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

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  • Barnes, Jake
  • Bhagavathy, Sivapriya Mothilal

Abstract

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.

Suggested Citation

  • Barnes, Jake & Bhagavathy, Sivapriya Mothilal, 2020. "The economics of heat pumps and the (un)intended consequences of government policy," Energy Policy, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:enepol:v:138:y:2020:i:c:s0301421519307839
    DOI: 10.1016/j.enpol.2019.111198
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    Citations

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    Cited by:

    1. Thomaßen, Georg & Kavvadias, Konstantinos & Jiménez Navarro, Juan Pablo, 2021. "The decarbonisation of the EU heating sector through electrification: A parametric analysis," Energy Policy, Elsevier, vol. 148(PA).
    2. Domenig, Christoph & Scheller, Fabian & Gunkel, Phillipp Andreas & Hermann, Julian & Bergaentzlé, Claire-Marie & Lopes, Marta A.R. & Barnes, Jake & McKenna, Russell, 2024. "Overcoming the landlord–tenant dilemma: A techno-economic assessment of collective self-consumption for European multi-family buildings," Energy Policy, Elsevier, vol. 189(C).
    3. Renaldi, Renaldi & Hall, Richard & Jamasb, Tooraj & Roskilly, Anthony P., 2021. "Experience rates of low-carbon domestic heating technologies in the United Kingdom," Energy Policy, Elsevier, vol. 156(C).
    4. Brudermueller, Tobias & Kreft, Markus & Fleisch, Elgar & Staake, Thorsten, 2023. "Large-scale monitoring of residential heat pump cycling using smart meter data," Applied Energy, Elsevier, vol. 350(C).
    5. Lyden, Andrew & Alene, Samuel & Connor, Peter & Renaldi, Renaldi & Watson, Stephen, 2024. "Impact of locational pricing on the roll out of heat pumps in the UK," Energy Policy, Elsevier, vol. 187(C).
    6. Wang, Y. & Wang, J. & He, W., 2022. "Development of efficient, flexible and affordable heat pumps for supporting heat and power decarbonisation in the UK and beyond: Review and perspectives," Renewable and Sustainable Energy Reviews, Elsevier, vol. 154(C).
    7. Ruhnau, Oliver & Hirth, Lion & Praktiknjo, Aaron, 2020. "Heating with wind: Economics of heat pumps and variable renewables," Energy Economics, Elsevier, vol. 92(C).
    8. Rosenow, Jan & Thomas, Sam & Gibb, Duncan & Baetens, Ruben & De Brouwer, Andries & Cornillie, Jan, 2023. "Clean heating: Reforming taxes and levies on heating fuels in Europe," Energy Policy, Elsevier, vol. 173(C).
    9. Brown, Donal & Hall, Stephen & Martiskainen, Mari & Davis, Mark E., 2022. "Conceptualising domestic energy service business models: A typology and policy recommendations," Energy Policy, Elsevier, vol. 161(C).

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