The Heat Pump Association (HPA) has published its latest research on options for overcoming the distortive impact of Environmental and Social Obligations on the domestic heating market.
This report and extensive background analysis sets out the implications of a range of options to tackle one of the key challenges in the acceleration of heat pumps for domestic heating, running costs.
As the UK Government ambitiously pursues decarbonisation through increased heat pump adoption, the HPA’s report sheds light on a critical factor impacting the market, the high electricity prices in Great Britain, relative to gas, which is distorting the domestic heating market. Great Britain (GB) has one of the highest electricity to gas price ratios (3.97) in all of Europe, nearly double that of the EHPA recommended ratio of 2. A significant contributor to high electricity prices is the disproportionate application in Great Britain of Environmental and Social Obligations – often referred to by Government as “policy costs” and known commonly as “levies”. Domestic electricity consumers, bear around 85% of these levies, which means a typical heat pump consumer pays £170 more than an equivalent gas boiler consumer in levy costs per annum.
The Government has committed to outlining a clear approach to gas vs. electricity price ‘rebalancing’ by the end of 2023/4 and agreed with the Skidmore Review recommendation that significant progress affecting relative prices should be made by the end of 2024. In response to this challenge, the HPA calls on the Government to introduce a temporary Domestic Heat Pump Tariff Discount to counteract the distortion in the domestic heating market caused by levies on electricity bills, which acts contrary to their wider decarbonisation goals.
The discount will reduce the price of electricity used for domestic heating or hot water produced by hydronic heat pumps to an amount equivalent to exempting that proportion of electricity from levies. Starting at 5p/kWh in 2024/25- 2025-26 and rising to 6p/kWh in real terms in 2026/27, the discount is estimated to require a maximum of £533m of discounted costs over three years. The HPA propose that this should be introduced quickly as an interim measure to bridge the gap between today’s situation, and the time when wider electricity market reform is completed.
Commenting on the release, HPA CEO, Charlotte Lee said: “Our research provides a roadmap to address the current distortion in the domestic heating market, which is undoubtedly hindering heat pump deployment. Reducing the price and electricity relative to gas is the sector’s number one policy ask. Action must be taken to change the energy price signals so that the lowest carbon heat is the lowest cost heat, which in turn will accelerate the deployment of heat pumps, and support the government’s decarbonisation goals.”
Additionally, Craig Dolan, HPA Chair noted: “The proposed Domestic Heat Pump Tariff Discount strategically bridges the gap between the current situation and the more complex, wider electricity market reform arrangements which whilst necessary will take considerable time. The introduction of a Heat Pump Tariff Discount will make heat pumps a more compelling financial proposition to consumers, and will drive a significant shift towards a greener and more efficient heating landscape.”
Jozefien Vanbecelaere, head of EU affairs at the European Heat Pump Association said: “Every consumer wants bang for their buck, and to get it on a heat pump the price of electricity should be no more than twice the price of gas. Reducing taxes and levies on the electricity bill and supporting consumers in the switch to electrification is long overdue. Governments across Europe need to act today so households and businesses can move to clean and sustainable heating at a wallet-friendly cost.”
James Dyson, Senior Researcher at E3G said: “Reducing heat pump running costs is crucial to make clean heat affordable, desirable, and accessible for all UK households. A targeted exemption on levies for clean heating does just this, making heat pumps as affordable to run as a gas boiler. It also has a relatively low price tag for the government, meaning this approach represents great value to accelerate the transition to net zero.”