UK heat pump incentive study backs interest free loan plan

A UK study of 8,016 people says the introduction of interest free loans to cover the full installation costs of heat pumps would have a positive impact on system uptake.

The new research from innovation charity Nesta and its Behavioural Insights Team (BIT) looked at consumer reactions to different proposals for incentivising heat pump use.

It claimed that a combination of measures such as interest free loans paid back over a number of years, as well as a reduction in operational costs through cheaper electricity would significantly improve the attractiveness of heat pumps.

The research was conducted between March and April 2022 and considered what impact, if any, different types of incentives would have on helping meet the government’s heat pump installation targets.

At present, the UK Government has committed to building up the industry supply chain and consumer demand so that at least 600,000 heat pumps are being installed annually from 2028.

To aid these targets, a £450m Boiler Upgrade Scheme was launched last month that began offering grants with a value of up to £6,000 towards the price of installing heat pumps.  At present, the funding allocated for the Boiler Upgrade Scheme can provide up to 30,000 grants a year up until 2025.

Nesta’s research noted that with the introduction of this new incentive, 21 per cent of participants would opt to install a heat pump when looking to replace their natural gas boiler. Just 12 per cent of the survey group said they would consider switching to a heat pump with no incentive in place, as a point of comparison.

The research argued that interest free loans and the rebalancing of energy costs to favour electricity could serve as a cheaper and more affective strategy to increase heat pump use.

Among the incentives proposed in the research is the interest free loan that could be paid back over a period of 6 to 12 year. Another option would be to introduce a significant reduction in the cost of running heat pumps compared to natural gas boilers.  The findings said this could be realised by switching current levies on electricity over to gas bills instead.

Such a move has been deemed unfeasible by serving government ministers at the present time.

Nesta’s research was based on the concept that overall running costs for a heat pump could be reduced to £40 less than those of a gas boiler. This prediction is based on revising existing levies applied to electricity costs, while gas prices continue to increase.

The government has previously committed to review current subsidies and tariffs imposed on power supplies with the aim to rebalance electricity costs over the course of the current decade.

By combining the proposals for the loans, with the reduced costs of electricity, the number of survey respondents that would consider installing a heat pump rose by 22 percentage points to 36 per cent, according to Nesta’s Findings.

Andrew Sissons of Nesta’s Sustainable Future team argued that the results pointed to some important lessons for policy makers when planning future incentives and heating policy.

He said, “Demand for heat pumps is increasing, and we could be seeing the early signs of a take-off for low carbon heating. The energy crisis has helped to make heat pumps a more attractive option, because they use so much less energy and because oil and gas prices have risen so steeply.”

Mr Sissons said it would now be vital to implement measures to help UK households to reduce demand for imported gas as energy prices are predicted to rise over the course of the current year to unprecedented levels.

He said, “This research shows that, if the government gets the support right, there is a significant appetite for switching to heat pumps. Interest free loans are appealing to homeowners, easy to set up, and much cheaper than subsidies. Government should also lower heat pump running costs by shifting environmental levies currently imposed on electricity to gas.”

“Moving the levies makes sense in terms of incentivising people to choose greener heating - and crucially it wouldn’t lead to higher bills for consumers. It is a win-win for government and families”