Heat pumps sales are growing across Europe. In this episode we explore whether we are at an inflexion point in the heating transition in Europe – and the key factors that will determine how quickly heat pump sales accelerate. In this episode, Jon Slowe and Sandra Trittin are joined by Thomas Nowak, Secretary General of the European Heat Pump Association and LCP Delta's Head of Heat Steven Ashurst.
Episode transcript
[00:00:04.490] - Jon Slowe
Welcome to Talking New Energy, a podcast from LCP Delta. I'm Jon Slowe.
[00:00:09.310] - Sandra Trittin
And I'm Sandra Trittin. And together we are exploring how the energy transition is unfolding across Europe through conversations with guests from the leading edge of the transition.
[00:00:19.330] - Jon Slowe
Hello and welcome to the episode. Today we're talking about heat pumps in Europe. And Sandra, I thought it would be nice to start with an update on your heat pump, because I think when we spoke recently, you were in the middle of getting a ground source heat pump installed and you described your garden as a building site.
[00:00:40.750] - Sandra Trittin
Yes. Hello. First to everyone and great to have you here. Yeah, actually, it's still a quite interesting journey, let's say, even though it's now finished, we have a warm house, we are taking warm showers, which is already great. It was an interesting journey in terms of decision making. Right. Also having the discussion with the neighbours, why do you choose a ground source? Why not an air source heat pump? Or why don't you just stick with gas? Right? That finally the prices are not as peaking anymore as before, getting into the choice, and finding someone who would be building the heat pump, then finally doing it right. And last time we met, it was that the garden looked like a mess, to be honest.
[00:01:30.280] - Jon Slowe
What was the most painful part of it, would you say?
[00:01:32.720] - Sandra Trittin
No, actually, it was the most easiest part.
[00:01:35.380] - Jon Slowe
Right.
[00:01:35.840] - Sandra Trittin
Because once the drilling machine arrived, it was just drilling the hole. It was a lot of fun for my daughter, looking at it, right. And every day seeing how the drilling machine got deeper. But this was the easiest part, I think the first one, two pieces were more difficult. Also making the decision, getting the right partner on board. And then I think it's also probably more in having the right partner who takes care of the installation within your home, because there's not many changes necessary. But still the old gas boiler has to be removed, the old water tank, to a certain extent, new pipes have been put in, need to be put there, but that really went smooth in the end. And afterwards, you just have to finally wait for the manufacturer, or for the employee of the manufacturer to come and to make the tick box, saying, like, everything is set up right and finally can go out and run. And this is happening now. Interesting journey. I will come back soon with more details, with a few art tickets on that.
[00:02:48.520] - Jon Slowe
Great. Well, Sandra, I'm quite excited because you remember we were on Nathan Gambling's podcast, he runs the heating podcast in the UK, and he's put me in touch with someone near me in Glasgow who has got the heat pump with the highest efficiency in the UK on some open source website. So, we had a chat the other day and he's going to come around for a coffee and he's going to help me optimise my heat pump to get really push the performance as high as it possibly can be.
[00:03:21.150] - Sandra Trittin
I'm curious to see what he will change in terms of parameters.
[00:03:25.010] - Jon Slowe
So am I. So am I.
[00:03:26.500] - Sandra Trittin
Where he would see the difference.
[00:03:28.080] - Thomas Nowak
Me too. Me too. I want to hear the outcome of that visit.
[00:03:33.090] - Jon Slowe
Well, enough chitchat about our heat pumps. Let's move on to the topic of the day, which is looking at the growth of heat pumps across Europe. And we'll introduce our guests.
[00:03:46.640] – Sandra Trittin
Yes. So first we have Thomas Nowak, the Secretary General of the European Heat Pump Association. Welcome, Thomas. Good to have you here with us.
[00:03:59.180] - Thomas Nowak
It's a pleasure to be here. Thank you.
[00:04:01.010] - Sandra Trittin
And to kick off, I would immediately have a question to you. If you're looking back to the time when you started off at the Association to now, what has mainly changed in the heat pump sector?
[00:04:14.140] - Thomas Nowak
Everything. If you want a short answer, and of course I can explain a lot about it, I started in Brussels in a dark evening of 2006. LinkedIn reminds me, it was 17 years and four months ago. And when I arrived in Brussels, I was not greeted by welcome cheers. Most people said we have already established renewable technologies. Heat pumps are not using renewable energy anyways. Most of the time they don't function, and you can't use them in un-renvated houses and for sure not in cold climates. And nobody talked about district heating and industry. And I think the biggest change is that over these 17 years we have established heat pumps solidly in the political discussion, in the political discourse, as a technology that provides sustainable and resilient heating and cooling based on renewable energy to European citizens and industries alike. And this is happening from the top down. Ms. von der Leyen is mentioning it in the State of the Union speech. Also, when they refer to industry, then it's recognised that the heat pump industry is quite a market leader for the whole world. So, there's a lot of manufacturing still in Europe and then it goes further down.
We have established, together with Kadri Simpson, Commissioner for Energy, the heat pump accelerator, and the action plan that the European Commission is making out of it. And on the member state level, you see quite significant moves in the direction of putting de facto or factual bands of single fossil boilers into place. That of course is always on the back of allowing hybrid solutions because the combination of number of technologies will then allow us to provide solutions for every type of building. And maybe at the last point also, system integration was never mentioned, and I think it was you at our forum who said we are asking as EHPA, the question wrong. We shouldn't ask can the electric grid hold for 50 million heat pumps. But we should ask can we fully decarbonise the electric grid without 50 million heat pumps? So, you see, it's a complete conversion of the opinion of many people in the sector and for sure of the major policymakers.
[00:06:21.870] - Sandra Trittin
Yeah, I think that was one of my best sentences over the last month. I find it back again and again.
[00:06:28.410] - Jon Slowe
Our second guest is LCP delta expert and colleague Steven Ashurst. Hello, Steven.
[00:06:34.330] - Steven Ashurst
Hi, Jon. Hi, Sandra. Hi, Thomas. Looking forward to the chat.
[00:06:37.250] - Jon Slowe
Thanks for joining us. Steven, can you give us a bit of scene setting? So, if you look at all the heating appliances sold across Europe, how many of those are heat pumps today, and how quickly is that figure changing?
[00:06:50.810] - Steven Ashurst
So, this was a very interesting exercise, pulling these numbers together. So, what I'm going to share is an excerpt of the top seven to eight heating markets in Europe. So very representative of the entirety of the European heating market. We have a ratio of standalone fossil fuel boilers that are sold to hydronic heat pumps. So, yes, mostly air to water, also ground to water. And yeah, hybrids in there as well. A fair amount of hybrids. So last year the ratio was about 4.4 to one. So, 4.4 standalone fossil fuel boilers installed for every one heat pump going back to 2017, just five years ago, that was a ratio at 19.3 to one.
[00:07:28.700] - Jon Slowe
Wow.
[00:07:29.060] - Steven Ashurst
So, you can see, of course, we had, I think, 2022 and 2021 were by some way the largest years ever for heat pump sales, whether purely electric or hybrid. Some markets in 2023 will also see that their own national sales volume exceeded once more, but yeah, within the space of five years, dropping down from 19.3 to four.
[00:07:47.620] - Jon Slowe
Wow. So those two perspectives, Thomas, that you've shared and Steven, you've shared, sets the scene fantastically. It shows the journey that heat pumps have been on since that dark day in Brussels. Thomas, when you set up the EHPA to where they are now, less ratio, better than 105, I'd like to focus a discussion on looking forward. I think all our listeners will be able to picture this curve, this upward curve or upward trajectory in their minds of heat pump cells across Europe. How will that trajectory continue and what are the key factors that will affect how steep that curve will get? Because I think we all want that curve to be as steep as it can to decarbonise heat as quick as we can. So, Thomas and Steven, I want to ask you each for your view on that trajectory and your top three factors from each of you that will determine how steep that trajectory will be in the next three years. Thomas let's start with you.
[00:08:43.910] - Thomas Nowak
Well, thanks. I want to start first, but that's not part of my list, by saying everybody should love heat pumps. It's a bit of a communication issue, right? If we tell people that the world with heat pumps is a better world than a world without heat pumps, actually they would know. Because if the cooling chain breaks and heat pump technology wasn't available, we would all be in deep trouble. But to answer your question, it's a very good one. Everybody loves S-curves because if you invest at the right point in time, you will become very rich. And I do think that we are really at the tipping point. Our own graphs show an even more positive picture than the one that Steven has shown, because we are also counting the air-to-air heat pumps that are used for heating. And then I am concluding that we are looking at a factor of one to three, actually. But the tipping point, the inflexion point was two years ago about.
So, our curves start to increase rapidly in 2021 and 2022, with 34% and 39% of growth respectively. And in my opinion, it would have been great if this growth could have continued, unfortunately. And maybe we need to touch about on that a bit later. 2023 is a very difficult year for the industry. But let's assume it wasn't, right? Let's assume we had this conversation at the end of 2022, and we had the data, or maybe first quarter of 2023, we only had data for 2022. Then I would have told you this is supposed to continue because as I said, in all legislation, heat pumps are solidly engraved on the top level. Communication heat pumps are there. But what drives end user demand, end user sentiment? Then I would mention three things. The first thing is the gas-to-electricity price ratio, because that converts the cost of a heat pump into an investment. If it's low enough, and we think it should have a factor of two, 2.5 maximum, then this triangle between electric vehicles, photovoltaic and heat pump. So, these would be three factors in the end, because I think they are mutually reinforcing. If you start to look at this, looking at a photovoltaic panel, or looking at an electric vehicle, you will start to be more alert of how you use energy and specifically electricity. And you will try to reduce the energy that you buy, and you will try to maximise the energy that you produce yourself, so you will become a prosumer.
So, this triangle is my number two and the number three, which is again, helping the acceleration, is giving a value to flexibility. And because end-users are so important, I think it's not a major driver, but it will be a huge support act, the establishment of one-stop-shops so that we can provide trust to those people that are supposed to buy and eventually pay for the heat pumps.
[00:11:23.030] - Sandra Trittin
And what is your view, Steven? What do you think from your point of view, are the drivers before we dive into the discussion?
[00:11:30.070] - Steven Ashurst
Well, we published a paper on this a few months back and I think the top three areas that we picked out then stalk, hold true. So, suppliers, retailers of heat pumps need to continue to see sales take share from new market segments so much, certainly not all, but much of the growth we've seen in the last number of years has been based in the new build segment and that's almost a part of the market that's wrapped up. Now. Hybrids had a beef spell, but mostly we see its fully electric heat pumps going into new homes. But there will need to be more commonly installations replacing natural gas oil more consistently. It's not that talking about fully electric retrofits this time they don't have a share there. And it does vary quite a lot per country, whether it's through the hybrid route or whether it's just through high heating or high temperature or, or high, high output fully electric systems. That is still a massive part of the market that is quite untapped when you look at different countries. The second aspect which links to that is entrepreneurialism. So, we're seeing the growth of really interesting propositions business models.
Thomas mentioned the one-stop-shops. We think they'll be absolutely the key and there's a lot more room in the market for more one-stop-shops that supply everything to the end customer new business models as well, rental models, Heat-as-a-Service (HaaS) models. Again, there are examples in key markets. But to really expand affordability to people who aren't current heat pump customers at the moment, things like this that will continue to lower the upfront investment cost will be key. And then the third one we identified at the time, which again strides are being made almost all the time, is just handling the supply chain. So that comes down to installation capacity. Not all markets have an installer shortage when it comes to capabilities with electric heat pumps or F gases, but a fair number do. And especially when you look at government growth targets, there's going to need to be a big replenishment of the installer workforce in the years ahead in general. And then there's the wider supply chain aspect. So, it's increasing the production output, which again is largely underway in our view. We'll probably see over the 2024, 25, 26 significant new production capacities coming online, which will have obviously more of an impact towards the end of the decade.
But yeah, I think we make it well over two and a half billion euro (€2.5B) invested over the last number of years in either brand new or expanded European heat pump production capacity. So, yeah, getting more traction in less traditional market segments, continuing to be very entrepreneurial with new propositions for end customers and keeping a handle on the rest of the supply chain would be the three things that we have identified.
[00:14:08.990] - Jon Slowe
That's a really interesting set of two lists. Thomas. Your first one of gas and electricity price ratio, I guess there's overlap with the new market segments because the better those ratios, the more new markets opens up. The second point of that EV/PV heat pump triangle has similarities, Steven, to what you were saying about propositions making it easy for customers to buy, that customer journey to reduce bills, decarbonise homes and different ways it can do that. And then two quite different but really interesting points, the value of flexibility and the supply chain, particularly the installer challenge. Sandra, any observations from your side?
[00:14:47.980] - Sandra Trittin
Yes, so, out of my own experience, I think the biggest challenge, let's say, for the future growth I have seen or heard, is actually the financing. Because if you look at an investment that you are taking on an air source heat pump, you're probably talking around €25,000.
[00:15:09.385] – Jon Slowe
In Germany.
[00:15:11.378] - Thomas Nowak
Yeah, good point.
[00:15:14.245] - Sandra Trittin
If you look for ground source heat pump, you're doubling. Right? And then for sure the running costs are lower, et cetera, which I hope for, right, because at the current electricity prices here in Switzerland, this might look actually different. But I think this financing part, I'm really surprised that this is still so untapped, let's say, of offerings. And I really see it as a key driver because either how you make the society moving, either by regulation, so you give either subventions or you forbid certain kind of technologies which then help to foster others, which is also happening. But if it should drive by itself, right, then it should normally, let's say, be affordable or there should be options to finance it. And it seems it's a pretty big hurdle, right, even here in Switzerland, for people to move into these kinds of technologies.
[00:16:10.590] - Jon Slowe
Now speaking, Sandra, with actually it's a company I spoke with on the podcast quite a while back, Horizon Capital, I think their name is, who finance smart metres in the UK. So, they enable energy retailers to instal smart metres without having them on their own books. And they've actually bought a portfolio of 600 heat pumps that are third-party owned and they see a really interesting way they're looking for their next thing after the smart metre rollout, but they see financing heat pumps as a really interesting growth area. So, Thomas and Steven, what's your views on the role of finance or how that relates to your three points?
[00:16:54.710] - Thomas Nowak
Well, if I start, then the electricity-to-gas price ratio will actually make financing easier. As I said, we need to move from having this as a cost and people perceive it only as a cost because that has all these implications of unaffordability to making it an investment. And no government of this world will be able to pay for the energy transition from their own pockets. Hence it is essential to activate end user funding. And this activation will only happen if banks understand what heat pumps can do. So, we always talking about a lack of installer knowledge. I think we do have quite a big lack of financing partner knowledge, where the people do not understand what the benefits are, or it doesn't fit their own calculation methods. And if the heat pump really saves heating costs, which is not the case today, especially with the prices of a heat pump installation in Germany. And it's actually a striking mismatch between Germany and what you pay in the UK for very much the same machine. But if that is not changing, then we will not activate the end-users. And then of course, you always fall back into how can I then finance all this investment because then I have to pay it from my available money.
But if we can reduce the operating cost, the Opex, then of course that will be different. And to this matter also the flexibility pays in. And both of these will make it more interesting for aggregators to offer the financing service that you mentioned, Jon. Because obviously if you can make money because you have better access to lower financing rates or you have long term investors that make millions of Euros available to you to put the investment into your balance sheet and then only charge the end user, the operating cost, then there is an easiness to access to this renewable energy technology.
[00:18:45.260] - Jon Slowe
On that price ratio, Thomas, how I might ask each of you for your three factors, your level of confidence on each of them. But if we start with the electricity-to-gas price ratio, what's your level of confidence that that will move to that 2.5 to one that you said.
[00:19:01.530] - Thomas Nowak
Well, it will move, it will move. On the policymaker side, we see a lot of agreement that this is an essential point. Every policymaker I've been talking to over the past two to three weeks agrees to that. It's not sure that they are willing to change, but the agreement to the point is outstanding. And then we can narrow this factor from two sides. Either we reduce the electricity price, or we increase the fossil price. And we will have a CO2 price for heating oil and gas from 2027 onwards in the whole European Union. So, the cost of gas heating will become more expensive. And those people that have quickly bought an oil or gas boiler, just to be sure and to avoid the uncertainty that is connected to heat pumps, maybe also as a result of a quite toxic debate, they may regret that rather sooner than later. So positive 100%.
[00:19:52.780] - Jon Slowe
Steven, what about your view on the financing part and how that plays into your three points?
[00:19:57.790] - Steven Ashurst
Yeah, on financing first, so it's crucial. Absolutely. As Sandra outlined, it should be quite straightforward for non-residential customers, typical C&I (commercial & industrial) customers, because there's lots of things you can do on balance sheet, off balance sheet, you can just charge one price for everything, including servicing and heat output. I think it's much easier to make a sensible, understandable offer to a consumer in the commercial market that ultimately makes moving off a standalone fossil fuel system to system of renewables or heat pump based easier. When it comes to the residential market, it is still a lot harder. So, yeah, our second point was on entrepreneurialism and we're saying that anything that can be deployed to allow people to not be reliant on using a grant and still paying upfront for the balance of the installation. So, yes, to be able to rent, to take a heat as a service contract. Some very interesting, very early-stage examples of things like salary sacrifice, listeners might know a little bit about that. A tax efficient way to invest in more expensive things. Quite common. You can use it to get a new bike or something through your work. But there's one or two examples that are trying to help people invest in heat pumps now, in that way.
We did another piece earlier this year, talking to a selection of retail banks, mostly active in the UK, but global banks, and it's clear that net zero, they don't really look at it as decarbonisation of heat, they look at net zero as the term that's got their attention now. And of course, they see that it's a huge opportunity for them, but they still don't really know how to make a business case for themselves whether it's from lending capital to your average householder and there's again, largely at the trial stage, but very interesting models being looked at. A green mortgage, or even more. Not even just a green mortgage, but a green loan. So, there are activity in this area from stakeholders have the money to deploy that will get much more common, already is becoming more common. And we have some colleagues who are convinced there's a flood of private finance coming this way. I think in general it is towards the energy transition, but when it comes specifically to the decarbonisation of heat, it'll take a lot longer. But, yeah, lots of reasons to be positive that there will be more options for average householders in the years ahead.
[00:22:30.370] - Sandra Trittin
In general, I think that sounds quite optimistic, right? Or positive. But Thomas, I'm coming back to one of your points earlier where you said like 2023 might not be this kind of optimistic, positive year for the industry, as expected. Could you probably tell us in two, three sentences why that is or what has changed?
[00:22:56.510] - Thomas Nowak
Well, what has changed is the gas-to-electricity price ratio has rebound and now it's up again in quite a few countries. And that means that for many end-users, the investment is more difficult, and they don't see the investment part of enduring these costs. That's number one. Then we are looking at an overarching insecurity in the markets. Interest rates have increased tremendously. Christine Lagarde has said that interest rates will stay high as long as it takes. I find it a bit haphazard not to say what that really means, because there is a lot of insecurity and the new build market in many countries has, I think it's safe to say, has collapsed. And because heat pumps are still a predominant solution, at least more than 50% of the heat pump of the newbuild market of buildings. This has really affected the manufacturers tremendously. And they weren't prepared for that because at the end of last year, you may remember, heat pumps were disseminated to the highest bidder, and you were not able to make any price comparison. If you approached an installer and said, I don't like your price, I will ask one of your competitors, they would wave you goodbye and say good luck.
Next, please. And this change was so fast. I think it really happened within three months maximum. It was really fast. And now we are sitting in a situation where the manufacturers have taken the word of the policymakers at face value, and they have invested a lot of money. I counted up to more than €5 billion of announced investments, and a lot of it is really now put into concrete. So, there is factories either finished or under construction and close to finalisation. So, this shortness of demand is met with overcapacity if all these new factories were to start production, and that, of course, is quite a crunch situation. And at the same time, then we also have the F-GAS regulation, which is now finalised, but which is in a way devaluing some of the additional production lines and also products. So, if you were not able to sell some of the products that you produced end of last year or beginning of this year, and now the situation has changed, and some people change their opinion and they are insecure anyways on what to do. And they read that, oh, there's a new regulation coming out that is limiting the availability of certain refrigerants, then they may simply conclude that they wait for the investment.
So that puts on top an additional burden and all of these things across Europe, really. There's a few markets where it's different. The Netherlands are still growing. Sweden seems to be quite optimistic. But for example, the southern European markets are not growing at the moment. We are not sure if we can even achieve the 2022 sales numbers in 2023. I'm still a bit optimistic, maybe a bit more optimistic than some of my peers, hoping that this triangle that I showed to you and that this huge success that photovoltaic investments have in electric vehicles have. But even there you see some slowdown leads to a parallel effect also for heat pumps. I'm not sure if it really happens. At the same time, I'm talking to installers that say I'm still booked until early next year. So, some industry sentiment has it that it's expected that there's going to be a major slump in the beginning of 2024 before it gets better, I guess.
[00:26:18.360] - Jon Slowe
Thomas, you talked about S-curves earlier on, and if we picture an S-curve, it's a smooth line. The reality is S-curves are never smooth. And it reminds me a bit of the solar boom way back in Germany when there was a challenge around the production of silicon and a shortage of solar and the price spiked and then there was oversupply of silicon and it was completely the opposite problem. So, I guess for both of you, Thomas, and Steven, are these things just part of what happens when you have S-curves, when markets transform? Or is there anything fundamentally worrying you, maybe relating to that wobble or to your three factors? What would be your biggest concern around the growth over a long period of time keeping accelerating? Steven, do you want to go first.
[00:27:08.650] - Steven Ashurst
And then Thomas I don't think it's necessarily a cause for concern. I'm really interested to see how this will play out. There's going to be, by the end of this decade, I would say, much more potential production capacity of heat pumps than the European market is asking for, just based on normal replacement rates and the fact that, yes, still, they won't be an option for everybody. And there will in that time also be progress on things like sustainable liquid fuels and low carbon gases. Another discussion, but I think that ultimately the significant expansion in European-based production capacity will only be a positive for consumers. It should exert a lot of downward pressure on product prices, which have been rising in the last number of years, and under normal conditions, I would expect would continue to rise because of the move to the new refrigerants, RT 290, the key one. So, it's not just the refrigerant that changes, it's the components that interact with that as well. So, of course, there's always going to be the recouping of the R&D (Research and Development) investments there. So, this significantly increased level of competition, not just between the main traditional heat pump brands, but the traditional European HVAC (Heating, Ventilation and Air Conditioning) boiler brands as well. That's going to be fascinating to see how that plays out. I'm not sure if that completely or directly addresses your question, Jon, but I think it's going to be not necessarily a cause for concern anyway.
[00:28:31.760] - Jon Slowe
Thomas, how do you see it? Are you worried about the next years? Is this a wobble? Is it just part of how things go? Or if you are worried, what's the biggest thing that's worrying you?
[00:28:41.770] - Thomas Nowak
If I'm sitting comfortably in my chair, I would say, yeah, that's how it goes. But I also talked to quite a few people on the ground and then, of course, there are really implications for individual installers and individual factory workers, where it's not so funny anymore. I talked to one CEO the other day and he said to me, I was at the factory, we built this new factory. It's also in the press that we built this new factory. And now you go on the factory floor and there is one production line running, but the second and the third are vacant and we employed 70 people for that, or we employed 90 people for that or we employed 100 people for that, so now we send them home again. It's really something that I find quite dramatic for individuals. But what I find more dramatic is that we were very, very happy and optimistic at the end of last year when we received all this political support and I attended the conference of the German Heat Pump Association in Berlin just recently, and we had five policymakers. They all said, yes, we understand electricity prices have to go down, but that's complicated.
So, you see that on the lip service level, it's okay, we want to do this. And of course, ideally, we would like you to all shift into heat pumps because then we solve our energy and climate problems. But when you ask them then what they will do, I find a threatening silence. The gravity of the situation, the gravity of the demand slump seems to have not arrived on the policymaker level at least, I cannot see that they take ambitious action. I have asked repeatedly for an all-hands-on deck approach and my feeling is at the moment we are not seeing an all hands on deck approach with policymakers that would make me optimistic in a direction where this is changing fast. And we have seen so many I mean, there was this rescue and recovery facility. This is running out now. So, you will see also there is going to be a crunch in available financing in the near future on the European level, which may influence subsidies that are paid, et cetera, et cetera. But we need the opposite. We need a strong drive in the direction of creating conditions that facilitate demand. And that I don't see. So that's my concern. Not so much what I observe, but the reaction to that.
[00:31:06.200] - Sandra Trittin
But then would you be thinking that solving it, let's say, with innovative business models, or as it is done now, packaging it into full-fledged solutions with solar and storage and charger might drive the market by itself?
[00:31:23.200] - Thomas Nowak
Well, it's one point. It's one point. But you will also not find these innovative business models if there is no business case behind it. Especially the people that offer these innovative business models have a very, very good accounting department. And they will tell you immediately if this makes economic sense for them because also, they will only get the big investors to pour money in this sector if these big investors see returns on investments. And normally these returns on investments are bigger than the ones that an end user would accept. If you look at end-users in Germany, you can probably not define a payback, okay? We have all heard that when you buy a new kitchen or a new car, you also have no payback. But people see a heating system, at least in the direct comparison to a fossil boiler, more as something that should pay off.
[00:32:11.850] - Jon Slowe
And that will need some degree of policy intervention to achieve that. But if we get that, that opens up the new sectors, Steven, that you talked about, that will unlock more of the entrepreneurialism, the business model innovation, the finance thing that we talked about. Inevitably, I guess, won't be a smooth S-curve. We already got a 2023 bump, but hopefully it's smoother than it is bumpier, let's put it that way.
I think keeping our time, we better bring out the talking new energy crystal ball. So, I'm going to set the dial quite close. We've talked about 2023. I want to set it just for three years’ time, 2026. And Steven? Thomas? For that year, fast forwarding to that year. What's the heat pump market doing in 2026? How much momentum will we have? Will we have kept; will we have gained in 2026? So, try and provide an elevator pitch for the heat pump sector in 2026 around that momentum growth S-curve angle. Steven, do you want to go first and then Thomas?
[00:33:22.200] - Steven Ashurst
Ultimately, at this point in time, we are forecasting a compound growth rate to the end of the decade of 10% annual growth in heat pump sales in Europe. So, yeah, not quite the heights of the last couple of years, but overall, that very positive trends. We're also seeing some key markets down this year, potentially some flatlining next year, but based on reasons we've discussed earlier, return to more generally positive conditions from 25, and perhaps not as bullish on the change in the energy price ratios as others. So, I think that will be a slow process in markets where it isn't already underway and it is very underway, or done essentially in other countries, but those where it's not already underway, Britain, Italy would be key ones. I think it'll be very slow.
[00:34:08.910] - Jon Slowe
But seeing momentum in 2026, seeing that S-curve, back on that S-curve by then.
[00:34:14.790] - Steven Ashurst
Like I said, our overall outlook is positive. And the key thing about 2026, which could be a milestone overall and the heating transition is the Netherlands. Invariably, we see the Netherlands as a country that's leading the way in many areas of decarbonisation of heat. And potentially from that year, the minimum viable retrofit heating system will be a hybrid heat pump.
[00:34:38.400] - Jon Slowe
Well, if the Netherlands, there isn't a country that's more of a gas country than the Netherlands. So, if they can, that will be a great example. Thomas, your view.
[00:34:45.320] - Thomas Nowak
I was at their conference yesterday and they think that from now until the quite foreseeable future, they will have about 50% hybrid heat pumps and 50% full heat pumps. May I, before I answer, ask another question to Steven, because you're looking also at some other countries, where do you see the Eastern European markets from the insight that you get when you talk to people?
[00:35:11.970] - Steven Ashurst
Quite a mixed picture, Thomas. I guess Poland is everyone's most interesting Eastern European market, isn't it? And that's grown very strongly to become one of the largest heating heat pump markets in Europe. That is one of the countries, unfortunately on our list that we expect to be down in 2023 versus 2022. But in Poland it's not necessarily a lack of installation capacity, it's not a lack of product availability that's the issue for them. It's not a lack of government funding on grants. It's just sort of dealing with the rate of change in the scale in Poland. They've still got significant amounts of coal boilers, oil boilers that the government is dead keen. So, we do expect over the longer term for Poland to be a really strong almost towards the front of the pack market for heat pump deployment hybrids. Based on our research, people aren't so interested in hybridising in Poland, so it would be fully electric or something else. Czechia is another one which we get asked about a lot. Honestly, we haven't done as deep a dive into the Czechia market as we have in Poland. But good incentives, good range of products, locally made products from brands there as well. So those would be two key Eastern European countries that I would pick out that would merit keeping an eye on as an indication for how Eastern Europe more generally will develop in the years ahead.
[00:36:37.250] - Thomas Nowak
Very interesting. Yeah, I share that view for sure. Probably one of the challenges in these two markets is to make them really home markets for their own industry. One journalist quoted the other day that there is a new heat pump valley coming up similar to Silicon Valley in the United States. And they said yeah, this is somewhere in the south of Poland and north of Czechia and then maybe also some Slovak and Slovenian locations and could even branch out into Romania and Hungary because we don't have good solutions for affordable solutions for these countries. And one thing that I did not mention so far, I think that if we assume that we have these 30% share of heat pumps in the overall heating market plus minus, right, then we can conclude that this is the target group of these heat pumps are people that are more affluent. And what we are still lacking is both business models and solutions for people that are much more economically constrained, where really it makes a big difference if you invest €10,000 or even €15,000 is the make-or-break distinction and so I think that will be essential.
But to answer your question then, 2026, I am of the opinion that we see a bump now with all its difficulties and we need to use that bump to remind policymakers that they have to take action because in general we have the tool sets ready, the technology is here, we understand the business models. There is enough ample evidence from countries where flexibility has a value and end-users can benefit from flexible electricity tariffs and they do so. So, there is examples, we can show examples for heat pumps in pretty much every building type. We find in one country, significant numbers for that. We find solutions from new business models based on flexibility or maybe on a lower electricity price. And we find countries where even the demand on installers has been successfully met by industry. So, principally, everything is ready. And hence my conclusion would be 2024 is the bump in the road, the bumpy ride. I hope it doesn't throw too many people out of their cars and everybody is buckled up safely. And then 2025, maybe even late 2024, we see a rebound. I do think that we need double digit growth. I have calculated when Repower EU came out that we need something between 15 and 25%.
Of course, it depends. And at the end of this S-curve, maybe that is around 2030. 2035, when heat pumps should be something like six, 7 million, maybe even 8 million units, because S-curve now the tipping point at 3 million, then maybe another tipping point at six. And then it starts to flatten out, because we don't think that heat pumps will take everything, even though I'm very optimistic. So double digit, for sure. If I have to give you a number, I will not, but a range, my guess would be 2026, back between 20 and 30%.
[00:39:40.680] - Jon Slowe
Well, that's a nice optimistic note to finish on. We hit a bump, but there are always bumps. And as you say, it does have real intangible effects on individuals, companies, investors. So, let's get through this bump as quick as we can, I hope, and back onto that S-curve. Thomas, Steven, thank you both very much. It's been a real pleasure. And there's loads more we could have talked about, but hopefully that's given our listeners a real flavour of where heat pump markets are going in Europe. Thank you both.
[00:40:08.920] - Steven Ashurst
No worries.
[00:40:09.470] - Sandra Trittin
Thank you.
[00:40:10.470] - Thomas Nowak
Thank you very much.
[00:40:11.590] - Jon Slowe
Sandra, what's your thoughts? Looking at, know, stepping back and looking at the heating transition and the growth of heat pumps?
[00:40:18.210] - Sandra Trittin
I think there are still hurdles to take. Right. And we heard about them. It's that price range between gas and electricity. It's the financing. It's probably also still the level of information, to some extent in public available information training. Demystifying also the topic about retrofitting in buildings with heat pumps. But the main point that I see again is that we should try everything to not rely eye on policymakers as much as we can. I mean, for sure, support is needed, but we also all know that policy is not moving quickly. So, I think now it's on us again to look for these innovative business models and create that space to bring in more heat pumps into the market and electrify heating in whatever kind of way, driven by the market, which is not easy. Right. It's the same as flex ten years ago. Right. That was also not easy. But there is a chance, and I think it's also great to see some innovators, let's say, moving, because once the hurdle is taken, I think then it increases also more for others. Right. And the market gets more interesting. Then I think also individually, I think it's always, if you can afford it, why should you not change it?
I know there are limitations. I know that every family, every household has to take its priorities depending on the context, et cetera. But I think it's also on us, right, that we have to make that happen.
[00:42:01.130] - Jon Slowe
Absolutely.
[00:42:02.390] - Sandra Trittin
How about you? What is your view? What are your key takeaways?
[00:42:06.450] - Jon Slowe
We are dependent on policy to quite a large degree, and through lobbying, education, finding ways forward, I think that will start to happen. But it will take time for those price ratios to get where in every country where we need to get them. But what I'm really actually heartened by is the number of companies diving into this space, be it innovative product design and packaging, be it new business models, be it people trying financing. You talked about flexibility ten years ago, Sandra, and I remember drawing a map of aggregators across Europe and there were like 70 of them. And there were hardly any price signals, there was hardly a market, and yet everyone was diving into that market. And heat pumps is different. There is a large market, but still the number of companies innovating, trying, pushing things forward. Countries like the Netherlands where progress is being made, I'm actually quite optimistic, but I don't think it will be smooth. I think some things will take longer and it inevitably will be a bit bumpy, which is hard for companies to navigate.
[00:43:12.870] - Sandra Trittin
Let's stay curious around the future.
[00:43:15.200] - Jon Slowe
Yeah, I think that mindset of creating the future and that's what I see the energy sector and new entrants doing is starting more and more to create their own future. Okay, let's leave it there. Thanks everyone, for listening. We hope you enjoyed that episode and look forward to welcoming you back next week. Thanks, and goodbye.
[00:43:35.290] - Sandra Trittin
Thank you. Thanks for tuning in. We are excited to bring you captivating conversations from the leading edge of Europe's energy transition. If you've got suggestions for topics or guests for future episodes, please let us know.
[00:43:47.930] - Jon Slowe
And if you're enjoying the podcast, then please do rate it and share it with colleagues. For show notes, transcripts and more, please visit lcpdelta.com.
Talking New Energy
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