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Slow but steady growth predicted for the UK heat pump and electric heating industries

 

A key question we are often asked is, ‘what are the opportunities and impacts for my business in the new energy landscape’? Our Electrification of Heat Research Service has recently looked closely into this question for the UK from a variety of perspectives; and we’ve identified a number of key insights into the growing convergence between the heat and electricity sectors.

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The impact of changes to RHI tariffs on the UK heat pump market

The latest Delta-ee podcast focuses on the impact of the latest changes to the RHI (Renewable Heat Incentive) tariffs and the impact they will have on the UK heat pump market.

Steven Ashurst, Senior Analyst and Micro-CHP Research Service Manager, and Lukas Bergmann, Senior Analyst and Heat Pump Research Service Manager, suggest the changes in tariff point towards a positive future for air source heat pumps.

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Despite being one of Europe’s largest heating system markets, heat pump sales remain weak in the UK – how can the industry find optimism on the road ahead?

This time last year the UK heat pump industry was enthusiastic, expecting unprecedented growth driven by the Government’s Renewable Heat Incentive (RHI). A year later the hangover is slowly receding and a more realistic outlook is starting to prevail.

As shown in our latest country report published under the Delta-ee Heat Pump Research Service, the UK heat pump market declined slightly in 2014 and for 2015 we at best expect a slow recovery of sales. There are 4 key reasons for this:

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Zero Carbon Homes Policy to be abandoned – UK microgen market will suffer

The market outlook for lower carbon residential heating products will become a lot tougher, as the government announced last week that it intends not to proceed with the zero carbon homes (ZCH) policy – including allowable solutions as well as stricter onsite energy efficiency requirements.

A major setback for the low carbon heating industry

Our Roadmap Service shows that in 2025, if the ZCH policy is removed, residential low carbon heating appliance sales will fall by ~50%, ~150,000 less products per year, compared to our reference forecast for the UK.

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2014 market roundup – Low carbon heat is still on the runway, engines are hot, but it’s not taken off … yet

Whole house low carbon heating solutions have grown slowly over the last 4 years, with new installations likely to only reach ~23,000 units for 2014. Despite the domestic RHI (Renewable Heat Incentive) in April 2014, no significant boost of installations has been observed yet.


*2014 = forecast


Why is the low carbon heat market not growing more quickly?
Our research under the Microgen Insight Service this past year shows – despite much potential to grow sales – the low carbon heating market faces many barriers holistically across the customer segments and installer base.

Insight from Owner-occupiers
Our third annual on-line survey with homeowners showed that appeal and awareness of microgen has side stepped over the last three years. Customer awareness of the RHI is low (13%) and appeal is not significant (‘appealing’ to around one-in-three people) – our research shows that many homeowners find the RHI complex. Supporting this, the feedback from customers who participated in our focus groups really hit home the key messages from homeowners - “high upfront cost” remains the largest barrier, something that the RHI cannot directly overcome. Extensive marketing and education is needed from industry as a whole to seriously push the market forward.

Insight from Installers
Many in-depth interviews with small, medium and large, local and national installation companies showed how there is a skilled and confident installer base, but they are not ‘pushing’ microgen. Microgen is “a hard sell” – high upfront cost and low customer demand are the two key factors why more installers do not actively promote it. This supports the argument that extensive marketing and educating of end customers is needed from industry to unlock higher customer pull, and get installers interested.

Insight from Housing Developers
Research with small, medium and nationwide house builders revealed that the majority will not even give microgen a glance without legislation prescribing it. With the back step in regulations this year, the government is highly unlikely to achieve zero carbon homes target by 2016, and the requirement to use microgen to meet building regulations is at least another year away. A key opportunity to gain some traction with low-carbon heating (it’s easier to install in new build) pushed further down the line.

Insight from Registered Social Landlords (RSLs)
RSLs remain the biggest customer segment paving the way for microgeneration – but over the last 12 months there has been signs of their engagement with microgen wobbling, given the continuous difficulties to get funding. RSLs are typically pro-microgen as it provides a long term, secure investment with justifiable benefits to their tenants (warm homes, better health, lower fuel bills, etc.), but with changes to the benefits system and funding being pulled from under their feet, RSLs are struggling to take full advantage of the RHI so far.

What needs to happen for low carbon heat to take off from 2015?
We didn’t expect 2014 to be a big year for the RHI due to the long lead times for low carbon heating technologies, as well as the other obstacles outlined above. But we are optimistic that the domestic RHI will have a more positive impact in 2015 as marketing efforts increase.

There are a lot of opportunities for industry to adopt more innovative approaches to really push microgen forward. We do see installations growing more quickly if industry focuses on:
  •  Marketing to, and education of, end customers (e.g. to simplify the RHI)
  • Technology innovation (e.g. Hybrids, fuels cell m-CHP)
  •  New business models (e.g. ESCOs)
  •  New financial propositions (e.g. ‘Product for free’)
  • The connected home (e.g. integrating microgen with other smart appliances)
Our 2015 research programme is currently being drafted around these topics. To learn more about how the Microgen Insight Service can help your low-carbon offering succeed, contact Research Service Manager [email protected].
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2014 roundup – The UK renewable heat market is in a steady state, what will change in 2015?

The renewable heat market has side stepped over the last 4 years, with new installations likely to only reach ~22,000 units in 2014. Despite the domestic RHI coming into the microgen arena this April, no significant boost of installations has been observed.

Why is the renewable heat market not growing?

Our research in the Microgen Insight Service shows – despite much potential to grow sales – the renewable heating market faces many barriers, including;
  • Customer awareness of the RHI is low (13%) and appeal is not significant (appealing to around one-in-three people) – our research shows that many homeowners find the RHI complex.
  • High upfront cost remains the largest barrier to a higher uptake of microgen – yet there has been no movement from suppliers to reduce this barrier to date.
  • Expensive DNO connections can block microgen-ready customers from installing ASHPs and PV.
  • There is no consistent message from industry – the boiler market is strong and it appears that whilst boilers are still selling like hot cakes, very few big manufacturers are committed to push their renewable alternatives.
  • Securing funding is challenging, especially in social housing (a key microgen customer segment). And, cash flow problems due to changes with the benefits system are driving them towards like for like boiler replacements rather than microgen.
What will 2015 look like?
We didn’t expect 2014 to be a big year for the RHI due to the long lead times for renewable heating technologies, as well as the many other barriers outlined above. But we are optimistic that the domestic RHI will have an impact in 2015. However, the extent of this impact does depend on the industry becoming more energised. We are already seeing lots of movement in 2014 with a whole host of innovative products becoming widely available (i.e. hybrids and m-CHP), novel business strategies being employed, and financial propositions being considered and offered to home owners. Yes, the microgen market is still very much comprised entirely of ‘early adopters’, however everything is in place for the critical mass to tip the balance.

For more information contact [email protected]
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