Saturday, 5 February 2022

Energy price increases - and the impacts for heat pumps.

Most reporting on the changes to energy price caps that come into force from April are about dual fuel bills and just report the total bill, not separating gas and electricity. However, if you are considering switching to a heat pump you are also interested in the ratio between gas and electricity costs - how much will it cost you to make that switch? Currently, heat pumps typically cost a little more to run than a gas boiler, but from April the gap narrows - plausibly to nothing in many cases.

The data behind this blog comes from OFGEM.

Firstly, the typical bill - there are slightly different costs for payment methods and I have assumed a standard credit payment. I am also using Eastern prices. There are regional differences but these too are small. 

Price cap for gas and electricity, whole bill £/year. This is based on 12000 kWh/year for gas and 3100 kWh/year for electricity.

You can see that the gas bill has gone up more than the electricity bill - which is what one would expect considering more and more of your electricity comes from renewable sources which have not got more expensive (though that is not the main reason).

The price cap is specified in two ways - as a 'nil' bill which represents the maximum standing charge and as a typical bill. Subtracting the standing charge bit I have calculated the price per kWh. If a company chooses to have a lower standing charge they could increase the price per kWh instead so this is not quite right but it is the best I can do. (The standing charge is about 11% for gas and 14% for electricity.)

Price cap p/kWh

If you are interested in switching to a heat pump, what does this mean? The answer depends on whether or not you intend to get completely off gas so you no longer have to pay the standing charge. However there is a cost for disconnection - and this varies depending on who you are with. Octopus are doing this for free - for the time being.

Ditching gas completely, starting with a typical bill, you could break even with a heat pump.

If you have a typical gas bill at the moment, ditching gas completely so you do not pay the standing charge would buy you an additional 2930 kWh electricity. From April, at the price cap level, the typical gas bill would buy you 3420 kWh. Allowing for your current boiler being 85% efficient and assuming your heat pump has to supply 10% more heat (see Will heating your house constantly use more energy) then you would break even with a heat pump COP (efficiency) of 3.8 at the moment, or 3.3 from April. Now 3.8 is unlikely but 3.3 is achievable. 

For example, according to the MCS Product database a Mitsubishi ECODAN gives 3.6 with a radiator temperature of 45°C, or 3.2 at 55°C and Vaillant aroTherm (split system) is 3.8 and 3.1. My heat pump is configured for 55°C at the moment but most of the time it is more like 35°C - 45°C and we are still warm (No this is not because of weather compensation - I am allowing for that but we are having trouble with the thermostat.)

Keeping the gas meter, you would need a mean COP of 3.7 which is rare.

If you keep your gas supply and continue to pay the standing charge, then the picture is not quite so rosy. Using the per kWh calculation above, the break even COP currently would be 4.8 and after April it would be 3.7. You are unlikely to achieve this, though it is not unknown.

Higher/lower bills and the energy efficiency of your house affect the break even point

These figures will vary depending on your situation. There are swings and roundabouts and they may cancel out for you:

  • If your bill is higher than typical, then the savings from disconnecting from gas are proportionately less.
  • If your house loses heat quickly then switching to a heat pump will demand more heat (see Will heating your house constantly use more energy)
  • If your boiler is less efficient than 85% (which is quite likely if it is old and/or scaled up) that favours the heat pump more.
  • If your house is extremely efficient and most of your bill is actually for hot water, then the COP you achieve will be lower: heat pumps are usually less efficient at providing hot water than space heating. However, with that sort of house your bills will be lower anyway.

    Fuel costs and also network costs are are the main drivers of the increase.
    I was also interested in what these bills are made of. These two charts show components of the bill over the last seven years. I have simplified OGGEM's classification a bit. 

    Components of the Electricity bill cap, y-axis is £/year

    The main parts of the electricity bill are direct fuel costs (dark blue); policy costs (grey) i.e. the subsidies for renewable energy and installing efficiency measures; network costs (yellow); and operating costs (light blue). You can see that the fuel costs are the most variable, though network costs have also increased recently. Prices were lowest in 2020/21. In absolute terms by far the largest increase is for fuel costs - £362 up since 2020/21 - and the next largest increase is for network costs - up £58. Policy costs have actually shrunk by £20. Here is the same chart for gas.

    Components of the Gas bill cap, £/year

    The gas bill does not have any policy costs so it is dominated by direct fuel, network costs and operating costs. The increase in fuel costs since 2020/21 is a little higher than for electricity - £380 and the increase in network costs is a little lower - £51. 

    Here is one final chart showing just the fuel costs and network costs over time. The fuel costs are more stable for electricity than gas but the network costs have increased more. This is what you would expect, given the increasing proportion of intermittent renewables requiring more network infrastructure. This trend is likely to continue for some time.

    Fuel costs and network components of the price cap for gas and electricity

    In summary
    Considering changes from now to April, the electricity increase is less than gas in absolute terms but not by much. Most of the increase is due to wholesale fuel costs. Fuel costs are always volatile but this increase is unprecedented. Electricity prices are more stable than gas. Network costs are also increasing, and faster for electricity than gas. This is reasonable given the transition to low carbon electricity. 

    These changes have narrowed the gap between electricity and gas costs which makes heat pumps a more attractive proposition than before - for many households running costs could be very similar.

    1 comment:

    1. The "Policy costs" are a major barrier to the adoption of heat pumps. They currently fall on electricity, but hardly at all on gas. Otherwise heating by heat pumps would be clearly cheaper than by burning gas.


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