What 13 years at the heart of the heating transition has taught me about the future
It’s almost 13 years since I first immersed myself in understanding the heating market, and began supporting Europe’s biggest energy suppliers and HVAC companies in navigating the heating transition. 2020 seems like a good time to reflect on what’s changed since then and consider what the next decade could bring.
Thirteen years ago I had just completed a PhD quantifying the impact of climate change on Icelandic glaciers – and predicting how these impacts would play out in future decades. The impact of continued warming – and the need for urgent action to stop it – was painfully clear. This desire to solve the climate crisis was of course what drove me to the energy industry. The science of climate change was clear – now to tackle action and adaptation. I focused in very quickly on heat, as one of the most critical (if most challenging) parts of energy consumption to decarbonise.
But the more time I spent with companies trying to make business in heat, the more I learned that decarbonising heat was good for the planet, but marginal when it came to most of the big heating and energy players making money. If only I could convince them that decarbonising heat would be critical to their future business!
Policy drivers were weak thirteen years ago, industry engagement was patchy, and the value which low carbon heating could create was not clear. My first market analyses painted a rather bleak picture. On policy, I could point to, for example, Sweden and Switzerland as two examples of countries where heat pumps had become mainstream, thanks to policy decisions made in the 1990s, and heat pumps were emerging in France as a real contender. In other major heating markets in Europe, there was limited activity. Annual sales of heat pumps in Europe totalled around 500,000 in 2007 and low carbon heating technologies were primarily installed by self-builders and forward-thinking developers. So, what characterised the market back then?
- For Europe’s biggest HVAC companies, low carbon heating was very much a sideshow to their gas boiler businesses, with most companies focused on R&D around a few high efficiency gas technologies.
- Energy industry activity in low carbon heating was restricted to trials and demonstration projects led by innovation departments of the big energy suppliers – and commercial roll-out was (for the majority) far off.
- Residential customers had little to choose from in terms of customer propositions for heat, and little choice on how to buy it – or who from.
- And digitalisation had yet to take hold – “smart”, “connectivity” and “flexibility” were words only used by the most innovative, leading edge thinkers. Standard heating systems were analogue and unconnected.
Fast-forward to 2020, and the glaciers I walked on 15 years ago are all but gone with accelerated climate warming (Iceland has lost about 7% of its ice since 1995). But all hope is not lost… Although the heating transition moves painfully slowly at times, the market has evolved significantly in the 13 years I have tracked it – and I have optimism for the decade ahead. Here’s why:
- Policy has stepped up a gear – at least in new build. Annual sales of heat pumps have doubled to about 1 million per year over the last 13 years, and low carbon technologies are a standard solution in new build single family homes in most major European markets. Low carbon heating in retrofit remains a challenge – but there are encouraging signs from policy-makers.
- For Europe’s biggest HVAC companies, low carbon heating is no longer a sideshow, but a crucial revenue driver. Boiler company Vaillant, for example, had a record year in 2018, attributing the growth to “heat pumps and efficiency technologies”, revenue from which grew by around 20%. Viessmann has also grown strongly in heat pumps, as well as reaching a significant sales milestone with its fuel cell micro-CHP system. Bosch has stated its intention to invest €100 million in heat pump technology over the coming years and is investing in fuel cells. The fastest growing heating company last year was NIBE – the only one of the top 5 heating players for whom heat pumps make up a majority of its revenue.
- For the energy industry, low carbon heating products and services has become a way to recoup lost energy sales and generate new revenue. Major European energy suppliers such as Engie in France, EDF Energy and Shell Energy in the UK, and Eneco in the Netherlands are all selling some package of low carbon heating. While offerings are at the early stages, and the precise business models may evolve, the direction of travel is clear. Low carbon heating is rising up the agenda for the energy industry, and not engaging is to risk future business.
- Customer propositions have evolved, promising to make decarbonisation of heat easier. Thanks partly to the emergence of competition from new and nimble, customer-focused service providers, incumbents are changing tact and focusing more on the customer. Viessmann, for example, has made bold steps to reposition itself as a service provider – not just a manufacturer. And energy companies are racing to launch Heat as a Service offerings.
- Digitalisation is firmly entrenched, placing heat at the centre of the wider energy transition – and opening up new value streams and opportunities for decarbonisation. In 2020, the value this is creating is primarily around optimisation of heating systems according to time-of-use tariffs or to maximise PV self-consumption. Value streams are also emerging in providing demand response and flexibility services to the wider energy system.
So based on what I’ve learned from the last 13 years, what could the 2020s look like? Clearly, there is still a long way to go, but I believe this decade is our chance to accelerate the decarbonisation of heat. I expect to see:
- Tightening policy (at a European, national and local level) tackling decarbonisation of heat in existing buildings
- More low carbon heating solutions designed for retrofit, perhaps packaged with home insulation or building fabric improvements and sold as an end-to-end service
- Low carbon heating solutions packaged with Heat as a Service or other service-based offerings
- A step-change in value to the customer emerging from the flexible operation of electric heating – as demand response markets take off and the value of energy system flexibility grows.
- More engaged customers, who when offered the right propositions, can make the switch to low carbon heating.
It is true that I cannot bring my glaciers back to their former glory, but in contrast to a decade ago, I am optimistic for the 2020s. I am optimistic because I am convinced that the heating market has fundamentally changed, and decarbonising heat is no longer a fringe interest, but a necessity at the heart of strategy for governments, the heating industry, and the energy industry. Ignoring decarbonisation of heat is no longer an option if these industries want to succeed. I am optimistic, because decarbonising heat (to save the planet!), and making money in the energy industry, are no longer mutually exclusive concepts. Quite the opposite, they are dependent on each other. I explore in more detail why the 2020s could really be the decade for decarbonisation of heat in this whitepaper.