Using these forecasts, we can also update our estimates of the whole life cost of installing a heat pump and a gas boiler under each of our scenarios. This estimate includes the upfront costs of installation and ongoing maintenance costs alongside running costs.

The whole life cost per year measure we use includes the upfront costs of installation as well as running costs and maintenance costs of a heat pump or gas boiler. Table 2 below shows the difference in whole life cost per year between a heat pump and a gas boiler. The analysis uses an efficiency (SPF) of 2.76 for heat pumps, and 0.87 for gas boilers (apart from in the high efficiency system scenario). It is based on our current market forecasts of energy prices.

The table includes different options for policy changes to encourage heat pumps, running horizontally across the table.

• Baseline – no changes from current policy. Includes the Energy Price Guarantee from October 2022 to October 2024.
• Levies adjusted and flexibility payments – under this scenario, levies on electricity remain removed to general taxation following the Energy Price Guarantee, and heat pump households receive a 2% discount to their heating bill for using electricity flexibly from 2025 (~£33/year for a typical home).
• Plus high efficiency system – this scenario includes all changes above, and adds a more efficient heat pump system on average, with an SPF of 3.28 [1].
• Plus £5,000 grant – this scenario includes all of the changes in the levies and flex scenario above and adds a £5,000 subsidy (equivalent to the Boiler Upgrade Scheme) for air-to-water heat pump installations.

Where the values are positive, this means a heat pump is more expensive over its lifetime than a gas boiler (these numbers are red); where values are negative, this means a heat pump is cheaper (these numbers are green).

[1] High efficiency refers to any system which is either: a) designed for low flow-temperatures (< 50oC); b) includes a properly sized and high-performance heat pump; or, c) a hybrid system (solar PV/T).

Table 3 repeats the same analysis but using a decoupled electricity markets scenario, in which more existing electricity sources are switched on to Contracts for Difference (CfD).

Impact of energy prices

Our analysis shows that:

• the energy crisis is likely to have improved the case for investing in a heat pump, moving the whole life cost of a heat pump closer to a gas boiler. Before any policy changes are considered, the energy crisis has moved heat pumps closer to the cost of gas boilers by £100 - £250 per year compared to pre-crisis prices.
• decoupling renewables from gas in the electricity market, by placing nearly all renewables on a Contracts for Difference scheme, further improves the case for heat pumps; within the baseline, the whole life cost of a heat pump relative to a gas boiler is reduced by £70-£160 per year.

Impact of policy changes

Our analysis shows that:

• moving environmental levies off electricity bills reduces the whole life cost per year of a heat pump relative to a gas boiler by £100-£240 under our central forecast of energy prices.
• improving the efficiency of heat pumps reduces the relative whole life cost by £120-£290 per year in our central forecast of energy prices
• the £5,000 subsidy reduces the whole life cost of a heat pump by £333 per year relative to a gas boiler under all scenarios.

Scenarios where heat pumps have a lower whole life cost

Once these policy and energy prices changes are combined, heat pumps begin to get much closer to gas boilers on whole life cost.

In our analysis, heat pumps are cheaper than a gas boiler over their lifetime when:

• a high-quality heat pump installation delivers high efficiency

AND

• a £5,000 grant is available

AND EITHER

• levies are removed or shifted

OR

• electricity prices are decoupled from gas.

If the full range of policy scenarios – including removing levies, a £5,000 subsidy, high heat pump efficiencies – is combined with a decoupled electricity market, heat pumps are £120-£160 per year cheaper over their lifetime than gas boilers. This shows that there are clear policy routes to making heat pumps more affordable than gas boilers.