The barriers are coming down for the renewable heating asset class with private capital taking this market to the next level, benefiting residential developers.
By Alastair Murray
Despite recent discussions about net zero, the policy ambition for clean heat remains clear. The UK Government has set a target of 600,000 heat pump installations per year by 2028. This is critically important because, put simply, we cannot decarbonise our housing stock without heat pumps. Other technologies such as hydrogen were once promoted, but heat pumps are now widely accepted as the most viable route to decarbonisation for residential properties.
Ground source heat pumps (GSHPs) are crucial here. They are more efficient to run – on average, GSHPs save three tonnes of Co2 per property – which also reduces the electricity grid infrastructure required, and they last considerably longer than air source heat pumps (ASHPs).
However, several barriers are obstructing progress towards the Government’s installation target, and the UK is falling behind other comparable European countries when it comes to heat pump uptake. Among these barriers, the significant installation cost associated with heat pumps looms large. In renewable energy generation markets (solar, wind, storage), investment from private capital has driven growth and this is now being applied to renewable heat. Policy objectives and environmental targets are finally aligning with what investors want out of this space.
The challenges we face
Renewable energy markets have made significant strides in reducing the cost of adopting green technologies. Solar and wind energy, for instance, have seen substantial reductions in costs over the past decade, largely due to private capital investment. Back in 2020, the International Renewable Energy Association (IRENA) found that solar photovoltaics (PV) had seen the sharpest cost decline of any electricity technology over the last decade. IRENA found that, between 2010-2019, the cost of solar PV globally dropped by 82%. Meanwhile, onshore wind costs fell by 40% and offshore wind by 29%.
The renewable heating sector has not progressed to the same degree. The Government recently increased household grants for heat pumps by 50% but, for many, particularly new build developments, this will not be enough to cover the upfront cost. This will continue to deter homeowners, as well as house builders and housing developers from transitioning away from traditional gas boilers. The Government should be more ambitious in policy terms but it is also up to the industry to develop market solutions.
New models to drive growth
At Rendesco, we have taken an innovative view on the financial roadblock faced by not only consumers, but developers as well. We have created a new class of investable renewable energy assets that appeal to long-term institutional investors, which at the same time removes the installation cost for consumers. Housebuilders and housing developers who need to make the switch from gas boilers benefit from a fully funded solution for the local vertical borehole infrastructure required to transfer heat from the ground to houses – not dissimilar to the gas grid. This approach makes the transition to heat pumps more financially viable. By steadily spreading the heating infrastructure costs it offers consumers more certainty in their utility bills and also doesn’t penalise the household who make the initial property purchase.
One of the key aspects that makes financial models like this a game-changer is the benefit for institutional investors. These investors are increasingly drawn to the long-term stability of renewable energy assets and the promise of inflation-linked income. This aligns perfectly with their ESG ambitions, allowing them to invest in assets that contribute to sustainability while generating steady returns over the long term. In an era when ethical investing is gaining prominence, such innovative models hold immense potential.
Furthermore, as the Government (and the main opposition parties) seek to channel institutional and pension fund investment into infrastructure projects, this is a model that we should be seeing more of in the years to come.
Scalability is another key element here. Private capital means that clean heat developers and operators can scale their operations to cover a multitude of properties and developments, all the while speeding up our progress to 2028’s heat pump target.
Previous government initiatives were pivotal in demonstrating the value of investing in the heat pump sector to drive its growth. The implementation of the Government’s Renewable Heat Incentive scheme in 2011, for example, gave Rendesco the opportunity to scale up asset development programs across the UK. This meant we could gather performance and operational data on our heat networks that we could use to attract private sector investment.
It took a certain level of vision and ambition from those who pioneered investment in this space but we now have a scalable green utility business which is helping to accelerate the country’s route to decarbonisation – and other investors are increasingly seeing the growth opportunity in this area.
The way forward
Overcoming the barriers to heat pump adoption is a critical task that requires a multifaceted approach. Encouraging models and investments which overcome these challenges is not just a step towards achieving our environmental goals; it is a blueprint for economic growth and stability and world-leading infrastructure we can be proud of. By promoting private capital investment in renewable heat, the Government can pave the way for a greener, more sustainable future while bolstering the UK’s economic resilience.
*First published in React News on Wednesday 8 November, 2023.