15000 17500
Price difference (£) between ASHP and Gas boiler (simulated)
Figure 8: Proportion of households that can benefit from government subsidy to bring ASHP to cost parity
with gas boilers. The vertical line represents the expected Clean Homes Grant of £4,0008
Mind the Gap: the costs of moving from boilers to heat pumps 11As identified previously, flats will generally
require smaller ASHPs. However there are
practical challenges in installing them in ats,
particularly around space and being more likely
to be rented. To date, ASHPs have been installed A graph showing the households and the difference between the (simulated) ASHP and
in around 3,000 ats, an adoption rate ve times Gas Boiler prices (£), broken down by Property Type
lower than for houses and bungalows . Figure 9
9
below splits the turquoise line from Figure 8, to 1.0
show the impact of a £4,000 subsidy on different
types of home. Here we can see while 13% of all
0.8
homes may bene t, the proportion is far higher
for ats (>40%) than for houses and bungalows Property Type
Proportion of households
House
(2-7%). 0.6
Bungalow/Chalet
Flat/Maisonette
0.4
fl
0.2
fl
fi
0.0
0 2000 4000 6000 8000 10000 12000 14000
fi
Price difference (£) between ASHP and Gas boiler (simulated)
fl
Figure 9: Proportion of households (split by property type) that can benefit from government subsidy to
bring ASHP to cost parity with gas boilers. The vertical line represents the proposed Clean Heat Grant of
£4,0008
Mind the Gap: the costs of moving from boilers to heat pumps 12If we cannot make it easy for flats to adopt heat Subsidy should cause the cost of ASHPs to fall, as more are installed
pumps, either through innovation or changes in
regulation, then we may want to consider them Over the past two decades we have witnessed huge falls in the unit costs of solar
separately within our analysis. In the table below and wind generation, widely documented as ‘learning curves’ which express how
we can see how bringing a certain number of technologies get cheaper as they come to scale. The learning curves for solar and
homes to cost parity costs significantly more if wind show a 20% reduction in costs for every doubling of cumulative production.
we assume flats cannot adopt heat pumps. Studies in Germany and Switzerland have shown even higher learning rates for
domestic heat pumps of 30-35%10, though these date from analysis up to 2004.
Required subsidy While we would expect global rather than GB penetration of heat pumps to shape
the cost of the equipment itself, currently around 50% of cost relates to labour.
% of homes at cost parity Including flats Excluding ats We can expect this labour cost to reduce in line with GB adoption.
3% £2200 £4100
fl
In this way, stimulating demand through a subsidy can ultimately drive down
5% £2400 £4400 costs, making heat pumps affordable for more households and/or reducing the
level of subsidy required on an ongoing basis.
10% £3800 £4800
Of course, even where heat pumps are the cheaper option, it is still not
guaranteed that households will choose them. Awareness is low, inertia is high.
If we assume that one in five households will need to replace their boiler over
the two-year life of the Clean Heat Grant and that half of those at cost parity
would choose an ASHP, then a subsidy of £4,100 would achieve a deployment
rate of 50,000 heat pumps per year, trebling the installed base within GB. If we
apply a 30% learning rate to the heat pump’s labour costs then we would expect
the overall cost of an ASHP to fall by 20%. The same subsidy that brought 3% of
homes to cost parity now achieves the same for 16%. On the same assumptions
as above, that could mean deployment of 230,000 heat pumps per year.
Mind the Gap: the costs of moving from boilers to heat pumps 13Government must decide on the level & length of investment The Government wants to jump start the mass deployment of heat pumps in a way that will not burden households with exorbitant costs, whilst also demonstrating fiscal responsibility after months of Covid-19 related expenditure. The analysis above has shown that its proposed £4,000 subsidy could make air source heat pumps cheaper than gas boilers for a significant minority of properties and that this could lead to significant cost reductions in industry. However, subsidies are likely to be required for longer than the proposed two-year life of the Clean Heat Grant, and it is important for households and industry alike to have confidence as soon as possible in the plan for 2022- 24 and beyond in order for us to see sustained innovation and demand growth for heat pumps. In theory a larger grant could see more properties transition away from fossil fuels, reduce ASHP costs faster and accelerate to a time where subsidies are no longer required. Recent media reports suggest that the Government is considering a £7,000 grant11. Given the extended period of waiting for the Heat and Buildings Strategy, it is unclear whether industry would be ready to deliver the volumes implied by a substantially increased grant both in terms of capacity and capability. At this point in time a smaller grant, while it would still support some households to transition to low carbon heat, risks undermining confidence in the Government’s commitment to the heating transition. Mind the Gap: the costs of moving from boilers to heat pumps 14
Limitations of this analysis
Significantly, our analysis is based purely on the Property Type vs Tenure
up-front cost of heat pumps. Our estimates of these Owner Tenure Social Housing Tenant
costs depend only on the floor area of the household
Bungalow/Chalet
and the current or estimated EPC of the property.
82.4% 14.5% 3.1% 8.8%
This analysis does not consider other factors that may
influence household heating choices, such as ongoing
costs, public acceptance and awareness, space
requirements, alternative heating technologies and
Flat/Maisonette
property tenure. 41.5% 28.9% 29.7% 24.3%
Taking the example of property tenure, in Figure 11
we can see that while almost 80% of UK houses are
owner-occupied, less than half of flats are. Tenanted
properties are likely to be subject to different, and 79.4% 11.9% 8.7% 66.9%
House
potentially more complex, decision-making.
70.5% 16.3% 13.3%
Tenure
Figure 11: Percentages of Tenure vs Property Type
Mind theheat
How we Gap:our
thehomes
costs of
2021
moving from boilers to heat pumps 15Conclusions The electric heat revolution should garner optimism: heat pumps are proven and available now. They provide a useful tool in the decarbonisation of heat and while they won’t be the only low-carbon technology for households, they are likely to represent a large and meaningful proportion of future installations2. However, in order to enable consumer uptake of ASHPs at scale, we need to address the up-front cost premium, through combinations of cost reductions and focused government subsidies. We need to improve our understanding of how factors other than capital cost combine with cost to impact adoption rates. Our agent-based model will consider a diversity of low-carbon heating alternatives with agent behaviours dependent on a greater range of factors than cost alone such as income, tenure and social factors, as well as industry considerations. Understanding how these factors interact will enable policy makers to understand the relationship between different intervention strategies and adoption and the rates at which they can best be deployed. Mind the Gap: the costs of moving from boilers to heat pumps 16
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