The Heat Pump Association (HPA) is proposing a domestic heat pump tariff discount in its new report on the impact Environmental and Social Obligations are having on the heat pump market in the UK.
The HPA’s 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.
Great Britain 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 GB of Environmental and Social Obligations – often referred to by government as “policy costs” and known commonly as “levies”.
Consequently, 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 aims to address the imbalance between gas and electricity prices by the end of 2024, but in the meantime the HPA suggests implementing a temporary Domestic Heat Pump Tariff Discount as an interim measure.
The discount would 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 proposes 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.
The report also explores other approaches to address levies on energy bills in the longer-term. It considers options ranging from completely removing levies from bills to shifting all levies on electricity to gas. The analysis shows that when levies are partially removed from electricity bills, heat pumps become more cost-effective to run compared to gas boilers in all modeled scenarios. The more levies are reallocated from domestic electricity bills, the lower the running cost of heat pumps relative to fossil fuel boilers. This is likely to encourage more consumers to switch to heat pumps.
The HPA suggests that, at a minimum, levies should be swiftly removed from electricity bills.
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.”
Craig Dolan, HPA chair, adds: “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, comments: “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 concludes: “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.”
Read Accelerating heat pump deployment: Interim domestic heat pump tariff
