How the energy crisis has affected heat pump running costs
The energy price crisis has made the case for heat pumps stronger compared to gas boilers. The price of gas to UK households has increased by around 4 times over the last 12 months, while electricity prices have increased by around 2.5 times. This has made gas boilers relatively more expensive to run.
The ratio of electricity to gas prices - which is crucial in comparing the costs of running a heat pump to a gas boiler - is now at around 3.8, compared to over 5 in 2021. Under the UK government’s Energy Price Guarantee, the ratio will be around 3.3 from October 2022. This means that more efficient heat pumps will have similar running costs to gas boilers under current energy prices.
This improvement in the position of heat pumps relative to gas boilers should last for as long as gas prices remain high. The UK government’s Energy Price Guarantee will influence this ratio for the next two years, but after that market forces are likely to return. The latest forecasts suggest gas prices will begin to fall substantially after 2025, which will make the ratio of electricity to gas prices rise once again. This means that government policy to reduce the long-term cost of electricity relative to gas remains crucial to the roll out of heat pumps. Our recommendations on how to do this are in the Policy recommendations section at the end of this report.
The chart below shows how efficient a heat pump needs to be to match a gas boiler on running costs at different electricity to gas prices ratios. The lines in the chart show the effective ratio of electricity to gas prices, while the shaded areas show the points at which heat pumps with different efficiencies can match gas boilers on running costs. The green shaded area represents heat pumps with good efficiencies, the orange area below-average efficiencies and the red area poor efficiencies. The chart uses calendar year averages.
The efficiency of a heat pump can vary depending on how well it is installed and how low its flow temperature is, but SPFs for well-installed heat pumps are typically between 2.7 and 3.2 at present. That means a well-installed heat pump is likely to have lower running costs than a gas boiler for the next 3-4 years, while even heat pumps with below average efficiency should have similar or lower running costs to a gas boiler.
Running cost scenarios
Chart 3 repeats this analysis but adds in some extra scenarios for future electricity and gas prices.
- Nesta’s current forecast of energy prices from 2022 to 2037, without policy action but including the Energy Price Guarantee, as used in chart 2 above .
- Current forecasts but with policy changes, with levies on electricity permanently shifted onto taxation after the Energy Price Guarantee ends.
- An effectively decoupled electricity market scenario, in which the price of renewable and nuclear electricity is separated from gas-generated electricity by a voluntary pot zero Contract for Difference (CfD) auction in 2023 .
In the current forecast scenario, efficient heat pumps are likely to remain competitive with gas boilers on running costs until around 2027, at which point they may become more expensive to run unless they are very efficient. However, in the scenarios where policy changes - both removing levies and ‘decoupling’ the electricity market - efficient heat pumps remain competitive with gas boilers on running costs for most years out to 2037. This suggests that permanently removing or shifting levies off electricity bills and effectively decoupling the electricity market (while maintaining responsiveness to demand) should be priorities for the UK government.
 This forecast is based primarily on Cornwall Insight’s Benchmark Power Curve, Ofgem’s tariff cap structure and component trends, National Grid’s Future Energy Scenarios, hedged energy costs from large firms, and averages from a few investment firm projections and analysts concerning natural gas and oil futures.
 As proposed by UKERC, with possible refinements on CfD structures, such as mechanisms which still allow a response to demand increases and decreases. Slightly higher strike prices than in previous CfD auctions will likely result if aiming to capture most generators from the Renewable Obligation scheme. But total savings to the UK over the lifetime of the CfD contracts should be greater.