Are renewable heating choices cost-competitive with fossil fuels within the residential sector? – Evaluation

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Are renewable heating options cost-competitive with fossil fuels in the residential sector? – Analysis

Overall, the cost competitiveness of renewable heating technologies versus fossil fuels varies considerably between regions. In Sweden, for example, the combination of a CO2 tax and relatively low equipment costs for heat pumps makes the latter more competitive than fossil fuel heating in most cases. In France, the payback period of an electric air-to-water heat pump compared to a gas condensing boiler for the average heat demand at fuel prices in 2019 without investment support can exceed 15 years. In the UK, Canada and Germany, renewable space heating technologies are struggling to compete with gas without political support. In terms of fuel prices in 2019, heating costs with air / water heat pumps for an average German apartment are around 50% higher than with a gas condensing boiler and around 55-70% higher in Canada. In Canada, heating costs for pellet boilers can be more than three times higher than for gas fired condensing boilers. Based on 2019 gas prices, assuming a CO2 tax of USD 50 / ton3, the tiered costs for heating with gas boilers in Canada would increase by over 20%.

The cost of capital account for a particularly high proportion of the accumulated discounted cash flow over the service life of heat pumps and solar thermal systems: In France, Germany and Great Britain the capital costs make up between a third and half of the electricity production costs for heat from pumps and more than 85% for solar thermal systems. As a result, the cost competitiveness of these technologies depends heavily on their lifespan.

In 2021, the UK announced it would install 600,000 heat pumps annually by 2028, while Ireland plans to install a total of 600,000 heat pumps by 2030, two-thirds of them in existing buildings. Both targets represent a significant increase over the current level of provision: in 2020 heat pump sales were 37,000 units in the UK and 8,000 units in Ireland (EHPA, 2021). To meet Ireland’s target, heat pumps must account for around half of all heating replacements in residential and commercial buildings between 2021 and 2030. In the UK, making up the current investment cost differential between gas boilers and heat pumps for 600,000 systems would represent a commitment of over £ 3 billion in loans or subsidies. However, such an increase in heat pump installations is expected to lower average installation costs through economies of scale and increased market competition.

In addition to the technologies discussed in this section, other renewable thermal solutions are emerging, such as inverters. This concept is on the rise in South Africa, for example, with almost 12,000 systems installed in less than five years (IEA SHC, 2021b). While this advance in South Africa is being driven by a mandate to limit the share of fossil fuels in the hot water supply, the ease of installation, reliability and cost competitiveness of PV2heat systems offer prospects for wider use.

In the longer term, renewable gases could also play a role in individual cases by using the existing gas infrastructure. In the case of hydrogen based on renewable energies, this would mean that end-user devices are hydrogen-ready, which is associated with limited additional costs compared to conventional gas devices.

Aside from cost competitiveness, there are still a number of non-economic barriers that hamper the use of renewable heat in the residential sector. Some challenges are of a technical nature (e.g. building suitability), others concern the maturity of the fuel and technology supply chains – including the availability of skilled installers – while others concern factors that influence consumer choices, such as trust in the technology, awareness of potential benefits , split incentives, access to finance and installation-related “stress costs” (IRENA, IEA and REN21, 2020). Expanding the use of renewable heat in buildings therefore requires that policy makers address these challenges through comprehensive and multi-dimensional policy approaches. These can potentially include a combination of awareness campaigns, regulatory measures and economic incentives that – most importantly – should put social justice at the heart of the transition.

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