2 Mar 2018

Subsidising heat pumps – evaluating ISDE

Jesse writes:*

The decarbonisation of the Dutch household energy supply gives several problems. Currently, most households use a gas-fired boiler for warm water and heating. Energetically, this is less efficient and produces more carbon dioxide than centralised heating. Therefore, the Dutch government incentivises households to install heat pumps with a subsidy ISDE.

For companies, the subsidy is beneficial as it increases their sales. Likewise, demand for gas boilers will shrink. As installers usually handle both gas boilers and heat pumps, the advantage lies mainly in the higher price for heat pumps.

Gas suppliers will not benefit from a switch to heat pumps and lower demand for gas. An average household uses 1.470 m3 of gas (Milieucentraal, 2018). In the past two years, 13.294 heat pumps were installed in homes (ISDE viewer, 2018). It is unsure how much gas is saved with the measure, because heat pumps can be all-electric (reducing gas consumption with 100%) or hybrid (in which gas is still used). ISDE subsidized heat pumps are expected to lower gas demand by 12-15 million m3 per year.**

For most households, heat pumps are already a good deal, as they have better conversion efficiency and use cheaper electricity. Payback takes 8-12 years, and the subsidy will further reduce that time.

Who benefits from this subsidy? Mostly, home-owners (not renters) able to pay €2.000 to €8.000 for the pump. Do they need a subsidy? Probably not. However, the opportunity costs of a heat pump and a comparable sustainable investment such as insulation and solar panels are apparently quite high. These measures often pay back soon and have a high return, but these are not taken by every household.

Is there an alternative to the subsidy? Yes. As the Dutch energy prices rise through taxation, it becomes already more attractive to install heat pumps. More certainty about the increase in energy tax might incentivise households to shift towards heat pumps. Furthermore, municipal loans might be granted with a very low interest rate (1.6%). This lowers the boundary, as the initial investment is covered by a third party. A Dutch research project has investigated removing financial risk for households taking sustainable measures.

Also, we might wonder what happens after the subsidy ends. This might lower the demand, but it is arguable that prices will also drop in the next few years due to increased experience with heat pumps and cheaper manufacturing costs.

Bottom line: The ISDE subsidy promotes the installation of heat pumps and thereby helps both companies and households. However, the households receiving the subsidy might not be the ones that really need it, and it is unclear what happens after the subsidy stops. Alternative incentivising mechanisms exist and may further stimulate heat pumps in the gas-addicted Netherlands.

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

** The claim is based upon own calculations and experience. There are 13.294 heat pumps subsidized. Average gas consumption in NL: 1.470 m3 gas. (sources provided in blog post)

13.294 * 1.470 = 19.542.180 = 19,5 million m3 of gas saved if every heat pump was all-electric.
Assuming that half of the heat pumps are all-electric, and the other half lowers the gas demand by approximately 50% , 14.6 million m3 of gas would be saved. However, since I am unsure about the share of heat pumps that is all-electric, and I think that gas demand savings with hybrid heat pumps is lower than 50% (see also links below - though not used in order to write this blog post, so therefore not stated as source)

https://www.essent.nl/content/particulier/energie-besparen/verwarmingsinstallaties/warmtepomp/index.html
https://www.milieucentraal.nl/energie-besparen/energiezuinig-huis/energiezuinig-verwarmen-en-warm-water/hybride-warmtepomp/

Essent states that gas savings are 30 to 50 percent. Milieucentraal states that CO2 emissions lower by 35 percent (Though difficult to calculate, as electricity is the substitute and also has indirect CO2 emission, I believe this could be the same as gas savings).

In order to do an analysis that is more solid, I asked the RVO (dutch governmental organisation) for data on their subsidies provided, and I am in contact with Susteen (www.susteen.nl) to use their tool for household savings, because this varies enormously per building type and other factors (age of building, actual energy use, and more).

1 comment:

Philipp said...

Hi Jesse,
Is there a good reason the government subsidises both kinds of heat pumps (hybrid vs. electric)?
You state that electric heat pumps will reduce gas consumption by 100%, but I think this is not exactly true. I am not sure of the dimensions, but also electric heat pumps will have “hidden” emissions as they require electricity which needs to be produced using the current NL energy mix. So a share of the gas that is no longer required for heating will be required for electricity production. It could be interesting to look into this for the sake of completeness of your analysis. I would also think that centralised heating will have an impact, though it may be smaller than decentralised heating.
You write that the households receiving the subsidy might not be the ones who really need it. I think this is a very interesting consideration, especially as you mentioned that heat pumps are already a profitable investment without the subsidy. In the end, this may be a “visible” but not very cost-efficient way of reducing emissions. Did you look into who (individuals / parties) initiated the subsidy, who was in favour of it and who rejected it (also for which reasons?)
An interesting case, I would like to hear about your results!

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