Heat pumps help the wider economy more than consumers

A new report from Nesta has found that for every heat pump installed, the UK can save around £1,100 in wholesale gas costs at current prices, but these savings are not felt directly by households.

The report posits that heat pumps are an important part of the UK’s response to the energy crisis, describing them as “among the most effective measures available” in this fight. They meet two crucial objectives for government: by significantly reducing carbon emissions (tackling the climate crisis) and reducing gas use (tackling the energy crisis).

Nesta’s analysts state that if all 23 million homes with gas boilers switched to a heat pump without any change in the share of gas in the electricity grid, the savings in wholesale gas costs would be equivalent to around 1.2% of GDP. Because the UK imports around 60% of its gas, this saving is likely to significantly benefit the economy and the government’s finances.

However, most of the savings from heat pumps are not directly passed on to consumers, because UK electricity prices track gas prices. This means installing heat pumps is highly beneficial to governments and to the economy, but not to households.

As a result, Nesta is calling on the government to make heat pumps more financially attractive for households. Without policy intervention, a heat pump bought today will still have a higher lifetime cost – when both upfront costs and running costs are combined – than gas boilers.

The report makes three recommendations that, if combined with a £5,000 subsidy, could make a heat pumps cost £120–£160 less per year over its lifetime than a gas boiler.

First, it suggests that government should reduce the influence of gas prices on electricity prices, while still maintaining the influence of overall market demand within renewables. In Nesta’s analysis, this could improve the relative lifetime cost per year of a heat pump by at least £70-£160.

Also suggested is the removal of levies from electricity bills. The environmental and social levies add up to around £150 to the average bill under the October 2022 price cap. It is claimed that shifting the cost of ECO to gas bills, and other levies to general taxation, would reduce the relative lifetime cost per year of a heat pump by £140-£330.

Finally, the report urges more efficient heat pump systems across design, installation and manufacturing. The UK government, analysts say, should seek to raise heat pump efficiencies by including efficiency standards in the market-based mechanism for low carbon heating and the Energy Related Product framework. It should also conduct – or require the industry to conduct – more regular monitoring of efficiencies of all heat sources (including boilers and heat pumps) as they operate in homes, making this data more widely available to customers.