A policy toolkit for global mass heat pump deployment

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Heat pumps, a critical technology for clean energy systems, are poised to become the most important technology for heating decarbonisation. Currently, the vast majority of heat is provided by fossil fuels. In order to promote and encourage heat pump installations across the globe, the Regulatory Assistance Project, CLASP and the Global Buildings Performance Network have developed this heat pump policy toolkit, which provides a suite of tools, and advice on how to use them, for policymakers interested in promoting this critical technology.

The structure of the toolkit is loosely based on that of a Greek temple, with foundations and pillars, supporting a rapidly growing heat pump market. The interactive toolkit (which includes clickable links throughout) also features short videos that give an overview of each relevant element of the toolkit. These videos make up a short series which complements this document.

This toolkit works as a synthesis of policy approaches to heat pump deployment and a guide to designing the best packages of policies. As you’ll see in the toolkit (and in the graphic below), a complete policy package needs to consider foundational elements and must also take account of each pillar. We provide details, examples and potential issues, and solutions within the various policy elements discussed.

Heat Pump Toolkit temple

Foundational elements of this toolkit recognise the need for coordination and communication around heat pump policy efforts and strategies.

Pillar 1 considers economic and market-based instruments. These instruments are fundamentally associated with balancing the economics of heat use towards clean options, such as heat pumps, so that their lifetime costs are cheaper than fossil-based alternatives.

Pillar 2 considers financial support. Within this pillar, we identify three key elements of financial support for heat pumps — grants and tax rebates, loans and heat-as-a-service packages.

Pillar 3 considers regulations and standards. We look at buildings codes and standards, appliance standards and heat planning and zoning.

To build an effective heat pump policy package, policymakers must consider foundational elements as well as each of the pillars. And even within each pillar, combinations of elements may be appropriate.

The clash with gas: Should it stay or should it go?

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Europe’s stated goal of achieving a net-zero power system by 2050 is inherently replete with enormous opportunities and challenges. High energy prices and Russia’s invasion of Ukraine have now ratcheted up the urgent need for action to emergency levels. Policymakers are facing the challenge of a lifetime to secure the supply of energy and protect disadvantaged consumers while maintaining momentum towards long-term climate goals. The events of 2022 have made evident to many experts that the transition away from fossil gas will figure prominently in all of these objectives.

To support policymakers and the numerous stakeholders in planning for a deliberate reduction in the use of fossil gas in the coming years, RAP has developed five fundamental guiding principles. The principles are general in nature due to the breadth of this gas transition and the various policy instruments that governments will need to reform such a large part of our energy economy. In light of the current crises, the authors have also applied these best practices specifically to the European Commission’s proposed Hydrogen and Decarbonised Gas Market package and Hydrogen Strategy, as well as to the hydrogen strategies of selected Member States.

To achieve an efficient and cost-effective transition away from fossil gas, we offer policymakers the following recommendations:

Graphic with five principles for transitioning away from fossil gas


A Clean Heat Standard for Massachusetts

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The burning of fossil fuels for heat accounts for a significant portion of greenhouse gas emissions and burdens many families and businesses with high energy costs. Meeting climate and equity goals requires that we find effective and affordable pathways to rapidly revamp the thermal sector.

This policy brief — prepared as an appendix to the Massachusetts Clean Energy and Climate Plan for 2025 and 2030 — describes the concept of a new requirement on heating energy providers, which we call a clean heat standard. The paper explores the major design choices that would be necessary to implement this concept.

At the highest level, a clean heat standard is a credit-based performance standard that would be applied to suppliers of heating energy. In the Massachusetts context, that includes gas utilities and providers of heating oil and propane, and possibly electricity suppliers. These parties would be obligated to serve their customers with gradually increasing percentages of low- or zero-emissions heat, earning tradeable clean heat credits while sales of fossil fuels are phased down.

Just as a renewable portfolio standard requires electricity providers to replace coal- and gas-fired generation with wind, solar and other clean electricity generation, the clean heat standard would replace fuel oil, propane and fossil gas heat with weatherization, energy efficiency improvements, heat pumps, clean district energy and other verified low-carbon options.

The E3-India model: It’s come a long way

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In 2016, the Regulatory Assistance Project approached Cambridge Econometrics about building a new macroeconomic modelling tool for India. The rationale for the model was simple: India needed to reduce its greenhouse gas emissions, but much of the policy to do so is set at the state level. A model that could identify the impacts of policies to boost state-level sustainable growth was therefore required.

Years later, the outputs of this work are presented in the book Economy-Wide Assessment of Regional Policies in India, edited by professor Kakali Mukhopadhyay. The book covers a range of topics relating to sustainable economic development in India, always with a focus on realistic (i.e., feasible) policy at the state level.

The model that was built came to be known as E3-India — “E3” for energy-environment-economy. It was developed by experts at Cambridge Econometrics, Professor Mukhopadhyay and former RAP colleagues Ranjit Bharvirkar and Surabhi Joshi. Without this collaboration, it is unlikely the model would have advanced to its present state.

The foundations of the model follow the Cambridge tradition, drawing on the demand-driven framework originally developed by Michal Kalecki and John Maynard Keynes. This approach provides several advantages over the more common equilibrium approach to modelling; it does not make assumptions about perfect information, rational behaviour or frictionless markets. In addition, it models labour markets, including involuntary unemployment — matters of particular importance to policymakers.

This demand-driven approach requires that behavioural parameters be informed by econometrics — that is, it requires, among other things, time-series historical data. With the model disaggregating India’s economy into both states and economic sectors, a substantial exercise in data collection and processing was required. Professor Mukhopadhyay led this herculean effort, yielding a tool that researchers today can download and use free of charge.

Another important feature of the model is its tight integration of energy consumption and greenhouse gas emissions within the wider economy. The model ensures consistency between physical and economic measures of energy consumption and prices — something that is critical for effectively assessing sustainability.

The power sector, which will play a crucial role in decarbonising India’s economy, is modelled in additional detail using an advanced framework developed by Jean-Francois Mercure. This allows the user to test policies such as feed-in tariffs, renewable subsidies and coal phaseouts, along with the standard energy and carbon tax policies that other models typically examine.

Each chapter of the book is dedicated to a different sector of the economy. A set of scenarios is used to explore different possible outcomes by implementing combinations of policies. The demand-driven nature of the model allows the analysis to start from a position in which the Indian economy has been set back by COVID-19; many of the scenarios look at ways to restore jobs and prosperity.

Eleven authors, experts in their respective fields, were involved in the production of the book. They put the E3 model to rigorous use, testing its capabilities and performance, and with it have revealed some important truths about the Indian economy and good news about its ability to transform itself into the sustainable, low-carbon powerhouse that it aspires to be.

The book is by no means the end of the E3-India project; in many ways, it is just the beginning. E3-India is a tool that policymakers can use for many years to come as they embark on the journey of promoting sustainable development. The model will continue to be updated. We encourage readers of the book to work with the model themselves, to challenge its conclusions and to examine other scenarios, all with the aim of developing public policies dedicated to improving the long-term welfare of Indian society and the environment. If India is to contribute to meeting global climate targets, much work remains to be done.

Where Do We Go From Here: Visions for a Clean Heat Standard

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In a webinar discussion, panelists discussed efforts across the country to put in place clean heat standards or other mandates for reduction of emissions from thermal end uses.

Where Do We Go From Here: Visions for a Clean Heat Standard

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The term “transition” implies moving away from one thing and toward something else. The energy transition in the United States has challenged utility regulators to ensure that the movement away from fossil-fuel-dominated resources, and the adoption of lower-carbon resources in their place, will not put at risk the economic benefits, security, and reliability associated with our current energy system.

As part of this transition, states across the country are exploring ways to lower the emissions associated with a particular energy demand: building heat. In a webinar discussion, panelists took a closer look at a variety of these efforts under way. Policies adopted or being considered by Northeast and Western states illustrate how cleaner heat does not need to be an “either/or” proposition, but instead can provide everyone — suppliers, consumers, and grid operators — with choices and a path toward a lower-carbon future.

Grid Operations and Why They Matter for Air Quality — Part 2

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In the second part of a training for the Mid-Atlantic Regional Air Management Association (MARAMA), Nancy Seidman explored the air quality and health benefits of energy efficiency and electrification.

Clean Heat for a Cooler Planet: Vermont’s Clean Heat Standard

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​In a presentation to the Natural Resources Council of Maine, Richard Cowart and Chris Neme discussed an innovative policy tool recently introduced in Vermont. Known as the Clean Heat Standard, it’s a promising new performance standard designed to progressively lower emissions from the heating fuel sector.

How heat pump sales are starting to take off around the world

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Experts see heat pumps as one of the main solutions for tackling the carbon emissions associated with keeping buildings warm, both in the UK and internationally. Yet sales of the technology, often likened to a fridge running in reverse, have remained stubbornly low in many countries.

The latest figures, collated in this article for Carbon Brief, show the tides beginning to turn, with sales in 2021 seeing double-digit growth in countries ranging from Austria to China.

While rapid growth in the market seems assured, heat pumps might still fall short of the levels required for a global pathway to net-zero by 2050, without further government action.

Highly efficient

Heat pumps are a low-carbon heating technology with the potential to deliver large-scale reductions in carbon emissions from building heat.

They use electricity to move heat from ambient outside air, water or soil to a building’s interior and to heat water. This process is highly efficient, with heat pumps delivering three to four units of heat for each unit of electricity needed to run them.

When the electricity used to drive a heat pump is produced from low-carbon sources, all this heat is also low carbon. It is this simple capacity to deliver heat very efficiently and cleanly that makes heat pumps a key technology in most pathways to net-zero.

The International Energy Agency’s (IEA) pathway to net-zero by 2050, for example, includes 1.8bn heat pumps in buildings in 2050 providing 55% of energy demand for heating globally. This compares with just 180m units installed today, providing 7% of heating.

Similarly in the UK, the most cost-effective Climate Change Committee (CCC) “balanced” pathway to net-zero sees the majority of homes being heated with heat pumps by 2050.

Until recently, however, the heat pump market has been growing far more slowly than required in the IEA or CCC scenarios. This is evident from the IEA’s global heat pump stock figures in the chart below, which shows that, at current trends, only 253m heat pumps would be installed globally by 2030, compared with the 600m units needed by that year in the IEA’s net-zero scenario – a shortfall of 58%.

Globally, just 177m heat pumps had been installed by 2020, according to the IEA’s data. Most of these heat pumps were in China (33%), followed by North America (23%) and Europe (12%).

Interestingly, the highest penetration of heat pumps can be found in the coldest climates, as the chart below shows. In Europe, the four countries with the largest share of heat pumps are Norway (60% of households), Sweden (43% of households), Finland (41% of households) and Estonia (34% of households). These four countries also face the coldest winters in Europe.

Expanding market for heat pumps in 2021

The IEA data shows the global heat pump market grew by just 3% in 2020. Before that, the market had been growing by around 10% per year. The IEA’s net-zero pathway requires market growth at a global level of around 13%, year on year to 2030.

Following the slowdown in 2020, initial data suggests the heat pump market saw a strong recovery in 2021, with double-digit growth in some of the countries where figures are available.

Across Europe, for example, the European Heat Pump Association (EHPA) expects market growth to have exceeded 25% in 2021, hitting 2m units sold per year for the first time.

The Polish heat pump association Port PC reported an increase of 60% for heat pumps in 2021, mainly driven by regulations phasing out coal heating for single-family homes in the country.

In Germany, the heat pump market grew by 28% in 2021, with 154,000 units sold – mainly because of the expansion of air source heat pump sales. The adoption of a carbon tax on heating fuels in 2021 partly explains the growth observed.

These figures are shown in the chart below, along with data for several other countries where data is available through to 2021.

The U.S., another global leader for air source heat pumps, gained 15% in 2021, capping a run of consistent yearly growth above 5% since 2015.

Finland showed similar growth to Germany in 2021, with an increase of 25% to 130,000 heat pumps installed, according to the Finnish Heat Pump Association. Given the small size of the country in terms of population, this is remarkable, with almost 5% of all homes installing a heat pump in 2021.

The majority of heat pumps installed in Finland were air-to-air heat pumps, which can also be used for cooling. However, the Finnish Heat Pump Association estimates that air-to-air heat pumps used for cooling account for only 10%-15% of the respective market.

What is notable about Finland is that the heat pump market only started to expand in the mid-2000s, with cumulative installations now exceeding 1m units.

Overall, the French heat pump market grew by 3% in 2021, but the air-to-water segment rose by 53%. The French heat pump market is the largest in Europe, with more than 1m units in 2021. By far the most important type of heat pump in France are air-to-air heat pumps.

Switzerland, another mature and long-established market for heat pumps, showed market growth of 20% in 2021, mostly air-to-water systems. More remarkable is the fact that 54% of all heating systems sold in Switzerland last year were heat pumps, making it the dominant heating technology not only in new buildings but in existing buildings too.

In China, initial estimates of residential air-source heat pump sales in 2021 saw market growth of 10% to more than 1 million units, for the first time, with hints of even larger growth in non-residential sales.

In Norway, a total of 125,000 heat pumps were sold in 2021, a similar amount to Finland. This represents growth of 36% compared to 2020. Also similar to Finland is that the majority of heat pumps sold in Norway are air-to-air heat pumps.

graph showing annual heat pump installations in norway, 2012-2021

Outlook for heat pumps

Although further rapid growth now looks likely, the pace of adoption – and how that measures up against pathways to net-zero – will depend strongly on government policies and energy price trends.

The recent increase in European and Asian gas prices makes heat pumps financially more attractive than gas boilers, as previous analysis shows. But that could change, which is why policy remains key and initiatives are underway to provide more support for heat pumps.

In the EU, for example, the European Green Deal and the associated push for decarbonising heating through a variety of directives means the market for heat pumps will double to 4m installations per year, according to the EHPA.

Drivers include a European Commission proposal to extend the EU Emissions Trading System to heating fuels, which would improve heat pump economics relative to oil-and-gas heating.

There is also new regulation in various European countries banning or limiting fossil-fuel heating, not only in new buildings but also increasingly in existing buildings.

For example, the new German government has announced that from 2026 all new heating systems must run on at least 65% renewable energy. Others such as Norway, Sweden, Denmark and Finland have announced explicit or implicit bans of new fossil oil-based heating systems in all buildings.

The Netherlands no longer allows new homes to connect to the gas grid, while Ireland, Flanders (Belgium) and Austria have announced bans on oil boilers for new buildings.

Ireland recently unveiled a €8bn scheme that nearly doubles the value of grants for heat pumps as the country looks to ship 400,000 heat pumps into homes by 2030.

In the UK, the government is consulting on requiring manufacturers of heating systems to sell an increasing number of heat pumps and has announced an “ambition” to phase out gas boilers by 2035. It will also launch a new heat pump grant scheme in April.

China has a track record of using clean heat solutions to reduce air pollution from coal boilers. Its southern provinces have high market potential for heat pumps, with areas such as Beijing already offering incentives.

Despite these local incentives and programmes, however, heat pumps lack support at the national level in China . For example, they are not classified as renewable by the national government, meaning they do not benefit from a clean heat subsidy available in the northern provinces.

In the U.S., a drive to electrify homes – and, in some areas, ban fossil fuel heating – is expected to further boost the prospects for heat pumps. The stalled Build Back Better plan included a 10-year $3.5bn rebate program for electric homes with up to $4,000 for heat pumps, among other incentives.

The Biden administration has also launched a National Building Performance Standards Coalition, a task force comprising 33 state and municipal governments, that aims to “unlock energy efficiency and electrification across the buildings sector.”

Double-digit growth in major heat pump markets during 2021 shows powerful momentum. But without the continued expansion of policies to support their rollout, heat pump deployment will fall short of the level needed to reach net-zero by 2050 – and to limit warming to 1.5C.

Duncan Gibb is the lead analyst on heating and buildings at REN21.

This article originally appeared in Carbon Brief. Graphics by Joe Goodman for Carbon Brief.