Five things to look out for in a heat pump price war

 

Both Octopus and Ovo have cut the cost of installing a heat pump to as little as £500 for some households, around £2,000 less than a gas boiler, as each looks to grab a stake in this fast-emerging market. We take a look at the small print.

The offers...

In September, Octopus unveiled their Cosy 6, a new, sleeker lower cost heat pump. With an estimated price point of £3,000 after the government grant, this brought prices in-line with a replacement boiler for the first time. Following the government announced to increase in the grant funding for households from £5,000 to £7,500, this has now reduced to £500.

In October, Ovo Energy raised the stakes with their own compelling installation offer. In a significant shift, the company announced it would also halve the price of electricity used to run a heat pump.

In partnership with installers Heat Geek, Ovo is promising installations from £500 PLUS the cheapest market rate for electricity to power a heat pump of 15p per unit. The company claims this will mean savings of around £500 a year, according to their calculations, however it will only apply to heat pumps fitted by Heat Geek as part of a trial.

Five things to look out for in the small print...

It's important to consider the small print if you are thinking of swapping out your old boiler. The Ovo offer has quite a few caveats and the Octopus tariff needs households to time their energy use to off-peak times to minimise running costs. 

1: Installation cost

Installing a heat pump for £500 is a great deal, but might only apply to a limited number of homes. Ultra-low installation costs are more likely for smaller homes where the external unit can be fitted next to the house and no internal changes to the heating system are needed.

Full installation costs for fitting a heat pump will typically range between £10,000 and £15,000 before the grant, as most homes will require a larger heat pump, some radiator changes and a compatible hot water cylinder. With the Government grant applied, this reduces the cost to between £2,500 and £7,500. Whilst higher than £500, it does bring the cost of a heat pump more in line with the price of a gas boiler for many more households.

2: Electricity rates

Cheaper electricity rates are welcome, too – but it’s crucial to understand the caveats as both Octopus and Ovo structure their tariff deals slightly differently. Octopus has different rates for electricity on its Cosy plan depending on the time of day and where in the country you are. This cost can be as low as 16p per unit during off-peak times (early in the morning or early afternoon) but as high as 45p during peak times (early evening). The standard cost of electricity is currently 27p per kWh.

Your family’s flexibility and your ability to heat your home more gradually, in the afternoons and before peak periods, will help keep your bills down. Using the washing machine and other appliances during off-peak times will also be important.

While Ovo has just announced a flat rate of only 15p per unit to run a heat pump at any time, it has yet to make clear if it will increase the rate per unit used elsewhere in the home. If this is the case, then the £500 saving on heating will be partially off-set by an increase in running cost for other household appliances.

Ovo have also confirmed that this rate will only apply to a trial of customers who have had a heat pump fitted through Heat Geek. You do not have to have an Octopus heat pump installation to qualify for their low-priced flexible tariffs.

3. Heat pump size and installation

Most UK homes have a heat requirement between 6-12kW and domestic heat pumps are available up to 15-16kW.

Octopus currently fit Daikin heat pumps as standard with models up to 11kW. Their new own-brand heat pump, due out later this year, is a 6kW model so suitable for mostly smaller homes. Households with a demand of 12kW or over are not currently covered by Octopus, but Ovo may offer larger units through their partnership with Heat Geek.

Low-cost installations rely on positioning the external unit close to the house, which can also be wall-hung at first floor or on a flat roof. Whilst they can be located further away, the installation cost will be higher. Internally the majority of homes will need to find space for a water cylinder. Smaller hot water 'batteries’ are available that can fit in small spaces, but the price will increase.

4: Government grants

The Boiler Upgrade Scheme previously offered a £5,000 voucher towards the installation of an air-source heat pump, but upgraded this to £7,500 from 23 October 2023. However, the overall pot of £450 million remains the same, this means that 60,000 customers will benefit over the next two years instead of 90,000. The Government may add more money to the pot after 2025, up to 2028.

There are still plenty of vouchers left to be claimed but increased demand may see take-up escalating. Yearly caps of £150m are in place, or 20,000 vouchers. Both Octopus and Ovo will apply for the grant for you as part of the installation process, so you won’t have to do it alone. NB local installers can also claim the grant on your behalf.

5: Installers

Octopus and Ovo have different business models. Ovo will partner with Heat Geek, a nationwide and highly respected network of specially trained installers of heat pump technology. Their engineers may advise you to make more changes to your home to get the best out of your heat pump. Larger radiators equal higher efficiencies from the heat pump, but that means the installation price will increase.

Octopus, meanwhile, has brought everything in-house, from research and development to final installation and maintenance, as they strive to streamline processes, cut waste, and reduce costs. Installation costs may be lower with fewer radiator changes, but energy savings will rely on shifting energy use onto off-peak periods as much as possible.

More about heat pumps:

Heat pumps are a new technology in the UK. Although the science behind it is solid, UK households are accustomed to oil and gas heating systems and heat pumps represent a marked change.

Heat pump use similar technology to fridges, but in reverse. They’ve been used in Europe for decades without issue and they work in even the coldest temperatures. Heat pumps work more efficiently when they are used to maintain a constant, comfortable temperature, as opposed to boilers, which are better suited to being turned on and off as needed. This is a shift in how we heat our homes that UK households will need to adjust to.