Baringa’s renewed analysis of electric heat pumps now shows significant running cost savings versus gas boilers.
In mid 2021, we published analysis outlining the economics of a residential-sized electric heat pump vs. a new gas boiler. We found that the economics didn’t stack up for consumers looking to purchase a heat pump system instead of a new gas boiler, even with available subsidies, as retail gas was so much cheaper (roughly 4x cheaper on a pence per unit basis) than electricity.
Fast-forward to March 2022 and the picture looks quite different - gas prices have skyrocketed due to the post-COVID global industrial recovery and worsening tensions between Russia and the West are leading to severe uncertainty around future gas supplies.
Heat pumps investment return now positive with UK government heat grant
We have refreshed our analysis using the latest Baringa gas and electricity price projections and the picture for heat pump economics looks quite different. Our analysis shows that installing an air-source heat pump (including additional costs for insulation retrofits) in a standard 3-bedroom house today, will return a profit of c. £3,000 over 20 years (with a 10-year payback) with the Boiler Upgrade Scheme1 due to launch in April.
We have assumed this investment is made at the end of the life of the current boiler so have included the avoided cost of a replacement boiler. Even with average annual energy savings of £300 per year, without the grant, it still results in negative savings over the 20 year period due to the high capital cost of the heat pump and insulation versus a gas boiler.
As gas prices increase, heat pumps offer a lower cost alternative
The current energy crisis is leading to UK households experiencing the biggest hit to disposable household income in the last 30 years2. High inflation and soaring energy bills have brought energy costs sharply into focus, and high prices could be here to stay. Any further sanctions imposed by Western governments on Russian energy supplies are likely to push costs up even further. The annual cost to heat a typical home has already increased by 270% (see chart below), with heat pumps now offering significant running cost savings.
Additionally, the Finanical Times reported last year that the UK Government was also set to publish proposals to shift green levies from retail electricity to retail gas bills to further boost the economic case for the shift to electric heating.
The time to switch to electric heating is now
It is now more important than ever that we look at options to reduce energy costs. This can be achieved in two ways: reducing the price paid and the volume used. In a globalised market, where reducing price is hard as we continue to trade on international gas markets; reducing the demand for gas should be in firm focus for policymakers.
Reducing our demand through better insulating our homes and accelerating the switch from gas to electric heating should be prioritised, and with today’s gas prices creating more favourable economics, now is the time to move.
The devastating crisis in Ukraine once again demonstrates the cost exposure UK homeowners have to uncontrollable global events. In the short term, continuation of high fossil-fuel prices will have serious repercussions for household incomes and energy security in the UK and across Europe.
Switching to heating systems powered by domestic sources of renewable electricity can both reduce our exposure to volatile global markets and reduce our own carbon footprint. While the economic case is moving in the right direction, there are multiple other challenges surrounding the transition from gas heating, with the current supply chain infrastructure being one.
Baringa recently hosted a series of industry roundtables aimed at tackling the problems of greening UK homes, with a paper soon to be published outlining our view on how to accelerate the market. We need stronger Government support and more private sector innovation to help UK homeowners make this switch to heat pumps and better insulated homes.
For more information on our heat pumps analysis or our work in this area, contact Daniel Bolton.
1 The Boiler Upgrade Scheme is a new UK Government grant of £5k for low-carbon heating appliances, which replaces the £4k Clean Heat Grant and is due to launch in April 2022.
2 Source: Bank of England
Water: lessons from the smart energy meter rollout
The challenges faced by the water sector in its own smart rollout and how it can overcome them.Read more
State of climate reporting
Five observations on energy & commodities tradingRead more
Quantifying the business case impacts of REMA
Do you understand the impact of REMA on the profitability of different technologies? Watch this webinar to inform your investment decision making.Read more
Energy Trading Week Insider: navigating the digital energy transition
In this interview, Howard Walker, CEO of America's for Commodities People, talks with Talis Bennett-Verschure, one of Baringa’s Energy and Resources experts about the digital energy transition and its impact on the energy market.Read more