Economic efficiency
of heat pumps

Our mission

According to the current draft for the amendment to the Building Energy Act, from January 1, 2024, every newly installed heat generator should be operated with at least 65 percent renewable energy. Heat pumps are already standard in new buildings, while in existing buildings the proportion fitted with heat pumps, is significantly lower.

To shed more light on the potential in existing buildings, Environmental Action Germany (DUH) has commissioned Prognos to create a reliable data base for estimating the economic viability of heat pumps in typical existing buildings that considers different conditions (price level, building type, etc.). The case studies resulting from the calculation have been incorporated into two DUH papers.

Our approach

The first step in calculating the case studies was to analyse and determine retail prices.

Electricity and natural gas

• Energy prices for the near future are based on futures (binding contracts for price hedging).
• For the more distant future, import prices will be determined on the basis of the World Energy Outlook.
• From this, retail prices for households are generated, taking into account taxes and levies.
• Energy prices are as of May 2023 and take into consideration current price developments and the electricity price cap.
• For the heat pump, the heat pump tariff was used, which includes reduced grid charges and lower concession fees for heat pumps.
• The CO₂ price in the Fuel Emissions Trading Act (SESTA) is based on the 2021 Federal Government's projection report.

Biomethane

• In order to achieve climate targets, a change from “renewable raw materials” to “waste and residual waste materials” and “slurry” was adopted. This is based on the Agora climate-neutral Germany scenario.
• The production paths via slurry and waste are significantly more expensive than renewable raw materials. Due to the more expensive substrates, the price increases over time.

Hydrogen

• It assumes the production of green electrolysis hydrogen, both imported and produced domestically, resulting in a mixed price.
• The parameters follow a realistic optimistic assessment and include technological learning rates and economies of scale. Due to these effects, the price drops slightly over the course of time until 2050.
• As the hydrogen launch grid will not be available until 2032, the hydrogen will not be assumed available until then, depending on infrastructure availability.

The calculations are conducted for the three time points of 2023, 2030, and 2040, and the respective energy prices are stored over the 15-year lifetime of the plants. All costs are discounted, taking into account interest (2 percent real) and the term (15 a).

Since the building stock in Germany is very diverse, two technical building variants were investigated (a single-family house and a small apartment building, each partially renovated), which are oriented according to the German residential building typology of the Institute for Housing and Environment (IWU). These selected types of buildings are common in the German residential building stock. 

Three heat generators are compared for each of the defined model buildings:

• An air-to-water heat pump
• An air-to-water heat pump in combination with photovoltaics
• A natural gas condensing boiler, as the most common system technology to date, for comparison
• Biomethane boiler: 50 percent admixture in 2030, 65 percent admixture in 2035

• Hydrogen boiler: 50 percent admixture in 2035 (balance sheet), 65 percent admixture in 2035 (not balance sheet, since hydrogen cannot be admixed at this percentage, this is equivalent to a 100 percent hydrogen supply)

The necessary investment costs and assumptions regarding maintenance and operating costs are based on studies and our own estimates. Due to the dynamic development of costs in recent years, the investment costs are calculated on the basis of appropriate indices (e.g., the construction price index) for the year under review (2023), to be determined in the course of the project.

The cost calculation also considered the current nationwide funding for heat pumps. For the years 2030 and 2040, learning curves have been defined for the investment costs. For the calculation, it is assumed that heat pump delivery will be lower in 2030 and 2035 and will be eliminated in 2040. 

Core results

As a result of the change in energy prices and the continuing availability of subsidies, the cost-effectiveness of heat pumps in moderately renovated apartment buildings has improved significantly compared to the use of fossil-fired heat generators in comparison with previous years. Switching to a heat pump is, under the assumptions made, now more economical than simply replacing a gas boiler. In addition, according to this calculation scenario, the profitability of the heat pump will also improve in the coming years, 2030 and 2040. This improved economic efficiency is mainly due to the fact that in the long term the price of gas is expected to rise due to the rising CO₂ price compared to the price of electricity. This coincides with the price forecasts in current studies, such as the long-term scenarios (Fraunhofer ISI et al.) or the short report on the German Buildings Energy Act (GEG) amendment (Ifeu, Prognos et al., 2021).

The biomethane and hydrogen boiler are shown to be significantly more expensive than a heat pump due to the high energy procurement costs. Even with a proportionate admixture, the costs of these variants, which are provided for in the GEG draft as fulfilment options, are around twice as expensive as that of a heat pump.

Links and downloads

Heat pump factsheet (PDF in German, DUH)

Cost check for heat supply with hydrogen and biomethane  (PDF in German, DUH)

More about our work on the heat and energy efficiency

Project team: Nora Langreder, Frederik Lettow, Nils Thamling, Sven Kreidelmeyer, Hans Dambeck

Last update: 13.06.2023