Subsidising heat pumps – evaluating ISDE

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Jesse writes:*

The decarbonisation of the Dutch household energy supply gives several problems. Currently, most households use a gas-fired boiler for warm water and heating. Energetically, this is less efficient and produces more carbon dioxide than centralised heating. Therefore, the Dutch government incentivises households to install heat pumps with a subsidy ISDE.

For companies, the subsidy is beneficial as it increases their sales. Likewise, demand for gas boilers will shrink. As installers usually handle both gas boilers and heat pumps, the advantage lies mainly in the higher price for heat pumps.

Gas suppliers will not benefit from a switch to heat pumps and lower demand for gas. An average household uses 1.470 m3 of gas (Milieucentraal, 2018). In the past two years, 13.294 heat pumps were installed in homes (ISDE viewer, 2018). It is unsure how much gas is saved with the measure, because heat pumps can be all-electric (reducing gas consumption with 100%) or hybrid (in which gas is still used). ISDE subsidized heat pumps are expected to lower gas demand by 12-15 million m3 per year.

For most households, heat pumps are already a good deal, as they have better conversion efficiency and use cheaper electricity. Payback takes 8-12 years, and the subsidy will further reduce that time.

Who benefits from this subsidy? Mostly, home-owners (not renters) able to pay €2.000 to €8.000 for the pump. Do they need a subsidy? Probably not. However, the opportunity costs of a heat pump and a comparable sustainable investment such as insulation and solar panels are apparently quite high. These measures often pay back soon and have a high return, but these are not taken by every household.

Is there an alternative to the subsidy? Yes. As the Dutch energy prices rise through taxation, it becomes already more attractive to install heat pumps. More certainty about the increase in energy tax might incentivise households to shift towards heat pumps. Furthermore, municipal loans might be granted with a very low interest rate (1.6%). This lowers the boundary, as the initial investment is covered by a third party. A Dutch research project has investigated removing financial risk for households taking sustainable measures.

Also, we might wonder what happens after the subsidy ends. This might lower the demand, but it is arguable that prices will also drop in the next few years due to increased experience with heat pumps and cheaper manufacturing costs.

Bottom line: The ISDE subsidy promotes the installation of heat pumps and thereby helps both companies and households. However, the households receiving the subsidy might not be the ones that really need it, and it is unclear what happens after the subsidy stops. Alternative incentivising mechanisms exist and may further stimulate heat pumps in the gas-addicted Netherlands.

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Source: http://www.aguanomics.com/2018/03/subsidising-heat-pumps-evaluating-isde.html