Market Update | Coming off gas

Market Update | Coming off gas

Picture Copyright Chris Watt

Thomas McMillan, Head of Energy Consulting at Savills UK, explores the value of heat pumps to the development industry.

In October 2019, the UK Government issued its consultation on the ‘Future Housing Standards’, a central piece of this policy proposes ‘no new gas’ from 2025 as part of the UKs drive to reduce Climate Change.

There is a compelling argument that heat pumps should now be the technology of choice for most developments, particularly residential schemes. However with up to 19 million heat pumps required by 2050 and only 27,000 installed in 2018, the challenge is enormous. Not only do we lag in installing them (we’re currently placed 18th in Europe) but we installed 1.7 million new gas boilers in 2018, second only to China. It will be difficult to wean the country off cheap North Sea gas, but we must do so if we are to reach our 2050 net zero target.

As the government pushes forward with its ‘no new gas’ objective, housebuilders must disregard individual gas boilers. Heat pumps offer the only viable alternative. However, in adopting this technology we need to consider the pressures that the energy trilemma brings to developments: the balance between the environment, energy security and social impact.

The challenge is that in the UK domestic gas is cheap (c4.46p/kWh) and electricity is expensive (17.36p/kWh). A single air source heat pump unit costs about three times that of a similar sized gas system with an SPF (Seasonal Performance Factor) of about 2.5 and costs about 6.94p/kWh to run. A gas boiler is about 80% efficient, making their energy use about 5.6p/kWh. On the face of it, residential occupiers will end up paying about 25% more for their heating.

So will the future cost of heating a property rise? It will certainly cost more to install heat pumps, and to make buildings more energy efficient. However this simplistic view does not consider the more important concept of development value.

The best way of securing this value is through an Energy Service Company (ESCo) which will look to own and operate a development’s energy infrastructure over 40 years, and to secure an income by providing a ‘service’.

It’s similar to how a mobile phone contract works where the consumer pays a fraction for the handset upfront, with the rest paid off under contract. An ESCo structure is most effective on developments of 250 residential units or more but it also works well on mixed use development sites with commercial and industrial occupiers.

When an ESCo considers heat pumps, the whole life cost of the energy infrastructure becomes important, as well as the initial capital outlay. Heat pumps have two interesting characteristics when considering value: their SPF and where they are physically positioned. Notably the SPF of an air source heat pump is around 2.5, while a ground source heat pump is around 3.0. This can be doubled to six when waste heat is introduced making them cheaper than gas boiler systems. In this scenario an ESCo can guarantee a discount to the occupier for a comparative gas system but increase its profit margin on every unit of heat sold.

Ground source heat pumps operate at a relatively low temperature, they don’t use a flammable fuel, they don’t need a flue, and as such they can be located in a range of places. Such flexibility can fundamentally change the way a building is designed, freeing up valuable real estate space previously taken up by fuel burning systems. Most significantly this includes penthouse spaces – often the most valuable elements of a prime development. This increased capture of value can dwarf heat pump installation costs.

The shift to heat pumps might sound like a brave new world but in fact it’s a small change built on decades of core surveying principles which consider where value sits and how to release it through sensible and robust contract structures.

With specialists in energy, sustainability, building consultancy, planning and valuations, Savills advises on all stages of a project from inception to operation, delivering low carbon developments while increasing overall value. The key is to apply strategic focus to energy infrastructure at inception.

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