A summary of our scenarios
Current cost situation – why policy action is needed
Heat pumps currently have significantly higher whole-life costs than gas boilers before any subsidy, because of the combination of higher upfront costs and similar running costs. However, households can currently receive £7,500 towards these costs through the Boiler Upgrade Scheme (BUS). After accounting for this subsidy, a typical household will currently pay a similar total amount for a heat pump as a boiler over its lifetime. Smaller homes, which typically require smaller heat pumps, benefit more from this than larger homes.
The BUS is only currently scheduled to run until 2028, after which point costs to consumers would rise substantially. This is shown in Figure 1, which represents our baseline scenario. Governments in the UK could continue subsidies after 2028, but this is unlikely to be affordable as the heat pump market scales up. Without policy action to reduce the costs of heat pumps, it would cost around £4.7bn per year over the next decade to maintain whole-life price parity through subsidies while matching the trajectory set out in the Sixth Carbon Budget. This is unlikely to be affordable. The government needs a plan for making heat pumps affordable that does not rely solely on subsidies.
Difference between median annualised whole-life cost of heat pump as gas boiler
Figure 1
This line graph illustrates the difference in median annualised whole-life costs between heat pumps and gas boilers from 2024 to 2035 under a baseline scenario, ie, with no policy changes. Negative numbers mean households save by switching to a heat pump. The chart plots costs for eight home archetypes: flats; bungalows; semi-detached, terraced houses and maisonettes; and detached houses, each split by construction age – before and after 1950. The average cost difference is depicted for each year of the heating being installed. Between 2024 and 2027, all archetypes pay up to £200 extra a year if they switch to a heat pump, with flats saving up to £150. There is a sharp increase in relative heat pump costs in 2028 when subsidies end – they range between £800 (detached houses) and £550 (flats). The relative costs gradually reduce to between £600 and £400 in 2035.
The scenarios
Our three scenarios represent potential ways of approaching cost parity between low-carbon heat and gas for a typical home. In each scenario, innovation, market development and governmental policies balance each other in different ways.
Figure 2 shows the difference in how much the average home would need to pay per year for a heat pump compared to a gas boiler in each scenario, depending on the year of installation. It shows that all three scenarios maintain the difference in the annualised cost between a heat pump and a gas boiler below £200 all the way to 2035.
Annual difference in whole-life cost between heat pump and gas boiler
Figure 2
This line graph shows the difference in annualised whole-life cost between heat pumps and gas boilers from 2024 to 2035 under four scenarios: Baseline, High innovation, Cheaper electricity, and High subsidy. The average cost difference is depicted under the four scenarios for each year the heating is installed. It ranges from -£400 to over £600. The Baseline scenario starts around break-even (0£ difference) and shows a steep increase to £670 in 2028 and then decreases slowly to £510. In contrast, all other scenarios begin with large savings (-£50 – -£230) and remain close to £0, crossing the break-even point in 2030. The maximum is £200 for Cheap electricity in 2034. The High subsidy scenario performs somewhat worse than the other two, with heat pumps becoming slightly more expensive in 2028 and remaining in positive values. Costs include installation and running costs, with negative values indicating savings from switching to a heat pump.
1. 'High innovation’ scenario
In the ‘High innovation’ scenario, heat pumps become both cheaper to purchase and cheaper to run thanks to a combination of increased efficiency and lower relative price of electricity. Levies on energy bills are partially rebalanced – to equalise the total levies paid on gas and electricity with typical consumption levels – which brings down the electricity-to-gas price ratio. Governments are able to scale down subsidies moderately quickly, ending them before 2034. This scenario leads to the biggest financial advantage for heat pumps, but relies on changes to the market price [3] and efficiency of heat pumps that are not entirely in the government’s power. Policies can and should aim to drive more innovation in the heating industry, but this cannot be relied on to deliver lower costs.
Heat pumps in an average home are cheaper over their lifetime for every year apart from 2034 and 2035 (essentially while some subsidy is available). The total cost of subsidies required under this scenario would be £16.1bn between 2025 and 2035, an average cost to governments of the UK of £1.5bn per year [4].
2. ‘Cheaper electricity’ scenario
The ‘Cheaper electricity’ scenario performs well on cost parity and has a limited cost to governments. It does, however, require significant action on electricity and gas prices. Levies are rebalanced so that each unit of gas and electricity carries the same total policy costs. This would not significantly affect households with typical gas and electricity consumption – the increase in gas levies would be offset by saving on electricity levies – but it would have distributional effects. Households that rely heavily on gas, which includes some fuel poor households, would be worse off under this proposal, and there is a strong case for compensating them. The change would be revenue-neutral for the government, although levies on gas would likely need to gradually increase as more households switch to electric heating. This scenario performs well on cost parity, similarly to the ‘High innovation’ scenario.
Heat pumps in an average home achieve cost parity or better until 2034. The total cost of subsidies required under this scenario would be £16.1bn between 2025 and 2035, an average cost to governments of the UK of £1.5bn per year.
3. ‘High subsidy’ scenario
The ‘High subsidy’ scenario represents a situation where neither the government nor the low-carbon heating industry makes enough progress on reducing installation costs and running costs. In this situation the government has to rely on higher subsidies for longer to maintain cost parity with boilers. This scenario performs least well on cost parity and has the highest cost to governments. As annual uptake of heat pumps rises, the total governmental spending on subsidies grows considerably each year.
This scenario performs slightly less well on cost parity. Heat pumps in an average home are slightly more expensive over their lifetime than a gas boiler from 2031 onwards. The total cost of subsidies required under this scenario would be £23.6bn between 2025 and 2035, with an average cost to governments of the UK of £2.1bn per year. This represents an additional cost of £680m per year compared to scenarios 1 and 2.
Table 1 includes details of all three scenarios.
Table 1: Summary of model scenarios
Table 2 summarises outcomes for the average household in the three scenarios in terms of relative annual costs for a heat pump compared to a gas boiler. (A positive value indicates that households save money by switching to a heat pump.) The ‘High innovation’ scenario and ‘Cheaper electricity’ scenario both manage to bring households close to price parity for substantially longer than what is expected in the baseline scenario.
Table 2
The price ratio between electricity and gas is critical. There is no realistic scenario that can achieve cost parity without reducing the ratio below 3.0 after 2025. To ensure that heat pumps are an attractive offer past 2028, the government has to either lower the electricity-to-gas price ratio further or maintain subsidies at the current high level for a long time. A lower than expected wholesale electricity price would not be sufficient to reduce the necessary ratio. A sharp increase in the market price of gas would have a much bigger effect, but would result in harmful impacts on households and the economy, which is why we have not included such a future in this analysis. Changes to the way policy levies are collected through bills are necessary for bringing electricity costs down and achieving whole-life price parity.
As a general rule, the more progress the government can make on reducing the electricity-to-gas price ratio and driving innovation in the industry, the less heat pumps need to be subsidised.
In the absence of subsidies – holding all our other assumptions constant – the relative costs of heat pumps for the average household would fall over time in all scenarios (Figure 3).
All scenarios, if no subsidies were available
Figure 3
This line graph shows the difference in annualised whole-life cost between heat pumps and gas boilers from 2024 to 2035 under four scenarios: Baseline, High innovation, Cheaper electricity, and High subsidy, if these scenarios included no subsidies. The average cost difference is shown for each year the heating is installed, with negative values indicating savings from switching to a heat pump. In 2024 the average household has the following additional annual costs for a heat pump compared to a gas boiler: £800 in the “Baseline” scenario, £680 in the “High subsidy” scenario, £620 in the “High Innovation” scenario and £490 in the “Cheaper electricity” scenario. These gradually decrease to £510, £370, £110 and £180 in 2035. Costs include both installation and running costs.
Table 3 shows how much governments of the UK would be required to spend on subsidies every year in each scenario. In the ‘Cheaper electricity’ and ‘High innovation’ scenarios subsidies are scaled down faster than in the ‘High subsidy’ scenario.
Table 3: Spending required by governments of the UK to cover subsidies that we assume in each model
We have assembled the scenarios to demonstrate how different factors can contribute to the affordability of heat pumps. They do not attempt to show the full range of possible policy and market developments, but rather to show the necessary and sufficient policies under different futures.
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[3] Although the Heat and Buildings Strategy (2021) cited a goal of cutting down heat pump costs by 25%–50% by 2025, costs have only come down by a marginal amount.
[4] Assuming that heat pump adoption follows the Balanced Pathway of the Climate Change Committee’s Sixth Carbon Budget – number of individual air-source and ground-source heat pumps and hybrids installed each year.
