Heat pumps are an important part of the UK’s response to the energy crisis. The UK must urgently reduce its gas consumption, and heat pumps are among the most effective measures available to do that. Replacing a gas boiler with a hydronic heat pump reduces a home’s gas use by over 70%, assuming the makeup of the electricity grid remains constant. For every heat pump installed, the UK can save around £1,100 in wholesale gas costs at current prices. If all 23 million homes with gas boilers switched to a heat pump without any change in the share of gas in the electricity grid, the savings in wholesale gas costs would be equivalent to around 1.2% of GDP. Because the UK imports around 60% of its gas, this saving is likely to significantly benefit the economy and the government’s finances.

However, most of the savings from heat pumps are not directly passed on to consumers, because UK electricity prices track gas prices. This means installing heat pumps is highly beneficial to governments and to the economy, but not to households. As a result, the government must make heat pumps more financially attractive for households.

The energy crisis is making the financial case for heat pumps for consumers slightly stronger, though in the context of increasing costs for all types of heating. As gas prices have increased, the ratio of electricity to gas prices has fallen, making heat pumps relatively cheaper to run. Under the UK government’s Energy Price Guarantee, the ratio of electricity to gas prices is due to be around 3.3 from October 2022. This means that efficient heat pumps (those with an efficiency around 2.9) will have similar running costs to a gas boiler.

Despite the changes caused by the energy crisis, policy action is still needed to make heat pumps more attractive. A heat pump bought today will still have a higher lifetime cost - when both upfront costs and running costs are combined - than gas boilers without policy intervention. However, our analysis shows that the relative cost of heat pumps can be reduced by:

• permanently shifting levies on electricity bills on to general taxation;
• “decoupling” electricity prices from gas prices by market reforms; and
• installing heat pumps to run at their most efficient (with an efficiency above 3.2).

If these policies are in place and combined with a £5,000 subsidy, a heat pump could cost £120–£160 less per year over its lifetime than a gas boiler.

This report has four sections.

1. How heat pumps can help tackle the energy crisis, by reducing gas use
2. How the energy crisis has affected heat pump running costs
3. How the energy crisis has affected heat pump whole life costs
4. Policy recommendations

As part of this report, we have updated the analysis in our March 2022 paper How to reduce the cost of heat pumps to take into account the latest energy prices. This report focuses on air-to-water/hydronic heat pumps, but the general messages apply equally to other types of heat pump and low carbon heat networks.