The economics of heat pumps and the (un)intended consequences of government policy

In Europe, space and water heating account for approximately 80% of final energy use in the domestic sector. For many European countries the electrification of heat provision, via heat pumps (HPs), provides a promising decarbonisation pathway. The UK is no different, but recently concerns have been...

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Bibliographic Details
Published in:Energy policy 2020-03, Vol.138, p.1-12, Article 111198
Main Authors: Barnes, Jake, Bhagavathy, Sivapriya Mothilal
Format: Article
Language:English
Subjects:
Attraction
Costs
Current distribution
Deployment
Economic impact
Economics
Electricity
Electrification
Energy consumption
Energy policy
Government policy
Heat exchangers
Heat pumps
Heating
Impact analysis
Low carbon space heating
Public policy
Renewable heat incentive
Residential energy
Taxation
Taxes
Taxes and levies
Water heating
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Summary:In Europe, space and water heating account for approximately 80% of final energy use in the domestic sector. For many European countries the electrification of heat provision, via heat pumps (HPs), provides a promising decarbonisation pathway. The UK is no different, but recently concerns have been raised about the financial attractiveness of HPs given how, through various policy choices, taxes and levies are applied more heavily on electricity bills than gas bills. In this paper, we critically examine this argument by assessing the financial attractiveness of HPs across their lifetime for a typical UK household and within the current UK tax and regulatory regime. The results suggest taxes and levies do weaken the economic case for HPs: their current distribution having an unintended impact on the economics of HPs. Nonetheless, they are not the only reason for HPs comparative financial disadvantage. Upfront costs and HP performance, both influence the extent to which taxes and levies impact the economics of HPs. The results have implications for the future deployment of HPs in the UK and point towards policies to increase deployment (to drive down costs) and increase HP performance as being important. •Review of UK taxes and levies on energy suppliers 2001–2020.•Assessment of lifetime economic competitiveness of heat pumps.•Taxes and levies weaken the economic competitiveness of heat pumps.•Upfront cost and HP performance are critical.•Policies to increase HP deployment and performance are key for decarbonisation.
ISSN:0301-4215
1873-6777
DOI:10.1016/j.enpol.2019.111198