Utility Week

UTILITY WEEK | JANUARY 2022 | 17 Heat This strategy of focusing on newer prop- erties makes sense in order to pass on cheaper costs. A report from the then Department for Energy and Climate Change (DECC) in 2016 on the potential for reducing heat pump costs said that installing air source heat pumps in new-builds was 10% cheaper because of reduced labour costs, slimmer margins due to high density sales and stand- ardised systems. A spokesperson for Octopus Energy tells Utility Week: "Heat pump installations can oƒen be concentrated in the off-grid market, which can be more costly and complex than typical UK housing stock. "By focusing on the mass market [instead of bespoke projects], we can make heat pump installations more efficient and stand- ardise hardware – massively driving down costs along the way. "And like in any other industry, the more competition we have in the market, the more costs for consumers will come down too." While bulk orders from property develop- ers and simpler installations are two factors that could reduce upfront costs, it will not be at the level projected by the government, says research consultancy Delta-EE. Its white paper on the potential for reduc- ing heat pump costs in the residential sector was published just two days aƒer the Heat and Buildings Strategy and states that the reduction is not likely to be nearly as much as the government has projected – and is unlikely to meet its 2025 deadline. The white paper sets out cost reductions in two scenarios. In the central scenario, the UK market will see installs in the low hun- dreds of thousands – not enough to meet the government's target of 600,000 installs per annum. In the optimistic scenario, annual installs will be in the high hundreds of thou- sands and high sales volumes will mean the majority of market players are able to squeeze margins to sell products at more than 30% below standard prices. In this scenario, more heat pump installa- tion companies would also be large compa- nies with lower overheads. But to achieve this kind of figure, and to maximise the strategy of targeting high den- sity, easy installations, mains grid gas cus- tomers and property developers will need to be convinced to be early adopters of the technology. They will need to make a major decision on their heat supply in the next few years, despite the government still consulting on heat networks, and with a decision on hydro- gen not due to be taken until 2026. Even if enough customers are tempted into making an early decision, the maximum reduction that the white paper expects is up to 38% – meaning an 8.5kW air source heat pump would still be more than double the cost of a gas boiler. In the central scenario, the predicted cost reduction is just 25%. Lindsay Sugden, head of heat at Delta-EE, says: "While overall the grants announced in the Heat and Building Strategy are a step in the right direction to decarbonising a crucial area in the UK's overall emissions, these pro- posals are not sufficient to achieve the gov- ernment's decarbonisation goals. "Our research suggests reaching a 25-50% cost reduction, as proposed in the Heat and Building Strategy, is unlikely to be met, espe- cially by 2025 as is currently suggested." Higher installs on the continent One of the main supplier voices missing from the subsidy announcement is British Gas. As the largest installer of heating systems in the UK, it is the energy supplier who could arguably segue into heat pump installations most easily. During COP26, British Gas parent com- pany Centrica unveiled a Climate Transi- tion Plan in which it committed to install 20,000 heat pumps a year by 2025, yet despite this, chief executive Chris O'Shea is far more reserved in his expectations for cost reductions. When giving evidence to the Industry and Regulators Committee for their enquiry into Ofgem and Net Zero, O'Shea pointed out that the plan to reduce costs was reliant on cus- tomer uptake, which is difficult to incentivise and encourage, as witnessed by the smart meter rollout. "If you industrialise the issue and incen- tivise it properly, it is easier, and we saw that with wind versus smart meters." He also questioned why the cost of heat pumps would fall just because the UK was installing more of them. "Some people will argue that they will get the costs down because it is new technol- ogy, but … this is not new technology; it is existing technology, and I am not sure why an additional 500,000 heat pumps in the UK will drive the price down – and that is what France is doing already today." DECC's heat pump report aligns with O'Shea: "Heat pump technology is essen- tially a mature technology, despite low mar- ket penetration in the UK." It adds that the equipment cost element of a heat pump, which makes up 60% of the total cost, is not just reliant on the UK mar- ket but is affected by the wider European and global industry. As O'Shea stated in his evidence, heat pumps have been around for decades, with many parts already being mass produced because they are shared components with the air conditioning industry. But there may be areas for the develop- ment of UK-specific solutions that will help reduce prices, as suggested by DECC's 2016 report. "There is high technical potential to increase efficiencies and identify lower cost materials for heat pumps," it says. Octopus Energy is also positive about the opportunity to be gained from UK-specific development. "Good solutions already exist for the mass market, but tech innovations will drive improvements and solutions for other prop- erty types too [such as high-rise flats which have limited external space], enabling heat pumps to work in almost all homes. "This is true for all markets, but in the UK we have particularly homogeneous heating systems and housing stock and a relatively temperate climate, which enables mass take-up of these solutions," the company says. However, if UK-specific solutions are going to be a key element of cost reductions by 2025, then it will be from a standing start. continued on page 15

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