Working PaperPDF Available
UKERC Technology and Policy
Best practice in heat decarbonisation policy: A
review of the international experience of
policies to promote the uptake of low-carbon
heat supply
Working Paper
December 2016
Richard Hanna
Bryony Parrish
Rob Gross
The UK Energy Research Centre
The UK Energy Research Centre (UKERC) carries out world-class,
interdisciplinary research into sustainable future energy systems. It is a focal
point of UK energy research and a gateway between the UK and the
international energy research communities. Our whole systems research
informs UK policy development and research strategy.
UKERC is funded by The Research Councils Energy Programme. For more
information, visit
The Technology and Policy Assessment (TPA) Theme of UKERC
The Technology and Policy Assessment (TPA) was set up to inform decision-
making processes and address key controversies in the energy field. It aims
to provide authoritative and accessible reports that set very high standards for
rigour and transparency. Subjects are chosen after extensive consultation with
energy sector stakeholders and with the UKERC Research Committee.
The TPA has been part of UKERC since the centre was established in 2004 and
is now in its third phase, which started in 2014. The primary objective of the
TPA is to provide a thorough review of the current state of knowledge through
systematic reviews of literature, supplemented by primary research and wider
stakeholder engagement where required.
The project team are grateful to the Expert Group for their extensive and very
helpful comments on drafts of the report. The members of the Expert Group
were: Ute Collier, Paul Dodds, Nick Eyre, Adam Hawkes and Jenny Hill.
Responsibility for the content of the report and any errors or omissions
remains exclusively with the authors.
Executive summary
Radical decarbonisation of heat supply in the UK will be essential to meeting
carbon reduction targets under the Climate Change Act, and delivering on
commitments made in the Paris Agreement to limit increases in global average
temperature to less than 2°C above pre-industrial levels. Responding to this
heat decarbonisation imperative will be particularly challenging in the UK,
which has amongst the lowest national share of energy from renewable
sources for heating and cooling in Europe.
This report presents the findings of a review of the evidence on policy support
for heat supply or infrastructure transitions in different European countries,
and sets out to understand how relevant these policy lessons might be to the
UK context for achieving radical decarbonisation of heat. The report does not
set out to make a judgment about the optimal pathway to low carbon heat, or
even the best combination of policies. The review also focuses on heat supply
technologies rather than options to improve the energy efficiency of building
fabric. Energy efficiency improvements will be of great importance to heat
decarbonisation but are not the focus of this particular study. Nevertheless,
the review captures integrated policy approaches, where energy efficiency
policy forms part of a package of policies supporting the uptake of any
particular heat supply technology / infrastructure for example enhancing
thermal efficiency as part of a whole building approach to maximising the
performance of heat pumps.
The evidence review evaluates policy experiences to date and is essentially
historical in nature. We have focused on two heat supply technologies for
which sufficient historic evidence of policies and market evolution is available:
heat pumps and district heating. These technologies vary in the extent to
which they are currently low carbon where they are deployed in different
countries. This variation depends on factors such as the carbon intensity of
national electricity grids or the balance between fossil fuel and renewable heat
sources. Nevertheless, both heat pumps and heat networks offer significant
potential to decarbonise heat supply in the future, and have strongly featured
in UK low carbon scenarios to 2050 (Winskel, 2016).
The findings of our review emphasise the importance of contextual factors
(ownership structures, degree of liberalisation, energy prices) along with
historical context. In many countries early deployment of heat pumps and heat
networks started before market liberalisation. Resource endowments such as
availability of hydro power or natural gas also have important impacts. This
notwithstanding, the findings highlight a number of important lessons,
including the role of policy stability, and a policy package which combines
finance with information, regulation and standards, and a supportive planning
and regulatory framework:
Policy stability promotes industry, consumer and, in the case of district
heating, local authority confidence. Where it comes to heat networks,
perceived policy stability means banks in Iceland and Denmark compete to
loan to district heating projects. In the UK, short-term abruptly changing
policies relating to heat network development have created uncertainty and
perceived risks for local government and the commercial sector. Similarly,
heat pump deployment in Denmark has been adversely affected in the past by
varying political support for the environmental agenda, opposition to electric
heating, or a lack of recognition of heat pumps as legitimate technologies for
delivering renewable energy.
A range of incentives, taxation and subsidies have proved successful in
different markets. Fossil fuel or carbon taxation has been successful in
building stable low-carbon heat markets in Sweden and Denmark. Subsidies
for replacing oil and electric heating can also be effective in stimulating
demand both for heat pumps and heat networks. Investment grants appear to
be particularly important for heat networks where energy markets have been
liberalised (and where district heating markets are less developed). The lesson
from a number of heat pump markets in the 1980s and 1990s is that the
success of incentives also depends on having standards in place for
manufacturing, installation and maintenance which are strong enough to
maintain the reputation of the heat pump industry. For example, an initial
surge in the German heat pump market following the introduction of a tax
credit scheme saw a crash in the mid-1980s, attributed in part to poor
installations, a lack of maintenance and low installer experience. The German
experience and that in other countries also indicates that markets can recover
once effective quality control measures are in place.
Information, regulation and standards are each key to policy effectiveness.
Enhancing the reputation of the industry through standards and regulations
has helped tackle low consumer awareness and confidence in countries with
high uptake of low-carbon heat. In market leading European countries such
as Switzerland and Germany, policies to increase technical standards, promote
heat pumps and implement information campaigns have been successfully
deployed in combination with subsidies to stimulate the widespread take-up
of heat pumps. In the case of heat pumps, the success of public subsidy
support and promotion depends upon technical standards being established
in the first place. National heat pump associations and test centres to monitor
heat pump performance have been instrumental for increasing quality
assurance. For heat networks, price regulation may also play a role in
reassuring consumers.
Planning and regulatory frameworks are helpful for giving heat network
developers confidence that they will secure a high enough percentage of the
local heat market to justify the initial capital expenditure in liberalised energy
markets. Strong planning policy is a feature of most large-scale heat network
development. For example, zoning has been introduced in Denmark,
supported by mandatory connection to heat or natural gas networks, and
banning of heat pumps in collective supply areas, while subsidisation of heat
pumps has been increased outside collective supply areas.
The UK context: The review assesses how transferable these international
experiences are for expanding the future provision of renewable heat in the
UK. Approximately 85% of UK households are connected to mains gas, while
customer surveys have reported high levels of satisfaction with gas central
heating systems and a lack of willingness to consider alternatives. European
countries with some of the highest heat pump sales per household over the
last decade have achieved such deployment in the absence of indigenous
natural gas production. Such countries have exploited their own resources for
the supply of heating in buildings. For example, Sweden and Switzerland
generate significant proportions of their electricity from hydro-power, which
provides a low carbon source of electricity for heat pumps. Sweden and Finland
have plentiful supplies of indigenous biomass which they use extensively as a
source of fuel for heat networks.
However a group of ‘middle ground’ countries possess a more mixed portfolio
of gas heating, heat pumps and heat networks. For these countries the
presence of strong policies appears to have played a central role in creating a
diversified mix. For example, recent policy in Germany has an explicit focus
on replacing gas grids with heat networks. Germany and Italy have over 20
million natural gas customers and have also sold half a million or a million
heat pumps respectively from 2005 to 2013. Irrespective of context a
successful approach is likely to combine subsidies, carbon taxes, planning
policy, regulation and strong support for certification, skills and product
Overall the review indicates that there is a strong historical precedent for the
multi-decadal heat system transition that the UK is likely to need if the
aspirations of the Climate Change Act are to be realised. Early deployment of
heat pumps and heat networks in leading countries took place as a response
to the oil crises in the 1970s. In the decades that followed a combination of
incentives, planning, regulation and taxation of conventional fuels/systems
brought forward a transformation of heat provision. Policies do not always
succeed; several countries experienced booms, busts and recoveries.
Nevertheless, it is clear that with sustained policy support over a period of 3-
4 decades it is possible to bring about a profound shift in the means by which
heating is provided.
Table of Contents
1 Introduction and purpose 9
1.1 Project aim and objectives 11
2 Approach to identifying and evaluating evidence 13
3 What works to support the deployment of heat pumps? 16
3.1 Introduction: markets, actors and context 16
3.2 UK policy experience 17
3.3 Discussion of policies supporting heat pumps 19
3.3.1 Subsidies, taxes and energy prices 19
3.3.2 Technical standards and the skills base 23
3.3.3 Consumer engagement 24
3.3.4 Building regulations 26
3.4 Sequences, co-ordination and stability of policy support 28
3.4.1 Sequence and combination of policies 28
3.4.2 Policy stability 33
3.5 Context and transferability to the UK 36
3.5.1 Contextual factors 36
3.5.2 Transferability to the UK 41
3.6 Summary of main findings 42
4 What works to support the deployment of district heating? 44
4.1 Introduction 44
4.2 UK policy experience 44
4.3. Policies to support the deployment of district heating 48
4.3.1 Financial support investment subsidies 48
4.3.2 Ongoing incentives and carbon/energy taxes 51
4.3.3 Heat planning 52
4.3.4 Regulations relating to building energy efficiency and the use of waste heat 55
4.3.5 Technical standards, price regulation and consumer protection 56
4.4 Applying policies to support the deployment of district heating 58
4.4.1 Policy stability and flexibility 58
4.4.2 Sequence and combination of policies 60
4.5 Context and transferability to the UK 65
4.5.1 Contextual factors 65
4.5.2 Transferability to the UK 68
4.6 Summary and policy recommendations 71
5 Discussion and overall conclusions 73
6 References 77
Table of Figures
Figure 3.1 Austria: heat pump support policies and market development, 1975-2013 30
Figure 3.2 Sweden: heat pump support policies and market development, 1982-2013 31
Figure 3.3 Germany: heat pump support policies and market development,
1990 2013 32
Figure 3.4 European climate condition zones 37
Figure 4.1 Sweden: policy developments, energy sources used for district heating
production and carbon intensity, 1980-2015 63
Figure 4.2 Norway: policy developments and fuel types used for district heating
production, 19832015 65
Table of Tables
Table 2.1 Keywords used to identify relevant literature in Science Direct and Google 14
Table 3.1 Examples of financial incentives for heat pumps in selected European
Countries 20
Table 3.2 Contextual factors and heat pump deployment across Europe: climate,
natural gas production and availability 39
Table 4.1 Contextual factors and district heating deployment across Europe:
natural gas production and availability, and residential space heating demand 67
1 Introduction and purpose
During 2015 the UK Energy Research Centre (UKERC) Technology and Policy
Assessment (TPA) Theme consulted widely over prospective topics for future
TPA reviews. This process indicated that a rapid assessment of the available
evidence on best practice in international policies aimed at deploying low
carbon heat technology in order to draw lessons for UK policy on heat
decarbonisation, would be both timely and relevant to UK policy.
Radical decarbonisation of heat supply in the UK will be essential to meeting
carbon reduction targets under the Climate Change Act (Chaudry et al., 2015,
Eyre and Baruah, 2015), and delivering on commitments made in the Paris
Agreement to limit increases in global average temperature well below 2°C
above pre-industrial levels (EC, 2016). Responding to this heat
decarbonisation imperative will be particularly challenging in the UK, which
has amongst the lowest national share of energy from renewable sources for
heating and cooling in the EU (Eurostat, 2015). The UK’s high penetration of
relatively cheap natural gas for supplying heat to buildings is an important
constraint on the deployment of renewable heat technologies and
infrastructure (Chaudry et al., 2015, Eyre and Baruah, 2015, Hannon, 2015).
The UK also has some of the least energy efficient housing stock in Europe
(ACE, 2013). Since by far the majority of the UK’s existing homes will still be
in use in 2050, heat decarbonisation in the residential sector will need to be
delivered predominantly as a retrofit, rather than new build solution (Hannon,
2015, MacLean et al., 2016). This review focuses on heat supply technologies
rather than options to improve the energy efficiency of building fabric.
Nevertheless, the review captures integrated policy approaches, where energy
efficiency policy forms part of a package of policies supporting the uptake of
any particular heat supply technology / infrastructure for example enhancing
thermal efficiency as part of a whole building approach to maximising
performance of heat pumps.
Options for supplying heat to residential and non-residential buildings include
combined heat and power, district heating or heat networks, electrification of
heating and heat pumps, hybrid heat pumps (operating in combination with
gas boilers), and repurposing of the gas grid for use with hydrogen or biogas.
The report focuses on heat pumps and district heating, because these options
have been widely deployed in several countries and a large evidence base on
policies is available. Future UKERC research will consider gas grid repurposing
and other options.
Low-carbon heat options often involve financial and non-financial barriers to
their uptake. Effective policies are likely to be ones that address or recognise
the relevant barriers and are designed to overcome them. These barriers
include the issues associated with the infrastructural transitions that are
required such as installing district heating, replacing natural gas boilers or
the roll-out of heat pumps which may require electricity distribution network
UK consumer research has identified a number of issues around residential
consumer uptake of low carbon heating technologies in general:
- Most UK residential consumers have gas central heating, and say they
would choose this technology in future (ETI, 2015, DECC, 2013a).
- Gas condensing boilers are seen as familiar, proven and trusted, and
most consumers state that in an emergency they would be their only
choice from lower carbon technologies (DECC, 2013a).
- Heating replacements often need to be completed quickly when
current systems are at or near the end of their life (ETI, 2015); 70% of
consumers say they would consider pre-emptive replacement only if
their current system needs considerable repairs (DECC, 2013a).
- Renovation work may provide an alternative opportunity to replace
heating systems, and consumers may consider pre-emptive
replacement if low-carbon heating offered a better alternative to their
current system (ETI, 2015). Off-gas consumers are overall less
satisfied with their current heating systems (DECC, 2013a).
- Most consumers say that increases in gas price or the availability of
feed-in tariffs for renewable heat would not influence their choice of
heating technology, but the availability of an up-front grant may
influence the choice of heating technology (DECC, 2013a).
- 43% in of surveyed residents in high-density urban areas were positive
about heat networks (DECC, 2013a).
- Alternative heating technologies also need to be easy for consumers to
control (ETI, 2015).
This project sets out to evaluate the relative effectiveness of different policy
approaches to support heat supply or infrastructure transitions
internationally. The research seeks to identify lessons from the international
policy experience and assess how relevant these policy lessons might be to
the UK context for achieving radical decarbonisation of heat. However, this
report does not set out to make a judgment about the optimal pathway to low
carbon heat, or even the best combination of policies. In the early phase of
scoping the review, it became apparent that evaluating the relative
effectiveness of international policies supporting renewable heat technologies
is a multifaceted problem, with a lack of clear metrics or criteria to measure
policy success or failure and determine the transferability of international
experiences to the UK.
Heat pumps and district heating vary in the extent to which they are currently
low carbon where they are deployed in different countries, depending on, for
example, the carbon intensity of national electricity grids or the balance
between fossil fuel and renewable heat sources. Nevertheless, both heat
pumps and heat networks offer significant potential to decarbonise heat
supply in the future, and have strongly featured in UK low carbon scenarios to
2050 (Frontier Economics, 2013, Winskel, 2016). Many scenarios envisage
combining heat pumps to maximise efficiency with use of decarbonised
electricity. Heat networks have the flexibility to supply heat from a variety of
different sources. This is useful for a low carbon energy system transition,
enabling district heating to deliver heat from various forms of low carbon
energy, such as biomass, waste and, depending on national grid carbon
intensity, electricity (e.g. heat pumps or electric boilers).
1.1 Project aim and objectives
The main aim of the research is to conduct a rapid evidence review of the
international experience of policies and policy packages aimed at boosting
take-up of low-carbon heat technology. This review includes both the
international experience with heat system change and also policies from the
UK and the Devolved Administrations. The overarching research question is:
What policies and other factors have driven change/transformation in heat
delivery technologies, fuels and infrastructure?
The research aims to address the following sub-questions:
What are the factors which determine the success of the policy
(including addressing barriers, other regulatory issues, market structure
and historical factors)?
What is the impact of external factors (for example, high fossil fuel
prices, heat density, or availability of natural resources)?
How are the outcomes affected by the aims of the policy?
Would this policy (or aspects of the policy) work within the
contemporary UK energy market context? What are the lessons for UK
Is there evidence to indicate which is the most suitable
delivery/engagement agent, or of the advantages of a particular
configuration of national and local action?
Chapter 2 describes the review process used to investigate the evidence base.
Chapter 3 examines the historical evidence on heat pumps and Chapter 4 is
focused on heat networks. Chapter 5 concludes.
2 Approach to identifying and evaluating evidence
In order to provide a timely contribution to inform thinking associated with
the UK strategy for heat, a rapid review was required. This was carried out in
the summer of 2016. Initial findings are reported in the Committee on Climate
Change Report ‘Next steps for UK heat policy’ (CCC, 2016). A first task was to
carry out a
rapid evidence assessment
(REA) to establish what evidence is
available in general about policy options employed or discussed
internationally to encourage the decarbonisation of heat supply, and what this
literature contains.
Given the short timescales available and the status of the study as an REA,
evidence has been identified through keyword searches of two databases:
Elsevier Science Direct (for academic literature) and Google (for grey
literature), using Boolean combinations of relevant terms. Google was
employed as a first step in identifying grey literature and specific websites
which host relevant material.
For the database searches, technology/infrastructure keywords were
combined with policy, policy evaluation and market deployment keywords
identified from a preliminary search of literature related to renewable heat
technologies and policy (see Table 2.1). Returned results were filtered for
relevance based on their title and abstract. If this is not sufficient to determine
relevance, further inspection of the main text was performed. The criteria for
relevance was that, in relation to change/transformation in heat delivery
technologies, fuels and infrastructure, the document considers some or all of
the following:
policy approaches used internationally to deliver heat
supply/infrastructure transitions;
metrics that the success of these policies can be measured against;
contextual information that may have influenced the success of
particular policy approaches in particular geographical regions or at
previous points in history.
Table 2.1 Keywords used to identify relevant literature in Science Direct and
Keyword categories
Technology / infrastructure
biogas AND heat
“biomass gasification”
biomass AND heat
“combined heat and power”/
“district heating”
“electric heating”
“fuel cell” AND heat
“heat electrification”
“heat pump”
“heat networks”
hydrogen AND heat
“natural gas”
“renewable heat”
Following the filtering of retained search results, key descriptive information
from each of the relevant results were captured, namely:
Country / geographic region;
Technology / technologies / infrastructures targeted;
Customer segment targeted (residential/commercial/public sector);
Policy intervention(s), aims and details;
Agents involved in policy delivery;
Study methodology;
Metrics to assess policy effectiveness;
Findings on policy effectiveness;
Factors influencing policy effectiveness (including contextual/external
and historical factors);
Transferability to UK context.
The geographic scope of the evidence considered was limited to European
countries in order to permit a sufficiently in-depth analysis of national
markets and policy success factors in the time available. During our rapid
evidence review, we did not find extensive examples of metrics used to
explicitly or implicitly judge policy effectiveness with respect to heat pumps
or heat networks. For heat pumps, a common metric used in the literature
reviewed was sales or number of installations, which can be normalised by the
number of households in a country or presented as a per capita equivalent.
Metrics used to represent the deployment of district heating include the total
heat capacity of systems in a given country (e.g. in MWth) and the proportion
of national populations supplied by heat networks. In general therefore, our
assessment of policies relies upon a qualitative evaluation of the relevant
material extracted, with reference to quantitative indicators of progress in
technological deployment where data has been obtained for this study.
Chapters 3 and 4 set out the findings of our policy assessment with respect
to heat pumps and district heating. Both chapters first address key policy
mechanisms which have been implemented in support of, or have otherwise
impacted upon, each technology. The effect of the sequencing of these
policies and how they combine, or have been implemented as part of a policy
package, is then discussed, with reference to selected national case studies.
Each chapter goes on to consider the role and importance of delivery agents
and the extent to which the international examples and case studies presented
might be transferable to future UK policy to support renewable heating
technologies and infrastructure. Chapter 5 provides an overall discussion and
3 What works to support the deployment of heat
3.1 Introduction: markets, actors and context
Drawing on the review of international literature, this chapter sets out findings
on what works and what doesn’t work in relation to policies which support the
wider uptake of heat pumps. Taking Europe as an example, the progress of
heat pump markets, as expressed by sales of heat pumps, is very mixed. On
this basis, mature markets can be identified, e.g. France, Germany,
Switzerland, Sweden, Austria and Norway, while the UK (alongside The
Netherlands, Czech Republic, Poland and others) can be considered as a
developing market, with low levels of market penetration and relatively high
potential for growth (Zimny et al., 2015). Key actors in the formulation and
implementation of policies to support heat pumps include government,
utilities, trade associations, installers, manufacturers, the building sector and
research institutes (Hannon, 2015, Kiss et al., 2014, Zimny et al., 2015).
A number of contextual factors influence the effectiveness of policies
designed to expand heat pump deployment. European heat pump market
leaders, such as Finland, Sweden and Switzerland, do not possess domestic
natural gas reserves and have very limited proportions of households with
connections to the natural gas grid. Several countries with high heat pump
penetrations also benefit from large hydro power resources. By contrast the
UK and Netherlands have both significant conventional gas reserves and very
high penetration of gas connections (Frontier Economics, 2013). Both have
limited hydro resources and very low penetration of heat pumps. However, the
picture for several countries is much more mixed, and some including France,
Germany and Italy combine both a high penetration of natural gas connection
and high deployment of heat pumps. The review therefore seeks to assess
both the effectiveness of policy and the relationship between policy and
contextual factors, including natural resource endowments.
Our review of the international experience indicates that policy interventions
which are particularly crucial in shaping the take-up of heat pumps relate to
subsidies and policy stability, and attempts to improve information provision,
raise standards and expand the skills base. As a precursor to our review of
European policies, section 3.2 first considers the impact of policies
implemented in the UK on the uptake of heat pumps. Section 3.3 elaborates
on the effectiveness or otherwise of interventions in different European
countries, with reference to examples from the literature identified. In section
3.4, the sequence, combination and stability of policies are considered with
reference to three country case studies: Austria, Sweden and Germany. Section
3.5 explores the different contextual factors which influence the effectiveness
of policies identified in our review, and how transferable the policy experience
in other European countries might be to the UK.
3.2 UK policy experience
The UK’s heat pump market remains small and relatively immature in
comparison to leading European markets. From 2010 to 2013, there were
18,185 sales of heat pumps per year in the UK, representing less than one
heat pump sale for every 1,000 households in contrast to Sweden and
Finland, where more than 20 heat pumps were sold for every 1000 households
over the same period of time (Eurostat, 2016, EHPA, 2014).
Approximately 19,000 microgeneration systems were fitted through the Low
Carbon Buildings Programme (LCBP) from 2006 to 2011 mainly solar hot
water and solar PV, but also air-source and ground-source heat pumps, wind
turbines and biomass boilers. This scheme offered an up-front grant which
covered a proportion of the installation cost (varying by technology). For
domestic installations, householders were also required to meet a range of
other energy efficiency and insulation criteria. The grant was paid once the
system had been installed (Bergman et al., 2009).
The UK’s Energy Act 2008 created provision for the Renewable Heat Incentive,
which aims to contribute to climate change targets by incentivising the
deployment of renewable heat (Donaldson and Lord, 2014). However, the
Renewable Heat Incentive (RHI) for residential installations was delayed on
several occasions after initially being scheduled for 2011, until its eventual
introduction in 2014. The Government therefore introduced another grant
scheme - Renewable Heat Premium Payments (RHPP) which were available
from 2011 to 2014. These payments subsidised some of the cost of installing
heat pumps and other small scale heating technologies in residential
buildings. Nevertheless, the RHPP underspent its allocated budget, and
together with delays to the RHI undermined market confidence and supply
chain development (Connor et al., 2015, Hanna, 2014).
An evaluation of the early effectiveness of the RHI has been recently published
by the Department of Energy and Climate Change. This evaluation includes a
survey of household owner-occupiers, who in many cases indicated that they
would not have installed renewable heat technologies (including heat pumps)
if the RHI had not been available (DECC, 2016). Moreover, non-financial
barriers continue to constrain the uptake of heat pumps in the UK (Balcombe
et al., 2014, Staffell et al., 2010), due to such factors as a lack of space for
thermal stores or the ‘hassle factor’ involved in installing heat pump units,
underfloor heating and new radiators for low-temperature distribution
Ongoing financial incentives such as the RHI require stability and continuity of
policy support in order to maximise their effectiveness in stimulating the
uptake of renewable heating technologies. A lack of policy stability impacts
adversely upon industry confidence. On the one hand, the majority of
Microgeneration Certification Scheme installers surveyed by DECC (2016)
reported that the RHI had led to increased enquiries and sales for renewable
heat systems. Conversely, almost a quarter of Microgeneration Certification
Scheme installers considered that the uncertainty of the RHI’s degression
mechanism had impacted negatively on the renewable heat market (DECC,
2016). The DECC consultation on interim cost control for the RHI in March
2012, shortly after the scheme was introduced, also risked undermining
consumer confidence (Donaldson and Lord, 2014).
Another important challenge for heat pumps in the UK is inadequate technical
performance and consumer perceptions and confidence arising from this,
which together with low public awareness of heat pumps in general, may be
significant constraints on rates of uptake (Balcombe et al., 2014, Connor et
al., 2015, Frontier Economics, 2013). Separate studies have demonstrated that
the performance of heat pumps installed in households may be compromised
by poor installation standards (Energy Saving Trust, 2010, Miara et al., 2011).
In 2008, the Microgeneration Certification Scheme (MCS, 2015) was
introduced as a quality assurance scheme for microgeneration products and
installers, and covers ground source and air source heat pumps. Each
installation company was inspected on an annual basis by one of a number of
certification bodies who were accredited through the MCS. Interviews with
installers of heat pumps and other microgeneration technologies conducted
by Hanna (2014) revealed some flaws in the operation of the MCS, in terms of
its effectiveness in protecting against poor installation practices. For example,
installers were able to self-select installations for MCS inspectors to visit
rather than inspectors selecting installations at random from a complete
record of heat pumps fitted by a particular company.
3.3 Discussion of policies supporting heat pumps
The sections that follow discuss policies that we have identified as being
important to the development of national heat pump markets in our review of
different European countries. Section 3.3.1 examines the design and relative
effectiveness of both direct subsidies (such as grants, tax breaks and ongoing
incentives) and indirect taxes (such as fossil fuel taxes). Sections 3.3.2 to 3.3.4
evaluate success factors relating to technical standards, promotional
campaigns and building regulations respectively. We find that generally each
area of policy discussed separately in these subsections is not mutually
exclusive; rather, many policy measures have been implemented as part of a
wider and integrated package of policy support. The nature of this integration
is examined in further detail in three country case studies which are presented
in boxes 3.1 to 3.3 below.
3.3.1 Subsidies, taxes and energy prices
The high capital costs of heat pumps compared to some incumbent heating
options is a key barrier to market growth (Frontier Economics, 2013, Gaigalis
et al., 2016, Giambastiani et al., 2014). Government interventions designed to
overcome high initial costs of installation and equipment, such as investment
subsidies, grants and tax exemptions, can be effective in stimulating
deployment (Frontier Economics, 2013, Gaigalis et al., 2016). In several
countries, capital grants covering a proportion of installation costs and tax
breaks on labour costs have been two of the most common financial incentives
supporting the uptake of heat pumps (Table 3.1).
Table 3.1 Examples of financial incentives for heat pumps in selected
European countries1
Instrument Type
€1000 - 2200
Minimum seasonal
COP2 = 4 / 4.5
Tax reduction
60% of labour costs
Maximum €3000
Tax reduction
40% of labour costs
Maximum €8000
€450 - €1200 for
€900 - €2400
SPF > 3.7 for ASHPs
SPF > 4.2 for GSHPs
€2000 - €3500
Retrofit only
Tax reduction
55% of total cost,
deducted in equal
instalments over 5-
High SPF5
Maximum €1000
Air-air systems
Tax reduction
50% of labour costs
Maximum €5000
Notes to Table 3.1
1. Table 3.1 has been adapted from Frontier Economics (2013), except for Austria
where the data has been extracted from Kranzl et al. (2013).
2. COP = Coefficient of Performance.
3. ASHPs = air source heat pumps.
4. GSHPs = ground source heat pumps.
5. SPF = Seasonal Performance Factor.
Investment subsidies introduced by the federal government in different
regions of Austria typically covered 15% to 30% of the total costs of
investment. An agreement reached between the federal government and the
regions in 2009 (Art. 15a-Agreement), requires heat pumps to achieve a
minimum level of performance a mean seasonal COP (Coefficient of
Performance) of 4 - in order to be eligible to receive a subsidy (Kranzl et al.,
In addition to covering part of the costs of heat pump installations and
products, there are some examples of investment subsidies which incentivise
heat pumps as a replacement for conventional forms of heating, such as oil
heating or electric heating. Investment subsidies have been implemented in
Sweden to incentivise the replacement of direct electric heating with heat
pumps or bio-energy heating in multi-family households. These subsidies
covered a percentage of the total installation costs and were capped at a fixed
amount (Sandstrom, 2000). Relatively recent investment subsidies in Austria
have also combined an incentive for the replacement of fossil fuel heating with
minimum performance standards: these subsidies provided €1500 or €2200
for switching from fossil fuel heating to heat pumps performing at a minimum
seasonal COP of 4 and 4.5 respectively (Kranzl et al., 2013).
However it is important to note that investment subsidies have had their
problems and the use of subsidies to promote heat pumps has its critics. In
1993, the Swiss government introduced subsidies for installing heat pumps in
retrofits (at a value of 10% of the total installation cost) as part of a heat pump
promotion programme (see section 3.3.3). However, these subsidies were
discontinued after two years as an impact assessment survey revealed that
85% of those surveyed would have installed heat pumps even if the subsidy
had not been available (Delta, 2013).
An evaluation of the success of a household subsidy programme in Norway
introduced in 2003, in which householders received 20% of the initial
investment costs for air-to-air heat pumps and wood pellet stoves, concluded
that subsidies for new technologies risk promoting products which are not yet
sufficiently mature and lack the quality and extent of technological support
structures that exist in more mature markets (Bjørnstad, 2012).
In addition to investment subsidies, carbon taxes have been present in several
European countries for the past 25 years. Finland was the first country to adopt
a carbon tax in 1990, followed by the Netherlands in the same year, Norway
and Sweden in 1991 and Denmark in 1992 (Sumner et al., 2009). A decade
later, the UK introduced the Climate Change Levy, in 2001, and carbon floor
price in 2013 (Ares and Delebarre, 2016). However whilst UK carbon taxes
apply to fuels for power generation they are not levied on final consumption
of gas by small scale and domestic end users. In several of these countries
there is evidence that the presence of carbon taxes on domestic fuels also
contributed strongly to the adoption of heat pumps, particularly where this
was combined with the use of higher carbon oil-fired heating systems. An
official in the Division for Energy at the Swedish Ministry of Environment and
Energy, contacted in the course of the project, placed particular emphasis on
the role of carbon taxes in the growth of heat pumps in Sweden
There is also discussion in the literature about the interaction between
subsidy, energy taxes and fossil fuel price movements. High oil prices were
one driver of early market growth of heat pumps in Austria, France, Sweden
and Switzerland in the 1970s and early 1980s, while declining oil and natural
gas prices also contributed to a crash in heat pump markets in the mid-1980s
in France, Germany, Sweden and Switzerland (Kiss et al., 2014, Zimny et al.,
2015). The relationship between oil prices, financial incentives and heat pump
installations in Austria has been studied by (Kranzl, 2007, Kranzl et al., 2013).
In Austria in the late 1970s / early 1980s, the peak in oil price was followed
by a rapid increase in hot water heat pump installations, while a significant
decrease in annual heat pump installations in the late 1980s and 1990s
coincided with consistently low oil prices (Kranzl, 2007). Between 2000 and
2009, the number of heat pump installations in Austria increased at a rate of
approximately 15% per year, a trend which can be attributed to policy
instruments which provide economic incentives as well as rising oil prices
during this period (Kranzl et al., 2013).
Swedish and German experiences in the mid-1980s also suggest that the
success of subsidy support depends upon standards of manufacturing,
installation and maintenance being sufficient to maintain the reputation of the
E-mail communication with Björn Telenius, Head of Section, Division for Energy, Ministry of
Environment and Energy, Sweden, 19 August 2016.
heat pump industry (see Case Studies 3.2 and 3.3). We therefore consider
these issues in more detail in section 3.3.2.
3.3.2 Technical standards and the skills base
There are a number of different non-financial barriers to the increased uptake
of heat pumps, such as technological performance and the availability of
information and advice about heat pump technologies that customers can
trust (Balcombe et al., 2014). A comparative review of European heat pump
field trials reveals that heat pump performance is highly variable for similar
products, due to variations in standards of design, installation and operation
(Gleeson and Lowe, 2013). In the UK, the Microgeneration Certification Scheme
was set up to ensure that installers and products meet required standards,
while support from the RHI is conditional on heat pumps and installers being
accredited through this scheme (Balcombe et al., 2014).
The establishment of test facilities in Switzerland in the 1970s and Sweden in
the 1980s was important for raising the technical standards of heat pumps
and providing quality assurance for subsidies introduced in the 1990s. These
test centres have observed significant improvements in heat pump
performance (measured in terms of COP) between the early 1990s and the
mid-2000s. Together with quality labels introduced in Switzerland in 1998
and Sweden in 2005, the test centres helped to redress the poor image of heat
pumps during the 1980s market crash when installation and product
standards were insufficient (Kiss et al., 2014).
In 1993, a procurement programme was launched in Sweden by NUTEK (the
Swedish Agency for Economic and Regional Growth) to develop and
commercialise innovative ground source heat pumps (GSHPs) (Zimny et al.,
2015). In cooperation with a group of purchasers and specialists, NUTEK
developed the requirements for a competition to procure technically advanced
heat pumps which were 30% cheaper and 30% more efficient than existing heat
pumps on the market. NUTEK invited manufacturers to enter prototype heat
pumps into the competition which met these requirements, with the buyer’s
group agreeing to purchase at least 2,000 units of the winning model.
Prototypes and whole heating systems were also independently tested by
third-parties to ensure the competition was transparent; a quarter of the
budget of the procurement programme was dedicated to free tests of
prototypes for competitors and product certification. Additionally, half of the
budget of the NUTEK programme was assigned to information dissemination
activities, while the programme was also linked to investment subsidies for
heat pumps. The effectiveness of this procurement competition can be
expressed through the doubling of Swedish heat pump sales from 1995 to
1996 (Kiss et al., 2014).
Countries where GSHPs markets are more advanced, such as Austria, Germany,
Sweden and Switzerland, have published higher numbers of technical
standards, e.g. 8 standards between 1995 and 2005, and 7 standards between
2007 and 2008 (Rizzi et al., 2011 ). Countries with greater sales of GSHPs are
also beginning to introduce ‘contractor certifications and quality awards’ to
reduce the risk of the industry and consumers being compromised by poor
quality products and installations. In December 2012, the European Union
requested that member states should introduce certification schemes (or
equivalent) for GSHP installers (Rizzi et al., 2011 ).
As one of a number of mechanisms to improve quality assurance, in 1989
Sweden set up the VPN - an independent complaints board or ‘Heat Pump
Court’ to address litigation cases relating to the false claims of installers about
heat pump performance (Delta, 2013, EHPA and Delta, 2013). The VPN is run
by the Swedish Heat Pump Association and allows customers to bring a claim
directly against installation companies if heat pumps are perceived to
underperform relative to expectations. Installers found to be ‘guilty’ are
required to resolve the problem and a small court fee paid by the customer. It
has been estimated that customers win around 60% of cases, with 90% of these
being the result of problems with installations rather than products. Court
decisions on cases are made public so that companies linked to substandard
installations are effectively named and shamed (Delta, 2013). In addition to
helping to raise consumer confidence, the heat pump court has incentivised
manufacturers to monitor the standards of installers who fit their products,
while also encouraging installers to improve the quality of their installations
to meet consumer expectations (EHPA and Delta, 2013 ).
3.3.3 Consumer engagement
The review identified a number of examples of marketing, promotion or
information campaigns which aim to raise awareness of heat pumps and build
consumer confidence. Nevertheless, the reviewed literature is somewhat
limited on details of what such promotion actually involved, let alone on what
its impact was. We discuss several forms of marketing which have taken place
in countries with higher uptake of heat pumps in comparison to the UK.
Promotion of heat pumps may be carried out by different actors, such as
government, utilities, industry associations, manufacturers and installers.
Evaluating the impact of promotion in terms of its success in increasing sales
of heat pumps is difficult even on a case by case basis, not least due to the
implementation of several different policies (e.g. technical standards,
subsidies) in tandem with marketing activities. For example, the Danish Energy
Agency’s recent promotional strategy combines a number of different policy
instruments - an information campaign, subsidies and heat pump trials, in an
effort to increase heat pump installations from 25,000 per year in 2011 to
200,000 per year in 2020 (EHPA and Delta, 2013).
One of the most extensive examples of how heat pump promotion can be
integrated with other policy instruments is the programme initiated and
funded by the Swiss Federal Office of Energy (SFOE), which represented part
of an overall drive to achieve greater independence from oil (Delta, 2013, EHPA
and Delta, 2013). This programme also included a short-lived subsidy for
retrofit installations which was not demonstrated to be a key driver for growth
in the heat pump market (see section 3.3.1). The SFOE established the Swiss
Heat Pump Association (FWS) in 1993. The FWS combined multiple actors
including manufacturers, energy suppliers and government entities and was
tasked with country-wide heat pump promotion and co-ordination of
marketing (Zimny et al., 2015). The Swiss promotion programme established
the Heat Pump Test Facility, WPZ, in 1993, with SFOE heat pump field trials
commencing in 1996. These were linked to the public dissemination of
independent performance data from the test centre and field trials in an effort
to raise consumer and installer confidence. Installation quality was bolstered
through a new installer certification scheme and standardised training for
installers provided by the FWS. Another element of this quality assurance drive
was the creation of the DACH quality label (now EHPA quality label), which set
minimum standards for heat pumps (Delta, 2013).
A notable feature of the marketing and awareness-raising strategy employed
by the Swiss heat pump promotion programme is that information
dissemination took place in each Swiss region (Canton) through community
events involving municipal utilities, installers and manufacturers, as well as
local communities. In addition, some companies, such as manufacturers,
carried out more direct advertising through TV advertising (Delta, 2013). In
the UK, the low public awareness of heat pumps and the lack of capacity of
installers to carry out significant marketing activities has been previously
highlighted by (Hanna, 2014). Overall, the success of the Swiss promotion
programme can be expressed by the rise in heat pump sales from less than
3,000 per year in 1993 to approximately 7,000 per year in 1998, at the same
time as oil prices were falling and might, all other factors being equal, be
expected to lead to a decline in heat pump sales (Delta, 2013).
In Germany, utilities and energy agencies have led information campaigns to
make consumers more aware about heat pumps. For example, the marketing
activities of the NRW Energy Agency and the RWE utility have been linked to
sustainable heat pump market growth in the German region of North Rhine-
Westphalia (Delta, 2013). NRW have produced radio adverts and engaged with
communities by attending local trade fairs and setting up information
dissemination events in town halls, similar to the community marketing
approach evident in Switzerland. RWE’s information campaign from 2005 to
2010 was motivated by their objective to encourage customers to switch from
gas or oil to electricity (Delta, 2013). RWE set up an online heat pump forum
for consumers to access information about heat pumps, installers and
products. Consumers can search a database of installers by postcode, on
which installers can advertise at low cost, while manufacturers also pay to
advertise their products on the website. The RWE database may also raise
consumer confidence in heat pump products and installers through being
associated with RWE as a trusted brand (EHPA and Delta, 2013). In other
respects, this online service performs a similar function to the online installer
database provided by the Microgeneration Certification Scheme database in
the UK.
3.3.4 Building regulations
The review identified some examples of building regulations which have
facilitated or supported heat pump markets in Europe. This section presents
a brief discussion of building regulations and their impact on heat pump
These regulations may take the form of minimum requirements for the
installation of renewable energy in buildings. Such requirements can be
effective in stimulating the deployment of heat pumps, particularly if they
target heat specifically (Frontier Economics, 2013). In 1997, Zurich (followed
by most other Swiss cantons) introduced a requirement for the share of non-
renewable hot water and space heating in new buildings to be restricted to
80% of useful energy demand. The remaining 20% could be met by installing
extra insulation, heat pumps, biomass or solar hot water. As heat pumps could
be installed cost-effectively, this regulation created a strong incentive for
deployment of heat pumps (Kiss et al., 2014).
In 2009, the German EEWärmeG (renewable energy heat law) set out
requirements for 50% of calculated heat load in new residential buildings to
be supplied by renewables. A year later, in the state of Baden-Württemberg,
an additional requirement was introduced whereby boiler replacements in
existing residential properties had to source 10% of heat demand from
renewables (Frontier Economics, 2013).
National and regional building regulations for minimum energy efficiency
requirements in new buildings contributed to a booming GSHP heat market in
Italy. As most GSHPs on the market require operation with low temperature
heating systems to achieve optimal performance, they have therefore been
easier to install in new build properties (Rizzi et al., 2011).
Sweden supported the early deployment of heat pumps through interest free
loans, income tax breaks and building regulations. The 1975 Swedish building
code (Svensk Bygg Norm - SBN) required that buildings with ventilation heat
losses in excess of 50MWh should be fitted with a heat recovery system.
Subsequently, the 1980 SBN incorporated an exhaust ASHP as an acceptable
solution for residential water heating (Zimny et al., 2015). More recent Swedish
building codes have contributed to the increasing dominance of air-to-air
heat pumps over GSHPs since 2005. This is because these building regulations
have mandated higher energy efficiency levels in new buildings, and tighter
building envelopes have tended to require controlled ventilation due to greater
ventilation losses (Zimny et al., 2015).
3.4 Sequences, co-ordination and stability of policy support
3.4.1 Sequence and combination of policies
The discussion of different policy instruments in section 3.3 has revealed the
integrated nature of much policy support for heat pumps in leading European
markets. It is for this reason that this section explores the sequence and
combination of policies, with reference to selected national case studies:
Austria, Sweden and Germany. These countries were selected because they
have some of the highest levels of heat pump deployment in Europe (in
absolute terms or per household), and because a sufficient level of information
was gathered through our review in order to assess the history of their policies
and market development in detail.
The case study boxes presented in this chapter provide an account of how
sales of heat pumps decreased sharply in the mid-1980s in Austria, Sweden
and Germany. These are examples of European countries where early
significant deployment of heat pumps took place following the oil crises in the
1970s. Austria, Sweden and Germany all experienced a recovery and growth
in heat pump sales during the 1990s, in particular due to concerted attempts
by governments and industry to bolster the reputation of the technology
through a combination of heat pump promotion, information campaigns, and
technical standards.
The case studies also highlight the important role of co-operation between
different delivery agents in the heat pump industry, and particularly the pivotal
role played by the formation of heat pump associations and their subsequent
activities. In 1993, the German heat pump association (IWP Heat Pump Action
Group) was created, with a first task of improving component quality and
installation practices. The IWP was formed from a partnership between large
utilities and heat pump manufacturers, who were aiming to revive the heat
pump market in the early 1990s. The IWP commenced a wide information
campaign in 1997, in partnership with the German Electricity Association, to
stimulate sales of heat pumps, which was also supported through the
introduction of federal subsidies. As a result, heat pump sales in Germany
increased from 500 per year in 1990 to 5,000 per year in 1998 (Zimny et al.,
The Austrian Heat Pump Association (LGW) was formed in 1990, and initiated
installer training programmes and quality assurance through the DACH quality
label, as well as an information campaign (Zimny et al., 2015). This is similar
to the origin and nature of the heat pump promotion programme in
Switzerland, which also involved that country’s heat pump association and was
linked to quality assurance initiatives (Section 3.3.3). The Swiss Heat Pump
Promotion Group (or Swiss heat pump association) was a partnership between
‘engineers, contractors, manufacturers, energy-suppliers and government
organizations’ set up in 1993 in order to promote heat pumps at a country
scale (Zimny et al., 2015).
Case study 3.1: Sequence and combination of policies in Austria
The evolution of the heat pump market in Austria, as expressed by annual heat pump sales (Figure
3.1), follows the pattern observed in other leading European heat pump markets, such as Sweden,
Germany and France. Initially the take up of heat pumps in Austria comprised systems for hot water
heating, and was driven by the oil crises of the 1970s and the resultant spike in oil prices. The
domestic production of electricity in Austria has been dominated by hydropower (Zimny et al., 2015),
and heat pumps offered a viable, low carbon alternative to heating oil. These early drivers were
followed by the introduction of tax breaks for new heat pump installations (Eunomia, 2016). However,
installation standards and consumer confidence in the technology were not sufficient at this time to
allow the emerging market to withstand the fall in oil prices from the mid-1980s, causing the heat
pump market to crash. In 1990, the Austrian Heat Pump Association (LGW) was formed and instigated
an information campaign, installer training programmes and quality assurance through the DACH
quality label. Nevertheless, Austrian heat pump sales did not begin to recover until 2001, a year in
which there were several different policy developments. For one, the Federal Environment Fund was
introduced, which subsidised the installation of heat pumps (Eunomia, 2016). Technical standards and
quality assurance were further bolstered through the introduction of an installer certification scheme
by LGW, and the establishment of a heat pump research and test centre called Arsenal Research. Figure
3.1 suggests that in 2008, the global recession may have contributed to a short-term fall in annual
heat pump sales in Austria, although the heat pump market subsequently recovered in 2012. In 2009,
sales were affected by the slowdown in building construction due to the high share of heat pumps
installed in new buildings. The decrease in heat pump sales at this time has also been linked to the
Austrian oil industry launching a programme to support heating oil boilers (Kranzl et al., 2013).
Figure 3.1 Austria: heat pump support policies and market development, 1975-2013
Sources for chart text:
EHPA (2009), Kiss et al. (2014), Zimny et al. (2015), Eunomia (2016).
Source for chart data:
Biermayr et al. (2014).
Case study 3.2: Sequence and combination of policies in Sweden
In Sweden, high oil prices helped to drive the early market growth of heat pumps in the 1970s and
early 1980s (Figure 3.2). Sweden also supported the early deployment of heat pumps through direct
investment grants and low interest loans (Sandstrom, 2000, Johansson, 2014), and the Swedish
building code (Kiss et al., 2014, Zimny et al., 2015). The heat pump market collapsed in the mid-
1980s in part due to declining oil prices, but also due to the ending of government subsidies for
residential heat pumps, the compromised reputation of heat pumps due to poor technical standards,
and a slowdown in the construction of new homes (Kiss et al., 2014, Zimny et al., 2015). New policy
instruments were implemented in Sweden in the early 1990s which focused on technical
improvements and increasing quality assurance (Kiss et al., 2014). In 1993, Sweden initiated a
procurement programme to develop and commercialise innovative GSHPs led by NUTEK the Swedish
Agency for Economic and Regional Growth (Zimny et al., 2015). After this time, the heat pump market
in Sweden has been supported through technical standards and certification for example the Swan
label (an eco-label for heat pumps) in 1998, the P-label quality mark for heat pumps in 2005, a
standard for the installation of geothermal systems and installer certification training (Kiss et al.,
2014, Zimny et al., 2015). In addition, there have been further information campaigns about energy
efficiency and alternative, lower carbon heating technologies such as heat pumps (Zimny et al., 2015).
From 1998 to date subsidies for heat pump installations in domestic buildings have been available
for discrete periods but not on a continuous basis, tending to last between one and four years,
followed by a break of a year or two before new subsidies have been introduced (Zimny et al., 2015).
Now, the Swedish heat pump market is considered to be mature, with at least one in two homes in
Sweden fitted with a heat pump (Eurobserv-er, 2015).
Figure 3.2 Sweden: heat pump support policies and market development, 1982-2013
Sources for chart text:
Sandstrom (2000), Kiss et al. (2014), Johansson (2014), Sumner et al. (2009), World Bank
(2014), Zimny et al. (2015).
Sources for chart data:
for 1982-1995, heat pump sales data received by email from
Swedish Heat Pump Branch, 2 September 2016; for 1994-2013, the data source is EHPA (2014).
Case study 3.3: Sequence and combination of policies in Germany
The German Ministry of Research and Technology initiated heat pump R&D in 1974. A tax-credit
scheme was introduced in 1979 which supported building energy saving measures, including heat
pumps, and in 1983 this tax credit was extended for a further four years. Despite this, in the mid-
1980s the heat pump market collapsed and declined from a peak of over 2,500 sales in 1980 to
approximately 500 sales per year in the mid-to-late 1980s (Sanner, 2016, Zimny et al., 2015). This
has been explained by the adverse impact on the reputation of heat pumps caused by poor product
standards, a lack of maintenance and experience of installers, as well as falling oil and natural gas
prices (Zimny et al., 2015). The steady growth in heat pump sales in Germany during the 1990s
(Figure 3.3) can be attributed to a number of different policies, which include the establishment of
the German heat pump association (IWP) in 1993, the publication of technical manuals and guidance,
federal subsidies for GSHPs and related promotion activities, and the information campaign led by
the IWP several years subsequently (Zimny et al., 2015). While the recovery of the German heat pump
market in the 1990s was also aided by a general increase in energy prices, it took at least a decade
for a significant acceleration in heat pump sales to occur (Zimny et al., 2015). In fact, the rapid
increase in annual heat pump sales observed in 2006 has been linked both to regulations governing
building energy efficiency (Energy Saving Ordinance) and an increase in the standard VAT rate from
16% to 19% in 2007 (Eunomia, 2016). Meanwhile, a similarly sharp growth in heat pump sales in
2008 can be attributed to a peak in fossil fuel prices and the introduction of the Market Incentive
Programme (MAP) in 2007. The financial crisis and falling oil and gas prices contributed to a
slowdown in annual heat pump sales in 2009 and 2010, with the German government implementing
budget cuts in 2010, which included a 3-month suspension of MAP (Eunomia, 2016, Zimny et al.,
2015). 57,000 heat pumps for space heating were sold in Germany in 2015, with increased MAP
funding leading to a tripling of applications to the scheme (EHPA, 2016).
Figure 3.3 Germany: heat pump support policies and market development, 1990 2013
Sources for chart text:
Zimny et al. (2015), Eunomia (2016)
. Source for chart data:
EHPA (2014).
3.4.2 Policy stability
Policy stability is important to the successful development of heat pumps. For
example, Austria has benefited from the long-term stability of policy and
financial support for heat pumps and other renewable heat technologies over
25 years, and similar long-term stability of (and familiarity with) delivery
agents (Eunomia, 2016). As noted in section 3.3.2, in Sweden and Switzerland,
continuous government and private sector R&D programmes were essential
for the ongoing technical development of heat pumps, whether the heat pump
market was experiencing phases of boom, bust or consolidation (Kiss et al.,
Some commentators on the Swedish experience suggest that policy stability
has been highest for carbon taxes rather than in provision of direct support
for heat pumps. The carbon tax in Sweden has sustained over two decades
and more than tripled since its introduction in 1991. However, subsidies
supporting heat pumps have been available for discrete periods of one to four
years at a time (Zimny et al., 2015). Some analysts argue that the effectiveness
and impact of these subsidies is debatable and they have come at significant
expense to the Swedish government (Kiss et al., 2014). Kiss et al. (2014) also
claim that uncertainties about how long investment subsidies would last and
the level of support they would offer may have compromised manufacturers’
long-term investments in heat pump technology.
The account of a technical expert at the Swedish heat pump association
(SVEP), challenges the notion that investment subsidies are an explanation for
the high deployment of heat pumps in Sweden (relative to other European
. This account indicates that as investment subsidies for heat
pumps have been limited to discrete and short-lived periods of time, they
have led to booms and busts of installation activity. It is suggested that the
widespread uptake of heat pumps, particularly in small dwellings, is more
likely to be due to substantial fossil fuel taxes and tax deductions for the costs
of labour required for heat pump installation. The economics of heat pumps
in Sweden also benefit from relatively cheap electricity and higher costs for
E-mail communication with Jan-Erik Nowacki, Technical expert - heat pumps, Swedish Heat Pump
Branch (SKVP), 2 September 2016.
district heating due to privatisation2. Sweden has by far the highest carbon tax
in Europe. Data from Eurostat (2016) shows that Sweden has had the highest
average annual natural gas price for any country in the EU over the last decade
(averaging 28 euros per gigajoule for ‘medium-sized households’ from 2004
to 2015). Despite this it is clear that the availability of subsidies for heat
pumps, together with measures to improve installation quality played a
significant role in Sweden as elsewhere.
Denmark represents an example of how low policy prioritisation for heat
pumps and shifting policy support affected the heat pump market. The first
oil crisis of 1973/1974 led to considerable efforts in Denmark to reduce the
country’s oil and gas imports and decrease energy consumption. Up to this
time, approximately 200 heat pumps had been fitted in single-family homes,
most of which were either performing poorly or inoperable. In 1974, the
Ministry of Trade funded a DKK 1.4 million R&D programme for heat pumps.
That same year, the first mass-manufactured heat pump reached the Danish
market (Nyborg and Røpke, 2015).
The Danish Energy Agency (DEA) was established in 1976 to oversee the new
drive towards energy independence, through a national energy plan which
included the following elements: to shift from oil to coal, nuclear power and
other alternative energy sources; develop a national gas grid using North Sea
natural gas; and conduct comprehensive heat planning across all counties and
municipalities. An oil tax was introduced in Denmark in 1977, which together
with the second oil crisis of 1979 caused substantial increases in the price of
household heating fuel. Since oil boilers were the dominant form of heating in
Danish households, there was a strong incentive to switch to cheaper heating
sources (Eunomia for DECC, 2016). A decade-long R&D programme on heat
pumps was also started in 1980 (Nyborg and Røpke, 2015).
In 1981, a new subsidy was implemented by the DEA, which covered 20% of
the cost of installing various renewable energy technologies, including heat
pumps. At the same time, the DEA funded the setting up of test stations for
each supported technology, including a dedicated heat pump test centre
located at the Technological Institute. This helped to standardise heat pumps
and reduce the risk of subsidies being spent on lower quality products.
However, grassroots organisations such as the Organisation for Renewable
Energy (ORE) and the Organisation for Nuclear Power (ONP), which were
influential in lobbying politicians, were generally opposed to heat pumps on
the grounds that they required electricity from fossil fuels as an input, and
also doubted their potential to save energy. In addition, the Ministry of
Environment was concerned about the possibility of GSHPs contaminating
groundwater. This resistance to heat pumps may explain why the subsidy for
heat pumps was reduced to 10% of the costs of installation in 1982, whereas
the equivalent subsidies for other renewable energy technologies were
increased to 30% (Nyborg and Røpke, 2015).
Mandatory connection was introduced in 1982 for households in areas with
collective supply from district heating or natural gas. While in the early 1980s,
electricity, oil and coal taxes were increased significantly as a response to
declining oil prices, natural gas was not taxed. Sales of heat pumps were
increasing at this time, but experienced a sharp fall in the mid-1980s (e.g.
decreasing from 2,000 sales in 1982 to several hundred in 1986). This market
collapse can be explained by variable installation standards and subsidies,
unsatisfactory promotion and the volatility of oil and electricity prices (Nyborg
and Røpke, 2015).
In the late 1980s, regulation and taxation combined to project a negative
image of electricity and dis-incentivise the uptake of heat pumps, particularly
as the majority of Danish electricity production at this time continued to be
from centralised coal power stations (, 2016a,,
2016b). Thus, in 1988 electric heating was banned, and electricity taxes were
increased again in 1989. Although the heat pump test station had been
established in 1981, almost a decade later the Danish heat pump
manufacturers’ organisation (AMHP) acknowledged that marketing of heat
pumps to the public was inadequate, and was failing to communicate their
potential as a renewable technology that could reduce carbon dioxide
emissions. In 1993, the Danish Energy Agency withdrew heat pump subsidies
in areas supplied by district heating or natural gas, while increasing subsidies
for heat pumps outside collective supply areas from 10% to 15% of installation
costs. The Energy Agency also supported an installer quality assurance
scheme (VPO) in the same year. Heat pump deployment was further hindered
by a new CO2 tax in 1994 which raised tax on electricity, while tax on heating
oil remained unchanged and natural gas continued to be tax free (Nyborg and
Røpke, 2015).
In 2001, a new conservative Danish government pursued a sharp break from
the environmental policies of the previous government by scrapping the
renewable energy subsidy law and decommissioning renewable energy test
stations (this affected both subsidies supporting heat pumps and the heat
pump test station). While the heat pump station continued to operate, it did
so on a much smaller budget based on voluntary user-finance (Nyborg and
Røpke, 2015).
Political opposition to heat pumps was removed in 2008, when the
government announced a reversal of previous opposition to environmentally
sustainable energy policy. The penetration of renewable and energy efficient
power production had been steadily increasing since the early 1990s, so that
by 2008 wind power and local CHP plants together contributed approximately
40% of electricity production in Denmark (, 2016). The new
government vision was underpinned by fossil fuel independence and green
growth. An information campaign was launched to promote the replacement
of run-down oil burners with energy efficient heat pumps. This was followed
in 2010 by the introduction of a subsidy scheme to support the replacement
of oil heaters with heat pumps, solar hot water or district heating (Nyborg and
Røpke, 2015).
3.5 Context and transferability to the UK
3.5.1 Contextual factors
Across different European countries, there are a range of contextual factors
which may help or hinder policies aimed at supporting the deployment of heat
pumps. These contextual factors include climate and the production and
availability of natural gas and clean electricity for heating. They can also
include competition with other incumbent forms of heating, such as oil and
direct electric as well as natural gas heating, or with district heating networks,
variations in building stock, typical heating systems (high temperature / low
temperature), and temporal variations in oil and gas prices.
Figure 3.4 shows a division of Europe into three climate condition areas from
European Commission guidelines in March 2013 for calculating renewable
energy production from heat pumps. The colder (blue), average (green) and
(warmer) climate zones represent climate conditions based on temperature
and global solar irradiation typical of Helsinki, Strasbourg and Athens,
respectively (EC, 2013, Zimny et al., 2015). The north of the UK falls into the
same zone as northeast France and western Germany, while the south of the
UK is in an identical zone to the southwest of France and much of the southern
Figure 3.4 European climate condition zones
Zimny et al. (2015)
The EU Renewable Energy Sources Directive sets out the portion of heat
delivered as renewable energy from heat pumps. Based on this Directive,
Gleeson and Lowe (2013) calculate that for the EU, heat pumps need to have
a seasonal performance factor (SPF) of greater than 2.88 in order to produce
renewable heat. The current mean performance of air source heat pumps does
not meet these standards, although this could change with greater penetration
of renewables into the electricity grid, or improvements in heat pump design,
installation and performance (Gleeson and Lowe, 2013).
The influence of contextual factors upon the capacity of countries to take up
heat pumps is complex. In Table 3.2, different European countries are ranked
according to heat pump sales per 1000 households, and compared in relation
to contextual data on climate, natural gas production and number of gas
customers in each country. In general, no definitive relationship is indicated
between climate and national heat pump sales per household. Tentative
observations can be made with respect to the production of natural gas, the
number of natural gas customers and climate condition zones. The three
countries with the highest total heat pump sales per 1000 households are
Sweden, Finland and Estonia
, which do not produce any natural gas at all,
have the least number of natural gas customers and are all in the ‘cold’
climatic zone. The UK and Netherlands have both the highest indigenous
production of natural gas and amongst the lowest number heat pump sales
per household. Despite this, Germany and Italy also have a significant level of
natural gas production and have high levels of household gas connections
while selling over half a million or a million heat pumps respectively from 2005
to 2013 (EHPA, 2014). This suggests that while heat pumps are likely to be
more attractive to households in countries which do not have extensive natural
gas connections, other factors including policies also play a key role.
In Sweden and Switzerland, the uptake of heat pumps has been facilitated by
the abundant supply of low carbon electricity supply from hydro-electricity
and nuclear power, as well as the lack of domestic gas reserves (Frontier
Economics, 2013). The availability of clean electricity in Sweden and
Switzerland has allowed heat pumps to be viewed favourably by policy makers
(Kiss et al., 2014). Similarly France combines a high penetration of nuclear
generation and of electric heating, with relatively high penetration of heat
pumps. In contrast, as described in section 3.4.2, heat pumps faced strong
political opposition in Denmark, particularly when fossil fuels dominated
electricity production during the 1980s and 1990s (Nyborg and Røpke, 2015).
Norway had a higher annual average from 2010 to 2013 - 34 heat pump sales per 1,000 households
- but was not included in Table 3.2 due to a lack of data on natural gas production and number of
natural gas customers.
Table 3.2 Contextual factors and heat pump deployment across Europe:
climate, natural gas production and availability
zone (s)
of natural
gas, 2013
(TWh, gross
Number of
natural gas
Total number
(1000s) of
annual heat
pump sales,
annual heat
pump sales,
per 1000
Warmer /
average /
Warmer /
average /
22, 941
Warmer /
Warmer /
Average /
Average /
Average /
EC (2013),
Zimny et
al. (2015)
(2016), Swiss
Office (2016)
EHPA (2014),
Notes to Table 3.2
1. Norway has not been included in Table 3.2 because no data is available from Eurogas (2014)
for indigenous production of natural gas or number of natural gas customers.
2. Indigenous production of natural gas figures are best estimates available at the time of
publication' (Eurogas, 2014).
3. 'Number of natural gas customers are counted by number of meters, and include domestic
as well as non-domestic (industrial, commercial and other) customers, except Germany for
which the number of domestic customers is equivalent to the number of dwellings supplied with
natural gas for heating' (Eurogas, 2014).
Overall, it is difficult to draw unequivocal conclusions about contextual
factors. The absence of an extensive natural gas supply to households and
availability of low cost and low carbon electricity correlate strongly with high
heat pump penetrations. However a group of ‘middle ground’ countries
possess a more mixed portfolio of gas heating, heat pumps and heat
networks. For these countries the presence of strong policies in the form of
carbon/energy taxes, effective regulation and planning appear to have played
a central role in creating a diversified mix.
3.5.2 Transferability to the UK
The review indicates that policy continuity and effective policy packages
involving government, industry and consumers play a key role in heat pump
deployment. Policies also need to integrate technical standards, quality
assurance and information dissemination. Investment subsidies to cover the
up-front costs of heat pump installation can form part of these packages but
may have an adverse impacts if they are short-lived or lead to booms and
busts in heat pump sales. There is also strong evidence that fiscal policies can
help promote heat pumps if they indirectly constrain competition from
incumbents through taxes on fossil fuels.
In Austria, Denmark and Germany, fossil fuel taxes have been the most
significant driver of heat pump deployment according to Eunomia (2016). This
is reinforced through some of the evidence presented in our review,
particularly in the cases of Sweden and Denmark. Since Germany possesses a
substantial proportion of households connected to the gas grid (42%), it can
provide an instructive comparison to the UK. In particular, the operating costs
of fossil fuel heating systems are higher in Germany due to the fossil fuel tax
in place there (Eunomia, 2016).
Our review does not specifically consider technological cost reduction or
learning rates as metrics of policy success. However, in Switzerland and
Sweden, the cost of heat pumps has decreased over time as these markets
have become more mature (Kiss et al., 2014). Conversely, costs are likely to
be higher in less mature markets such as the UK. As installation costs
represent a significant proportion of costs related to heat pumps, there is
potential for significant cost reduction in the UK under a scenario in which
policies guide the UK heat pump market towards increased competition and
maturity (Eunomia, 2016).
Overall the review suggests that if the UK is to develop policies to increase the
use of heat pumps it is likely to be instructive to focus on the experience in
countries with a diverse mix of gas and heat pumps. Whilst countries with a
radically different context (particularly gas connection levels and electricity
mix) might not offer such direct analogies, specific lessons may still apply.
The experience of several countries in taking steps to improve the quality of
heat pump installations is a clear example. The review also suggests that
irrespective of context a successful approach is likely to combine subsidies,
carbon taxes, regulation and strong support for certification, skills and
product standards.
3.6 Summary of main findings
Our findings on policies to support the deployment of heat pumps include:
Markets for heat pumps vary in their relative maturity across Europe,
but we need to be aware of the different contexts in which these markets
have developed, for example the availability of alternative heating
systems, particularly natural gas. A key success factor for heat pumps
is policy stability, which promotes industry and consumer confidence.
In the UK, high consumer satisfaction with gas central heating systems
means that in recent surveys many consumers say they would be
unwilling to consider alternatives. Across Europe, heat pumps have been
widely deployed where natural gas networks are less extensive, as gas
heating is typically cheaper than alternatives. Off-gas consumers in the
UK may be more willing to consider alternative heating technologies.
In market leading European countries, policies to promote heat pumps,
implement information campaigns and increase technical standards
have been successfully deployed in combination with subsidies to
stimulate the widespread take-up of heat pumps. Low consumer
awareness and confidence form a barrier to the uptake of heat pumps;
enhancing the reputation of the industry through standards and
regulations have been key in overcoming this barrier in countries with
high levels of uptake of these technologies.
Swedish, German and Danish experiences in the early to mid-1980s
suggest that success of public subsidy support depends upon standards
of manufacturing, installation and maintenance being sufficient to
maintain the reputation of the heat pump industry. Some leading
European heat pump markets (e.g. Germany, Sweden and Switzerland)
experienced a recovery and growth in heat pump sales from the early
1990s, in particular due to concerted attempts by governments and
industry to boost the reputation of heat pumps through a combination
of promotion, information campaigns, subsidies and technical
Heat pump deployment in Denmark was affected by varying political
support for the environmental agenda, opposition to electric heating, or
lack of recognition of heat pumps as a legitimate form of renewable
energy. There is similarity between the UK and Denmark since in both
countries subsidy programmes supporting renewable heat technologies
have been delayed or terminated, adversely impacting on market
It is important to determine the balance between policies which incentivise
heat pumps and those which support the development of district heating. In
Denmark, policies have included mandatory connection to district heating or
natural gas networks, a ban of heat pumps in collective supply areas and
increased subsidisation of heat pumps outside collective supply areas.
Chapter 4 considers heat networks in detail and returns to this interaction
4 What works to support the deployment of district
4.1 Introduction
Drawing on the review of international literature, this chapter sets out findings
on what works and what doesn’t work in relation to policies which support the
wider uptake of heat networks, also known as district heating (DH). As in the
case of heat pumps the literature indicates that there is a wide range of
variation in the penetration of district heating across Europe. In the UK to date,
district heating has achieved very little deployment compared to other
countries in Europe. In Denmark, Sweden and Finland, 50-60% of buildings
are supplied by district heating; by contrast, district heating supplies perhaps
1% of buildings in the UK (Ecoheat4EU, 2011b). Barriers to the development of
district heating in the UK are fairly well known, and are described by DECC
(2013b), Frontier Economics (2015) and others.
There are important differences between heat pumps and heat networks, with
the latter requiring a higher degree of regional or urban coordination and
planning. Nevertheless the review reveals important similarities related to
policy continuity, financial support and the quality of the consumer
experience. As with Chapter 3, this chapter provides a brief review of the UK
experience (section 4.2) before assessing the international experience in
terms of individual policies (section 4.3). In section 4.4, the sequence,
combination, stability and flexibility of policies are considered with reference
to two country case studies: Sweden and Norway. Section 4.5 explores the
different contextual factors which influence the effectiveness of policies in
other countries and the extent to which they might be transferable to the UK
policy context.
4.2 UK policy experience
In the UK, short-term and abruptly changing policies relating to district
heating development have created uncertainty and perceived risks for local
government and the commercial sector (Webb et al., 2014). UK grant
programmes have triggered some limited development activity, but low
industry confidence in future support schemes meant investment in skills or
supply chains was not triggered instead, prices and lead times for specialist
consultancy services were temporarily driven up (Hawkey, 2012). The
perceived uncertainty of UK energy policy in general can also raise concerns
about future risks to district heating (DECC, 2015).
A number of UK policies have focussed on funding feasibility assessments for
district heating rather than infrastructure development: the Low Carbon
Pioneer Cities Heat Networks Project, Heat Networks Delivery Unit (HNDU), and
the London DEMaP project. Specialist support from either DECC or ARUP was
provided along with funding, and the role of specialist support to local
authorities is discussed further below.
The HNDU successfully attracted a large number of applications (234 from
121 Local Authorities), of which 201 were successful; most Local Authorities
working on heat networks applied for this central government funding, and it
may have helped to raise the profile and perceived credibility of district
heating. However, while these projects are still at an early stage, their further
development appears to be highly uncertain: many Local Authorities expect it
will be challenging to secure funding for the capital costs of development and
to pay for further external support (e.g. for commercial skills training). In
addition, some projects may require public investment to go forward since
they offer marginal rates of return (DECC, 2015). This concern appears to be
supported by the experience of the district heating scheme in Birmingham,
operated as a public private partnership, where the focus on profitability has
meant separate public funding was been required to meet local objectives by
extending the network to supply multi-storey public housing (Hawkey et al.,
By contrast, the London DEMaP project, which was succeeded by the
Decentralised Energy Project Delivery Unit (DEPDU), has driven actual network
deployment. By project closedown in 2015, ten out of ‘more than 20’
supported projects had progressed to procurement and delivery, with ‘many
others in the pipeline’ (Kirk, 2015). DEPDU provided Local Authorities and
other district heating sponsors with financial assistance and specialist support
from the consultancy ARUP to support project commercialisation (UNEP,
2015). In some cases, the availability of support from DEPDU leveraged other
funding for additional feasibility studies (Investment and Performance Board,
Multiple stages of funding are desirable to support heat network deployment
(UKERC, 2016), and DEPDU appears to have been successful in offering
support beyond the stage of feasibility assessments. DEPDU was 90% funded
by the European Investment Bank on the condition that this would be
repayable if projects failed to leverage significant additional capital
investment. To reduce this risk, only projects with a high chance of being
delivered were prioritised for development (Investment and Performance
Board, 2013). It seems likely that this model would not be able to support
many of the projects identified following the support of the HNDU, if these
cannot attract private capital. In addition, some projects supported by DEPDU
consisted of extensions to existing networks of supply of new-build areas,
and capital cost and financial risk may be reduced when connecting new-build
areas to district heating rather than retrofitting (Ecoheat4EU, 2011b).
In Scotland, investment support for infrastructure development is available
and the majority of funded schemes are already in operation. The District
Heating Loan Fund provides loans of up to £400,000 covering up to 100% of
the cost of developing district heating schemes, which are repayable with 3.5%
interest over 10 years; technical support is also offered where appropriate. In
addition, the Warm Homes Fund can support district heating projects that use
renewable heat to provide affordable warmth to homes, and offers grants of
up to £20,000 and loans of up to £5million. Together this support has funded
26 DH schemes, of which 22 were operational at the time of evaluation. Half
of respondents would likely not have taken action without the support scheme,
and the remainder may have taken some action but using the support scheme
reduced risks to project delivery (Fawcett, 2015); a similar finding was
reported for the Low Carbon Pioneer Cities Heat Networks Project (Ambrose et
al., 2015).
Although a high number of individual schemes have been developed as a
result of capital support available in Scotland, they appear to be relatively
small in scale, with 835 households newly connected to district heating in total
(a single project supported by DEPDU, Royal Free Hospital in Gospel Oak,
provided heat to over 1,500 residents). It is unclear at his stage of the review
whether this was due to the nature of schemes Local Authorities prioritised
for development, or limitations of the policy support. Suggestions to improve
the scheme include additional technical support, such as a best practice guide,
which could increase confidence to develop larger schemes; offering higher
loan amounts for larger projects to be delivered; and marketing DH more
widely to larger potential customers, such as housing associations and
facilities managers (Fawcett, 2015).
The planning and regulatory framework supporting district heating is
generally relatively weak in the UK, which is suggested as a major factor
inhibiting its development (Toke and Fragaki, 2008). UK policy requires only
voluntary appraisal of the use of waste heat from, for example, thermal
electricity generation, and it has been suggested that UK lobbying contributed
to weakening the EU Energy Efficiency Directive to replace mandatory use of
waste heat with a requirement for business case analysis (Hawkey and Webb,
There are perhaps some exceptions with a stronger planning framework, but
these are limited to specific areas of the UK. At one point planning regulations
required new developments in Milton Keynes to connect to district heating
(Hawkey and Webb, 2014). The Greater London Authority developed an
Opportunity Area Planning Framework supporting district heating, which also
requires connection to existing or planned heat networks (Nine Elms on the
South Bank, 2016).
Relatively little UK evidence has been identified to date on specific policies to
support customer connection to district heating. The evidence so far reviewed
included one example that evaluated residential consumer acceptance of
district heating: at the Wyndford estate in Glasgow, replacement of old electric
storage heaters with district heating plus external wall insulation lead to
substantial increases in satisfaction amongst the 10% of residents interviewed.
Heat metering and billing was sometimes confusing, however, with some
residents finding it difficult to understand how their use of heating and hot
water related to what they paid (Webb et al., 2014).
More generally, early customer liaison was identified as a key success factor
for District Heating Loan Fund projects (Fawcett, 2015), but many projects
funded through the HNDU expected it to be challenging (DECC, 2015). In
particular, it can be difficult to coordinate multiple larger consumers, which
may have differing needs, and mistrust a communal solution (Hawkey, 2012).
4.3. Policies to support the deployment of district heating
4.3.1 Financial support investment subsidies
District heating is capital intensive, and has uncertain returns unless
established as a monopoly. This points to an important potential role for
financial support for investment (Andrews et al., 2012). Investment subsidies
may be provided as a grant or loan, and ongoing financial support may be
provided in various ways. The review to date has identified international
evidence on the role of investment subsidies and ongoing financial incentives.
These are discussed in turn in the following sub-sections.
Investment grants are considered to be a general good-practice support
measure, but not typically suitable for countries with highly developed district
heating markets (Ecoheat4EU, 2011b). Stakeholders from countries where
district heating is less developed see investment grants for network
development as highly important (Werner, 2011).
In the majority of cases, investment subsidies were not involved in the
extensive development of district heating seen in Denmark and Sweden.
However, most development took place before energy market liberalisation,
with district heating companies owned and/or controlled by municipalities,
and risk reduced through planning and regulation of heat supply (Toke and
Fragaki, 2008, Ericsson, 2009). Danish municipalities have also reduced risk
by guaranteeing loans to district heating developers (Andrews et al., 2012).
Some evidence has been identified of investment subsidies for district heating
development in pre-liberalisation contexts. In pre-liberalisation Germany,
investment subsidies were provided by the Future Investment Programme (ZIP)
I and II which followed the 1970’s oil shocks. On average 35% of investment
costs was distributed to district heating utilities to promote the expansion of
CHP and district heating; connected load increased by around 14,000 MW, and
employment also increased (Ecoheat4EU, 2011a). In Sweden, two waves of
investment subsidies for biomass CHP took place before and after energy
market liberalisation in 1996, with the aim of increasing biomass CHP
generation in the context of the planned closure of nuclear generators. These
had a relatively small direct impact on national electricity generation, but may
have helped to raise the profile of CHP (Ericsson, 2009).
Investment subsidies have been widely involved in the development of district
heating post-liberalisation, although Prague’s district heating system is
unusual and noteworthy because much of its development took place under
free market conditions with no subsidy or grant, although the project was
started under a planned economy (Andrews et al., 2012). In Norway,
investment subsidies have been the most important measure for expanding
district heating. Support for district heating has been given to all new district
heating plants, including investments of 30 million Euros in 2008 and 59
million Euros in 2009 (Ecoheat4EU, 2011a).
The district heating development in Rotterdam, Netherlands, received a
central government grant of 27 million Euros linked to avoided CO2 and NOx.
It was developed by a municipally owned company and also received 38 million
Euros in municipal equity as well as having 150 million Euros of loans
underwritten; these figures reflect municipal support approximately tripling
after the closure of a local waste incinerator meant increased capital
investments in more extensive heat networks were necessary for the project
to be delivered (Hawkey and Webb, 2014).
In Germany, investment subsidies for heat networks are available according to
the length and diameter of pipes, which has stimulated interest in, planning,
and beginning work on DH (Ecoheat4EU, 2011a). Under the German CHP Act
in 2013, single payments totalling €110 million were used to fund 1,017
district heating systems with a total length of 423 km (Gailfuss, 2016).
There is also some evidence that investment subsidies can stimulate
expansion of district heating in countries where it is already well established.
Funding from central government supported the development of less
traditional heat networks in post-liberalisation Sweden, including smaller
networks, expansion into less heat dense areas of one and two family homes,
and greater use of industrial waste heat that was less local to heat demand
areas and so required relatively extensive heat networks. It played a
particularly important role in improving the economics and raising legitimacy
of industrial waste heat to supply district heating. District heating competed
with other types of projects to secure this funding, which was available for
local projects to address environmental issues, employment and greenhouse
gas emissions (Ericsson, 2009).
Between 2006 and 2010, Swedish subsidy programmes were directed to
individual consumers. A subsidy for replacement of oil boilers in one or two
family homes had high uptake and resulted in more rapid replacement, but
was criticised for poor cost-effectiveness. Heat pumps were the most popular
replacement and connection to district heating accounted for around 20% of
the subsidy. A subsidy to replace direct electric heating in any type of home
was available at a higher rate, due to the additional costs of installing central
heating, and lead to around 80% shift to district heating, although with
significant variation between regions depending on local feasibility (Ericsson,
The way funding is administered may influence its effectiveness. For example,
in an Italian support scheme, selected DH plants received a set percentage of
allowable investment costs as a one-off grant; 70% of available funds were
allocated, and only 32% of selected projects are currently in operation (rising
to 49% if failed projects are excluded) (Aste et al., 2015). Payments were made
after completed work was verified, in some cases many years after work
began, and the support mechanism could be improved by simplifying and
clarifying the application process and criteria and reducing the time involved
(Aste et al., 2015). In addition, policies may need to offer sufficient levels of
funding to have larger scale impacts. Investment subsidies for heat networks
under the German CHP Act were at one time limited to 20% of total investment,
which may be too low (Ecoheat4EU, 2011a). Also in Germany, the Market
Stimulus Package for Renewable Energy Sources (MAP) focussed on small and
medium enterprises and relatively small projects or investment levels.
Ecoheat4EU (2011a) suggests that the MAP should be expanded to cover
installations or enterprises of any size.
In general, investment grants may be more effective at reducing perceived risk
because they do not require ongoing political support (Ecoheat4EU, 2011b).
Investment subsidies could also reduce the total funding required if funded
organisations apply high discount rates to future funding (Frontier Economics,
2015). Nevertheless, grants have been criticized for reducing developer
accountability and leading to less well designed systems (Thorsteinsson and
Tester, 2010). In Iceland, geothermal exploration and drilling has been funded
by government loans that convert to grants if no resource is identified
(Thorsteinsson and Tester, 2010), and the logic of providing grants rather than
loans could perhaps also apply to funding for feasibility assessments.
4.3.2 Ongoing incentives and carbon/energy taxes
Some international evidence was identified of financial incentives provided by
schemes that increase the revenue that can be gained from CHP electricity
generation, or tax alternative forms of heating (Ericsson, 2009, Toke and
Fragaki, 2008).
In Sweden, tradable certificates for renewable electricity supported biomass
CHP and were often the most important factor in deciding to invest in CHP.
This has resulted in an increase in CHP for DH, which previously decreased
after the development of nuclear generation (Ericsson, 2009).
Denmark promoted CHP generation from the beginning of DH deployment.
The ‘triple tariff’ paid to CHP operators was based on the time of electricity
generation, with higher tariffs being paid during peak times. Aggregators
allow CHP operators to access similar markets and prices as large generators,
and the triple tariff has now been more or less replaced by trading on the spot
market. Danish CHP-DH typically incorporates additional thermal storage
which supports this flexibility (Toke and Fragaki, 2008).
Revenue support for CHP also plays a strong role in recent district heating
deployment in Germany. The German Combined Heat and Power Act
(KWKModG) includes bonus payments for electricity from CHP for a set time
period to offset the higher investment costs of CHP compared to conventional
power plants. The KWKModG also mandates the grid connection of CHP and
gives equal priority to the purchase of electricity from cogeneration and
renewables over electricity from conventional sources (Ecoheat4EU, 2011a).
This move towards integrating CHP generation with renewables seems likely
to give CHP a less active and effective role balancing electricity systems than
in Denmark, where CHP plants trade on the spot market, but it also seems
reasonable that the administrative burden on CHP operators will be lower.
Investment support for heat storage is also continued, which can support more
flexible operation of CHP to help balance renewable generation (Toke and
Fragaki, 2008).
As with investment subsidies, the way ongoing financial support is
administered can impact on its effectiveness. In Germany, a recent review of
the bonus payments for electricity from CHP included the amount and duration
of payments being decided in advance of construction for projects over
10MWe. Previously, projects had to be completed before payments began and
uncertainty over whether payment levels would change before project
completion reduced willingness to invest (Gailfuss, 2016). Aste et al. (2015)
note that CHP increases overall economic viability as well as energy efficiency
of DH, but report some evidence in Italy of inefficient heat dumping as a result
of perverse incentives that excessively reward electricity generation, and
suggest that incentives should be optimised to maximise environmental
As with heat pumps, carbon or energy taxes levied on incumbent heating
options can also incentivise heat network development. They may also have a
significant impact on the fuels used to provide networks with heat. Oil was
taxed from the start of district heating development in Denmark in the 1970s,
and the level of taxation was raised after oil prices fell in the 1980s, which
allowed CHP systems to be run profitably (Toke and Fragaki, 2008). Denmark
now has one of the highest energy taxes in Europe (Oñate et al., 2014). Taxes
in Sweden were introduced after the initial development of DH, and have
mostly been responsible for changing the fuel used to meet shifting policy
objectives: first reducing oil use, and more recently increasing the use of
biomass. District heating infrastructure has been able to rapidly respond to
changing energy policy in this way (Ericsson, 2009). In Norway, there are taxes
on fuel oil and electricity (the main alternative heating sources), but there is a
tax deduction for electricity used for district heating, while waste incineration,
the main heat source for district heating, is tax exempt (Ecoheat4EU, 2011a).
Germany taxes fossil fuels and CHP plants, which are the main heat source for
district heating, and are exempt from this tax if their load factor is over 70%.
Large power stations are also exempt from this tax, so the tax exemption for
CHP provides no advantage for electricity generated from CHP, but it
nonetheless provides a significant advantage for district heating over
individual oil and gas heating (Kerr, 2008).
4.3.3 Heat planning
Planning frameworks supporting or mandating district heating in certain areas
can reduce the financial risk of developing district heating projects
(Ecoheat4EU, 2011b). Andrews et al. (2012) contend that since district heating
is capital intensive, and inherently risky in a free market, projects will only be
developed if developers are confident they will access a high percentage of
the heat market. They propose that for district heating to be economically
attractive 60% of the heat market in the development area must be connected.
Building regulations can play a role as well as zonal heat planning.
Andrews et al. (2012) also suggest that European countries with high levels of
district heating have greatly reduced the risk of demand uncertainty through
heat planning, including granting monopoly powers to district heating
companies, leading to the ability to access capital at very low rates, and
willingness to invest for relatively low rates of return. Heat planning is
generally perceived as a highly useful policy by stakeholders across a range of
countries, but there is some tension between prescriptive planning and
consumer choice (Werner, 2011). This challenge is illustrated by the example
of Germany, which has a framework for very strong heat planning, but which
is little used as it can be unpopular; this is discussed further below.
Denmark and Sweden employed relatively prescriptive planning pre-
liberalisation, when most district heating development took place.
Municipalities’ responsibilities and powers regarding heat planning have
decreased following energy market liberalisation, and heat planning has
become less widely used. In Denmark, local authorities are required to
produce local heat plans that identify existing and future heat demands of
buildings and current and potential heat sources, and assess which heat
sources are most socio-economically cost-effective and locally appropriate.
The Danish Heat Law of 1979 required local authorities to oblige new buildings
to connect to DH, and electric resistance heating was banned in areas supplied
by district heating, obliging many buildings to connect (Toke and Fragaki,
2008, Oñate et al., 2014). From 2000, local heat plans in Denmark no longer
required binding planning, and local authorities may decide whether or not to
require certain buildings to connect to district heating (Chittum and
Østergaard, 2014); the extent to which this power is used varies considerably
(Oñate et al., 2014).
Planning was also a key part of district heating development in Sweden (Oñate
et al., 2014). Heat networks were initially managed by municipalities, and then
transferred into municipal ownership (Ericsson, 2009). Subsequently, some of
these DH systems were sold to large national or international utilities, which
in the late 2000s accounted for 42% of energy supplied to district heating
(Ericsson, 2009).
In 1977, Swedish municipalities were required by law to develop local energy
plans. The law has been criticised for a lack of clarity on exactly what the plans
should include, and a lack of sanctions for municipalities not producing them;
about 27% of municipalities did not have a plan in 2006. Also, the law does
not give municipalities any authority to influence other actors, for example by
mandating the use of district heating. Nonetheless, in pre-liberalisation
Sweden, some municipal energy companies refused to supply electricity for
heat in areas with existing district heating. In post-liberalisation Sweden,
customers are free to disconnect from district heating and use alternative
heating sources, although district heating suppliers are granted monopolies
on district heating supply. Although local authorities are not able to mandate
the use of district heating, they are able to require new building developments
to be connected to district heating. However, this power is not always used.
Alternatively, municipalities may suggest district heating supplies a new
development where this is viable, and facilitate communication between
developers and the district heating supplier (Ericsson, 2009).
Germany has the potential for a very strong planning framework, particularly
post-liberalisation. German municipal codes enable municipalities to enforce
mandatory heat planning in certain areas if they choose to, as long as the
municipality fulfils certain criteria and has sufficient control over the local
district heating utility. This can include obliging all building owners to connect
to and use district heating as their sole heating technology. The stability
provided could help municipalities to plan heat sources and networks more
efficiently and secure investment, particularly in areas without any nearby
district heating infrastructure. A number of municipalities have used
mandatory heat planning, but it accounts for only 12% of district heating in
the country (Ecoheat4EU, 2011a). It can be unpopular and this may account
for it being relatively little used, but increasing public involvement in the
process could help to promote acceptance (Ecoheat4EU, 2011a).
Norway also has a fairly strong planning framework, although customers are
not obliged to use district heating. The Planning and Building Act, introduced
in 1985 (Norwegian Ministry of Local Government and Modernisation, 1985),
obliges municipalities to consider district heating feasibility as part of spatial
planning, and they may choose to create local heat plans that support district
heating. The Energy Act requires district heating companies to produce
detailed development plans, including evidence of customer commitments to
connect, in order to obtain a license; in turn, the license grants them a
concession to supply district heating in a given area. If that area is also covered
by a local heat plan supporting district heating, the district heating company
is able to require all customers to connect to, though not use, district heating
(Ecoheat4EU, 2011a).
4.3.4 Regulations relating to building energy efficiency and the use of waste
District heating is technically compatible with energy efficient buildings, and
supplying low energy buildings can also support the use of lower temperature
heat including from renewable sources (Andrews et al., 2012). However, there
can be economic challenges if heat demand decreases (Ericsson, 2009). The
Planning and Building Act 2010 in Norway required all buildings above 500m2
to have a minimum 60% of their net heating demand supplied by means other
than direct electric heating or fossil fuels; for buildings under 500m2, the
minimum requirement was 40% (Ecoheat4EU, 2011a).
In Germany, the Act on the Promotion of Renewable Energies in the Heat Sector
(EEWärmeG) aimed to increase the share of renewable energy in final energy
consumption for space and water heating, and cooling, to 14% by 2020. DH is
covered if heat is produced by a substantial share of renewables, at least 50%
CHP, or a combination of both (Ecoheat4EU, 2011a).
The objective of the German Energy Saving Ordinance (EnEV) (amended in
2009) was to reduce primary energy demand for heating and hot water in
buildings by 30%. This could be delivered through CHP DH in combination with
insulation, or other measures (Ecoheat4EU, 2011a), while minimum insulation
levels were also required (Ecoheat4EU, 2011a). These building regulations
have the advantage that they consider primary rather than end use energy, so
they account for the efficiency benefits of DH from CHP or renewables.
However, they have also led to a decrease in heat demand over time, while the
level of heat demand has become less certain because the legislation has
changed 'on a regular basis (Ecoheat4EU, 2011a).
Regulations requiring the use of waste heat can also promote the development
of district heating (Hawkey and Webb, 2014), and coordinated planning with
waste management can provide heat sources for district heating through
municipal solid waste incineration or biogas production (Ericsson, 2009).
Regulations on the use of waste heat initiated DH development in Norway and
the Netherlands. In Norway, this related to EFW, and in the Netherlands, to
industrial waste heat. However, there could be concerns in that sources of
waste heat may be far from settlements, requiring more capital investment
(Ericsson, 2009), and further local co-dependency and risk introduced - as
seen in a case in Netherlands described by Hawkey and Webb (2014), where
one waste heat source withdrew, and another closed down.
In Sweden, available waste heat from industry was an important factor behind
DH development in some towns. Subsidies were important for developing the
more extensive networks necessary to recover waste heat. From 2002, a ban
on landfill of combustible waste encouraged the uptake of energy from waste
as a heat source for DH, although this appears to relate principally to existing
networks (Ericsson, 2009).
4.3.5 Technical standards, price regulation and consumer protection
In Sweden, the Swedish District Heating Association had an important role in
setting technical standards for performance and interoperability. Technical
standards also benefited the emerging industry by reducing the risk of
becoming locked into obsolete infrastructure with no replacement parts
available, disseminating knowledge and helping to ensure pipes performed
consistently well, and possibly reduced the price of pipes (Ericsson, 2009).
Price regulation can increase consumer confidence in district heating (Andrews
et al., 2012), and this may be particularly important where planning has
created monopoly operation (Ecoheat4EU, 2011b). Prior to liberalisation in
Sweden, cost-based pricing was mandatory and district heating companies
were prohibited from making profits. Price regulation ended with liberalisation
and district heating tariffs now vary significantly between areas. This is likely
to reflect different costs in different areas, but also different approaches to
cost setting and expected profits: some suppliers set prices according to cost
(although information on costs is not transparent), and some consider the
price of alternative heating; while large utilities may expect much higher rates
of return than municipal district heating companies (Ericsson, 2009).
In Sweden, de-regulation of prices following energy market liberalisation led
to protests from consumers who argued that district heating operators were
then in a position to take advantage of operating as a natural monopoly; this
has triggered two government investigations (Oñate et al., 2014). Third party
access for heat to networks has been discussed, but may reduce district
heating operational efficiency (Oñate et al., 2014) and increase costs through
increasing risk and administrative burden, which could cancel out the benefits
of competition (Ericsson, 2009). It could also make it more difficult to
coordinate district heating planning and management with, for example, local
waste management (Ericsson, 2009).
In 2005, Reko quality certification was introduced for district heating with the
intention of increasing consumer confidence. Certification includes a
requirement for price transparency. Reko certification soon became
widespread but in 2008 a new District Heating Law came into force mandating
price transparency for district heating and directing contract conditions. An
Independent District Heating Board was set up as part of the Swedish Energy
Agency to mediate disputes between energy companies & customers, and
energy companies and industries supplying waste heat (Ericsson, 2009).
In Germany, the Ordinance on General Conditions for the Supply of District
Heating was established in 1980 and continues today (Ecoheat4EU, 2011a). It
provides a framework of standard business conditions and contracts for the
supply of DH to all customers other than industrial customers. This aims to
offer customer protection, but also benefits the district heating industry
through providing greater legal certainty around the business. Actors from the
district heating industry see the Ordinance as important for further
development of district heating (Ecoheat4EU, 2011a). Although likely due to
factors other than the Ordinance, it is interesting to note that in a survey
conducted by AGFW (the German Energy Efficiency Association for District
Heating, Cooling and Combined Heat and Power) comparing consumer
attitudes to district heating, gas, oil, and other forms of heating, district
heating has a higher rate of overall satisfaction, is considered to have the
fairest pricing and has highest customer loyalty (Ecoheat4EU, 2011a).
District heating operators may also choose to provide price guarantees to
reassure users. A district heating marketing campaign in Sweden (targeting
detached homes, which have little DH supply) offered fixed prices for heat for
five years (Mahapatra and Gustavsson, 2009). A government grant was
available to encourage residential consumers to switch from electrical
resistance heating to district heating, heat pumps or biomass boilers, but the
marketing campaign was identified as key since consumers subsequently
preferred district heating in particular (Mahapatra and Gustavsson, 2009).
Other than fixed heat prices, success factors identified for the campaign
included a two year guarantee on installations, with removal of existing
heating and installation of components for district heating offered as a
package; the district heating company arranged for a bank to offer attractive
loans to residents for costs not covered by the government grant; and the high
use of interpersonal communication, such as numerous local meetings to
present the offer, and use of a demonstration vehicle parked locally to show
prospective customers how district heating is operated in the home
(Mahapatra and Gustavsson, 2009).
4.4 Applying policies to support the deployment of district heating
4.4.1 Policy stability and flexibility
In general, policy stability was identified as a key success factor for district
heating development, including in Iceland (Thorsteinsson and Tester, 2010)
and Denmark, where perceived policy stability means banks compete to loan
to district heating projects (Chittum and Østergaard, 2014). Evidence has been
identified of policies being changed to improve their effectiveness for a variety
of reasons: to target policies more closely to meet policy objectives; and to
respond to changing policy objectives over time.
Since stability is an important success factor for district heating policy, it
seems reasonable that any changes to policy will be more effective if these do
not increase uncertainty for district heating market actors. As well as providing
ongoing support to projects that began under previous forms of the policy,
consulting district heating market actors as well as other stakeholders to
inform policy design may increase the effectiveness of support measures
(Ecoheat4EU, 2011a). Following energy market liberalisation in Sweden some
district heating has come under the ownership of national/international utility
companies, rather than municipal energy companies, and it is uncertain
whether this has resulted in a decrease in investment (Ericsson, 2009).
In addition to national energy policy promoting district heating, the design of
specific policies can influence stability for projects. The Norwegian Energy
Fund includes a mechanism to transfer unused funds from previous years; this
flexibility creates funding certainty for major capital intensive projects with
long and often uncertain delivery times. The Energy Fund also receives new
funds each year from returns on national deposits and a small charge on
electricity bills, which creates certainty for industry and helps Enova (a public
enterprise which provides investment support for district heating) to fund
large projects (Enova, 2015).
German policies relating to building efficiency can also promote district
heating, but as requirements are regularly reviewed and tightened this creates
long term uncertainty for heat demand (Ecoheat4EU, 2011a).
In Germany, policies have been changed to improve their effectiveness, and to
align policies on CHP with those on renewable generation. To improve policy
effectiveness, the 2009 amendment to the CHP Act addressed some
limitations of the 2002 policy by removing size restrictions on CHP plants
eligible for support, and introducing investment subsidies for heat networks
to provide a sink for surplus heat from CHP. It also gave electricity from CHP
dispatch priority equal to renewables (Kerr, 2008). The most recent
amendment to the CHP Act in 2016 followed an evaluation of the Act in 2014
(Gailfuss, 2016). Changes in 2016 that aim to improve policy effectiveness are
that larger CHP plants over 10MWe have the amount and duration of bonus
payments decided in advance of construction, to reduce uncertainty, while
smaller CHP plants up to 2kW will now receive investment subsidies to reduce
the administrative burden (Gailfuss, 2016). Other changes in 2016 better align
the Act with wider energy policy. Coal CHP will no longer be supported. Bonus
payments will no longer be made when electricity prices are negative, and
electricity from CHP plants over 100kW must either be consumed by the plant
owner or marketed directly; these changes should result in CHP electricity
generation taking a somewhat more active role in the electricity system and
integrating with renewable generation (Gailfuss, 2016).
In Norway, investment support and other polices have been increasingly
targeted over the years in response to policy evaluation and cost analysis of
possible policy targets. Investment support initially supported the most rapid
deployment of district heating. Investment support was later diversified to
target different heating plants, including smaller plants, greater use of
renewable heat, and demonstration projects for more innovative technologies.
Policies aimed at end consumers were introduced following the decision to
support conversion of direct electric heating to water based central heating
where this is relatively easy to do, in order to allow further expansion of
district heating (Enova, 2012).
4.4.2 Sequence and combination of policies
The deployment of district heating faces multiple barriers (DECC, 2013b)
suggesting that packages of policies may be more successful than single
policies in encouraging its deployment. There is also some evidence that
different types of policies can address the same barrier: financial support and
heat planning can both reduce the risk of making a large capital investment
when future demand is uncertain. This makes it interesting to consider the
sequence and combination of policies employed in countries which have
achieved district heating deployment which was targeted by policy.
This subsection discusses some suggestions on how the sequence and
combination of policies may influence the uptake of district heating,
considering the two country case studies presented in boxes 4.1 and 4.2 and
other relevant evidence reviewed in section 4.3.
Firstly, we consider the role of price regulation in liberalised markets, and how
this is affected by other policies. In Sweden, where DH has already been
developed, heat networks became established prior to the liberalisation of the
market, and the loss of price regulation following liberalisation has caused
concern because DH represents a natural monopoly and is an established and
straightforward heating technology for many people to use. In response,
requirements for pricing transparency and contract conditions were
introduced (Ericsson, 2009, Oñate et al., 2014).
In other countries where DH has not yet been developed, and heat planning is
used to support DH infrastructure development, it might be appropriate to use
price regulation or other consumer protection alongside this. For example, the
Norwegian Energy Act in 1991 included price regulation for protecting the