Are renewable heating options cost-competitive with fossil fuels in the residential sector?

This report is part of Renewables 2021

While fossil fuels met more than 60% of heat demand in the buildings sector globally in 2020, the recent rebound in oil and gas prices revives the question of the cost-competitiveness of renewable space and water heating technologies.1 The cost-competitiveness of heating technologies depends on a combination of parameters, including initial investment costs, variable operating costs, fixed operating and maintenance costs, and the presence of financial and economic incentives or disincentives.

Upfront costs

The purchase cost of residential heating units varies greatly, not only from one technology and sub-technology to another ‒ depending on the system’s functionality, quality and degree of automation ‒ but also between regions, depending on the scale of the market. Although economies of scale and market competition can still yield significant cost reductions in various regions, the purchase cost of most renewable heating technologies, for example heat pumps and automated biomass boilers, is anticipated to remain higher than for fossil fuel options, such as oil and gas boilers, in the medium term. Ground-source heat pumps have among the highest upfront costs; however, this is partly due to the drilling for and installation of the underground heat exchanger, whose lifetime can reach 40 to 100 years, and which should thus be considered as a long-term investment. The relatively high cost of reversible heat pumps should also be put in the context of the additional possibility of operating them as air-conditioning systems.

In addition to the cost of the heating unit per se, upfront costs also include installation costs (e.g. transport, piping work) as well as ancillary costs (e.g. fuel storage tank, buffer storage tank). Whether the new heating configuration combines space and water heating or requires two separate systems (e.g. a biomass stove for space heating in combination with a heat pump or solar thermal water heater) also influences total investment costs. Importantly, in some cases, switching to renewable-based technologies for space heating may also require replacing or adapting the heat distribution system. For instance, heat emitters designed for use with fossil fuel boilers typically operate in the range of 60-80°C, while heat pumps are more efficient with output temperatures below 55-60°C.2 In the United Kingdom, about half of all dwellings may require either modification of the heat distribution system or reducing heat demand through building retrofits in order to operate with a 55°C flow temperature on an average winter day. This share increases to more than 85% of dwellings on a cold winter day (BEIS, 2020). The cost of installing larger hydronic radiators, underfloor heating or forced-air heating systems can be significant ‒ as much as half the cost of the heating unit. Such investments are not necessary with solar thermal systems, which can be combined with existing installations. This flexibility may, for instance, partly explain the high interest for solar thermal systems under the United Kingdom’s recent Green Home Grant scheme, in which it represented 60% of all low-carbon heat installations (Solar Energy UK, 2021). For most other countries, however, limited data are available on the characteristics of installed heat distribution systems in buildings. Consequently, the financial cost and the levels of disruption implied by a wide-scale transition to renewable heating are difficult to estimate.

In addition to affecting overall cost-competitiveness, the high upfront cost of renewable technologies can also create financing obstacles for households. Policies can play a key role in overcoming these challenges, for instance through investment grants, rebates, fiscal incentives and loan schemes. Policies supporting energy efficiency investment in buildings can also assist the transition to lower-temperature distribution systems.

Operating costs

Variable operating costs depend on annual heating demand, technology efficiency and consumer fuel prices. Electric heat pumps – especially ground-source systems – are by far the most efficient technology, with their coefficient of performance about three to five times higher than the efficiency of condensing gas and oil boilers. In contrast, biomass boilers are generally 10% to 20% less efficient than their gas equivalents on annual average (Energistyrelsen, 2021). As for fuel prices, solar thermal systems make use of a free energy source, while other renewable heating technologies benefit from better price visibility than fossil fuel options, since wood pellet and electricity end-user prices are generally less volatile than oil and gas prices. 

Importantly, the policy environment can considerably influence fuel costs, for instance through subsidies, fuel taxes or fuel tax reliefs (e.g. on renewable electricity used for heat), and carbon pricing. While incentives for renewable heating in buildings are increasingly prevalent, in many countries, policies subsidising the use of fossil fuels for heating continue to conflict with those that support the uptake of renewables (REN21, 2021). For instance, for the year 2020 IEA estimates of global fossil fuel consumption subsidies exceed USD 180 billion (IEA, 2021i).

Overall cost-competitiveness of heating technologies

Levelized cost of heating (LCOH) for consumers, for selected space and water heating technologies and countries


Overall, the cost-competitiveness of renewable heat technologies versus fossil fuel options varies significantly across regions. In Sweden, for instance, the combination of a carbon tax and relatively low equipment costs for heat pumps make the later more competitive than fossil fuel heating in most cases. In France, excluding investment support, the payback period of an electric air-to-water heat pump versus a condensing gas boiler for average heat demand can exceed 15 years at 2019 fuel prices. In the United Kingdom, Canada and Germany, renewable space heating technologies struggle to compete with gas without policy support. At 2019 fuel prices, the levelised cost of heating with air-to-water heat pumps for an average German dwelling is about 50% higher than with a condensing gas boiler, and about 55-70% higher in Canada. In Canada, the levelised cost of pellet boiler heating can be over three times higher than for condensing gas boiler heating. Based on 2019 gas prices, assuming a USD 50/tonne carbon tax3 would increase the levelized cost of heating with gas boilers in Canada by over 20%.

Capital costs account for a particularly high share of the cumulative discounted cash flow over the lifetime of heat pumps and solar thermal technologies: in France, Germany and the United Kingdom, capital costs represent between a third and half of the levelized cost of heat for heat pumps, and more than 85% for solar thermal technologies. Consequently, the cost competitiveness of these technologies is highly sensitive to their lifetime.

In 2021 the United Kingdom announced a target for the installation of 600 000 heat pumps a year by 2028, while Ireland announced a plan to install 600 000 heat pumps in total by 2030, two-thirds of them in existing buildings. Both targets imply a significant step up from current deployment levels: in 2020, heat pump sales amounted to 37 000 units in the United Kingdom and 8 000 units in Ireland (EHPA, 2021). Achieving Ireland’s target requires heat pumps to account for approximately half of all heating system replacements in both residential and commercial buildings over the 2021-2030 period. In the United Kingdom, compensating for the current investment cost differential between gas boilers and heat pumps for 600 000 installations would represent a commitment of over £3 billion in loans or subsidies. However, such a boost in heat pump installations is expected to push average installation costs down through economies of scale and stronger market competition.

In addition to the technologies discussed in this section, other renewable heating solutions are emerging, such as solar PV-to-heat (PV2heat), which consists of PV modules directly (and solely) connected to an electric resistance water heater using DC power without inverters. This concept is, for instance, gaining ground in South Africa, with almost 12 000 systems installed in less than five years (IEA SHC, 2021b). While this progress is being driven in South Africa by a mandate limiting the share of fossil fuels in hot water supply, the simplicity of installation, the reliability and the cost-competitiveness of PV2heat systems offer perspectives for wider deployment.

In the longer term, renewable gases could also play a role in specific cases by taking advantage of existing gas infrastructure. In the case of renewables-based hydrogen, this would imply end-user appliances being hydrogen-ready, which entails limited extra cost compared with traditional gas appliances.

Beyond cost-competitiveness, multiple non-economic barriers still hinder the uptake of renewable heat in the residential sector. Some challenges are technical (e.g. building suitability), others concern the maturity of fuel and technology supply chains ‒ including the availability of qualified installers ‒ while others again relate to factors influencing consumer choices, such as confidence in the technology, awareness of potential benefits, split incentives, access to financing and “hassle costs” associated with the installation (IRENA, IEA and REN21, 2020). Scaling up the use of renewable heating in buildings therefore requires policy makers to address these challenges through comprehensive and multidimensional policy approaches. These can potentially include a combination of awareness-raising campaigns, regulatory measures and economic incentives, which ‒ most importantly ‒ should place social justice at the heart of the transition.

Residential heat economics calculator

  1. Renewable space and water heating options comprise all technologies using renewable energy sources, including biomass, geothermal heat, solar thermal heat and ambient heat harnessed by heat pumps.

  2. Similarly, integrating renewable heat technologies like solar thermal, geothermal and heat pumps into district heating systems is easier in high-efficiency networks that operate at low temperature.

  3. For comparison, carbon prices in the European trading system have been higher than EUR 50/tonne since May to the time of writing.