Gas heat pumps struggle to gain traction in the market even though the technology is ready and proven (nearly 15,000 installed in Europe and 800,000 in Asia, for a wide range of applications).  In most European markets, installations number less than 1% of annual heating installations.  

Delta-ee has been investigating the potential opportunities for gas heat pumps in commercial buildings, as part of research for the UK Department of Energy and Climate Change.  We identify potential for at least an order of magnitude growth for gas heat pumps in the UK by 2020, with the best opportunities in sectors such as health care, restaurants, hotels and education.
 

Why are we positive?  Here are three reasons:

1. Gas heat pumps can already make economic sense against the incumbent and notoriously challenging-to-compete-with gas boiler.
2. Gas HPs represent off gas grid opportunities too (e.g. switching from oil boiler to LPG Gas HP).
3. Gas HPs have less impact on our aging electrical grid infrastructure and represent an opportunity to decarbonise without so much grid investment to support it. 

But there are significant barriers to overcome if this potential is to be unlocked.  Based on our research, the top five barriers to gas heat pumps being installed were:

1. Specifiers - arguably the most critical link in the supply chain to get gas heat pumps to market - are a block. “Why would we choose an unknown technology when we can more quickly design a boiler solution which we know works?” quote from specifier
2. Limited sales channels and routes to market for gas heat pumps create challenges for accessing the technology (especially in the UK)
3. Lack of awareness and/or in some cases poor perception of gas HP technology due to lack of information
4. Upfront cost of gas heat pumps relative to incumbent technology (i.e. gas boiler)
5. Policy - this does not currently set a framework which places Gas HPs on an even playing field

We believe that gas heat pumps should receive any incentive offered to other renewable technologies, including electric heat pumps, but that incentives alone are not the key to unlocking the market.  There is a role to play for gas heat pump suppliers and heating suppliers to drive this market themselves.  A focus on information dissemination throughout the value chain, developing the supply chain, and paying particular attention to specifiers will be a strong starting point to building a sustainable market.

Find out more about our previous work with DECC here. For more information on our in depth gas heat pump reports visit our Heat Pump Research Service web page.

I have just returned from the IEA Heat Pump Centre Conference in Montreal, Canada, where I was impressed by the extent of new heat pump R&D and development – some of which is indicative of a new generation of heat pumps which could be commercialised over the next few years. I also gave a presentation on developments in Europe regarding smart heat pumps and the value to the customer which you can access here.  

While the papers presented at the conference illustrated the global extent of advancement of heat pump technologies and markets, I noted clear evidence that Asia in particular is ahead of the curve in terms of driving HP R&D - especially Japan and Korea but with China emerging fast. Developments in these markets are being driven by strong government energy efficiency targets in response to security of supply concerns, spiralling demand and a need for energy conservation.

This is supporting a massive amount of support for heat pump R&D in Japan, China and South Korea in order to deliver ambitious targets regarding efficiency improvements - and in some cases cost reduction. Looking at the way Japanese companies have already significantly influenced the competitive landscape in the European heat pump market in the last few years, and from seeing the research presented at this Conference, it is difficult to see this trend changing – the difference now is that we see a much stronger presence from Korea and China than before. European (and other international) manufacturers should take note of this increasing competition!

Here are some of the topics picked up at the conference which we will be watching closely in future Heat Pump Research Service and wider work…

• Increasing heat pump system efficiency & cutting upfront cost: The Japanese Next Generation Heat Pump project (led by New Energy and Industrial Technology Development Organisation - NEDO), has already made steps in this direction in line with targets of 50% efficiency increase and 75% cost reduction by 2030.
• Pushing the boundaries of heat pumps into new applications in Japan: Another NEDO demonstration project is testing the use of new heat sources such as waste heat from sewage systems in urban areas.
• China playing Japan and Europe at their own game - advancing inverter technology, ground-source heat pumps and domestic hot water heat pumps. Technology in China is moving fast, and efficiencies will catch up. The emergence of Chinese DHW HPs we have discussed in a previous blog.
• The R&D emerging from South Korea is driven largely by its immediate challenge of keeping the lights on: It has already experienced electricity shortages due to the rapidly increasing peak demand and declining capacity reserve margin. Demand response – potentially with heat pumps – is identified as a key mechanism through which to reduce the scale of this challenge. Incidentally, South Korea has joined the UK (in work being carried out by Delta-ee) & others in IEA HPP Annex 42 to share learnings on the use of heat pumps for such load management applications.

The direction of travel is clear for European markets – demand side flexibility will be an essential requirement of the future energy system.

In some markets (e.g. Germany, France, Denmark), the first signs are there. In other markets (e.g. the UK), future penetration of renewables and increasing distribution network congestion will see increased requirements for flexibility – we see the demand side as well positioned to provide this flexibility. And drawing upon Delta-ee’s ongoing research in heat and distributed energy, one of our conclusions is that electric heating will be a key part - or even the key part - of this on-coming flexible demand revolution.

This view was backed up by  the research for our new report on Smart Heat Pumps (from the Delta-ee Heat Pump Research Service).  I also saw evidence of the growing recognition of the role of heat pumps during some of the interesting discussions at our Heat Pump Roundtable in Paris last week (a convergence of utilities, heat pump manufacturers and other industry players, which i'll tell you about in a later blog...).  We see a huge amount of activity using heat pumps - and electric heating - as a flexible demand resource.  Examples include:

• There are a huge number of demonstration projects across Europe testing how much flexible demand can come from electric heating (including heat pumps), and how much value this can create for customers, utilities and others.
• There are many more “smart-ready” heat pumps on the market from manufacturers than 12 months ago (e.g. including from NIBE, IVT, Neura and several others);
• Some utilities have already launched smart electric heat offerings, or are testing business models (e.g. Fortum, EDF);
• A host of new players are finding business opportunities for themselves in the emerging smart market – for example HEMS companies (e.g. There Corporation), and independent aggregators (e.g. Voltalis).

What is a Smart Ready Heat Pump – And Why Are They Required?

We believe that value will be offered for flexible demand in the future. If heat pumps can exploit this value, and use it to create a better customer proposition, a part of this value will be shared with the customer.  And it is when the value is shared with the customer, that the flexible demand revolution will really translate into sales growth for heat pumps.

We have identified three key characteristics which differentiate ‘smart-ready’ heat pumps from ordinary heat pumps. Our competitor analysis reveals that a very small number of manufacturers fully meet all of these criteria – though many are taking steps in this direction:

• Connectivity: The ability to remotely monitor and control the operation of the heat pump is a minimum requirement for any smart heat pump.
• 2-way Communication: The heat pump should be able to accept dynamic signals from external sources (for example, weather forecasts, variable price signals, direct control requests)
• Sophisticated Control Algorithms: The control system should be able to optimise performance through proactively preparing to meet demand AND providing flexibility.

Where’s The Money?

In our latest research on smart heat pumps, we identify five key value sources for flexible demand. While it is difficult to exploit many of these value sources today, we see developments in market and regulatory structures which will ultimately open up more of these value streams:

• System operators paying for balancing services from flexible demand resources such as heat pumps
  
• Distribution Network Operators avoiding the costs of grid upgrades by shifting the operating times of e.g. heat pumps away from peak times
  
• Energy retailers creating value by shifting HP demand to periods with lower electricity costs
• Energy retailers minimising their imbalance costs by using smart heat pumps to reduce the errors between actual demand and expected demand.
• End customers benefiting through e.g. time of use tariffs enabling running cost savings, or even eventually ‘heat pump for free’ business models.

The way in which value is shared across the different stakeholders in the electricity value chain – and critically how much is shared with the customer - will determine the size and exact timing of the flexible demand opportunity.

In my next blog on this topic I’ll be looking at some of the learnings from selected demonstration projects testing the use of heat pumps as flexible demand……..
 

This is the fourth article in our series of five sharing some highlights from our study on domestic hot water heat pumps (DHW HPs), recently published as part of our Heat Pump Research Service . For more information on the study or the Service please contact me or my colleague Lukas Bergmann .

Japan leads the way in development and sales of CO2-based domestic hot water heat pumps

This is the second blog in our series highlighting some outcomes from our study on domestic hot water heat pumps (DHW HPs), recently published for members of our Heat Pump Research Service. [For more information on the study or the Service please contact us]

As discussed in our previous blog, Domestic hot water heat pumps – An electrifying outlook!, DHW HPs are the fastest growing sector of the European heat pump market – the market could double in size to more than 120,000 installs per year by 2017. We have already discussed the major opportunity lying in the replacement of direct electric water heaters. But we also see huge growth opportunities for DHW HPs in upgrading existing heating systems – here we focus on oil boilers.

DHW HPs with oil boilers represent opportunities for manufacturers, utilities and policy-makers!

• For boiler manufacturers, there is an opportunity to ‘upsell’ existing oil boiler installations with a DHW HP (not to mention the new proposition in the boiler replacement market – where new boilers can be sold packaged with a DHW HP)
• For heat pump companies, DHW HPs are a low cost - and therefore lower risk - way to shift customers away from oil heating and get them used to the idea of heat pumps – building the foundations to grow a bigger heat pump business
• For utilities, DHW HPs are a valuable part of an energy services offering - a low upfront cost product which can deliver energy cost savings to existing customers who are on oil, and ultimately give utilities more happy customers
• For policy-makers, DHW HPs represent a low cost way to decarbonise the oil heating sector – and a first step for customers to get used to heat pumps
  

Why are oil boilers a target sector for domestic hot water heat pumps?

Low oil boiler summer efficiencies = high energy bills = unhappy customers!

Oil boilers typically have much lower efficiencies in summer, when they are being used only for hot water production. This may not be such an issue for modern oil boilers, but summer time efficiencies of existing, aging oil boilers could be as low as 40%, and certainly not much higher than 70%. What is the result? High energy bills for customers!


Domestic Hot Water Heat Pumps are a low cost way to reduce energy costs for oil customers

Oil boiler + DHW HP = lower energy bills = happy customers!

A DHW HP installation means the oil boiler can effectively be switched off in the summer. Delta-ee’s modelling indicates that the running cost savings achieved by upgrading an oil boiler with a DHW HP in markets like the UK, Germany, France and Poland can be significant – with payback times reaching below 3 years in some scenarios.   Of course, the customer proposition is sensitive to evolution of oil and electricity prices – in markets like Germany there is a risk to the strength of the proposition from the already high electricity prices. However, many European markets are already seeing the benefits from the use of DHW HPs with oil boilers, and we think there is plenty of opportunity in oil boilers with non-optimal performance.


There is already a market for the application of DHW HPs with oil boilers – and the potential is huge

In Germany, around two thirds of the 10,000 DHW HPs installed last year were installed alongside an oil boiler – the hot water tank of the oil boiler is replaced by the DHW HP (with integrated tank), to boost summer efficiencies. We see the same application of DHW HPs in other markets, such as Switzerland and France.

The potential is huge.  In Germany alone, 50% of existing oil boilers - an incredible 3 million systems – are already more than 18 years old and could potentially benefit from efficiency improvements with DHW HPs. If we add to this the installed base of >3 million oil boilers in France and >1 million in the UK it is easy to see how the addressable market stacks up to several millions. Realising just a fraction of this potential will keep the wheels of the DHW HP market turning...

Delta Energy & Environment (Delta-ee), in association with the European Heat Pump Association (EHPA), have just launched a new Guide that showcases European best practice to build successful and sustainable heat pump markets.  You can download the full Guide here.

Today in Europe more than 750,000 heat pump systems are installed annually, and approximately 5.4 million systems have been deployed since 2005.  In contrast, 8 million gas boilers are installed across Europe every year.  The European Heat Pump market has been static for the last few years (in fact 2012 saw a drop in European HP sales).  While in some European markets such as Sweden and Switzerland, heat pumps are already the heating technology of choice, in most other markets there is still vast untapped potential, and heat pumps rarely make up more than a 5% share of installed domestic heating systems in any country.  In Germany, the heat pump market is small though steadily growing.  In France, we see the heat pump market slowly recovering from an incentive-led 'boom & bust' pattern. Other markets including the UK and Poland show promising signs of emergence, though heat pumps are still very much a niche solution. 

Heat pumps can play a significant role in supporting European goals on emissions reductions and energy efficiency gains - but only if their potential is utilised.  Can a concerted effort by industry stakeholders help to unleash the heat pump opportunity?  Delta-ee and the EHPA thinks so! 

We have identified Five Guiding Principles which have already proven to be successful approaches across Europe and beyond.  Implementation of these principles will support sustainable heat pump market growth: 

1. Build a StrongPolicy Framework
2. Ensure Quality Permeatesthe Entire Sector
3. Raise Awareness ThroughMarketing and Promotion
4. Develop a CompellingCustomer Proposition
5. Monitor Ongoing Market Requirements
   

Governments, industry associations, utilities, heat pump manufacturers and installers all have a key role to play in implementing these principles in their markets.  We will dive into each of these principles in more detail in five subsequent blogs.