Capturing value in the transition blog series: Bringing the heat, how will European heating companies make the most of the energy transition?

In this blog (the third in the Capturing Value in the Transition blog series) we discuss the massive opportunities for European heating companies as heat decarbonises and how they will need to address major challenges to thrive in the energy transition. 

A significant change is coming to the European heating landscape as momentum builds to decarbonise the sector. Demand for heat pumps in picking up in key markets and innovation in hydrogen for heating is increasing. As the sector shifts, this presents massive opportunities, and threats, to established and new heating manufacturers, and other stakeholders in the energy transition.

Four key trends are causing the rapid change in the sector

The push for net zero means all sectors need to rapidly reduce carbon emissions. While traditionally the focus of climate policies had been on the electricity sector and improving the thermal efficiency of homes, there has now been a renewed focus on using low carbon technologies to heat our buildings.

The gas price shock has caused rethinks of policy across the board from both price and security concerns, and consumers have become more engaged in the sector, paying more attention to how they can reduce costs using new technology.

Heat demand, especially when electrified and integrating with EV charging, batteries and solar PV, is becoming a resource of flexibility as smart systems enable optimisation.

New business models are being employed that are changing the traditional relationships with customers. Rather than selling individual heating products, innovative companies are providing whole house solutions, heating-as-a-service and energy-as-a-service solutions that extend the relationship with the customer. This opens up opportunities for the relationship with the customer (traditional the installer has this) to be picked up by other entities. These new approaches reduce barriers for customers and will unlock greater deployment of technology.

Opportunities for European heating OEMs are massive

Given the above trends – the energy transition is opening up significant opportunities in the heating sector, especially in key European markets, such as France, Germany, Italy, Poland and the UK, among others. We expect the heat pump market alone to almost double by the end of the decade in core European markets, from €17bn in 2022, to €30bn by 2030. We see three key significant opportunities:

1. Demand for heat pumps is being supercharged by government support and increasing awareness of the technology across north, west and central Europe. 2022 experienced 11% growth in sales, and we expect sales to reach 7 million per year by 2030. Those with the most compelling and engaging customer propositions (such as significantly reduced upfront cost models or that take away any risk at all for customers or that communicate the value proposition in a really compelling way) stand to benefit hugely.
2. Smart and flexible electrified heating is being rolled out and could drive new revenue streams. Using smart technologies to increase customer attractiveness will increase market share and new flexibility markets opens potential new revenue streams.
3. Hydrogen ready, high efficiency boilers will begin replacing natural gas boilers by the middle of the decade. Regulations currently being considered will require new gas boilers to be hydrogen ready.

But challenges ahead threaten the incumbent transition

From the perspective of the established heating manufacturers in Europe, there are significant strategic challenges to navigate in order for them to maintain and improve their position in the market.

There is fierce competition from international manufacturers, particularly from China and Japan, which are capturing a large proportion of the nascent European heat pump market. While the context is somewhat different, European heating manufacturers could potentially face a re-run of the collapse of the European solar PV industry without strategic action.

Not only do European OEMs face competition from international manufacturers, but also from other players, such as forward-thinking energy suppliers who are offering bundled tariff and heating solutions, or innovative start-ups who offer whole house solutions. While these companies could be competitors, leading to an erosion of sales and market share, they could also be seen as potential partners offering new routes to market.

New players with innovative business models and finance options that make adoption easier for customers are growing rapidly. Some energy companies now offer heat pumps at no upfront cost, backed by financing, optimised with home energy management systems and bundled time of use tariffs. Customers’ expectations on how they buy heating products are changing, presenting a challenge to heating OEMs as traditional models and routes market also need to change. The customer proposition needs to be really compelling to grab market share.

While demand is building, the mass market appeal of heat pumps are as yet unproven, especially in some key markets. While some homes are suitable for low temperature heat pumps, many would require either significant alterations (efficiency and radiator upgrades) or more expensive high temperature heat pumps. Hybrid heat pumps, that combine a gas boiler and a heat pump, are seen by some as a transition technology. Manufacturers need to better understand their customers’ needs, now and in the future, to develop the products customers want.

Installers are critical to the market, yet there is a shortage of skilled installers. This is a long-term issue that requires partnership between industry and government to address.

Conclusion

The energy transition represents both opportunity and threat to European heating OEMs. Those companies that continue business as usual will see there market share and profitability fall as they’re overtaken by their competitors. To succeed, they will need to put the customer at the heart of their strategy, be innovative, develop new offerings and build partnerships to develop new routes to market.