Heat pumps can deliver three to five times more heat than the electricity they consume. However, to fully realise this potential, energy pricing must work in their favour. Today, taxes and levies often tip the balance towards fossil fuels, slowing the energy transition. In a time of volatile fossil fuel prices, smarter electricity pricing could protect consumers and accelerate the uptake of electrified heating. This highlights why the electricity-to-gas price ratio is a critical policy lever—and what governments can do right now to unlock heat pump deployment.
Heat pumps are inherently efficient and lowcarbon technologies, extracting heat from renewable environmental sources or from sources that would otherwise be wasted. They use electricity to provide this function and typically produce three to five units of heat for every unit of electricity consumed. For heat pumps to be costcompetitive with other heating options, such as fossil gas, they must have lower running costs to encourage uptake. Consequently, the price ratio—most commonly the electricitytogas price ratio—is of high importance for heat pump deployment.
In many countries, electricity is overtaxed and burdened with levies, while competing fuels such as gas are subject to significantly lower taxation. As a result, despite their high efficiency, heat pumps can have higher operating costs than gas or oilbased heating systems.
Volatile fossil fuel prices urge action
In the current energy crisis, driven by geopolitical tensions and conflicts in the Middle East, fossil fuel prices have become highly volatile. This has made it increasingly evident that end users would be less vulnerable to price spikes if the transition towards electrified heating through heat pumps were accelerated. Electricity prices are also affected by the energy crisis, but to a lesser extent than fossil fuel prices, due to the growing share of renewable energy in electricity generation.
Following the meeting of the European Council in stated at the press conference that, in order to mitigate the impacts of the energy crisis, the European Council had discussed and would take action on all four components that determine electricity prices: the energy price itself, grid charges, taxes and levies, and carbon pricing. She emphasised that the Emissions Trading System (ETS) is working effectively, having significantly reduced gas consumption in the EU. This has lowered the region’s dependence on fossil fuel imports and reduced the vulnerability of Member States. It has also driven major investments in the energy transition, particularly in lowcarbon energy sources such as renewables and nuclear power, which are domestically produced and strengthen EU energy independence. However, she also stressed that the ETS needs to be modernised and made more flexible.
Webinar about how to tip the balance
On February 25, the USERs TCP organized a webinar titled Tipping the Balance: how governments can modernise their tax and levy policies to improve the economics of heat pump take-up.
The webinar featured Dr Richard Lowes, Global Lead for Heat and Buildings at the Regulatory Assistance Project, and explored how pricing policies can influence heat pump deployment.
One key takeaway from the webinar was that, while a lower relative price of electricity is always beneficial, policymakers should generally aim for a maximum electricitytogas price ratio of 2.5:1. A ratio above 3:1 should be a cause for concern, as it can erode the efficiency advantage of heat pumps. The webinar presented case studies showing how governments in several countries – including parts of the United States, China, Germany, Denmark, the Netherlands, and Sweden – have successfully reduced relative electricity prices and achieved reasonable heat pump running costs.
Policy options for governments seeking to boost heat pump uptake were also presented, including eight priority levers that could be implemented immediately to make electricity cheaper:
- Short term impact
- Reducing taxes added to electricity
- Policy and network cost recovery that supports efficiency and flexibility
- Medium term Impact
- Ramping up demand-side flexibility at scale
- Using grids more efficiently
- Double sided contracts for difference that reflect system value
- Efficient design of capacity mechanisms
- Long term impact
- Locational pricing
At the end of the webinar, the Heat Pumping Technologies TCP was presented, along with an overview of the key factors behind the development of heat pumps in Sweden, which has one of the highest heat pump penetration rates in the world.
The webinar was recorded and be accessed via this link.