How to calculate the running cost of a new heat pump

Here we present the simplest calculation for working out the economic benefit of a heat pump. Change the numbers to suit your case.

Annual Running Cost

The EPC (Energy Performance Certificate) should tell us what the approximate heat demand is for the property in kWh (space heating and water heating). If gas is used only for heating and hot water then the annual energy usage statement from the gas supplier will show the actual usage. Using the average from multiple years removes the weather effects (e.g. mild winter). Multiplying that actual usage by the boiler efficiency will give the actual heat demand (if the annual gas statement was 17500 kWh and the boiler efficiency is 80% then the heat demand is 17500 * 0.80 = 14000 kWh). If you use gas for cooking too then you’ll only be able to make an estimate of your heat demand. It may be easiest to use your EPC unless you know it is far off.

Let’s say we use 12000 kWh for space heating and 2000 kWh for hot water.

If we purchased a new condensing type boiler we might get an efficiency of 95%. So the kWh of gas we need to purchase to deliver 14000 kWh of heat is 14000 / 0.95 = 14737 kWh.

The current gas unit cost is around 4p/kWh to 5p/kWh. This will be on the gas statement from the gas supplier. Let’s say ours is 4p/kWh (including VAT).

The cost to heat with gas is 14737 * 0.04 = £589 per year

Now, when we look for a heat pump we need to know the Seasonally adjusted Coefficient of Performance (SCOP) from the technical data sheet. If you can’t find SCOP then look for SPF, Seasonal Performance Factor. This number varies based on the local outside temperatures, so it is important to use one for your region, or one with very similar climate.

Let’s say ours will be 3.8.

The kWh of electricity we need to purchase to deliver 14000 kWh of heat is 14000 / 3.8 = 3684 kWh.

The current electricity unit cost is around 15p/kWh. This will be on the electricity statement from the electricity supplier. Let’s say ours is 15p/kWh (including VAT).

The cost to heat with electricity is 3684 * 0.15 = £552 per year

Ok so that is running costs, but what about overall costs?

Lifetime Cost Averaged per Year

To get overall costs we need to include the cost to purchase and install the equipment, any grants we can get, the cost to service the equipment and the expected lifetime of the equipment. A basic internet search gives us 15 years for a gas boiler and 20 years for a domestic heat pump.

For a gas boiler we need to get quotes for a new unit and installation. These can vary quite a lot. Let’s say we get the lowest quote at £3500. Let’s also say the annual gas service is £50. The total lifetime cost is £3500 + (£589 + £50) * 15 = £13085. To make things simple we’ll assume no inflation. The lifetime cost is the total cost divided by 15 years which is £872 per year.

For a heat pump we need to see if it is in the Renewable Heat Incentive (RHI) scheme or not. If not then we do the same calculation as for the gas boiler. If it is in the RHI scheme then we need to work out the grant. The tariffs for earlier this year are here. The RHI tariff was 10.92p/kWh when last checked. To calculate the annual RHI payment we need the Seasonal Performance Factor (SPF) of the heat pump. Let’s say it is 3.8. The annual payments are based on the EPC heating demand plus the EPC hot water demand (if you think your EPC is wrong then that may affect your grant).

RHI Annual Payment = (1 – 1 / SPF) * (EPC heating demand + EPC hot water demand) * 10.92 / 100

= (1 – 1 / 3.8) * (12000 + 2000) * 10.92 / 100

= 0.737 * 14000 * 10.92 / 1000 = 1126.48

Total RHI grant = 7 years * 1126.48 = 7885.36

Let’s say the cost of the new RHI-approved heat pump is £7500.

The total lifetime cost is £7500 – £7885.36 + (£552 + £100) * 20 = £12654.64.

Assuming no inflation the lifetime cost (20 year life) for this example is £633 per year.

If the product is not Microgeneration Certification Scheme (MCS) approved then no RHI grant is available. This may be true with air-to-air Air Source Heat Pumps for space heating which are also generally more affordable (roughly around half of the purchase cost of the air-to-water systems, although you would need to get quotes to check exactly).

Other Cost Considerations

1. Treating space heating and hot water separately. The seasonally adjusted Coefficient of Performance (SCOP) for heating hot water in a heat pump is lower than for space heating as the delivery temperature is higher for hot water. This difference can be easily taken into account. Instead of 14000 / 3.8 = 3684 kWh above, we have say 12000 / 3.8 + 2000 / 2.9 = 3848 kWh. This also allows us to look fairly at systems that provide space heating only or hot water only.
2. Reliability. As well as the cost of an annual service (included above as £50 for a gas boiler and £100 for a heat pump), some people have traditionally purchased gas boiler insurance or gas service plans to cover for possible boiler breakdowns. A number of premium heat pump manufacturers provide extended warranties within the cost of the equipment and annual service already. If the manufacturer is confident enough to provide a long guarantee then that probably indicates an expectation of high reliability. So ask for details of the warranty or guarantee to gauge this.
3. Adding inflation. To make the calculation more sophisticated (especially if you create your own spreadsheet) you can also take account of inflation or apply a discount rate (see Net Present Value in an encyclopedia). Additionally you could include the expectation of fuel and electricity price rises over the next decade. Gas wholesale prices were at a low in 2020 and an increase is expected through this decade [1]. With the cost of renewable electricity falling and the great increase in renewable generating capacity, the likelihood is that gas prices increase more than electricity. To what extent this will be is a matter of debate. What is your view on how active governments become with policies to charge for carbon dioxide emissions?

Click here to see how to calculate the carbon dioxide emissions for a heat pump.

Click here for an overview of some useful heat pump knowledge.

[1] World Bank commodity price forecast, April 2021, https://thedocs.worldbank.org/en/doc/c5de1ea3b3276cf54e7a1dff4e95362b-0350012021/related/CMO-April-2021-forecasts.pdf