Nesta published analysis on 13 June 2024 setting out how far individual factors could close the cost gap between heat pumps and gas boilers, measured against a baseline of no significant change in any other factor, for a 2030 installation with no government subsidy1. The work forms part of its report How to make heat pumps more affordable2.
The four most influential factors, and the reduction each makes to the additional annual cost of a heat pump relative to a gas boiler, are set out in the analysis1:
| Factor | Reduction in additional annual cost |
|---|---|
| £5,000 heat pump subsidy | £480 |
| High wholesale gas price | £450 |
| Levy rebalancing (per unit) | £300 |
| 0% interest rate on heat pump loans | £290 |
Low wholesale electricity prices and increased efficiency, measured as seasonal coefficient of performance (SCOP), had the smallest effect, under £100 each1. Nesta states that the factors are highly interdependent, and that changes to the relative prices of gas and electricity have a stronger effect on parity when absolute energy prices are higher, because running costs then make up a larger share of lifetime costs1.
On running costs specifically, Nesta found that equalising levies on the basis of a typical home's consumption reduces the difference in lifetime costs by £70 on average, ranging from £190 for a small home to £260 for a large home, while equalising per-unit policy costs reduces the difference by £300 on average, ranging from £140 to £5601. Assuming the DESNZ high gas price trajectory shifts relative running costs by £450 a year on average, against £30 a year for the low electricity price trajectory1. Raising average SCOP from 3.0 to 3.3 saves households £70 a year on average, with a range of £40 to £1401.
"We have tested the factors that could make heat pumps relatively cheaper in the future, and it is clear that some have a disproportionate effect while others make only a marginal difference."
The report's baseline scenario, with no policy changes, shows all home archetypes paying up to £200 extra a year if they switch to a heat pump between 2024 and 2027, with flats saving up to £150. Relative heat pump costs rise sharply in 2028 when subsidies end, ranging between £800 for detached houses and £550 for flats, before gradually reducing to between £600 and £400 in 20353. Nesta states that the Boiler Upgrade Scheme (BUS) is only currently scheduled to run until 2028, after which point costs to consumers would rise substantially, and that maintaining whole-life price parity through subsidies alone would cost around £4.7bn per year over the next decade3. Households can currently receive £7,500 towards costs through the BUS3; the scheme is available in England and Wales, while households in Scotland can access a £7,500 grant, £9,000 in rural areas, plus an additional interest-free loan2.
Nesta modelled three scenarios. In the High innovation scenario, installation costs fall by 4.5% a year instead of 2.5%, average SCOP rises from 3 to 3.3, levies are modestly rebalanced to an electricity-to-gas price ratio of 2.6, and subsidies reduce from 2028 to zero in 2034, at a total cost of £16.1bn between 2025 and 2035, or £1.5bn a year on average4. In the Cheaper electricity scenario, levies are rebalanced to a uniform 1.29p per kWh on each unit of electricity and gas while keeping total revenue constant, and the electricity-to-gas ratio falls just below 2.0, against 4.1 today5. Installing a heat pump in 2030 under that scenario saves households between £10 and £230, £70 on average, with larger homes saving more than flats; total annual costs are £1,120 for a heat pump and £1,190 for a gas boiler after subsidy5. The High subsidy scenario costs £23.6bn between 2025 and 2035, £2.1bn a year on average, £680m a year more than the other two3.
Why it matters for households
The analysis puts numbers on which levers change what a household actually pays. A subsidy cuts the upfront bill by a flat amount for every home, while levy rebalancing and wholesale gas prices change running costs, which Nesta says account for approximately 60% of lifetime costs1. That distinction matters for heat pump running costs and for the comparison set out in heat pump vs gas boiler running costs: a household's exposure to gas prices, and the size of its home, change how much it gains or loses. Nesta notes that larger older properties benefit more from levy rebalancing and from low gas prices, and that households relying heavily on gas, including some fuel poor households, would be worse off under per-unit rebalancing, with a strong case for compensating them1. The report also notes that install costs make up almost half of total costs for heat pumps and only about 10% for gas boilers5, which is the gap the Boiler Upgrade Scheme grant is designed to narrow. Nesta states there is no realistic scenario that can achieve cost parity without reducing the electricity-to-gas price ratio below 3.0 after 20253.
What happens next
Nesta's scenarios assume the existing £7,500 subsidy remains until at least 2028 before reducing at different rates2. In the High innovation and Cheaper electricity scenarios, subsidy falls to £5,000 in 2028, £3,750 in 2029, £2,500 in 2031 and zero in 20344. The report states that the BUS is only currently scheduled to run until 20283. No government decision on subsidy levels beyond that point is reported in the analysis.
Sources5 cited
- How much difference do the different factors make? | Nesta, nesta.org.uk
- How to make heat pumps more affordable | Nesta, nesta.org.uk
- A summary of our scenarios | Nesta, nesta.org.uk
- Scenario 1 – High innovation | Nesta, nesta.org.uk
- Scenario 2 – Cheaper electricity | Nesta, nesta.org.uk