Pump it up

Last year, the government identified electric-powered heat pumps as one of the most effective low carbon solutions to replace boilers in on grid homes and improve energy affordability, while reducing reliance on gas imports. In October 2021, ambitious targets were set to install 600,000 heat pumps per year across the UK by 2028.

However, reports suggest current installation rates are falling 90% behind target. The European Heat Pump Association has warned that, if installations stay at this rate, it could take the UK more than 600 years to reach net zero.

As the government navigates the triple threat of inflation, cost of living and energy crises, it faces a tough balancing act of aligning decarbonisation goals with challenging economic realities. Significant investment and policy changes will be required to drive growth and innovation in the heat pump installation market, as well as boost the national grid capacity to cope with the future electricity demand. One of the greatest challenges will be to support and incentivise homeowners to switch, when disposable incomes are under increasing pressure and additional expenses are unfeasible for many households. Conversion to heat pumps often costs between £10,000 and £25,000, and the accompanying insulation needed can increase the financial burden further still.

While the current economic instability makes a gradual rollout inevitable, the transition to clean heating is essential to mitigate climate change and reduce fossil fuel dependencies. To make heat pumps an economically viable solution, the public and private sectors will need to act together to bring prices down. In this article, we will explore what we have learned about the opportunities heat pumps present for policymakers, industry and financial providers, as well as the actions they can take to achieve the fastest impact.

Policymakers

Accelerating the leap to heat pumps will support the UK’s path to net zero and build green skills, while also helping establish long-term energy security and independence. But current policy efforts may not be enough to make heat pumps attractive to homeowners or support the industry’s transition to deliver heat pumps at scale. Recent comments from the government’s net zero reviewer make it clear that more financing solutions are needed to reduce the burden on homeowners. To make heat pumps more competitive and promote widespread adoption, we believe policymakers should consider prioritising the following actions:

1. Increase investment in energy efficiency and insulation

In a modern house, heat pumps are estimated to be 3-4 times more efficient than boilers. However, their cost-effectiveness is limited by the energy efficiency of our housing stock. So the target announced in the Autumn Statement to reduce the energy demand of buildings by 15% by 2030 is an important step forward. Currently, the average home in England and Wales only has an EPC rating of D, and many are much lower than this, making UK homes some of the worst insulated in Europe. Cutting heat loss from buildings is essential to tackling the energy crisis and is key part of the clean energy transition.

2. Make clean energy the most price competitive option

Heat pumps are powered by electricity and can also work well in combination with domestic solar panels. In adequately insulated homes, the long-term running cost of heat pumps depends on future electricity prices. And these are very uncertain. What is certain is that the rising share of low carbon sources in the national electricity mix will lessen the effect of future surges in gas wholesale prices. While any increases in environmental levies on fossil fuels are not appropriate in the midst of the current crisis, the long-term ambition should be to make using low carbon electricity cheaper for consumers than relying on gas. Moving in this direction could support energy equity and accelerate the shift to low carbon heating. After all, heat pumps are only as clean as the electricity that powers them.

3. Support the heat pump installation industry to scale-up heat pump installation volumes and ensure quality

To meet decarbonisation goals, the UK needs a step-change in the volume of heat pump installations, while maintaining installation quality. Heat pump installation is skilled work, and the Heat Pump Association is calling for over 70,000 heat pump engineers by 2035. These will need to be recruited from both qualified gas boiler engineers and people outside the industry. Currently high training costs mean engineers might spend more on training than they will earn. It’s important that installers and businesses are provided with the right financial incentives to retrain, as well as formalising qualification routes and certification schemes, to ensure that costs and quality are standardised. Investing in the low carbon workforce could send out a clear message to consumers and industry that the government is committed to heat pumps as a net zero enabler. To learn more about how the UK can build the green capabilities needed to reach Net Zero, read our new report A blueprint for green workforce transformation.

4. Signal confidence to the market through regulatory commitments and financial incentives

Existing measures such as 0% VAT on heat pumps and the Boiler Upgrade Scheme are positive steps. However, the current allocated funding will only cover 90,000 heat pumps over three years, while around 1.7 million gas boilers are installed every year. The industry needs to work well without subsidies in the long term and an effective policy mix is vital to kickstart the transition and bring down future installation costs. One of the most important factors will be for the UK government to provide the market clarity on the direction of travel away from fossil fuel heating systems. The German government has announced that all new heating systems will have to run on at least 65% renewable energy by 2024, while the Netherlands has announced a ban on standalone fossil fuel heating systems by 2026.

Industry

A revolution of the heating sector is needed. To meet net zero by 2050, the UK’s 29 million existing homes will need to be upgraded to low carbon heating systems. Heat pumps therefore present a significant growth opportunity and early movers are seeking to capture market share. The transition to low carbon heating systems will require new skillsets, business models and partnerships. To capitalise on the opportunities low carbon heating brings, industry players should consider taking the following three actions:

1. Build up a skilled workforce of energy transition experts who will advocate for the switch to green heat

There are currently around 2,000 heat pump installers in the UK. To reach 600,000 heat pumps per year by 2028, this will need to rise to more than 30,000 installers. Upgrading homes to heat pump systems is complicated and will require installers to decide the best system design for different homes, as well as advise homeowners on financing options, long-term energy costs and payback periods. Research by BAXI found a third of gas boiler engineers expect to install heat pumps in the next three years. To encourage more to make the switch, the industry needs to work with the public sector and other providers to invest in training programmes, standardise qualification routes and attract the next generation of low-carbon heat installers. Trusted manufacturer and industry-led practical training will be key to increasing installer confidence in heat pumps and driving up installation rates. 

2. Collaborate within industry and government to bring down costs and advance R&D

As more heat pumps are installed and technical expertise increases, the government is predicting the price of heat pumps will decrease by 25-50% by 2025. Growing demand for heat pumps across Europe is already requiring manufacturers to advance both their production capacity and the performance capabilities of their units. Innovative partnerships will kickstart development of what is still early stage technology. While orders and installation volumes in the UK are currently relatively low, staffing shortages and high research and development (R&D) costs are keeping costs high. Collaboration will be key for industry players to overcome these barriers and grow the heat pump market. Many of the industry’s big players have already forged new partnerships, but further cooperation or consortium-led action could help the UK to strengthen the heat pump supply chain, plug the green skills gap and improve R&D efficiency. Public sector institutions can also play an important role, such as councils that fuel demand hubs by creating district wide discounts.

3. Focus on increasing heat pump efficiency through service innovation and transparent smart technology

Heat pumps are most effective in well-insulated homes. However, with only 40% of homes in England meeting the recommended Energy Performance Certificate (EPC) rating of ‘C’ or above, heat pump installers will need to take a fabric first approach to maximise the efficiency and applicability of heat pumps systems. Industry can address this by specialising in insulation and heat pump installation as a full package solution.

Uncertainty about installation and running costs are a barrier to the uptake of heat pumps. Manufacturers and installers could explore developing tools to help people make informed choices about their heating systems. Smart technology to monitor the energy performance of low carbon heating systems, and appropriate reporting and complaint channels, will be critical to keep the sector accountable on its journey to net zero.

Finance providers

Finance providers have a key role to play in the transition to low carbon heating. The UK government has previously committed to phasing out gas boilers, but the current uptake of heat pumps is falling behind targets partly because homeowners often face minimum upfront costs of £5,000 or more. Developing fair and customer-friendly finance options could be one of the greatest accelerators of heat pump adoption. This is a key area where collaboration between government and the private sector could make the biggest difference.

For finance providers, offering loans to fund consumer purchases of heat pumps and green retrofits presents great potential for revenue growth. If the target to install 600,000 heat pumps a year is met in 2028, then c.£4.5 billion worth of loans could be required in that year alone. Partnering with the government and the heat pump industry should be a priority for finance providers looking to capture this market and support customers to switch to low carbon heating systems. To help lead the charge, providers should support customers with the following actions:

1. Expand their green loan offerings with a focus on green retrofitting and heat pumps

Several UK high street lenders already offer green financing for the purchase of EPC A/B buildings or loans to fund green home improvements and retrofit heat pumps into older homes. These are distinct from regular loans as they are accompanied by cash-back or lower interest rates. Unfortunately, many banks report that uptake of these products is low, indicating gaps in product accessibility. Such gaps are accentuated by variations in products provided by different lenders –  for example, only some customers have access to reduced rate additional lending for green home improvements such as energy efficiency measures. Increasing availability of these products across the market will be key to facilitating the transition to low carbon domestic heating. Greater green loan availability, including green alterations to standard mortgages, would prove beneficial to customers in the long term because they will live in energy efficient homes and reduce their bills. Meanwhile, lenders will also benefit from interest against higher loan values and reduced risk of a collapse in property value due to new carbon-reduction policies.

2. Team up with the industry and government to increase public awareness and simplify the customer journey towards buying a heat pump

Finance providers can play a key role in marketing the benefits of heat pumps to their customer base. Green financing offers and funding packages can be complex and confusing for both installers and customers. To help consumers make informed decisions about their investments, finance providers should seek to simplify offers and work alongside the industry to make financing an easy part of the customer experience. This could include creating calculation tools to help customers gain certainty about payback periods.

Banks also have an important ecosystem orchestration role to play, bringing together engineers, support networks, industry innovators and customers. For example, ecosystem orchestration could come from working with industry to move beyond consumer credit to portfolio financing. This is where loans are taken by heat pump providers rather than individual households, which could expand heat pump uptake by removing the need for households to take on more debt.

3. Facilitate a speedy and just transition

The finance sector has a vested interest in the Race to Net Zero. If the transition is missed by a decade, the Bank of England has warned that banks could incur £110 billion in losses. In the absence of voluntary action, there is an increasing likelihood of legislation forcing banks to act.

Given public scrutiny over the industry’s funding of fossil fuels, now is the time for lenders to make meaningful steps towards decarbonisation. Offering low-cost financing options for heat pumps can protect customers from gas price volatility and rising energy poverty in the UK. Banks should partner with government to help tailor support towards lower income families. One option could be considering financial incentives and support structures for social housing to transition to heat pump systems, such as green bonds.

The race to low carbon heating is in everyone’s interests and requires us all to act

Decarbonising the heating sector is essential to accelerate the Race to Net Zero and could have long term benefits for the UK’s energy security. Reducing our reliance on natural gas is the right thing for both the planet and all of our future energy bills. The opportunity is clear and it’s time to act.

Heat pumps can drive forward the replacement of the UK’s extensive gas boiler network. Capable of heating and cooling homes, they can help us mitigate the causes of climate change as well as adapt to the extreme weather events it brings. Concerted action from industry and governments has led to widespread adoption in countries like Sweden and Norway, and we can replicate this in the UK. However, a step-change is needed from policymakers and industry to drive down costs, accelerate product innovation and deliver installations at scale, so that heat pumps become the cleanest and cheapest way to heat our homes.

The last piece of the puzzle will require us all, as consumers, to embrace change when we can. When it is time to update your home heating system, research heat pumps as an alternative, explore what funding is available and what finance options might work for you. While heat pumps might not work for everyone, industry analysis estimates around 17% of homes are suitable for a heat pump today with no change to the fabric of the building and another 30% could switch with only minimal upgrades to insulation. Could your home be one of them?