One important factor in explaining the difference in heat pump installation rates between countries is the electricity-to-gas price ratio – how much a unit of electricity costs relative to a unit of gas. It is important because it is essentially a comparison between the cost of running a heat pump versus a gas boiler. The electricity-to-gas ratio is most relevant in countries where there is a high penetration of gas as a fuel for heating purposes.
Comparatively, lower electricity prices encourage the uptake of heat pumps because they become cheaper to run compared to a gas boiler. Higher electricity prices make heat pumps less economically attractive as the running costs are higher than a gas boiler. Therefore, a low electricity-to-gas price ratio can lead to higher heat pump adoption rates, given that heat pumps become more economical compared to gas.
There is a weak negative correlation between the electricity-to-gas price ratio and the installation rate of heat pumps. Between 2018 and 2021, countries where electricity was comparatively more expensive than gas tended to have lower installation rates. Most of the countries with high rates of heat pump installation have lower electricity-gas-price-ratios, typically averaging below three between 2018 and 2021. The three Scandinavian heat pump powerhouses are excluded from this analysis as they have very limited gas grids.
Average heat pump sales and ratio of electricity-to-gas, 2018-2021
It is of course quite difficult to make comparisons between countries as they have different levels of gas grid penetration and different levels of heat pump installation which may be used for both cooling and heating. Additionally, the correlation between the gas-to-electricity ratio and the pace of heat pump installations does not signify a causal relationship between the two.
The presence of a gas grid is a possible disincentive to adopting heat pumps. Countries with an extensive gas grid, such as the UK, the Netherlands and Germany, have historically been slower to adopt heat pumps. Scandinavian countries with very limited gas grids, such as Sweden, Norway and Finland, have among the highest rates of heat pump penetration.
Similar thinking applies to other fuels such as coal and heating oil. For example, in Poland coal is ubiquitous as a heating fuel. A lower relative price of coal compared to electricity disincentives the adoption of electricity as a heating source.
On a higher level, there are political and economic costs to phasing out the gas grid in countries with high penetration. Countries that depend on electric, oil or coal heating do not have large inter-house infrastructure similar to the gas grid that needs to be phased out. The presence of a gas grid also raises the prospect of hydrogen being used for home heating. Overall, the presence of an extensive gas grid might cause delays due to path dependence.
Between 2011 and 2021, in the 17 countries examined a unit of electricity was on average 3.1 times more expensive than a unit of gas. The UK has the third-highest ratio in Europe after Germany and Belgium. In the UK, between 2011 and 2021, electricity was on average 3.8 times more expensive than gas. It is also alarming that the trend in the UK is heading in the wrong direction; between 2018 and 2022 electricity was on average 4.4 times more expensive than gas.
Electricity-to-gas price ratio in Europe, 2008-2021
According to previous Nesta research, air source heat pump running costs reach parity with gas boilers when electricity is just over three times more expensive than gas. While it is not the only factor that affects the uptake of heat pumps, making electricity cheaper relative to gas is an important policy instrument to encourage the switch from fossil fuel heating systems to heat pumps and other systems that utilise electricity.
