Heat pumps could become cheaper to run than gas boilers if prime minister Andy Burnham follows through with a proposed shake-up of household energy bills.
Burnham has already confirmed that VAT will be removed from domestic electricity bills from 1 October, saving a typical household around £45 a year. But reports suggest the new government is considering wider reforms designed to reduce electricity costs and make cleaner heating more financially attractive.
Research and innovation foundation Nesta has proposed a package that includes removing more levies from electricity bills and paying for them through general taxation. It also wants the gas standing charge abolished, with network costs instead recovered based on the amount of gas households use.
Nesta estimates that its full package could reduce a typical dual-fuel household’s bills by around £130 a year.
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Crucially, the changes would also narrow the gap between electricity and gas prices. This is important for those who own or are considering a heat pump because heat pumps use electricity but can produce around three to four units of heat for every unit of energy they consume.
That makes them considerably more efficient than gas boilers. However, electricity has historically been much more expensive per unit than gas, meaning households have not always benefited financially from that efficiency.
Lowering electricity prices relative to gas could allow an efficient, properly installed heat pump to cost less to run than a gas boiler. Nesta describes reducing the electricity-to-gas price ratio as one of the most important steps the government could take to encourage households to switch to cleaner heating.
The first part of that shift has now been confirmed. From October, the 5 per cent VAT charged on household electricity will be removed, including for customers on fixed tariffs. The government expects suppliers to pass the saving on in full.
However, the VAT cut alone is expected to save the average household about £45 a year, and the wider reforms have not yet been adopted as government policy.
Heat pump running costs also vary considerably between homes. Insulation, radiator size, system design, electricity tariff and how the heating is operated can all affect the final bill.
Installation costs remain higher than those of a replacement boiler, although eligible households in England and Wales can currently receive a grant through the Boiler Upgrade Scheme.
The government’s next Budget is therefore likely to determine whether Burnham’s electricity VAT cut is the first step towards a more fundamental change in how Britain pays for heating, or simply a short-term reduction in bills.
Read more: Are heat pumps worth installing in your home?
