Select Committee on Innovation, Universities, Science and Skills Written Evidence

Memorandum 25

Submission from Yorkshire Forward


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.


  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.


  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.


  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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