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ng The Scottish RenewablesHeating Pilot

THE SCOTTISH RENEWABLES HEATING PILOT

Clear Plan UK and Logan Project Management

Scottish Government Social Research 2008

It should be noted that since this research was commissioned a new Scottish government

has been formed, which means that the report reflects commitments and strategic objectives conceived under the previous administration. The policies, strategies,

objectives and commitments referred to in this report should not therefore be treated as current Government policy.

© Crown Copyright 2008 Limited extracts from the text may be produced provided the source is acknowledged. For more extensive reproduction, please write to

the Chief Researcher at Office of Chief Researcher, 4th Floor West Rear, St Andrew's House, Edinburgh EH1 3DG

This report is available on the Scottish Government Social Research website only www.scotland.gov.uk/socialresearch.

CONTENTS SUMMARY OF KEY FINDINGS 1 1. ABOUT THE PILOT 3 2. ABOUT THE EVALUATION 6 3. KEY FINDINGS 7 Householder Satisfaction 7 Warmth Levels 9 Impacts on Fuel Poverty 12 NHER Ratings 14 4. COST BENEFIT ANALYSIS 17 Installation Costs 17 Costs and Benefits 18 Options Appraisal per £1m Upfront Capital Spend 20 5. RECOMMENDATIONS 24

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Summary of Key Findings i. This evaluation report is one of two outputs from a two year pilot study into the

viability of including renewable technologies in future fuel poverty programmes. The other output, a report on the operational aspects of the pilot, is available from the Energy Saving Trust website.

ii. The pilot ran from April 2006 to June 2008 and involved 87 households who

received a new renewables-based central heating system. In the main, these systems were heat pumps (either air-source or ground-source), with a small number of biomass boilers/stoves and solar thermal systems also installed. This report focuses on results from the heat pump technologies.

iii. Eighty-seven properties received a renewables heating system and, where

possible, Warm Deal (WD) insulation measures. Fifty-six social rented sector properties were involved in Phase 1, with 31 owner-occupied properties in Phase 2.

iv. One hundred and seventy installations were initially planned, but costs were higher than expected. The average cost of an Air Source Heat Pump (ASHP) in the pilot was £10,500 (fully installed), while the average cost for a Ground Source Heat Pump (GSHP) was £17,240 (fully installed). Estimated near future costs with bulk installations were £9,000 per ASHP and £14,500 per GSHP.

v. Nearly nine in ten householders were very or fairly satisfied with their new renewables system and there were good satisfaction levels across a range of areas. A number of other householder benefits were also identified, including self-reported improved health status and energy efficiency behaviours.

vi. The installation of renewable central heating systems improved National Home Energy Rating (NHER) scores in all households. The average NHER score of properties in the pilot before installation was 2.8. After installation of renewables plus WD measures, the average NHER score was 5.5, slightly below the national average of 6.1. However, current NHER software is considered to under-estimate the effectiveness of modern models of heat pumps.

vii. NHER–based projections suggest that, before improvements, pilot households emitted on average 11.7 tonnes of carbon per year. The installation of renewable heating systems +WD was projected to reduce this to an average of 4.9 tonnes, a better projected outcome than for oil +WD or electric storage +WD.

viii. Electric storage was found to have a higher benefit to cost ratio (BCR) than the heat pump or oil-based systems. However, for the purposes of this pilot, a better measure is how effective the various technologies are in removing households from fuel poverty for a set capital spend. ASHP was found to provide the greatest overall value for money in terms of households lifted from fuel poverty per £1m capital spend. Based on June 2008 energy prices, ASHP would lift 43 households from fuel poverty for that level of spend. For the same spend, electric storage could lift 37 households out of fuel poverty, GHSP would lift 29 households from fuel poverty (because of its high installation/unit costs) or oil could lift 19 households. If carbon values are included in these calculations, ASHP would lift a still higher number – 55 – from fuel poverty.

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ix. The evaluation’s value for money comparison shows that even if only a minority of target homes can be treated within available resources, then it is still more effective to install ASHP, albeit in fewer properties than would be treated by fossil fuel systems, thus achieving the greatest number of households removed from fuel poverty for the level of resource available.

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1. ABOUT THE PILOT 1.1 The Scottish Government provided £1m funding over two years (April 2006 -

June 2008) to pilot the installation of renewables-based central heating systems in properties off the gas grid across the country. This pilot is to help Ministers make informed decisions on whether to include renewables technologies within future programmes to target fuel poverty. The pilot was managed by the Energy Saving Trust (EST) and the independent evaluation of the pilot was conducted by ClearPlan UK and Logan Project Management.

1.2 Fifty-six properties in the social rented sector and 31 properties in the private

sector were included in the pilot. 1.3 The pilot concentrated on two particular renewable technologies: air-source

heat pumps (ASHP) and ground-source heat pumps (GHSP). In addition, a small number of biomass systems were installed. These renewable-based systems provide heat and hot water in the home and have the potential to have significant impacts on fuel poverty. Solar thermal – a secondary, non-space heating technology - was installed as an ‘add-on’ in a small number of pilot properties to assess their potential contribution to reducing fuel bills. In addition to the renewables technologies, separate funding was provided for the full package of Warm Deal (WD) insulation measures in each property where it was feasible to do so.

1.4 The pilot’s eligibility criteria were as follows. 1.5 Householders had to:

• Be in receipt of a Warm Deal passport benefit; • Be ineligible for the Central Heating Programme.

1.6 Properties had to:

• Be off the gas grid; • Have no central heating system or one that was more than 15 years

old or one that was inefficient and incurring excessive cost; • Be physically suitable for installation of a renewables heating system.

Phase 1: Social rented properties 1.7 Installations in the social rented sector took place between January and

March 2007. Thirty-four ASHP and 22 GSHP were installed (56 systems in total). No biomass systems were fitted due to uncertainties about long-term pellet supply/costs during the Phase 1 installation period. Seven solar thermal systems to heat hot water were installed. Details of installations by phase are provided in Table 1, overleaf.

1.8 Systems were installed in 8 cluster areas across Scotland, in partnership with

Local Authorities and Housing Associations. Most installations took place in largely rural areas, reflecting the pilot’s emphasis on harder to treat properties

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off the gas grid. EST (using funding provided by the Scottish Government) provided 60% of total installation costs in the sector, with local authority and housing association partners contributing the remaining 40%.

Table 1 - Number of renewables systems installed, by phase

Phase 2: Owner-occupied properties 1.9 Thirty-one privately owned properties were included in the second phase of

the pilot. Properties were clustered in a range of locations across Scotland. Again the majority, though not all, were in rural locations. Installations took place between August and December 2007.

1.10 ASHP, GSHP, biomass, and solar thermal systems were installed in private

properties. EST reached price agreements with suppliers for short-term, reliable biomass pellet supply, which enabled 4 properties to have biomass installed. However, results on biomass are tentative because of the small numbers involved, so for the most part are not included in this report. Six households received solar thermal systems.

1.11 EST (again using funding provided by the Scottish Government) met 100% of

installation costs in this phase. 1.12 Figure 1, overleaf, shows the locations of the installations by technology.

1Solar thermal interventions were installed as complementary technologies beside 10 of the air source heat pumps and 3 of the wood pellet systems.

Technology Social Housing Phase

Owner Occupier Phase

Ground source heat pump (trench/loop) 2 2 Ground source heat pump (bore) 20 3 Air source heat pump (outdoor air) 28 21 Air source heat pump (exhaust) 6 1 Wood pellet biomass 0 4 Sub-total 56 31 Solar Thermal interventions1 7 6

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Figure 1 – Map of installations by renewable technology

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2. ABOUT THE EVALUATION 2.1 Clear Plan UK, in conjunction with Logan Project Management, conducted an

independent evaluation of the pilot, with the following three main aims:

• To evaluate the impact on fuel poverty of using renewable based solutions;

• To explore participants’ experiences of and attitudes towards using the renewable technologies installed;

• To assess the value for money of including renewable-based systems in future fuel poverty programmes.

2.2 The evaluation was informed by the following data collection:

• Participants’ experiences of using the renewable systems were explored using householder diary records, regular questionnaires (including pre- and post-installation) and telephone interviews.

• The NHER software package was used to model the relative effectiveness of renewable and traditional (oil-fired and electric-storage) central heating systems in raising NHER levels in pilot properties.

• Household incomes were collected to assess fuel poverty levels. • Modelling was conducted to compare the effectiveness of renewables

and traditional technologies in tackling fuel poverty. • Temperature data loggers were installed in the main living area and

bedroom of each property to gather data on warmth levels before and after installation.

• Carbon savings from the new systems were estimated and compared to traditional systems.

• A cost-benefit analysis was conducted to consider whether heat-pumps should be included within future fuel poverty programmes.

2.3 Data-gathering for the evaluation was carried out by both EST and Clear Plan.

Responsibilities were broadly divided between quantitative and qualitative data gathering. EST had primary responsibility for gathering quantitative data, including information about the energy efficiency of each property before installation, the package of improvements delivered to each property and household energy costs before and after installation. Clear Plan had primary responsibility for gathering qualitative data on householder perceptions of and experiences of living with the renewable heating systems and for evaluating the quantitative data gathered.

2.4 Data analysis was conducted by Clear Plan and Logan Project Management.

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3. KEY FINDINGS Householder Satisfaction 3.1 A range of research methods was used to establish householders’

experiences of their new heating system, including questionnaires pre- and post-installation, and at the end-point of the pilot. In these questionnaires, householders were asked to rate how satisfied they were with key elements of their new systems, and how satisfied they were overall. Figure 2, below, shows satisfaction levels from the 75 householders who responded to questionnaires four to six weeks after installation and at the end of the pilot in Spring 2008.

Figure 2 – Satisfaction levels from post-installation and end point questionnaires2

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Very satisfied Fairly satisfied Neither satisfied or dissatisfied Fairly dissatisfied Very dissatisfied

3.2 Overall levels of satisfaction with the new heating systems were high, at

approximately 9 in 10 householders very or fairly satisfied at endpoint. Around 7 in 10 were very satisfied.

3.3 For most indicators, levels of satisfaction did not change markedly between

the post-installation and end point questionnaires, suggesting that householders’ first impressions were not altered by longer experience. There was, however, a small decline in the proportions very/fairly satisfied when it came to reliability – from 89% to 83%.

3.4 A small minority of householders also reported that the temperature on

occasions felt low in comparison to the temperatures they were used to.

2 Note that due to rounding up/down, figures may not add up to 100.

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Installers explained this as a common perception when heat pumps replace traditional systems: the ‘nature of the heat’ produced by heat pumps is more evenly distributed through the property. For householders who are used to the localised extremes of temperature associated with solid fuels, this can take time to get used to.

3.5 Eighty-two percent of householders were very or fairly satisfied with their

system’s ease of use at post-installation. The mainstream Central Heating Programme research found a similar proportion - 80% of householders - considered their systems ’extremely easy to use’ or ‘easy to use’ – so the pilot’s finding is positive, considering that renewables systems will probably have been entirely new to pilot households. By endpoint, satisfaction with ease of use had risen to 90%.

3.6 Approximately three-quarters of householders were very or fairly satisfied with

the running costs of their new system at post-installation and at endpoint. However, new electricity meters were installed after installation of the renewable system, which meant that householders could not immediately shift to the most efficient tariff for fuel pumps (currently Economy 10).3 This may have negatively affected some householders’ views of running costs.

3.7 Noise levels attracted a relatively low satisfaction rating from recipients of

ASHP, reflecting the inherent feature of these systems to produce some noise during particular phases of operation. Just 63% of ASHP recipients were very or fairly satisfied with noise levels, and 8% were dissatisfied. In contrast, 78% of GSHP recipients were very or fairly satisfied with noise levels.

3.8 Interviews and questionnaires gathered additional information about

householder experiences. At post-installation, 44% of householders reported the installation had caused significant mess within and/or disruption to their home. In almost every case, damages arose from the process of installation of the distribution system for the heat, i.e. the radiators and pipe work, not the technology used to generate the heat itself. In other words, householder complaints were generally not specific to renewables systems. One exception to this was the disturbance and damage caused by boring/trenching for the GSHP ground loop. Most householders were satisfied with the measures taken by installers to limit damage or accepted some damage as an inevitable consequence of the process. However, three householders felt that the level of damage was excessive.

3.9 Interviews with householders drew out a number of quality of life benefits.

Note that these were perceptions rather than measured outcomes, although in some cases evidence from other aspects of the evaluation does support some of these contentions. In summary, consistently reported themes were as follows:

• The house generally felt warmer;

3 Some installers suggested that other tariffs could be designed which could increase heat pump efficiency even further. This would of course increase their potential to tackle fuel poverty.

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• There was an even, constant heat throughout the house; • Householders were able to use rooms in the house that were

previously unheated or too cold to use; • There was a greater level of comfort for those with mobility/health

issues, and also for children; • There was a freedom from the physical labour involved with coal or

wood-fired heating systems in re-fuelling and de-ashing; • Less time was spent cleaning the house from coal/wood dust residues

from the open fire; • There was a reduction in the levels of dampness; • The temperature in the home was comfortable enough to invite friends

over. 3.10 It should be noted that many of these reported benefits are not dissimilar to

those reported in the mainstream Central Heating Programme – in other words, all (except arguably ‘constant heat’) are not specific to receiving a renewables system. There has, however, been some evidence of greater interest in environmental issues following installation, with approximately three-quarters of participants noting that they had made a special effort to be energy efficient since the installation of the renewable system.

Warmth Levels 3.11 Small temperature logging devices were placed in 83 of the 87 homes in the

pilot, generally in the lounge and in the principal bedroom of each property. Each device took one room temperature reading every hour. Data was available for before and after periods for 65 living rooms and 55 main bedrooms and from 6 other rooms.4

3.12 Properties were monitored before installation for periods ranging from 2

weeks to 9 months, and with an average pre-installation monitoring period of 5 months. The time period for monitoring after installation ranged from 4 to 16 months, with a mean of 12 months.

3.13 Figure 3, overleaf, shows the mean temperature in the living room of all

properties for which data was available, before and after installation of the new heating systems. Before new heating, 22 of 65 living rooms had a mean temperature below 18C, falling to 9 living rooms after intervention. Note that data loggers are set to record ambient temperature every hour. This includes overnight temperatures when rooms are not in use. An average of the temperatures recorded over a 24 hour period may therefore underestimate the actual temperatures achieved during daytime hours when rooms are in use.

4 Some loggers were not returned, or not returned in time, and some did not function as intended.

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Figure 3 – Mean living room temperatures

Mean living room temperature before and after, 65 properties

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3.14 Figure 4, below, shows the mean temperature in the bedroom of all properties

for which data was available, before and after installation of the new heating systems. Before the new heating, bedrooms were colder than living rooms, with the majority (36 out of 55) having a mean temperature below 18C. After installation, the number below 18C fell to 14.

Figure 4 – Mean bedroom temperatures

Mean bedroom temperature before and after, 55 properties

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3.15 Reports from householders suggest that the whole property was warmer

following installation of the renewable heating system and that variations in

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temperature were reduced. This is supported by evidence from temperature loggers. Daily temperature range, the difference between the highest and lowest room temperature each day, is a measure of temperature stability. The daily range fell in 55 of the 65 living rooms recorded, and in 38 of the 55 bedrooms, indicating higher stability of temperature in these rooms. The mean value of the daily range in the 65 living rooms fell from 4.8C to 3.2C after the new heating. In 5 cases, the mean daily temperature variation was under 1.5C for periods each exceeding a year.

3.16 Figure 5, below shows how the temperature in the living room of a property in

Orkney, which had previously been heated by a coal fire, stabilised around 21C following installation of an ASHP. Other rooms in the property are likely to have achieved greater increases in temperature than the living room (due to poorer temperatures before) and are likely to have similarly stable temperatures.

Figure 5 – Example graph showing increase in temperature stability.

3.17 The qualitative research on householder perceptions and experiences

revealed that a common problem with household warmth before installation was not in the main living area but in other rooms of the property. It was not uncommon for households to have bedrooms which they did not use because the rooms either had no installed heating or because heating those rooms was unaffordable. Several families reported that prior to the new system being installed children slept in the living room because second bedrooms were unusable. One of the benefits householders valued most highly was the delivery of consistent heat throughout the whole property, a benefit which would not have been recorded by temperature loggers in living rooms and main bedrooms.

New heating installed

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Impacts on fuel poverty 3.18 One of the evaluation’s key tasks was to establish the effectiveness of

renewables systems in tackling fuel poverty. A household is defined as living in fuel poverty if, in order to maintain a satisfactory heating regime, it needs to spend more than 10% of its income (including Housing Benefit or Income Support for Mortgage Interest) on all household fuel use. Modelling was undertaken, and was based on the following elements:

• June 2008 fuel prices • Performance efficiency assumptions calculated from the actual

monitored performance of the systems installed on the pilot. • Household income figures for 77 households (10 households refused

to provide or only provided incomplete income data), with incomes adjusted to June 2008.

3.19 Mean annual household income across the 77 households that supplied

income data was £13,137. Household incomes ranged between £4,476 and £35,500.

3.20 Before improvements, the average annual cost to maintain a Satisfactory

Heating Regime5 (SHR) across the fuel poor households in the sample was £2,427. The highest annual cost was £5,713. The lowest was £952. Costs were consistently higher in the owner occupier sector, reflecting the lower NHER and generally poorer condition of the properties in that sector. Based on this analysis, 67 households in the pilot were in fuel poverty before improvements, while 10 households were not fuel poor. Of the fuel poor households, 33 were in extreme fuel poverty.6

3.21 After improvements, the average annual cost to maintain a Satisfactory

Heating Regime across households that provided income data was £1,237, almost half of the average before improvements. The highest annual cost after improvements was £3,449. The lowest was £627.

3.22 Figure 6, overleaf, shows the percentage of income needed under each

scenario to maintain a Satisfactory Heating Regime – each symbol represents a pilot household under each modelled scenario: with no improvements, with oil, with electric storage and with renewables. The chart shows that renewable systems (the pink squares) are consistently less expensive to run than electric storage or oil and suggests that they are therefore more effective at tackling fuel poverty.

5 The definition of a 'satisfactory heating regime' would use the levels recommended by the World Health Organisation. For elderly and infirm households, this is 23° C in the living room and 18° C in other rooms, to be achieved for 16 hours in every 24. For other households, this is 21° C in the living room and 18° C in other rooms for a period of 9 hours in every 24 (or 16 in 24 over the weekend); with two hours being in the morning and seven hours in the evening. 6 Extreme fuel poverty is defined as a household that would have had to spend more than 20% of its income on fuel to maintain a Satisfactory Heating Regime.

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Figure 6 - Percentage of income required to maintain an SHR by heating scenario – whole sample

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3.23 Table 2, below, shows the numbers in fuel poverty in each of the modelled

scenarios. Of the 77 households for which income data was available, 67 were in fuel poverty before improvements. Twenty-seven of these households would be lifted from fuel poverty by renewables. Oil heating would be effective in just 9 households and electric storage in just 7 cases.

Table 2 - Impacts of the Different Technologies on Fuel Poverty

No improvements

WD + Renewables

WD + Electric Storage

WD + Oil

Fuel Poor Households 67 40 60 58 Not Fuel Poor Households 10 37 17 19 Lifted from fuel poverty N/A 27 7 9

Comparative Carbon Savings 3.24 The carbon production associated with the various modelled scenarios was

calculated using standard conversion factors7 and assumed system performance based on an SHR. Table 3, overleaf, presents the annual carbon emissions produced for each scenario.

7 See Annex 1 of http://www.defra.gov.uk/environment/business/envrp/pdf/conversion-factors.pdf

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Table 3 – Mean carbon emissions by scenario

Mean carbon emissions (87 properties)

CO2 tonnes per annum

Without improvements 11.7 WD & Renewables 4.9 WD & Oil Central heating 7.0 WD & Electric Storage 10.1

3.25 The table shows that carbon emissions are highest for the unimproved

properties and fall with any of the new heating options. However, the renewable heating fitted achieves significantly lower carbon emissions than the oil or electric alternatives - an average saving per household per annum of 6.8 tonnes of CO2 compared to the unimproved properties. This compares to a saving of 4.7 tonnes of CO2 which the installation of oil central heating with Warm Deal measures would achieve and 1.6 tonnes of CO2 per annum achievable from the installation of electric storage heating with Warm Deal.

3.26 The performance of specific heat pumps in reducing carbon emissions was

considered and is summarised in Table 4, below.8 The table shows that both achieve carbon savings, delivering around 5 tonnes CO2 per year saving. The difference between ASHP and GSHP depends on the assumed difference in performance between these systems and could be larger in practice than assumed in this pilot. Actual carbon savings, like actual cost savings, will depend on how systems are used by individual householders.

Table 4 – Mean carbon emission reductions in comparison to electric storage heating, by heat pump technology

Renewable heating Annual CO2 reduction, assuming SHR, tonnes

Shadow value of carbon saving, over 15 years

ASHP 4.9 £2300 GSHP 5.1 £2400

NHER Ratings 3.27 Energy Efficiency is measured using two methodologies: the National Home

Energy Rating (NHER) and the UK Government's Standard Assessment Procedure for the Energy Rating of Dwellings (SAP). The NHER is the most commonly used in Scotland as it considers all energy use and allows for regional and geographical variations. The SAP only considers energy used by heating and hot water and does not take into account any geographical or

8 The figures quoted are average values for all those properties in the pilot suitable for that technology, and assuming system performance in line with that measured during this pilot. Financial values for the quoted carbon savings are given, making use of the published shadow cost of carbon published by Defra http://www.defra.gov.uk/environment/climatechange/research/carboncost/pdf/HowtouseSPC.pdf

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climatic variation. This section describes the energy efficiency ratings of the properties in the sample as calculated by the NHER software.

3.28 Once properties were accepted on to the pilot, an energy audit - a visual

inspection of each property to collect information on its heating and insulation characteristics - was undertaken. After completion of the audits, a consultant engaged by EST used the National Home Energy Rating Surveyor software to generate energy efficiency ratings for each property and predicted annual fuel costs to maintain a SHR in each of the following scenarios:

• Before improvements, • With Warm Deal and Renewable Heating, • With Warm Deal and Oil Central Heating, • With Warm Deal & Electric Storage Heating.

3.29 Results from the NHER analysis are presented below. It is important to point out from the outset that there are limits to the accuracy of NHER data in relation to this project. This is because:

• Surveys for this pilot were done to Level 1 or Level 2 depending on the

available data. It should be noted that the evaluation of the impact of the Central Heating Programme on Fuel Poverty used Level 3 NHER surveys, a more detailed model of the energy usage in each dwelling. As a result there is a greater level of uncertainty built in to the data used by the software to calculate energy efficiency in this pilot.

• The NHER software used by the pilot relied on efficiency data for older models of heat pump. It was unable to take into account the increased levels of efficiency of the more modern models of heat pump installed on the pilot. As a result it will underestimate the NHER ratings for the newer models of heat pump installed on the pilot. The renewable systems installed on this pilot are likely to achieve higher NHER scores than those presented in this chapter.

• The NHER software used is not sufficiently detailed to differentiate between ASHP and GSHP and indeed to accurately model renewable heating options. The NHER results therefore include an element of uncertainty.

3.30 It should be noted that findings in this section therefore relate only to the

NHER ratings generated by the software, and do not relate to the calculations for fuel poverty.

3.31 The Scottish House Condition Survey (SHCS) classifies NHER ratings into

three bands: 0-2 (Poor); 3-6 (Moderate); and 7-10 (good). The mean NHER rating of all properties in the pilot before improvements was 2.8, substantially below the national average of 6.1 found by the SHCS 2005/06. Figure 7, overleaf, shows the NHER ratings for all 87 properties on the pilot with no improvements, with renewable heating (+WD), with oil (+WD), and with electric storage heating (+WD).

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Figure 7 – NHER distribution by scenario – all properties

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3.32 The NHER calculations suggest that oil based heating would be the most

effective at increasing NHER ratings, followed by renewables, and then electric storage. Calculations suggest that with WD + Oil, 33 of the 87 properties would remain below the national average. WD + Renewables would leave 43 properties below the national average. WD + Electric Storage would leave 77 properties below the national average.

3.33 The potential ‘distance travelled’ for each scenario was also considered, i.e.

the number of properties that would increase NHER by a single point, by two points, three points and so on, from the starting point of ‘no improvements’. The introduction of WD + Oil can achieve an average potential increase of 3.2 NHER points; WD + Renewables has the potential to increase the NHER of the properties in the pilot by an average of 2.7; and WD + Electric Storage can achieve an average NHER increase of 1.4.

3.34 These findings might seem to cast doubt on the fuel poverty modelling earlier

in the report, which suggested renewables were more effective than traditional technologies at tackling fuel poverty. However, as stated earlier, this analysis relates only to the theoretical modelling produced by the NHER software. There are limitations to the accuracy of the NHER software used for the pilot. It should not be taken as evidence that an intervention of WD + Oil is the most effective in tackling fuel poverty. Nevertheless, as NHER is the standard measure of energy efficiency used in Scotland, the study team felt it important to include NHER-based analysis in this report.

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4. COST BENEFIT ANALYSIS Installation costs 4.1 The actual costs paid for all 83 Heat Pump systems fully installed ranged from

the lowest cost of £5,895 to a high of £26,100.9 The mean cost of a heating system was £12,950. The costs of each system, fully installed, are shown in Figure 8, below:

Figure 8 - Range of heat pump installation costs

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4.2 Future costs were also considered. A number of factors can affect the future

costs of installing renewable heating systems within Scotland:

• economies of scale arising from higher volume purchasing, • economies of scale arising from greater numbers of installations, • maturity of the technologies within Scotland (local contractor familiarity and

global technology maturity), • currency exchange rates for imported systems, and • improvements in the procurement processes for installation contractors.

4.3 Evidence to support our analysis and conclusions on the potential for future price reductions was drawn from:

• costs experienced in this pilot including breakdowns where available, • cost for installation of oil and electric systems achieved by the CHP

through higher volume purchasing, • modelling of future costs published by elementenergy, 10

9 The higher upper costs reflect the inclusion on the pilot of one particularly large, hard to treat property and two properties which involved significant auxiliary installation work. 10 The Growth Potential for Microgeneration in England, Wales and Scotland, elementenergy, June 2008, http://www.berr.gov.uk/energy/sources/sustainable/microgeneration/research/page38208.html

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• interviews with installers, housing and ESSAC officers, and • examination of available studies relevant to potential future prices of

renewable systems.

4.4 The average costs experienced in the pilot are shown in Table 5, below, as are estimated costs considered achievable within the next two years. As can be seen in the right hand column, the cost of renewable options does not reduce significantly in the near future scenarios.

Table 5 – Mean pilot costs and estimated near future costs for heat pumps

Technology Mean cost experienced in the

pilot, £

Estimated near future cost with standard

specifications and hundreds of installations,

£Air source heat pump 10,500 9,000Ground source heat pump 17,240 14,500

4.5 All installers considered that prices for retrofitted heat pump or biomass systems in single dwellings were likely to fall as the technologies matured within Scotland. They also felt that, with sufficient numbers, economies of scale through volume purchasing are likely to be become available within the installation process. Not all installers expressed an opinion, but those who did considered that as the number of systems installed in Scotland rises, reductions in the cost of heat pump units and associated installation and pre-installation inspection and design were very likely. Reductions in cost were anticipated by the installers because of economies of scale in supply of units, and increased expertise of staff. In terms of prices, all respondents felt prices could reduce modestly, especially with increased volumes. Installers were hesitant to commit to making firm estimates of the cost reduction that could be achieved, however notional figures in the range of 10-30% of equipment cost, or around £1,000 were quoted.

Costs and Benefits 4.6 Table 6, overleaf, summarises the chief costs and benefits of the four heating

options considered – ASHP, GSHP, electric storage, and oil - against the original heating. A Satisfactory Heating Regime is assumed, and June 2008 energy prices have been used as the basis of energy price calculations.

4.7 All four heating options are preferable to the original heating systems given

the assumptions made. Electric storage heating provides a substantial energy cost saving of £500 per year over the original heating. Oil gives a slightly greater saving of £600 per year, but at a capital cost around £4000 higher. The heat pump options deliver much higher energy cost savings than either, but at much higher capital costs.

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Table 6 - Summary of costs and benefits of different heating options compared to original heating.

Heating technology

Estimated near future installation

cost, £

Mean annual energy cost, £

Carbon emissions

(tonnes CO2 per

year)

Carbon value11 versus

original heating,

£

Net Present Value12,

£

Benefit-Cost

Ratio

Original heating

n/a 2,300 11.7 0 0 n/a

Electric storage

2,850 1800 10.1 730 11,500 4.9

Oil boiler 6,890 1700 7.0 2160 6,300 1.9

ASHP 9,000 1210 5.1 3030 12,200 2.4

GSHP 14,500 1170 4.9 3120 9,600 1.7

4.8 Electric storage heating has the highest Benefit Cost Ratio (BCR) and so

offers the most attractive option financially per pound spent.13 ASHP comes next with higher installation cost but lower running costs than storage heating, giving a BCR of 2.4. Oil and GSHP have similar lower BCR of 1.9 and 1.7 respectively. All options other than the original heating include Warm Deal measures. Note, however, that the highest BCR does not correspond with the greatest reduction in fuel poverty per pound spent as will be seen in the options appraisal in the next section.

11 This is the value of the carbon saved compared to the original poor heating, over the life of the heating system, calculated using the Defra technique http://www.defra.gov.uk/environment/climatechange/research/carboncost/pdf/HowtouseSPC.pdf 12 Assumes a 15 year life for oil and heat pump heating, 20 years for electric storage heating. An annual planned maintenance cost of £75 was assumed for boiler servicing for oil systems, and an average amount of £30 per year planned maintenance was taken for original heating to cover chimney cleaning of those properties that used solid fuel. 3.5% energy inflation assumed. 13 Net Present Value (NPV) and Benefit-Cost Ratio (BCR) are used as measures of the value of options. NPV is the sum of total costs and benefits of an option, with future costs and benefits discounted to current values. NPV figures on their own are only useful for calculating the overall value of an investment. Any NPV greater than zero is potentially worthwhile. In a world with limited funds however, then for options of equal up front cost, the option with the greatest NPV is the most attractive financially. BCR is the ratio of the NPV benefits to the NPV costs , it therefore allows options with very different up front costs to be compared. Consider 2 options, (a) and (b), option (a) with a cost of £100 and an NPV of £250, and option (b) with a cost of £200 and an NPV of £300. Option (b) has a higher NPV, but option (a) achieves almost as much value for half the initial cost and so has a higher BCR, 3.0 against 2.5 for (a). When the BCR is 1.0, the costs and benefits are roughly in balance, and the project could not normally be recommended. A higher BCR therefore represents a more attractive option.

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4.9 To illustrate the effect on BCRs of energy price changes, a sensitivity analysis was performed and is shown in Table 7, below. This shows that the benefits of heat pumps rise substantially with higher fuel prices. Electric storage heating however retains the highest BCR due to the lower capital cost and longer assumed life despite not giving as low an energy running cost as heat pumps. Note that BCR is compared to original heating systems.

Table 7 - Sensitivity of BCR to different energy prices

Heating technology June 2008 prices -50%

June 2008 prices

June 2008 prices + 50%

Electric storage 2.7 4.9 7.2

Oil boiler 0.714 1.9 3.9

Air source heat pump 1.3 2.4 3.4

Ground source heat pump

0.9 1.7 2.1

Options Appraisal per £1m Upfront Capital Spend 4.10 This section considers the impact that the pilot may have had on levels of fuel

poverty by modelling four hypothetical situations for an upfront capital spend of £1m, as follows:

• If ASHP only had been installed, • If GSHP only had been installed, • If oil only had been installed, or • If electric storage heating only had been installed.

4.11 We now explain in more detail how these calculations are performed. Two

average cost scenarios are presented:

• the average actual costs achieved by the pilot, and • the average costs that may be achievable within the next two years.

4.12 Income data was available for 77 of the 87 households in the pilot and

showed that 67 of these were in fuel poverty before improvements. Using this data we can then calculate, for each technology, the percentage of income each of these householders would require to spend at June 2008 prices to maintain a SHR. We can then model the percentage SHR had each

14 Note oil heating gives a lower energy cost than previous heating, but the NPV of the savings is less than the cost of installing the heating, so the BCR is below one. This scenario, considers a 50% fall in energy prices but with the relative price of electricity and oil unchanged. A fall in the price of oil relative to electricity would improve the BCR of oil.

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technology been applied to all of the properties where installation was possible. We can therefore estimate the percentage of households that would be removed from fuel poverty, had that single technology been installed.

4.13 Table 8, below, shows how many households could have been removed from

fuel poverty for every £1 million spent on installing each of four compared technologies, ASHP, GSHP, oil and electric storage heating. For discussion purposes, we also present the number of households that would be removed from fuel poverty using the average cost for each technology adjusted to take account of the value of carbon savings that may be made by the installation of each technology in comparison to electric storage15. For example, the average carbon value figure for ASHP when compared to electric storage was £2300. This is the difference in carbon emissions between the ASHP and an equivalent electric storage heating system, taken over the life of the measure, converted to a monetary value using the UK government shadow pricing of carbon method. Therefore the average cost of an ASHP net of carbon value in comparison to electric storage is £10,500 minus £2300, or £8200.

Table 8 - Number of households lifted out of fuel poverty per £1 million investment - ASHP/GSHP/Oil/Electric Storage based on installation costs achieved by the pilot

OilElectric storage ASHP GSHP

Installed cost per system £6890 £2850 £10500 £17240% of households removed from fuel poverty by this technology 13% 10% 45% 51%Systems installed per £1m 145 351 95 58Households removed from fuel poverty per £1m spend (ex carbon value)

19 37 43 29

Carbon value (versus electric storage) £1400 £0 £2300 £2400Installed cost per system net of carbon value £5490 £2850 £8200 £14840Systems installed per £1m 182 351 122 67Households removed from fuel poverty per £1m spend (inc carbon value) 24 37 55 34

4.14 Table 8 shows that ASHP are effective in removing the greatest number of

households from fuel poverty per £1 million investment. Although more than three times as many electric systems could be installed for that spend; the higher running costs of the electric systems mean that fewer households overall would be removed from fuel poverty.

15 It should be noted that the value of the carbon savings are notional. Although comprising a benefit which can be monetised, the actual funds are not within the CHP. Therefore some additional resourcing would be required to achieve the number of installations in these tables above within these costs.

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4.15 Table 8 also shows that GSHP give the lowest running costs of all and so, once installed, are the most effective at removing households from fuel poverty. However, GSHP systems are more expensive (unit and installation costs), so fewer systems can be installed per £1m investment. Overall, GSHP are a less effective option for removing households from fuel poverty than ASHP at current prices.

4.16 Table 9, below, considers the potential of the various technologies to remove

households from fuel poverty if estimated future installation costs reductions for heat pumps were achieved.

4.17 There is no change to the calculations for oil and electricity, however the

estimated reductions in the installation costs of ASHP and GSHP mean that greater numbers of installations would be achieved for every £1 million investment and hence their relative effectiveness at removing numbers of households from fuel poverty is improved.

Table 9 - Number of households lifted out of fuel poverty per £1 million investment - ASHP/GSHP/oil/electric storage based on estimated achievable future installation costs

Oil Electric storage ASHP GSHP

Installed cost per system £6890 £2850 £9000 £14500 % of households removed from fuel poverty by this technology 13% 10% 45% 51% Systems installed per £1m 145 351 111 69 Households removed from fuel poverty per £1m spend (ex carbon value)

19 37 50 35

Carbon value (versus electric storage) £1400 £0 £2300 £2400 Installed cost per system net of carbon value £5490 £2850 £6700 £12100 Systems installed per £1m 182 351 149 83 Households removed from fuel poverty per £1m spend (inc carbon value) 24 37 67 42 4.18 It is clear from Table 9 that taking into account estimated achievable future

installation cost reductions, the number of households removed from fuel poverty for every £1million investment by ASHP is substantially higher than that which would be achieved by the installation of electric storage heating per £1 million investment. Further, ASHP have the potential to remove more than twice the number of households from fuel poverty as oil fired heating (an option within the current CHP) for every £1 million investment.

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4.19 There is no substantial change to the merit order of the four systems in terms of effectiveness at removing households from fuel poverty per £1m spend. The lower estimated future cost of GSHP means that GSHP just overtakes electric storage heating, when carbon value is added in, as the second most effective solution at removing households from fuel poverty per £1m investment.

4.20 This value for money comparison shows that even if only a minority of target

homes can be treated within available resources, then it is still more effective to install ASHP, albeit in fewer properties than would be treated by fossil fuel systems, thus achieving the greatest number of households removed from fuel poverty for the level of resource available.

4.21 The hypothetical modelling undertaken for this options appraisal shows that

whilst electric storage heating provides the most attractive financial option in terms of BCR, ASHP systems would remove the greatest number of households from fuel poverty for a given budget. GSHP and electric storage systems are the next most effective at removing households from fuel poverty. Oil fired systems are least effective, at June 2008 energy prices, at removing households from fuel poverty.

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5. RECOMMENDATIONS 5.1 When correctly specified and installed, with adequate levels of support

provided to allow householders to understand how to use the systems cost-efficiently, heat pump technologies are an effective, cost-efficient way to tackle fuel poverty. In particular, where householders are considering their options under future fuel poverty programmes, they should be offered advice on the comparative benefits of ASHP, including the potential for savings on energy costs over the longer term.

5.2 If ASHP (and possibly GSHP) are to be accepted onto future fuel poverty

programmes, they could be offered on an equivalent basis to the current Central Heating Programme’s position on oil systems, where householders pay any additional cost above a set cap.

5.3 Where heat pumps are installed under future programmes, meter changes

should be scheduled shortly in advance so that householders can take advantage of the savings available through the optimum tariff as soon as possible. There were reports throughout the pilot of households who were not on the optimum tariff. More information on tariffs is provided in the accompanying EST report.

5.4 Where heat pumps are installed, an enhanced level of support and advice on

energy efficiency should be provided to householders. In particular this should focus on ensuring that householders understand how to use heat pumps most cost-efficiently. This will mean improved householder manuals (there were a number of complaints about manuals distributed in the pilot) and possibly an ‘after-care’ service.

5.5 To maximise opportunities to reduce costs and grow the market,

consideration should be given to:

• Establishing agreements with local authorities, housing associations and EST to share information on procurement programmes and the prices of renewable systems achieved;

• Setting up a consortium purchasing agreement with other major potential purchasers, such as local authorities or housing associations;

• Convening discussions with accredited ASHP installers with a view to negotiating lower installation and unit costs;

• Reassessing the conclusions of the pilot following any further significant shifts in energy prices. Conclusions may also be reviewed once a stable market for biomass pellet prices is available.

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