6.8 million heat pumps by 2030; from vision to reality · the uks climate strategy, through a...

Published by Ecuity Consulting LLP May 2012

A Report by Ecuity Consulting LLP sponsored by:

6.8 million Heat Pumps by 2030; from Vision to Reality Meeting the challenge


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Disclaimer

The report has been prepared by Ecuity Consulting LLP for the report’s sponsors. The views expressed

in this report represent a consensus of the report’s sponsors; they do not necessarily reflect the

specific positions of individual sponsoring organisations.


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Enablers

• Infrastructure upgrades

Decarbonising electricity generation, developing a bigger and smarter grid, developing local electricity and heating grids

• Technology improvements

Improving and demonstrating heat pump performance and reliability, developing technology solutions like energy storage

• Installer network and skills

Boosting number of installers and skills, educating installers to act as advocators of low carbon heating in their liaison with customers

• Industry capacity to scale

Developing an efficient supply chain and responding to deployment demand

An overview of key points

1. The UK’s climate strategy, through a series of carbon budgets and the

recently published Carbon Plan, ascribes a prominent long-term role to

domestic heat pumps. The ‘Medium Abatement’ scenario of the 4th

carbon budget projects the deployment of 0.6m domestic heat pumps

by 2020, rising to 2.6m by 2025 and 6.8m by 2030. These are essential

and attainable deployment targets.

2. To meet this challenge energy companies, manufacturers and the

Government will need to work together in order to deliver radical

improvements to the capacity of the energy system to support mass

uptake and develop effective long term regulatory support. Systemic

improvements and proper support with a simultaneous awareness

raising process can deliver lasting change to consumers’ priorities away

from conventional heating solutions and towards heat pumps.

3. The key energy system enablers are:

4. The main drivers of an effective regulatory framework are:


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Policy drivers

• Incentivising the uptake of heat pumps and hybrids through the Green Deal

Linking the Green Deal with the RHI to address the barrier of lack of up-front capital

• Addressing low noise threshold under Permitted Development

Increasing noise threshold for air-source heat pumps to 45dB

• Addressing the barriers currently posed by the Standard Assessment Procedure (SAP) Aligning SAP with the Ecodesign, associating SAP with long-term energy system performance expectations, linking heat pump default performance value with Ecodesign standards

• Increasing RHI Phase 2 certainty

Rendering RHI-eligible both air-source heat pumps and hybrids, setting a lower than 10-year tariff duration to combine overall cost effectiveness with attractive consumer incentive

• Developing regulatory incentives beyond subsidisation

Placing stringent emissions’ performance standards for new heating units under the Building Regulations by the end of the decade

5. These enablers and policy drivers will need to take place in tandem. This

report aspires to establish a framework of collaboration between

industry and Government towards deploying 6.8m domestic heat pumps

in a cost effective, socially positive and consumer friendly manner.


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1. The role of heat pumps in the UK’s energy and climate policy

The UK’s climate strategy, through a series of carbon budgets and the recently published

Carbon Plan, ascribes a prominent long-term role to domestic heat pumps. Heat pumps

are identified as an essential technological solution in order to deliver emissions’ reductions

and increased renewable energy uptake in the domestic sector1 2. Indeed, as energy

efficiency improvements reduce heat demand and energy becomes increasingly consumed

in the form of electricity, heat pumps are expected to become the key delivery mechanism

for demand side decarbonisation.

In order to achieve this goal, wide and timely deployment of this technology is necessary.

Based on the medium abatement scenario of the 4th Carbon Budget, the deployment of

2.6m domestic heat pumps by 2025 rising to 6.8m - equal to 24% of the total heat demand

- by 2030 will be important in order to achieve essential CO2 mitigation and renewable heat

deployment goals. The lowest energy intensity and process emissions trajectories of the

2050 Pathways Analysis assume that ‘most space heating will be provided by heat pumps’

by 20503.

A group of major domestic heat pump stakeholders believes that the extensive uptake of

heat pumps is both necessary and attainable. However current deployment rate is weak -

just 18,480 heat pumps were installed in the UK during 20104. Significant changes to the

energy system and effective long term regulatory support is going to be vital to

accomplish the level needed.

This report outlines the challenges ahead towards the attainment of 4th Carbon Budget

uptake goals and aspires to serve as a foundation for sustained collaboration between

Government, industry as well as all stakeholders involved in the development of this vital

technology.

1 Committee on Climate Change (2010), ‘Fourth Carbon Budget’

2 DECC (2011), ‘Carbon Plan: Delivering our Low Carbon Future’

3 HM Government (2010), ‘2050 Pathways Analysis’

4 BRSIA (2011) ‘Heat Pumps United Kingdom: A multi-client Study’. This figure includes both commercial and

domestic heat pumps


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Graph 1: Projected uptake of heat pumps according to the 4th Carbon Budget (Medium abatement scenario)

Source: 4th

Carbon Budget, Table 3.5

2. Responding to the challenge

The wide deployment of heat pumps is a single, yet significant, component of the plan to

move towards a low carbon sustainable economy. An effective and visionary regulatory

plan will be required to encourage consumers to invest in heat pumps, drive down capital

costs to competitive levels and eventually incentivise the mass transition to low carbon

heating at a low societal cost beyond 2020. For policy to be effective, significant

investment will need to be undertaken in developing infrastructure, technology and skills.

Regulation and systemic improvements will need to be accompanied by an effort to raise

consumer awareness so as to allow heat pump penetration into a market currently

dominated by cheap, but inefficient and carbon intensive, gas-based heating systems.

Therefore the analysed changes and improvements will only be effective if they take place

in tandem with an extensive campaign plan to provide reliable information and encourage

consumers to take a look at the long-term economics and wider implications of heating


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system selection. This campaigning effort would be more credible and effective if carried

out collaboratively between public and private sector.

The below chapter outlines key systemic enablers and regulatory drivers that will need to

develop in parallel to meet the challenge of deploying 6.8m heat pumps by 2030.

Graph 2: The challenge ahead

2.1 Key enablers

Below is an overview of enablers that along with an effective regulatory framework will

underpin the deployment of 6.8m heat pumps by 2030. The industry recognises the

challenge of getting all these elements in place and looks forward to working with the

Government and decision makers to achieve this.

2.1.1 Infrastructure upgrades

Heat pumps are one of the most efficient and dependable ways of using electricity to heat

homes and provide hot water. Given that heat pumps rely on electricity consumption to

operate, mass roll out of the technology makes little sense without parallel


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decarbonisation of electricity generation supply in energy infrastructure improvement5.

This process will necessitate significant investment - up to £200 billion might be required by

2020 alone - to be sustained over many years in uncertain financial conditions and against a

background of increased risk and uncertainty6.

The Carbon Plan projects this low carbon electricity to likely come from renewable energy

(35-50GW), particularly wind farms; a new generation of nuclear plants (10-20GW) and

carbon capture and storage (CCS) fitted coal and gas-fired power stations (10GW). Although

technology and cost will determine the actual future generation mix, significant new

capacity of 40GW-70GW will be necessary to replace existing generation and accommodate

new sources of demand, such as those emanating from the proliferation of electric

vehicles7.

To handle less predictable electricity supply, significant investment and innovation will

need to be undertaken to render the grid more flexible and allow distribution network

operators to cope with fluctuations in supply and demand. The deployment of smart

meters and the smart grid is most certainty a way forward as a means of enabling more

dynamic ‘real time’ flows of information on the network and more interaction between

suppliers and consumers8. The development of a bigger electricity grid with the expansion

of coordinated and integrated onshore, as well as offshore, electricity networks is another

necessary action to transport more electricity more efficiently9.

In parallel with centralised infrastructure improvement, investment should be undertaken

to deploy localised grids to distribute efficiently locally generated heat and electricity.

Heating networks and electricity microgrids can find application particularly in dense urban

environments improving network flexibility and alleviating grid energy losses.

2.1.2 Technology improvements

On-going effort is undertaken to improve and further demonstrate the performance and

reliability of heat pumps. That process will increase Government, but mainly consumer

confidence in the capacity of the technology to cost-effectively address heating needs.

The EST undertook and published in 2010 the first large-scale heat pump field trial study in

the UK to determine how heat pumps perform in real-life conditions10. The performance

results demonstrated significant performance variation among installations and were lower

5 See also DECC (2010) ‘Electricity Market Reform Consultation Document’, Chapter 1

6 Ofgem (2010) ‘Project Discovery: Options for delivering secure and sustainable Energy Supplies’

7 DECC 2011) ‘The Carbon Plan: Delivering our low Carbon Future’

8 DECC (2009) ‘Smarter Grids: The Opportunity’

9 DECC (2012) ‘Offshore Transmission Coordination Project: Conclusions Report’

10 Energy Saving Trust (2011), ‘Getting Warmer: A Field Trial for Heat Pumps’


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than similar European trials, such as the ones carried out regularly by the Swedish Energy

Agency11. According to the report the majority of poorly performing heat pump installations

were either not properly installed or not correctly operated.

Nevertheless performance volatility is an indication that additional testing is required to

demonstrate the performance, especially of new products, in suitable settings and

address operation and installation complications. This group of heat pump stakeholders is

looking forward to working closely with the Government in such a future heat pump field

trial undertaking.

Apart from performance improvements and the capacity to deliver operational and energy

cost reductions compared to incumbent solutions, consumers attach very high importance

to low maintenance costs and high reliability when investing in microgeneration solutions,

including heat pumps. Therefore continuous work to deliver a ‘hassle free’ technology for

consumers is also required on behalf of industry12.

Given that heat pumps place added strain on the electricity grid, driving further

development and wide commercial deployment of energy storage innovations makes

sense. The uptake of technologies like hot water cylinders to store heat produced by heat

pumps and electricity storage tools to make use of energy produced in excess by intermitted

renewable technologies, especially during periods of excess demand, is a necessary

development that will complement mass heat pump uptake13.

2.1.3 Installer network and skills

An important and often overlooked enabler for heat pump uptake is the increase in the

number of installers trained and certified to undertake installation of the technology and

the improvement of installers’ skills so that installation is carried out well and gives

consumers maximum benefit. Heat pump developers have taken significant steps towards

improving and expanding installers’ training and further continuous effort is required by

industry to expand knowledge and skills of the technology, installation processes and

consumer needs as demand increases.

Furthermore given that at least 1.6m boilers are replaced annually, providing installers a

corresponding number of occasions to liaise with home owners, installers’ potential to act

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See list of products tested by the Swedish Energy Agency here: http://www.energimyndigheten.se/sv/Hushall/Testerresultat/Testresultat/Luftvattenvarmepumpar1/?tab=2 (last accessed 23.03.2012) 12

Element Energy (2010) ‘The Growth Potential for Microgeneration in England, Wales and Scotland’ 13

The Low Carbon Networks (LCN) Fund established by Ofgem to allow up to £500m support to projects sponsored by the distribution network operators (DNOs) to try out new technology could serve as a window of opportunity to support research and drive innovation in the significant area of energy storage

http://www.energimyndigheten.se/sv/Hushall/Testerresultat/Testresultat/Luftvattenvarmepumpar1/?tab=2


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as advocators of low carbon alternatives, including heat pumps, is immense14. Indeed,

consumers are generally willing to pay extra capital cost for a novel technology if this is

recommended by an installer15. This opening will increase further with the introduction of

the Green Deal which could allow for the simultaneous financing of both heat pumps and

insulation measures. Raising awareness towards this direction is not only a major

opportunity for installers, but also for the industry and the Government to efficiently drive

low carbon heating uptake in the domestic sector.

2.1.4 Industry capacity to deliver scale

Although a number of elements need to be in place to enable growth, wide uptake of heat

pumps will not be realised unless a cost effective and efficient supply chain is in place to

manufacture and deliver the required scale.

The expansion and improvement of supply chains will necessitate wide industry

investment to allow industry to deliver project demand without bottlenecks relating to

equipment manufacturing, supply and installation. All industry stakeholders are determined

to undertake the necessary investment to meet projected targets.

Towards this direction regulatory certainty will be key to ‘avoid stop-start investment cycles

and provide confidence to supply chain investors of a long-term business opportunity

beyond the next decade’16.

2.2 Putting in place the right policy drivers

The existing regulatory setting for heat pumps is often cited as a source of uncertainty.

This is taking place during a crucial phase of market development. Addressing factors of

uncertainty and setting forth a firm long-term regulatory plan will drive necessary

improvements to infrastructure, technology and supply chains.

2.2.1 Low potential of domestic heat pumps and hybrids under the Green Deal

The Green Deal scheme establishes a framework to enable private firms to offer consumers

energy efficiency improvements to their properties at no upfront cost, and recoup

payments through a charge in instalments on the energy bill17.

14

Boiler annual replacement figure from DECC (2012) ‘The Future of Heating: A strategic Framework for low Carbon Heat in the UK’ 15

Element Energy (2008) ‘The Growth Potential for Microgeneration in England, Wales and Scotland’ 16

Committee on Climate Change (2011) ‘The Renewable Energy Review’


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In theory the Green Deal has the potential to incentivise the uptake of heat pumps and

hybrids, over less efficient alternatives with no upfront capital required. Currently heat

pumps are eligible measures within the Green Deal, as long as they meet the Golden Rule

calculation. The Golden Rule is based on the premise that estimated savings on bills will

always equal or exceed the cost of the measures.

Whilst the inclusion of heat pumps is a positive and welcome step, in practise there are very

few cases where heat pumps will meet the Golden Rule unless support through finance

subsidy is included before the Golden Rule calculation is made. It is still uncertain whether

consumers will be able to part-finance the capital cost required for the installation of a

heat pump to the point at which the outstanding balance meets the Golden Rule and then

use financing under the Green Deal to cover this amount, but still claim RHI support18 19. It is

also unclear if consumers that will combine the Green Deal with the RHI will be eligible for

the full RHI tariff.

If combination with the RHI is not permitted, then the Green Deal could eventually hinder

the wide roll-out of heat pumps by rewarding the uptake of conventional alternatives that

would require no upfront capital, given that consumers tend to attach exceptional

importance to the up-front costs of a microgeneration technology20. Linking the Green Deal

with the RHI for the domestic sector, while allowing full RHI tariff eligibility, is a golden

opportunity to address the barrier of a lack of up-front capital to invest in these energy

saving technologies and ensure the policy is socially inclusive and creates an opportunity for

a mass market uptake.

2.2.2 Overly stringent noise threshold limits set under Permitted Development Rights

Permitted Development Rights remove the requirement to submit a planning application to

the local planning authority for developments meeting specified conditions, saving costs and

time. Permitted Development Rights for solar PV, solar thermal, GSHPs and biomass boilers

were introduced in 2008. ASHPs were initially excluded from these standards due to noise

concerns.

Although a noise threshold of 45dB for ASHPs was recommended by government in 2008,

the Department of Communities and Local Government extended Permitted Rights to

include ASHPs with a substantially lower threshold of 42dB in 2011. The noise limit of 42dB

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DECC (2011) ‘The Green Deal: A Summary of the Government’s Proposals’ 18

This group of heat pump stakeholders plans in due time to examine and propose specific ways to link the Green Deal with the RHI, and present the financial implications of such linkage 19

Combination of RHI with Green Deal can only occur when the recipient of the Green Deal loan and RHI financing is xthe bill payer. 20

Element Energy (2008) ‘The Growth Potential for Microgeneration in England, Wales and Scotland’


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places ASHPs at significant disadvantage as the majority of ASHP products would need to

be installed several metres away from the nearest dwelling to allow eligibility. Therefore a

great number of ASHP installations that occur in the UK still need to seek planning

permission.

This creates an unnecessary layer of complexity for ASHP installations which does not occur

for other primary heating renewable technologies. A timely upward review of the noise

threshold to the levels deemed acceptable by the government in 2008, 45dB would ease

installation complexity for the majority of ASHP products and therefore allow them to

contribute to the technology’s full potential.

2.2.3 Addressing the barriers currently posed by the Standard Assessment

Procedure (SAP)21

SAP has been the source of significant uncertainty in regards to perceived disconnect with

the Microgeneration Certification Scheme (MCS) and relevant EU schemes like the

Ecodesign as well as its technical assumptions and the accessibility of its model.

Currently there appears to be a discrepancy between SAP and the UKs projected energy

policy direction. New build compliance is based on current grid CO2 intensities rather than

a 15 year forward average, as per Zero Carbon Hub’s advice22 . Factoring in anticipated

and necessary changes in the energy system would allow overall CO2 rating to reflect the

product’s lifetime rather than offer a spot assessment. This approach will clearly benefit

heat pumps and help drive uptake in new build where CO2 currency is important as homes

are built to last a lifetime. Given that a SAP and EPC rating reflects the current status of

energy price and CO2 savings, having a separate CO2 compliance figure for new build

calculations is advised.

The current process of including a technology into SAP is included in Building Regulations

Appendix Q. Appendix Q allows for a wholly new technology to be included in SAP and

enhanced performance products from a technology category already supported to be

included in SAP but with default performance figures. The Appendix Q process has been

reported to be tedious, expensive and uncompetitive. Allowing for an immediate

assimilation into SAP, as well as MCS, of products, and corresponding performance

standards, incorporated into Eco-design would significantly encourage wider competition

and innovation.

A prominent example of a product genre currently excluded from SAP is hybrid heat pump

systems. Hybrids can deliver a significant part of initial heat pump uptake, especially in off- 21

This Chapter on SAP has been contributed by Kelly Butler, Marketing Director of BEAMA. For a the full account of the analysis of SAP challenges offered by Kelly Butler, see Annex, Chapter 6 22

Zero Carbon Hub (2011) ‘Modelling 2016 Using SAP2009 Technical Guide’


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grid areas in combination with, for example, oil boilers. As effectively SAP does not

recognise hybrids, this hinders the opportunity of uptake of this technology.

The recent SAP consultation has proposed reduced heat pump default figures based on

the results of the recent EST field trial (see Chapter 2.1.2)23. A decrease in default

performance figures would be both a discouraging signal for a growing industry and unfair

based on the field trial’s scope, testing conditions and subsequent technolgy

improvements. Using Ecodesign performance figures as a basis for default performance

figures that factor in an in-use factor would be recommended. In-use factors could be

revised when the product becomes MCS accredited and installed by an MCS installer, given

that accreditation would offer adequate quality assurance.

2.2.4 Lack of certainty towards Phase 2 of the RHI

RHI Phase 2 for the domestic sector is the main financing tool to drive domestic heat pump

uptake towards the end of this decade. Yet there is still limited information as to the

scheme’s format, its technology scope and provisions in anticipation of its

commencement.

Given the delayed commencement of Phase 2 of the RHI for the domestic sector it is key to

extend the RHPP, a one-off voucher scheme to householders to install domestic heating

technologies, until summer 2013 when RHI Phase 2 is anticipated to begin24. RHI eligibility

for RHPP voucher recipients would enhance consumer certainty and contribute to the

success of this new phase of the RHPP scheme. Further to using the RHPP as a bridging

solution towards the RHI, establishing certainty concerning the eligibility of a number of key

heat pump technologies is key.

ASHPs, that are projected to represent most of heat pump uptake, were excluded from

Phase 1 of the RHI for commercial projects. ASHPs have thus far been the technology with

the highest uptake under RHPP at domestic level, highlighting the appeal of this product for

consumers. Their inclusion in the RHI is essential for domestic heat pumps to deliver their

full potential and towards this direction further collaboration is required between

Government and industry to assess the technology’s cost and performance.

Hybrid systems, that encompass a heat pump combined with an auxiliary heat source,

usually a boiler, to meet part of peak heating demand, have similarly been left out from

Phase 1 of the RHI. Hybrids can deliver a significant part of initial heat pump uptake

towards penetrating conventional markets, as the technology gains traction among

consumers as a stand-alone solution. Hybrids enable consumers to take advantage of the

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DECC (2012) ‘Consultation on Changes to Standard Assessment Procedure (SAP)’ 24

The second phase of the RHPP scheme commenced on 2nd

April 2012


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benefits of heat pumps, along with the surety of heat supply during peak times from boilers.

In time, as gas/electric cost ratio changes, the heat pumps will gradually be utilised more

and boilers less. RHI eligibility of hybrids at this early stage is key to initiate a gradual

process of replacing standalone conventional heating systems while developing consumer

certainty.

RHI format and specifically subsidy duration is a salient issue that could determine the

success of the scheme. While it has been suggested that subsidy duration might be reduced

compared to the 20-year subsidy lifetime of Phase 1 of the RHI, there is still little relevant

information on this issue. Subsidy duration is crucial as it is bound to affect budgetary

effectiveness as well as initial tariff levels and hence consumer appeal. As analysed in

greater detail in Chapter 3, a lower than 10-year tariff duration would generate the critical

initial fiscal incentive for consumers at a competitive overall policy cost and therefore

represents a rather appealing arrangement25.

2.2.5 Developing regulatory incentives beyond subsidisation

Appropriate regulatory support in tandem with the development of a number of key

enablers can put the domestic heat pumps’ industry on a sustainable path for growth by the

end of the decade. Given the high projected uptake rate it will be impractical as well as

ineffective to sustain RHI subsidisation of domestic heat pumps beyond 2020. Alternative

regulatory means will need to be explored to drive the essential uptake during the next

decade. Past successful examples could serve as a guide.

The introduction of an efficiency performance standard for boilers in 2005 under the

Building Regulations effectively mandated condensing boilers and made the UK the biggest

market for these products in Europe. This regulatory change took place when the boiler

market uptake rate was about 200,000 installations per annum. A similar annual uptake rate

is to be expected for domestic heat pumps by 2020. Therefore a lasting regulatory change

to put in place stringent emissions’ performance standards for new heating units under

the Building Regulations by the end of the decade would create a level playing field for

low carbon heating products, including heat pumps, triggering a mass shift from

conventional products and eliminating the need for sustained financial support.

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Chapter 4 focuses on the issue of RHI tariff duration given the assumption of this group of heat pump stakeholders that the right tariff lifetime would be essential for the scheme to have the desired impact


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Graph 3: A path to achieve necessary heat pumps’ uptake during 2012-2030

3. RHI tariff duration sensitivity analysis - the case for a shorter

tariff duration

Tariff duration is a crucial factor that could define the success of the RHI scheme, as well as

its short-term and long-term viability. Getting this element right could determine the

success of the scheme26.

3.1 Correlation of RHI tariff duration and tariff rate

According to the impact assessment of the RHI, a 12% internal rate of return (IRR) is

assumed to be acceptable to incentivise the uptake of renewable heat technologies27 28.

26

The analysis carried out in Chapter 3 attempts to assess the effect of different RHI tariff duration scenarios. The tariff levels extrapolated for the purposes of this analysis are indicative 27

DECC (2011) ‘Renewable Heat Incentive Impact Assessment (A)’

Appropriate support

• Infastructure upgrades

• Technology improvements

• Supply chain and installer network development

• Consumer certainty

Change in the Building

Regulations

Mass uptake


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Assuming a 12% IRR, four different subsidy rate scenarios have been established based on

diverse tariff durations for ASHPs and GSHPs29:

Scenario 1, 5-year subsidy duration




As demonstrated by the graphs below, necessary per unit subsidy rates to achieve a 12% IRR

tend to decrease as tariff duration increases30. Tariffs tend to be considerably higher for

GSHPs, compared to ASHPs, due to the technology’s higher retail price and installation cost,

despite the fact that GSHPs typically attain higher efficiency rates.

Graph 4: ASHPs RHI tariff rate vs. RHI subsidy duration to achieve a 12% IRR

28

See Annex, Chapter 1 for a list of cost and performance assumptions used for this modelling exercise. Cost and performance data for domestic heat pumps represent industry averages. Data to extrapolate these averages have been contributed by all participating heat pump manufacturers. 29

An oil boiler counterfactual has been used for the purposes of the modelling carried out for this report. For subsidy rate, budgetary and emissions abatement modelling results based on a natural gas boiler counterfactual please see Annex, Chapter 2. 30

See Annex, Chapter 3 for a concise explanation of the modelling methodology used to calculate appropriate tariff levels based on a 12% IRR


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Graph 5: GSHPs RHI tariff rate vs. RHI subsidy duration to achieve a 12% IRR

3.2 Correlation of tariff duration and RHI budgetary cost

RHI tariff duration would similarly affect the overall budgetary cost and consequently the

overall cost effectiveness of the RHI scheme. In order to examine tariff duration effect on

the RHI budget, the four defined duration scenarios have been applied to a progressively

increasing heat pump uptake rate. The proposed uptake pathway has been designed to

reach 600,000 installations by 2020 adhering to the projections of the 4th Carbon Budget

(see graph below)31 32.

31

See Annex, Chapter 4 for detailed annual installation assumptions used for the purposes of this report towards achieving 4

th Carbon budget deployment targets

32 See Annex, Chapter 5 for a brief explanation of all budgetary calculations undertaken in this report


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Graph 6: Proposed domestic heat pumps’ uptake towards 600,000 installations by 2020

Given the difference in performance and cost specifications between ASHPs and GSHPs,

diverse budgetary scenarios regarding their eventual share of the overall heat pump

deployment have also been assessed. The uptake of ASHPs is expected to be relatively

higher given that they present a suitable replacement option for conventional heating,

require lower initial investment capital by the customer and are easier to install. GSHPs on

the other hand present an efficient and dependable solution especially suitable for the new

build market.

The technology uptake share pathways considered for the purposes of this report are:

Pathway A, Air source heat pumps 90% / Ground source heat pumps 10%

Pathway B, Air source heat pumps 80% / Ground source heat pumps 20%

Pathway C, Air source heat pumps 70% / Ground source heat pumps 30%

3.2.1 Short term budgetary effect of tariff duration

Given that the RHI is a subsidy scheme with a finite value of £860 million to be funded under

the Government budget until the end of this Spending Review Period in April 2015,

assessing the short term budgetary effect of different subsidy rate scenarios is key.


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The model indicates the below budgetary cost ranges until April 2015, assuming the

commencement of Phase 2 of the RHI scheme in April 2013, according to the three subsidy

duration scenarios33:

Scenario 1, 5-year subsidy duration : £72m - £90m




The graph below illustrates the specific effect of all examined scenario/pathway

combinations of RHI tariff duration and individual domestic heat pump technology uptake

on the RHI budget until the end of this Spending Review period.

Graph 7: RHI subsidy cost until April 2015 (£ million)

The short-term budgetary cost of domestic heat pumps’ support under the RHI is higher in

the case of shorter subsidy duration scenarios as subsidy payments tend to be more

‘frontloaded’. However given the delayed expected commencement of RHI Phase 2 none of

the examined scenarios would require more than 11% of the overall budget of the RHI

scheme until April 2015. Hence all proposed tariff durations and rates would present a small

33

The purpose of calculating the short term budgetary cost of support for heat pumps is to compare it against the undiscounted finite value of the RHI scheme until 2015 (i.e. £860m), therefore for comparison validity purposes budgetary cost figures until 2015 have not been discounted.


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risk of placing strain on what is a finite scheme budget until the end of this Spending Review

period.

3.2.2 Long term effect of tariff duration on scheme budget and scheme cost effectiveness

Aside from short-term budgetary considerations, a subsidy scheme’s success is highly

determined by its capacity to bring about positive societal results - in this case emissions’

abatement to meet binding carbon abatement objectives and investment generation in a

low carbon sector - in a cost effective manner.

A domestic heat pump unit, if installed and operated properly, would bring about significant

emissions’ savings compared to the counterfactual option, in this case an oil-fired boiler. For

both examined heat pump technologies, annual emissions’ abatement would amount to

about 2.2 to 2.6 tonnes of CO2 per unit, translating to up to 1,500,000 tonnes of CO2

abatement by 2020 through the deployment of 600,000 domestic heat pumps (see graph

below).

Graph 8: Annual emission savings per heat pump unit vs. an oil boiler counterfactual (tonnes CO2)

To determine the cost effectiveness of each of the three proposed tariff duration scenarios,

it is important to estimate the effect that they would have on the overall cost of the scheme


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until the phase out of all subsidy support. The three identified tariff duration scenarios

would generate diverse overall scheme costs as tariff payments accrue differently

throughout the scheme’s lifetime. As demonstrated in the graph below, the overall cost of

subsidy support tends to increase as tariff duration increases. Overall budgetary costs have

been discounted as per DECC’s policy concerning impact assessments34.

Graph 9: RHI subsidy cost until the end of the scheme (£ billion)

Given that projected uptake of domestic heat pumps is considered to be fixed for the

purposes of this exercise as per 4th Carbon Budget projections (see graph 6), overall carbon

abatement effectiveness would be proportional to overall scheme cost. Estimated carbon

abatement effectiveness ranges for each scenario are set forth below (see graph illustration

below):

Scenario 1, 5-year subsidy duration : 121£/t CO2 - 147£/t CO2




34

See for instance DECC (2010) ‘FIT Impact Assessment’


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Graph 10: Scheme carbon abatement effectiveness (£/t CO2 abated)

Overall carbon abatement effectiveness for domestic heat pumps under the RHI appears to

be significantly higher as subsidy duration decreases. Therefore a longer tariff payment

duration of 20 years would make little sense if the Government aims to maximise the return

on public money used to finance the initial deployment of domestic heat pumps. A lower

than 10-year tariff duration would fare better in terms of delivering cost-effective emissions’

reductions.

3.2.3 Striking the right balance between short-term cost viability and scheme effectiveness This sensitivity analysis demonstrates that short tariff duration scenarios are overall more

cost-effective and lead to higher tariff rates, therefore creating the necessary short term

incentive for customers to kick-start the market. On the other hand, shorter tariff lifetimes

present a higher initial strain on the budget.


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Graph 11: RHI policy cost vs. RHI tariff duration35

The position of this group of heat pump stakeholders is that a lower than 10-year tariff

duration makes both financial and commercial sense. Nevertheless fiscal risks should be

addressed through a process of tariff degression based on deployment levels that is

regular, fixed, transparent and based on predetermined deployment triggers. Frequent and

structured degression presents the benefit of avoiding the phenomenon of a start-stop

market while allowing for the necessary industry certainty at an early commercial phase.

Overall, RHI support for heat pumps makes strong strategic sense and fits the UK’s long

term energy and climate plans. A lower than 10-year RHI tariff accompanied with

deployment-based tariff degression presents significant merits for consumers and industry

and represents a cost-effective solution for the Government to meet binding renewable and

emissions abatement targets (see graph 12).

35

Cost analysis graph based on a 90% ASHPs / 10% GSHPs pathway


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Graph 12: Policy cost effectiveness of domestic heat pumps RHI support vs. overall projected cost effectiveness of the RHI36

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Cost effectiveness of domestic heat pumps RHI support based on report’s modelling results for a 5-year subsidy duration and an uptake mix of 90% ASHPs / 10% GSHPs


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Annex

1. Cost and performance data

Below is a table with all cost and performance data used for the RHI modelling undertaken

for the purposes of this report37:

Table 1: Cost and performance data used

Counterfactual Assumptions

Independent Variables & Assumptions Values Source

Cost Streams

Oil and Gas Boiler Capital Costs (CapEx) (£) 3,700

Based on surveyed industry average (includes installation

costs)

OpEx Tariffs

Natural Gas Retail Price (pence/kWh) 4.79 IAG toolkit, year 2012 (tables 4-

9)

Oil Retail Price (pence/kWh) 5.33

IAG toolkit, year 2012 (tables 4-9), DECC's 2011 Conversion

Guidelines used to convert litres to kWh

Technical Variables

Counterfactual Heating System

Heating and Hot Water Efficiency 90% Grade A boiler efficiency

according to SAP

Emissions Factors

Natural Gas Carbon Intensity (kgCO2/kWh) 0.18322 IAG toolkit (table 2a)

Oil Carbon Intensity (kgCO2/kWh) 0.26613 IAG toolkit (table 2a)

Air Source Heat Pumps - ASHP

Independent Variables & Assumptions Values Source

Cost Streams

Capital Costs (CapEx) (£) 9500


costs)

OpEx Tariffs

Electricity Price (pence/kWh) 15.88 IAG toolkit, year 2012 (tables 4-

9)

Technical Variables

Three-Bed Semi Detached w/CWI and LI (AVG House)

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Provided cost and performance data is indicative and represents a heat pump unit with a capacity of about 8kW +- 2kW that is reported to be adequate to provide the UK average annual heating and hot water requirement of 15726kWh per annum


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Average Heating and Hot Water Requirement (kWh per annum) 15726

DECC, 'Energy consumption in the United Kingdom 2011 edition

SPF Heat Pump 3.00 Based on surveyed industry

average

Tech Life in Years 20 Based on surveyed industry

average

Emissions

Electricity carbon intensity (kgCO2/kWh) 0.4633 IAG toolkit (table 1)

Ground Source Heat Pumps - GSHP

Independent Variables & Assumptions Values Values

Cost Streams

Capital Costs (CapEx) (£) 17500


costs)

OpEx Tariffs

Electricity Price (pence/kWh) 15.88 IAG toolkit, year 2012 (tables 4-

9)

Technical Variables

Three-Bed Semi Detached w/CWI and LI (AVG House)

Heating and Hot Water Requirement (kWh per annum) 15726

DECC, 'Energy consumption in the United Kingdom 2011 edition

SPF Heat Pump 3.5 Based on surveyed industry

average

Tech Life in Years 20 Based on surveyed industry

average

Emissions

Electricity carbon intensity (kgCO2/kWh) 0.46 IAG toolkit (table 1)

2. RHI tariff and budgetary modelling results based on a natural gas boiler counterfactual

It is initially expected that domestic heat pump deployment is largely, but not exclusively,

going to be driven by demand in the off-grid sector. For this reason an oil boiler, a typical

conventional form of off-grid domestic heating, has been used as a counterfactual for the

purposes of the modelling carried out in this report.

However heat pumps also currently present a very attractive solution to replace forms of

domestic heating utilised in properties connected to the grid, such as gas boilers. Indeed on-

grid demand for heat pumps is expected to grow substantially to cover a significant part of


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anticipated uptake. Therefore, in this chapter, we provide modelling results based on a

natural gas counterfactual. It should be noted that the conclusions of this report would not

change in case a natural gas counterfactual were to be used.

A. Appropriate RHI tariff levels for domestic heat pumps using a natural gas boiler

counterfactual

Given the lower price of natural gas as a fuel source, in comparison to oil, a marginally

higher RHI tariff rate for domestic heat pumps would be required to attain the targeted 12%

IRR. Tariffs would need to be roughly 0.5p/kWh to 1p/kWh higher compared to a scenario

using an oil boiler counterfactual (see Graph 4 and Graph 5).

Graph 13: Air-source heat pumps’ RHI tariff rate vs. RHI subsidy duration to achieve a 12% IRR using a natural gas boiler counterfactual


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Graph 14: Ground-source heat pumps’ RHI tariff rate vs. RHI subsidy duration to achieve a 12% IRR using a natural gas boiler counterfactual

B. Overall RHI subsidy cost of domestic heat pumps using a natural gas boiler counterfactual

Given somewhat higher required subsidy support rates for domestic heat pumps, using a

natural gas boiler counterfactual, RHI costs to support the uptake of the technology would

be higher, albeit marginally (see Graph 7).

RHI costs until the end of the Spending Review period in April 2015 are provided in the

graph below.


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Graph 15: RHI subsidy cost until April 2015 using a natural gas boiler counterfactual (£ million)

Overall RHI costs for the support of domestic heat pumps until the end of the RHI scheme

are provided in the graph below.

Graph 16: RHI subsidy cost until the end of the scheme using a natural gas boiler counterfactual (£ billion)


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C. Carbon abatement potential of domestic heat pumps and RHI scheme efficiency using a natural gas boiler counterfactual

Natural gas has a relatively lower carbon intensity compared to oil. Therefore, the CO2

abatement potential of domestic heat pumps, although still significant, is lower when

serving as replacements to natural gas boilers. Annual emissions savings per unit are

estimated between about 0.8 tonnes and 1.1 tonnes per annum based on the domestic heat

pump technology deployed (see graph below, see Graph 8 for comparison).

Graph 17: Annual emission savings per heat pump unit vs. a natural gas boiler counterfactual (tonnes CO2)

Given somewhat higher required RHI tariffs and a relatively lower estimated carbon

abatement potential, the overall RHI carbon abatement effectiveness cost for domestic heat

pumps would be evidently higher if a natural gas boiler, instead of an oil boiler

counterfactual, were to be used for modelling purposes (see Graph 10). The graph below

indicates estimated carbon abatement potential using a natural gas boiler counterfactual.


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Graph 18: Scheme carbon abatement effectiveness using a natural gas counterfactual (£/t CO2 abated)

3. Subsidy rate calculation based on a 12% IRR

The below bullet points provide a summary of the methodology employed to calculate tariff

levels for ASHPs and GSHPs. This methodology adheres to the methodology used by DECC in

relevant impact assessment exercises.

The methodology employed, yields the value of the tariff required to deliver 12%

IRR. To achieve this, cost streams and revenue streams need to be identified.

Cost Streams include the capital expenses (CapEx) over and above the

counterfactual. To estimate cost streams, we levelise this expenditure by annuitizing

it over the scheme timeframe under a discount rate of the intended IRR, in this case

12%, over the whole operating period.

Revenue Streams: the operational expenses (OpEx) of running heat pumps are lower

than those of an oil boiler. Therefore, the consumer will benefit from “Operational

Expenses Savings”, which, in this case, represent the revenue streams. There are two

parts that constitute the revenue calculation: 1) Revenue during the RHI scheme and

2) Post-RHI scheme revenue, given that a heat pump’s operating lifetime may extend

beyond the phase out of subsidy support.

The proposed RHI tariff is the difference between the cost and the revenue. This

ensures that levelised costs equal levelised revenues, where costs include an IRR of

12%


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4. Annual installation assumptions

The below annual uptake assumptions for domestic heat pumps have been used for the purposes of this report. Assumed annual deployment suggests a gradually increasing uptake rate towards achieving the goal of 600,000 domestic heat pumps by 2020. Although the suggested annual uptake rate is indicative, all participating actors hold that the goals set under the 4th Carbon Budget are indeed essential.

Table 2: Annual installation assumptions used for RHI budgetary modelling

Annual Installation Assumptions

2013/2014 20,000

2014/2015 30,000

2015/2016 40,000

2016/2017 55,000

2017/2018 75,000

2018/2019 100,000

2019/2020 125,000

2020/2021 155,000

Total 600,000

5. Basic explanation of budgetary calculations

The key aspects of budgetary modelling carried out for the purposes of this report are

briefly outlined below:

The model distinguishes between three tariff duration scenarios of 5, 10 and 20

years.

Due to the seasonality of installation and sales, where some consumers might install

in the beginning of the year while other in the end of it, the model discounts the

generation of the new installs in their first year by 50% in order to overcome this

uncertainty. This will minimize the margin of error. For example: an ASHP under 10-

year timeframe will be assumed to be running on half capacity in the first year and

full capacity during the rest 9 years of subsidy support. After 10 years, the

installation is no longer included in the budgetary calculations.

The model accounts for two different types of installations, namely ASHP and GSHP,

assuming diverse ratios (9:1, 8:2 and 7:3), given that the financial and performance

characteristics of ASHP and GSHP tend to differ.

Final budget figures are discounted at a rate of 3.5% as per HM Treasury Green

Book. Budget figures until the end of the Spending review period in April 2015 are

not discounted.


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6. The Standard Assessment Procedure; a Barrier To Take Up But A Gateway To Quality38

The Standard Assessment Procedure is the subject of much industry scrutiny with respect

not only to the detail of its assumptions but also the accessibility of the model and its

continued image as a standalone package that does not sufficiently dovetail with other

policy drivers and mechanisms.

The following relates to the SAP model both as a new build compliance tool and the

platform for Energy Performance Certificates and Green Deal assessments.

1. Accessibility

The current process for pushing technology into SAP is the Appendix Q process. This allows

for completely new technology (previously not included in SAP) and enhanced performance

products from a technology category already supported but with default performance

figures.

It has been well documented that the SAP Q process is too expensive, uncompetitive in its

management and too long. The ventilation and heat pump industries have both reported

this. There is also no full and long term alignment between SAP and MCS.

DECC is advised to seek a sensible solution to fast tracking technology and efficient products

into SAP by publishing and adhering to a clear Eco-design alignment policy. Within this

approach we should see the following:

a. Products that are tested and CE marked in accordance with eco-design technical requirements and should have their efficiency performance directly translated into SAP with a resulting SPF produced within the algorithm. The same products should have the same requirements for satisfying MCS.

b. All products incorporated into Eco-design will be automatically assimilated into SAP and eligible for MCS. For instance, hot water only heat pumps will be performance rated through Eco-design Lot 2 (water heaters) and consequently these products can be fast tracked into SAP using a database driven drop down table. Using the test standards featured within Eco-design these can also be quickly entered into MCS standards.

The above approach keeps SAP (and MCS) relevant to wider policy and ‘live’ with the

broadest range of product placed on the market. This also ensures a harmonised approach

for the EU with no UK specific test and performance accreditation demands on industry.

The performance measurement for Eco-design is standardised and testing open to

competition which is good for industry and encourages innovation.

38

Contributed by Kelly Butler, Marketing Director, BEAMA


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A prominent example of a technology genre currently excluded from SAP is hybrid heat

pump systems. Hybrids can deliver a significant part of initial heat pump uptake, especially

in off-grid areas in combination with, for example, oil boilers, allowing the technology to

gain traction among consumers as a dependable stand-alone solution. At the moment there

is no recognised calculation method to identify the energy contribution and carbon saving

potential that this type of product can provide. As Effectively SAP does not recognise these

types of products, this hinders the opportunity of uptake of this technology.

2. Energy Policy Relationship

There is a disconnect between SAP and energy policy direction. The Zero Carbon Hub has

already advised Government officials that new build compliance should be based on SAP

grid CO2 intensities that reflect a 15 year forward average. This makes sense as it means

the overall CO2 rating reflects the product’s lifetime and not a spot assessment figure.

This approach will clearly benefit heat pumps and help drive uptake in new build where

the CO2 currency is so important as we build homes to last a lifetime and reflect our future

energy policy and not a single point in time.

DECC is advised to ensure that the forward CO2 projection is used. Industry accepts that

DECC is concerned that a SAP/EPC rating reflects the current status of energy price and

CO2 but this in itself can be tackled by having a separate CO2 compliance figure for new

build calculations. It really is that simple.

3. Measurement and Quality Relationship

The current SAP consultation has proposed reduced heat pump default figures based on the

results of the incomplete EST field trial. DECC is urged to consider whether this is the right

signal for a fledgling industry and to consider a more innovative apprach to handling

defaults and/or the Eco-design driven ‘live’ database, linking ‘in use’ factors – effectively

penalities – that are lifted if the product is MCS accredited and installed by an MCS installer.

With regards the EST field trial sample, this was wholly unrepresentative of the overall

installed base today at less than 1% (i.e. >45,000 units in the market from 2012). The trial

sample pre-dated MCS and this has been made clear so it is also unrepresentative of current

design and installation standards. Industry is committed to monitoring under the RHPP and

has also worked on year 2 of the trial. The trial is as yet incomplete and on this basis cannot

be used. STP11/HP01 states that SAP Q is now in place so it is appropriate to review the

defaults. This is irrelevant as SAP Q measures bench conditions and defaults assume

installed conditions so this is a mixed reference. Intervention analysis seen by BEAMA has

also indicated that interventions have had an impact on SPF performance (47% of those

visited) with a greater number affecting the CoP positively (80%). There is evidence then


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that suggests addressing design and installations issues through standards that are policed

i.e. MCS, will have an impact on performance and supports retention of default values.

The industry approach would be to use Eco-deisgn performance figures that have an in-use

factor applied unless there is some form of quality assurance mechanism in place. This very

much links into the thrust of the latest Part L proposals, pushing for built as designed via QA.

In effect, MCS is the industry QA mechanism, meaning if products are MCS accredited and

installed to MCS standards, they should perform closely to the Eco-design assumed

standards.

Building on the above proposal we would also advise DECC to engage with CLG to ensure

MCS is mandatory across new build. Currently the number of MCS installations is below the

BSRIA market level by some way. We believe there are a number of reasons for this but

primarily because many heat pumps are installed in new build and with the Code for

Sustainable Homes not being rigorously enforced, there is no compulsion to use MCS. This

can be turned around if MCS is required to recduce in use factors, just as we have seen

successfully applied to the ventilation industry for new build usinf central mechanical

systems.

If you wish to discuss this report further please contact Ecuity Consultant,

Ilias Vazaios at [email protected] or via telephone 01564 771 554

mailto:[email protected]

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