The problem

Replacing fossil fuel heating systems, such as gas boilers, with low-carbon heat pumps is a vital solution to reduce the carbon emissions from our homes. However, the current cost of heat pumps makes them inaccessible to most people.

It currently costs about £10,500 to buy and install a heat pump, though the price can range from £8,000 to £15,000. In comparison, buying and installing a new gas boiler costs roughly £2,000. This comparatively high upfront cost is a major barrier to buying a heat pump, and will make it difficult to decarbonise home heating at the required rate and scale.

Although there are government grants to help households buy heat pumps, the public budget allocated for these grants would only support the installation of 90,000 installations over three years. This is far below the government’s target of 600,000 heat pumps per year by 2028. The amount granted per household may also leave many requiring additional financial aid in the form of loans or payment plans to overcome the high upfront cost.

The idea we tested

We investigated whether an employee benefit scheme for heat pumps would encourage people to get a heat pump, and if it was possible to run such a scheme in practice. It would reduce the upfront cost, using a similar mechanism to the cycle to work scheme.

In its most basic form, this scheme would be a zero-interest loan between an employer and an employee. Employers would pay for an employee’s heat pump and installation up front, and employees would pay the debt back to their employer in monthly instalments taken from their pay cheque. Ideally salary deductions would be taken before tax, like the cycle to work scheme, which could result in a 20% reduction in the overall cost of the heat pump.

However, as the tax benefit would require government backing, we primarily focused on a scheme without one. This allowed us to test the effectiveness of an innovation that could be developed immediately and independently of government support, but could benefit from government backing at a later date. We also investigated the additional desirability that a government-endorsed tax exemption might add, to understand its importance to the scheme.

The speed test

We began with desk research to better understand the problem area, why previous green finance schemes were unsuccessful and how similar employee benefits operate. This research informed the design of the heat pump benefit scheme and helped us to identify which key stakeholders to interview.

We interviewed two heating engineers to find out about any potential issues with our proposed scheme, as research revealed that previous green finance schemes were unsuccessful partly for not considering installers enough. Their response was positive, with the only issues highlighted relating to training and accreditation, which this scheme wouldn’t address.

We then conducted a survey with employees from two organisations to investigate whether this scheme would increase the likelihood that they would install a heat pump. The results suggest that the scheme could have some impact in increasing heat pump uptake: about 40% of participants said they’d be more likely to get a heat pump and only 20% said it wouldn’t encourage them to get one. The survey also highlighted the importance of lowering the overall cost of heat pumps, not just spreading the upfront cost. 90% of participants said they’d want to use a government grant alongside the scheme, and ‘lowering the upfront cost’ was ranked second to ‘reducing the total cost’ in terms of importance.

We also presented the idea to HR staff from two organisations, to understand if our scheme would breach common administrative, logistical and financial limitations.

Despite the warm response from installers and employees, interviews with HR departments suggested the scheme may be unaffordable and administratively burdensome for the majority of organisations. This is made worse by the preference of our survey respondents to repay costs over five years or more, creating a financial burden on the employer for years.

There are also issues around departing employees who haven’t repaid their debt, especially as the preferred repayment period is greater than the average time people stay in a job. HR departments said they would feel ethically uncomfortable taking large amounts of money out of a final pay cheque and that it wouldn’t be practically possible for former employees to remain in debt to their previous employer. There were also concerns about the ownership of the heat pump and how it would be taxed.

Finally, our financial calculations show that the proposed scheme wouldn’t save that much money, relative to the total cost of a heat pump, compared to a low-interest personal loan. The benefit of the scheme would be strongest with longer repayment periods of five years or more, but this wouldn’t be practical for employers.

Conclusions and next steps

We concluded that an employee heat pump benefit scheme wouldn’t be an effective solution for lowering the upfront cost of heat pumps. Although employees were positive about the scheme, the financial and logistical difficulties of running it suggest it would not be suitable in practice.

The small number of organisations who would be in a position to run this scheme also leads to little chance of it having an impact at scale, or the government supporting it with tax exemptions.

Instead of an employee benefit scheme, we’d suggest developing low-interest personal loans for heat pumps that can be used alongside government grants. There could still be a role for employers to provide a form of employee benefit in this space, for example by supporting employees with interest rates associated with loans.