£10,000 to Increase Your Energy Bill: Making the Economics of Heat Pumps Stack Up

UK Policy Net Zero

£10,000 to Increase Your Energy Bill: Making the Economics of Heat Pumps Stack Up

Commentary
Posted on: 4th May 2021
Tim Lord
Senior Fellow | Net Zero

When we think of decarbonising the UK economy, we tend to think of Big Infrastructure – gigawatt scale offshore wind farms, nuclear power stations, and new industrial sectors like zero carbon hydrogen production.

But perhaps the most important enabling technology for net zero in the UK is the humble heat pump – a box about one metre cubed on the side of our houses which has the potential to decarbonise our home heating.

While there are debates about the right way of decarbonising UK heating, there is no doubt that heat pumps will need to play a big role.  And the government has acknowledged that. We currently install heat pumps at a rate of around 30,000 per year.  The government’s target is to install 600,000 a year by 2028.  That figure is likely to need to rise to 1.5 million a year by 2035.

It’s hard to overstate the scale of ramp-up that’s required to hit those targets.

To illustrate: if you stood on Whitehall and faced north, a chain of all the heat pumps installed last year would stretch to the M25. 

By 2028, we’ll need that line of heat pumps to stretch to Edinburgh. 

By 2035, it would need to stretch all the way to John O’Groats… and back again.

To get that level of take-up, we need a proposition for consumers that is desirable. But at the moment, the basic consumer proposition is: pay £10,000 for a device which you don’t understand, and which will increase your energy bill.   And that’s if you can find an installer to fit it.

Addressing that problem is a multi-faceted issue, which I will return to in future. But there is one key element which has to work, and which we can do something about relatively quickly: the running costs need to be lower than for a gas boiler.

But at the moment, the way we structure our energy bills has the opposite effect.  Green “policy costs” – principally the costs of paying for early and more expensive renewables projects, which have fixed long-term contracts at relatively high prices – almost all fall on the electricity bill.

I was in government when that decision was taken a decade ago, and the rationale made some sense at the time: it’s electricity we are decarbonising, so electricity consumers should pay the bill.

But the logic for that has fallen away.  Back in 2013, when Ministers were exhorting officials to “get rid of the green crap” on energy bills, the average household emitted about 2 tonnes of CO2 from its electricity use, and 2.7 tonnes from gas use. Policy costs on electricity were about £35, and on gas £11.  Not a great incentive, but not a disaster.

But today, the average household emits only 0.6 tonnes from electricity use – and over 2 tonnes from gas. Yet at the same time, the policy costs on electricity have increased to over £160, while on gas they have fallen.

And it’s going to get worse.  By 2030, our electricity use should be 75% cleaner than it is now, but policy costs will be about the same.

So in 2013, policy costs on electricity were in effect three times higher than for gas. Now, they are 55 times higher. By 2030, they will be 200 times higher.

£ of policy costs per tonne of CO2, UK gas and Electricity

We are, in effect, expecting people to shift from a high carbon fuel to a low carbon fuel, while simultaneously strengthening the disincentive for them to do so.

A new report last week argued that we should move policy costs from electricity bills to general taxation, and add a rising carbon price to gas bills in line with those seen in parts of Europe.  For a “conventional” home – one that uses gas for heating, and electricity for everything else – that would have a minimal effect on bills: electricity would be cheaper, gas more expensive, and the overall bill about the same.  But for a household purchasing a heat pump, the economics would completely change – making a heat pump cheaper to run than a gas boiler.

Making that change isn’t easy: it requires the taxpayer to take on new liabilities for the ongoing costs of green electricity; and it does not tackle the wider issues around capital costs and supply chains for heat pumps. But without a change like this, it’s hard to see how the business case for decarbonising our heat will ever stack up for consumers.

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