The "dead zone" of the economic viability of heat pumps
Generated by FV/TGA+E using Midjourney
What happens to the "death zone" of the economic viability of heat pumps?
What is the "dead zone" of the economic efficiency of a heat pump? Where is it? How to escape? Is it new?
Dead zones are waters devoid of oxygen or completely oxygen, where there is hardly anything to thrive: no fish, crabs, mussels, or plants. In mountaineering, a dead zone is a height at which the partial pressure of oxygen is not sufficient to sustain human life for a long time.
Since the 21st Heat Pump Forum of the German Heat Pump Association (BWP) on November 8-9, 2023 at the latest, the "dead zone" has also become a term in the TGA+E industry. Dr. Kai Schiefelbein, Managing Director of Stiebel Eltron, published a chart in his presentation entitled "Yield Enhancement and Industrial Policy" showing the energy price ratio of "electricity to gas and oil" in 16 European countries. Germany is the "frontrunner" in the chart, with an electricity/gas price ratio of more than 3.25. The national average is 2.1, which is more favorable for electric heat generators. A range above 2.5 in the bar chart is marked as "Loss of competitive advantage in [heat pump] operations." Charts with labels are created by PwC.
Schiefelbein: "We heat pump folks are actually putting it more simply: at the moment, there are more than 3 heat pumps in the portfolio that are in the dead zone. Germany has 3.3. Obviously, the additional investment in heat pumps will not be amortized at the current ratio of electricity to gas prices in Germany. This means that without additional incentives, such as through subsidies, there is usually no investment in heat pumps, even for short-term end customers.
In fact, the electricity/gas price ratio varies widely in Europe, with the highest in Germany, which is not competitive for heat pumps compared to oil and gas heating systems.
The bad news: there is indeed a "dead zone" in the economics of heat pumps.
Good news (for the heat pump industry): If there is a "dead zone" for the economic viability of heat pumps, then there will inevitably be a "dead zone" for gas and oil heating systems. In addition to the electricity/gas price ratio, there are other options that can change the "dead zone" of the economic viability of heat pumps. What's more, there is still potential for optimization in heat pumps, but not for gas heating.
If we compare the cost-effectiveness of two viable systems in terms of life cycle costs, there are usually three aspects that are in the midst of changes in unclear and predictable boundary conditions – e.g. energy prices: in one domain, system A has a clear advantage, in one domain, system B has a clear advantage, and in between, there is an area where neither system has a clear advantage. Thus, the definition of "dead zone" can be broader: a system has such a distinct disadvantage in terms of hard factors (life cycle costs) that soft factors can no longer compensate for this.
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Figure 0: In a concrete comparison of the economic efficiency of heat pumps and gas heating systems, an example of a "dead zone" is shown, taking into account the actual installation costs and the 30% (basic subsidy) heat pump subsidy within the framework of BEG-2024 and the actual annual performance factor achieved 2.7.
Cost-effective: heat pumps with oil and gas heating
The fact that almost all buildings (about 70 to 80 percent) can be heated completely or to a large extent by an electric heat pump with a heat pump should have spread by now, even outside professional circles. This also applies to air-to-water heat pumps.
In the case of a heat pump design optimized for the modernization of existing heating systems, the heating load of a small building is covered by a single energy with a bivalent point between approximately + 2 and − 7 °C outside temperature, while the heating element as the second heating stage, despite having a considerable power component, covers only a small part of the annual heating demand. However, in the case of regulating the heat pump, the effect on the actual annual performance factor (APF) is minimal, as the heat pump can operate for a longer period of time without circulation during the associated heating period when the outside air temperature is higher.
However, in the sense of "total cost is lower than alternative heating solutions", the cost-effectiveness of heat pumps depends not only on the annual performance factor achieved in actual operation. Further dependencies are the investment costs of the two systems, including the cost of connection and the cost of any fuel storage that may be required, their maintenance, repair, and inspection costs, the annual efficiency of the system being compared, the amount of heat to be supplied, the heating curve, the ancillary energy demand, and the cost of providing the primary energy source and the specific energy price of the primary energy source.
When comparing heat pumps with oil and gas heating systems, the cost of investment or, in the case of subsidies, the own share of the cost of investment, as well as the price of fuel and the price of electricity for heat pumps, are decisive.
Systematic comparison of calculated equations
The total cost to the investor is G, the capital cost K, the combined cost of maintenance, upkeep, chimney sweeping, and auxiliary power supply C, the heating cost QB, the annual energy efficiency η, the specific energy price e, the subsidy rate BEG and the heat pump index W and the gas heating index G, and the ratio of the electricity price to the gas price f n The results are accurate enough to be used for system comparison calculations:
Official 1:
GW= (1-BEGW) ∙ KW+ 问B∙ ew/ 贾兹 + CW
Equation 2:
GG = kg + 问B ∙ Egg/ ηg + CG
Equation 3:
fn= eW/eG
The equation theorem is only possible if the two systems QB are the same and are only covered by the systems in question. For combining only one system with solar thermal energy, a slightly extended method must be used, such as gas heating using solar thermal energy. S+S and Q are used for the coverage factor B. The second condition is that in the case of a subsidy KW must not exceed the maximum qualifying fee.
If you put GW= gG, for cost equal and eW= eG∙ five n, you will get:
Official 4:
fn= 贾兹 ∙ [1 / ηG– ((1-BEGW) ∙ KW+ CW– KG− CG) / (QB∙ eG)]
Replace with ((1-BEGW) ∙ KW+ CW– KG− CG) / (QB∙ eG) = z, and Equation 4 becomes clearer:
Equation 4a:
fn= 贾兹 ∙ [1 / ηG– z]
"Slimming" electrical price ratio
Equation 4/4a shows that the achievable ratio of electricity price to gas price at the same total cost depends not only on the cost of energy, but also on the cost of investment, the cost of further maintenance, the amount of heat to be supplied, the level of energy prices and the efficiency of the thermal power generator. If we only refer to the cost of the primary energy source, z = 0 would result in a "slimming" electricity/gas price ratio of f a:
Equation 5:
fA = Jaz / ηG
This corresponds to Schiefelbein's statement: "At the current ratio of electricity to gas prices in Germany, there is no amortization of additional investments in heat pumps.
Figure 1 shows that the electricity consumption for single-family home heating is between 14,000 and 30,000 kWh/a, and the gas price is 0.09 cents/kWh, and the annual utility wheel for the gas heating system is 0.94, based on the calorific value (HS), for four annual performance data and two BEG subsidy rates, the "slimmed" electricity/gas price ratio fa.Figure 2 multiplied by fa and shows the electricity price, where the gas and electricity costs are the same.
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Figure 1: What is the ("slimmed") electricity/gas price ratio if only the primary energy used is assessed, ignoring capital services, ancillary energy, and maintenance costs? These curves apply to the 9 cents/kWh gas price and the constant energy price during the period under review.
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Figure 2: How much does it cost to make a heat pump lower than the total cost of a gas heating system? Figure 2 translates Figure 1 into an electricity price. Heat pumps are more economical if the available electricity price is lower than the selected curve during the period under consideration. These curves apply to the gas price of 9 cents/kWh and the constant energy price during the period under review.
It is shown as a wide range from 2.44 to 3.51: therefore, there is no unique one in this simplified representation that can be used to control the market and has no effect on the level of energy prices. Due to the focus on energy costs, subsidies also do not play a role, so the curves of the subsidy rates of different BEGs overlap with the same JAZ.
In the case of a hypothetical natural gas price of 9 cents/kWh, the electricity price to share the additional cost of the heat pump investment is as low as 24.74 cents/kWh and as high as 34.90 cents/kWh. If the price of natural gas is calculated at 19% VAT instead of the current 7%, the marginal electricity price will rise to 27.32 cents/kWh and 38.44 cents/kWh, respectively. Heat pump electricity is currently priced at around 26 cents/kWh. However, due to the current price trend, it will also be difficult for gas prices to rise above 9 cents/kWh if VAT falls back to 19% for new contracts.
However, Figures 1 and 2 also have a clear message: an important factor influencing the necessary electricity/gas price ratio is the annual performance factor that the heat pump industry has mastered to achieve in practice. Quality assurance in design, hydraulic planning, commissioning, and operation has improved JAZ by 0.3 to 0.6 percentage points.
This can also be seen in the equation: if Equation 5 is used in Equation 3, the above simplification ("slimming" the electricity/gas price ratio) results in the highest electricity price, where the main energy cost of the heat pump is lower than that of a gas heating system.
Equation 6:
eW, maximum, a= eG∙ Jaz / ηG
It is important that eG and ηG have the same reference value (calorific value or calorific value). Therefore, once electricity is installed, the economic price of electricity is essentially only political (eG) and is achieved by optimizing heat pump operation and user behavior (JAZ).
The declaration of quality assurance also applies to gas heating. The above-mentioned marginal tariff of 24.74 cents/kWh and maximum of 34.90 cents/kWh increases from 0.88 (no quality assurance) to a minimum of 26.31 cents/kWh and a maximum of 37.05 cents/kWh with an annual cycle of 0.88 (no quality assurance).
All-electric/gas price ratio
eW, maximum, however, this is not necessarily the maximum electricity price overall, and the total cost of a heat pump is the same as the total cost of a gas heating system. The denominator of z indicates that under a high grant subsidy, z can be less than zero.
z = ((1-BEGW) ∙ KW+ CW– KG− CG) / (QB∙ eG)
The BEG subsidy rate is 0.55 and 25,000 euros for heat pumps, and the owner's own contribution is 0.45 ∙ 25,000 euros = 11,250 euros, which is only slightly higher than the installation cost of a new gas heating system. For low-income households, a subsidy rate of up to 75 per cent will be applied in the future. Even if the installation cost of the heat pump is €30,000, the owner's own contribution to the heating system is only €7,500, which is less than the estimated cost of a gas heating system.
It can also be seen that the QB denominator has an impact on the electricity/gas price ratio, i.e. different ratios are generated according to the necessary heat supply. The extent of this effect is shown in Figures 3 and 4. The impact of the gas price level is much smaller.
To be able to create the graph, K and C and e are assumed to be G and the interest rate of capital financing. In addition, as Q increases, different costs B we make the following assumptions:
● KG: The installation cost of a gas heater is Q 8,400 EUR B= 14 000 kWh/a and increases linearly by 100 EUR/1,000 kWh/a to 10 000 EUR B30 000 kWh/a.
● ηG is optimistic about 0.94 (Hs) to ensure quality execution.
● KW: The installation cost of the (air-water) heat pump is Q 20 000 EUR B = 14 000 kWh/a, with a linear increase of 500 EUR/1000 kWh/a to 28 000 EUR B of Q and 30 000 kWh/a.
(Figures 5 and 6 are based on more pessimistic costs and higher implementation costs.)
● CG and CW: The sum of maintenance costs and auxiliary energy costs usually favors heat pumps. Therefore, it is used for the CG− CW cost line with a foothold of 140 euros B = 14 000 kWh/a and a linear slope of Q from 5 euros/1000 kWh/a to 220 euros B30 000 kWh/a. Other profitability comparisons also set a cost difference of 0 euros. The BDEW heating cost comparison shows the advantages of heat pumps.
● In terms of capital financing, the interest rate of 4% and the simplified model are adopted, and the installment is paid on December 31 of each year. It is assumed that the term of both systems is 20 years.
The hypothetical installation costs are also scaled proportionally under Figures 3 and 4.
With these assumptions, the total cost for the first year can also be used as a baseline, rather than the life cycle cost as the total cost baseline. This means that the electricity/gas price ratio is weighted unchanged over the useful life, or that both energy sources have the same rate of price increase over their useful life. When it comes to actual investment decisions, current energy prices tend to be more important than energy price predictions. Therefore, the approximation is also in line with market behavior.
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Figure 3: What is the electricity/gas price ratio, taking into account all the costs of the primary energy used, capital services, ancillary energy, maintenance and repairs? These curves apply to the price of natural gas at 9 cents/kWh and to the constant energy price during the period under review. The cost of installing a heating system is shown in the figure below. They are financed at 20% interest over 4 years.
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Figure 4: What is the total cost of a heat pump compared to a gas heating system, what is the cost of electricity? Figure 4 converts Figure 3 into an electricity price. Heat pumps are more economical if the available electricity price is lower than the selected curve during the period under consideration. These curves apply to the gas price of 9 cents/kWh and the constant energy price during the period under review.
Compared to Figures 3 and 4, Figures 5 and 6 are based on more pessimistic cost trends and higher realizations, such as optimizing heat transfer or installing heat pumps. Costs start at €25 000 (+€5000) and rise linearly by €700/1000 kWh/a to €36 200 (+€8200) with QB30 000 kWh/a. The calculation takes into account the qualifying costs through BEG EM capped at €30,000.
It shows the significant impact of the difference in installation costs on the location of the "dead zone". Without subsidies, a kilowatt-hour of electricity would have to be cheaper than even a kilowatt-hour of low-energy natural gas. The impact of the €30,000 subsidy cap is also visible. As a result, the company's own share of installation costs rises steeper, and the electricity/gas price ratio decreases as Q increases. B is faster. In the case of a 55% BEG curve, the effect is noticeable. At first glance, the 30% BEG curve seems to be ineffective, but the rising electrical price ratio has been reversed.
Figure 5: What is the electricity price ratio, taking into account all the costs of the primary energy used, capital services, auxiliary energy, maintenance and repairs? These curves apply to the price of natural gas at 9 cents/kWh and to the constant energy price during the period under review. The cost of installing a heating system is shown in the figure below, and the cost of installing a heat pump has increased compared to Figure 3. They are financed at 20% interest over 4 years.
Figure 6: How much does it cost to make a heat pump lower than the total cost of a gas heating system?Figure 6 converts Figure 5 into an electricity price. Heat pumps are more economical if the available electricity price is lower than the selected curve during the period under consideration. These curves apply to the gas price of 9 cents/kWh and the constant energy price during the period under review.
Results discussed
In general, it can be seen that there is no fixed electricity/gas price ratio independent of other influences to distinguish between the "dead zone" of the economic efficiency of heat pumps (Figures 1 to 6 above the curve) and the "dead zone" of the economic efficiency of gas heating systems. Subsidies for JAZ and BEG EM for heat pumps have a significant impact (Figures 3 to 6).
Figures 3 to 6 show that with a basic subsidy of 30 per cent, heat supply still has a significant impact on the electricity price ratio required. In the case of a subsidy of 55%, this almost completely disappears before the eligible costs reach the ceiling (Figures 5 and 6). Above the ceiling, as expected, the required electricity/gas price ratio decreases.
Determining the profitability of a heat pump based on the electricity/gas price ratio is decisive for continuous operation (deployment planning in a hybrid system), but only applies to the initial rough classification when making investment decisions.
In the country comparison, the criterion of "low electricity/gas price ratio" as a favorable condition for the sharp increase in heat pumps is far from sufficient, without taking into account the achievable annual performance factors (typical heat transfer systems and climate zones), subsidy schemes, legal restrictions (phasing out gas heating in new buildings and renovations) and regional availability of energy (gas network density). This also applies to the "slimmed" electricity/gas price ratio, which includes the annual use wheels of JAZ and gas heating systems. Nor can it be assumed that other countries have more efficient gas heating systems.
JAZ and its own share of installation costs (indirectly via BEG-EM) show that the entire supply-installation chain of heat pumps can have a considerable impact on the location of the system curve separating the dead zones through optimization and quality assurance.
From the point of view of gas heating, the situation is much worse: 2 The price of pipeline gas as an energy source is expected to rise faster with the pricing of renewables either forced to stock or a forced shift to hydrogen. In addition, the utility wheels of gas heating systems are considered exhausted and there is no obvious potential for optimization in terms of installation costs.
With boundary conditions defined and the same total cost, the position of the actual electricity/gas price ratio relative to the boundary curve can give the impression of being exaggerated. For example, if the curve JAZ=3.0_BEG=30% is assumed in Figure 5, the heat supply is 16,000 kWh/a, and the marginal electricity price is 23.12 cents/kWh, and the electricity price is actually 26 cents/kWh, the cost of a heat pump this year is 153.6 euros, so it is 6.6% higher than gas heating. If the price of natural gas rises from 9.0 cents/kWh to 9.9 cents/kWh, the additional costs will be offset again. The price increase of 0.9 cents/kWh corresponds to an increase in carbon monoxide2 at 42 euros/ton.
What is the impact of combining with a PV system?
It can be expected that the buildings that represent this standard will have their own photovoltaic systems and their own electricity use in the future. In general, there are economic advantages to using self-generated electricity because the feed-in tariff is much lower than the cost of electricity purchased. For PV systems up to 10 kW currently in operation until 31 December 2023, the feed-in tariff is 8.2 cents/kWh.
In order to determine the potential for self-consumption of electricity generated in combination with existing photovoltaic systems, a large number of assumptions need to be made about electricity and heat demand, the configuration of photovoltaic systems, the construction of heating systems (including drinking water heating), charging electric vehicles through house connections, etc. To show the trend of the important trend of insolation towards the "dead zone" position, Figures 7 and 8 chose the conservative assumption of average installations.
Combine gas heating with photovoltaics: Since the feed-in tariff is lower than the gas price of 9 cents/kWh assumed here, it may be worthwhile to use excess electricity for heating. However, for this purpose, the heating system must be technologically extended. For this, it is assumed that the additional cost incurred by direct electric heating is 850 euros.
Fi-in tariffs will remain unchanged for 20 years, and gas prices are expected to rise. Therefore, the investment decision is not based on a small spread of 0.8 cents/kWh in the first year, but on a more optimistic spread. Without this assumption, it would be uneconomical to increase direct electric thermal power generation. For the lowest heating demand, the tipping point is the price difference of 2.6 cents/kWh.
The surplus electricity from QB2380 to 3340 kWh/a is used for direct electric thermal power generation with a 100% utilization rate. Q-related coverage B then starts at 17% and drops to 11.1% until the highest caloric requirement.
Combining heat pumps with photovoltaics: In the case of heat pumps, it also depends on the availability of surplus electricity between QB2380 and 3340 kWh/a for heating. Assuming that 40% of them can only be used with finely controlled heating elements, this will incur an additional cost of 850 euros. Due to the large distance between the feed-in tariff and grid consumption, this sub-measure is often cost-effective, as it avoids the low-COP operating phase and reduces wear and tear on the heat pump. In the calculation model of BEG-2024, there are no additional costs for funding (there is no information on this at the time of writing).
60% of the available surplus electricity can be used for compressor operation. For the sake of simplicity, it is assumed that the different effects of the combination with the heating elements cancel each other out and that the annual performance factor does not change as the heat pump heat supply decreases. If the "photovoltaic heating element" exceeds the equilibrium limit, the annual coefficient of performance will tend to improve, just like gas heating.
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Figure 7: If two systems have the same amount of surplus (see text) of self-generated electricity from existing PV systems, what is the electricity/gas price ratio, taking into account all the costs of primary energy used, capital services, ancillary energy, maintenance and repairs? The increase in the installation cost of the heating system is shown in the figure below. They are financed at 20% interest over 4 years.
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Figure 8: What is the cost of electricity when the total cost of a heat pump is lower than that of a gas heating system, and both systems have surplus electricity from the existing PV system available? Figure 8 converts Figure 7 into an electricity price. Heat pumps are more economical if the available electricity price is lower than the selected curve during the period under consideration. These curves apply to the gas price of 9 cents/kWh and the constant energy price during the period under review.
It should be noted that an expansion approach with the same available electricity and the same additional cost reduces the additional capital cost and reduces the cost of grid feeding. From a gas heating point of view, people will not invest in solar energy. This will increase the advantages of the heat pump.
What does the change in natural gas prices mean?
Figures 9 and 10 in Figures 3/4 and 7/8 provide curves for AP of 2.7 and subsidy rates of 0%, 30% and 55%, respectively, regardless of whether or not they use their own electricity through an existing PV system. With a base gas price of 9 cents/kWh, and all of the above assumptions, only the two variants that receive the 55% subsidy are in the area of the achievable heat pump tariff on the market.
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Figure 9: What is the cost of electricity for a heat pump with an annual coefficient of performance of 2.7 and different configurations lower than a gas heating system at an affordable price? The installation cost of the heating system depends on the use of surplus electricity from the existing photovoltaic system and is financed at an interest rate of 4% over a period of 20 years.
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Figure 10: What is the cost of electricity to make the total cost of a heat pump lower than that of a gas heating system? Figure 10 converts Figure 11 into an electricity price. Heat pumps are more economical if the available electricity price is lower than the selected curve during the period under consideration. These curves apply to the gas price of 9 cents/kWh and the constant energy price during the period under review.
The electricity/gas price ratio is only marginally affected by the level of natural gas prices. However, for cost parity, the gas price level has a very significant impact on the price of electricity. Currently, a gas price of 9 cents/kWh is common for new contracts outside of the base supply, but looking back at last year, this seems overly optimistic. In addition, the federal government used to design the price projections for the 2024 GEG Government Draft. For the period 2024 to 2035, it assumes an average gas price of 12.96 cents/kWh and an average price of 30.70 cents/kWh for heat pump electricity.
Figure 11 uses different gas prices and a heat pump annual performance factor of 2.7 with subsidies of 30% and 55%.
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Figure 11 shows that the boundary curve changes a lot during the use phase as the price of natural gas changes. For each plant configuration (JAZ and BEG subsidy), there are 4 production lines with different gas prices. The maximum gas price corresponds to the average assumed by the German government until 2035.
Figure 11 shows that, under current boundary conditions, it is cheaper to replace a heating system with a heat pump that initially seemed uneconomical, even if the price of natural gas rises faster than the price of electricity. A 2 cent/kWh increase in natural gas price means that electricity prices will rise by 5.74 ct/kWh at the same total cost (black arrow). In comparison, a CO2 certificate price of 93.7 euros/tonne, including 19% VAT, means that the price share of natural gas is 2 cents/kWh. The fixed price for 2024 is €40/tonne, so the certificate price must climb to €133.7/tonne, an increase of 2 C//kWh.
However, in principle, it is also possible to increase prices or develop downwards. According to BDEW natural gas price analysis, in 2021, the average cost of natural gas for household customers with a natural gas consumption of 20,000 kWh/a was 7.06 cents/kWh.
However, Figure 10 shows that using the PV system's own electricity can significantly improve economic efficiency, especially if the PV system is already self-sustaining. In the case of high electricity prices, it can be assumed that this is the case, so the choice to use your own electricity from a photovoltaic system also has a retrospective effect. You should also keep in mind that heat pumps offer completely different possibilities
As another reminder of quality assurance, a curve with an annual performance factor 0.3 percentage points higher has been added to Figure 11, with a blue arrow indicating the extent to which the "dead zone" has changed under the service owed under normal work and service contracts: about 3 cents/kWh. For comparison or complement: according to European law, reducing the electricity tax to a minimum level will (additionally) reduce the price of electricity for the final consumer by 2.32 cents/kWh.