Memorandum 25
Submission from Yorkshire Forward
EVIDENCE RELATING
TO THE
EXPERIENCE OF
YORKSHIRE FORWARD
AND COMMUNITY
ENERGY SOLUTIONS
IN COMMERCIALISING
AIR AND
GROUND SOURCED
HEAT PUMPS
Introduction and background
1. Community Energy Solutions (CES) is a
non for profit distributing community interest company established
in 2006 by the DTI in partnership with Yorkshire Forward and One
North East.
2. The aim of CES is to bring affordable
warmth to low income off gas communities through either the extension
of the gas network or the introduction of proven domestic renewable
technologies.
3. This evidence relates to the experience
of Yorkshire Forward and CES in achieving a paradigm shift in
the number of air source heat pumps (ASHP) and ground source heat
pumps (GSHP) installed from small volume pilot projects to volume
installations into communities in excess of 50 households.
4. We believe that, subject to final deal
confirmation, the company has valuable evidence of the commercialisation
and depolyment of heat pump (HP) technology in the sector of large
scale installation programmes, in communities of high deprivation,
at rates competitive with long established technologies eg gas-fire
central heating.
5. While our evidence relates only to the
deployment of heat pumps, we believe that the lessons are likely
to relate to all potential mass market renewable energy technologies.
Analysis
6. At its inception, CES carried out detailed
analysis of the UK and other major European markets and in relation
to the UK market found the following.
7. The type of commercial activity taking
place tends towards the installations of units on a one off basis
at high cost. Even organisations with a potentially high level
of demand, such as social housing providers, are tending to install
in small pilot numbers with little evidence of scale up.
8. The organisations involved tend towards
small economic units, comprising individuals and small enterprises.
Results
9. CES undertook a detailed investigation
of the market and the purchasing process and has achieved some
considerable progress in making step changes towards achieving
volume installations, specifically.
10. With ASHP's, CES is delivering complete
whole house installations, including all piping and radiators,
tanks etc, at a price comparable with a gas installation to 213
homes in North Linconshire. At an average cost of £4,000
for a whole house installation this level of offer is generating
considerable interest.
11. CES will shortly confirm a GSHP proposition,
again for a whole house installation including boreholes, pipes,
radiators, tanks etc, for around £6,300.
12. Prior to this the best known installation
price has been £6,500 for basic heat pump and ground works
only.
13. These prices include existing grant
mechanisms where available.
Challenges faced
14. The process of achieving this position
has identified many challenges within the market and market behaviour.
15. Our experience in negotiations has generally
been that despite offering to secure a step change in demand side
orders and volume and taking on the sales and marketing costs
and responsibilities, the supply side has generally been unable
or unwilling to deliver a matching shift in supply side economics
to create a new market equilibrium for higher volumes at a price
attractive to the social sector.
CES' response and experience to date
16. The response of CES has been to look
for market players who are willing and able to offer the shift
in supply side economics required, and some interesting evidence
has emerged:
17. The manufacturers of HP technology have
been generally more responsive in looking to develop new market
equilibriums than the installation side.
18. It appears that manufacturers are motivated
by growth and volume orders but that view is not shared by the
installation and drilling components of the chain.
19. In addition most manufacturers of GSHP
and ASHP, because of the maturity of the technology, are able
to scale up efficiently. The market growth currently taking place
is not enough to make any significant difference to pricing.
20. Frustrations have been expressed by
some GSHP manufacturers that they perceive installers are not
using the available grant funding to develop the market and expand
product sales but to enhance their margins at current levels.
Specifically, one manufacturer stated that it had "cut prices
back as far as it could" (under the Low Carbon Buildings
Programme), but that the installation community was simply "using
the product discount and the grant funding to enhance their own
profits".
21. The "specialist installers",
particularly on the GSHP side, have proved inflexible.
22. In some cases the "specialist installers"
have expressed complete disinterest in the market opportunity
CES has created. They have stated that growing their operations
is a challenge and the preference is to maintain current supply
scale and keep prices and margins high.
23. The cost of drilling remains a considerable
barrier to market growth and indeed is the chief barrier remaining
to CES' completion of its GSHP proposition.
24. Some drillers have expressed disinterest
in the potential of a large scale retrofit market.
25. A change in market equilibrium has been
created approaching manufacturers directly. In the case of ASHP's,
a Yorkshire based manufacturer responded strongly to the opportunity
to grow volume, with significant programme technical and price
support. Similarly, although within the boundaries imposed by
its German parent offices, the UK branch of a GSHP manufacturer
has responded keenly and worked closely with CES to grow the market.
26. In addition the use of installation
organisations from outside the heat pump specialist community,
from the organisations serving large scale gas and other retrofit
projects, has brought the ability to provide scale and competitive
pricing.
27. However, challenges remain on achieving
cost effective drilling and groundworks prices. Whilst a great
many of the logistics costs (moving drilling rigs between jobs),
are diminished by CES' high volume/high density projects, a corresponding
shift in groundworks cost has yet to be seen.
Conclusion
28. In order for the market to commercialise
at price and volume levels suitable for competitiveness with fossil
fuel alternatives in the mass market housing sector, there needs
to be a step change in both supply and demand curves.
29. In terms of demand, CES has been able
to agglomerate large scale demand and market analysis suggests
that at the right price enormous demand exists.
30. However there needs to be a corresponding
shift in supply side economics.
31. With both ASHP's and GSHP's, the supply
side consists of several components (eg compressors and ground
loops) of the supply chain and there needs to be a shift of all
components to deliver meaningful change. This is particularly
the case for GSHP's.
32. In the case GSHP's, manufacturers are
interested in volume growth although all are inevitably operating
at the low end of volume compared to the white goods industry
of which this product is arguably part.
33. Installers from the high volume gas
installation sector can create change by bringing their approaches,
prices and scale to the sector. Although there is an element in
this sector that allows margins to be enhanced to make up for
low gas installation margins.
34. There is a significant challenge associated
with the drilling sector. This sector has been in long term decline
for some considerable time due to the decline of the mining industry
and supply is tight. Operators consider GSHP to be an opportunity
to recoup the profitability of the sector and growth in the number
of people to operate rigs is slow. The existing supply curve is
not shifting but prices appear to be simply rising in the face
of increased liquidity in the GSHP market.
35. Finally, the feasibility and timescale
of progress in commercialisation outside the "fuel rich"
sector ultimately rests with the entry of new players and approaches
to the market where those new players bring different supply approaches,
costs and methodology, and significantly shift the supply curve.
July 2007
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