This report and 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.

As the UK Government ambitiously pursues decarbonisation through increased heat pump adoption, the HPA’s report sheds light on a critical factor impacting the market, the high electricity prices in Great Britain, relative to gas, which is distorting the domestic heating market.

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 two.

A significant contributor to high electricity prices is the disproportionate application in Great Britain of Environmental and Social Obligations – often referred to by the Government as “policy costs” and known commonly as “levies”. 

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 has committed to outlining a clear approach to gas vs. electricity price ‘rebalancing’ by the end of 2023/4 and agreed with the Skidmore Review recommendation that significant progress affecting relative prices should be made by the end of 2024.

In response to this challenge, the HPA calls on the Government to introduce a temporary Domestic Heat Pump Tariff Discount to counteract the distortion in the domestic heating market caused by levies on electricity bills, which acts contrary to their wider decarbonisation goals.

The discount will 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 propose 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.