4.3.4. Financial Options

The previous section shows the heating cost of heat pumps and the cost saving of replacing existing heating technologies with heat pumps. This section focuses on the LCC of heat pumps and financial alternatives. Figure 14 shows different financial options for a refurbished detached house; self-financed, financed, financed with Boiler Upgrade Scheme (BUS) grant, interest-free financed with Home Energy Scotland (HES) cashback and interest-free financed with HES cashback including EEI costs. The results are illustrated in discounted costs of 3.5% for a 15-year period. Figure 14 only shows the results for a refurbished detached house for simplicity.

Self-financed and financed options are not economically viable in the baseline scenario for end-users for all fuel types except electric heaters. Replacing oil boilers with heat pumps shows savings of £4525 and £4164 for self-financed and financed scenarios respectively. Coal and wood have similar results, while LPG still performs negatively with –£2094 and −£1732 for self-financed and financed options, respectively.

Grants and cashback provided by governments help to reduce upfront costs so heat pumps become an economic option for end-users. BUS grant offers a £5000 grant for homes in UK and Wales, and HES provides £7500 cashback and an interest-free loan for the remaining costs for Scottish homes. In these scenarios, the highest outcome occurs in LPG boilers with £6045 and £3091 from HES and BUS grants, respectively. Coal and Wood have lower results with around £4500 for HES and £1500 for BUS grant. The oil boiler has £3613 for HES and only £659 for BUS grants.

EEI measures are beneficial for reducing energy demand so reducing heating costs increase savings. However, installation costs of energy efficiency measures are significant, especially for unrefurbished houses (illustrated in Appendix C, Figure A3). A refurbished detached house requires £9000 for more ambitious EEI measures. Therefore, EEI measures become economically viable for only LPG with £1480 in LCC. The remaining fuel types, (oil, coal, and wood) show negative results with −£951, −£12, and −£86 respectively.

**Figure 14.** Cumulative lifetime costs of replacing heating technologies with heat pumps and different financial options for future scenarios (BUS: Boiler Upgrade Scheme Grant, HES: Home Energy Scotland Cashback, EEI: Energy Efficiency Improvement Cost).

Replacing electric heaters with heat pumps always shows positive results for all financial options as electricity prices are higher than fossil fuels, creating higher potential fuel cost savings. The results could be as high as £24,129 with the HES grant whereas self-financing is also significantly high (£15,991) when compared with other fuel types.

Future scenario results show that changes in fuel prices increase the financial benefits. HES grant savings could reach £7084 in the RE scenario and £9836 in the CE scenario for oil. Coal and wood also show similar trends to oil, but the highest benefits occur with LPG among fossil fuels. Savings from LPG could reach £13,428 in the CE scenario. Self-financed and financed options are still negative for oil, coal, and wood fuel types in the RE scenario. However, they also become positive in the CE scenario. Only a reduction occurs in electric heaters because electricity prices are expected to decrease in the future. Therefore, consumers using electric heaters should replace their heating system in the baseline scenario to achieve the highest potential savings.

Figure 15 shows total undiscounted savings for Orkney when heat pump uptake is followed by future scenarios and the breakdown of total undiscounted costs by fuel and payment type. CE scenario results show that all financial options offer potential positive savings. The highest savings occur in HES + Financed (interest-free) scenario with £161.0 million, followed by BUS + Financed (interest-free) and BUS + Financed scenarios with £141.5 million and £135.5 million. The lowest savings occur in the self-financed with £81.9 million and EEI + HES + Financed (interest-free) scenario with £77.5 million. CE scenario helps to increase savings from EEI measures and become more viable than the self-financed scenario. The total EEI measure cost is £129.9 million in the CE scenario. This investment in EEI measures helps to reduce the total project cost from £87.8 million to £79.8 million with smaller size heat pumps. As the energy demand is reduced, electricity cost is also reduced from £62.3 million to £49.0 million.

**Figure 15.** Cumulative undiscounted cost distribution of replacing heating technologies with heat pumps in Orkney for different financial alternatives and future scenarios by fuel types.

Even though the EEI scenario does not provide positive savings in the baseline scenario, future scenarios could help to create savings for refurbished archetypes. However, unrefurbished houses require more support to make EEI measures financially viable. The total EEI measures require an investment of around £130 million in the CE scenario. Further, £21.3 million savings could be achieved as a result of EEI (£8.0 million reduction from upfront project cost and £13.3 million reduction from electricity costs). However, £108.5 million support is still required to achieve the same total savings with HES + Financed (interest-free) scenario. Therefore, more grants are needed. The number of unrefurbished and refurbished houses eligible for EEI coupled with heat pump uptake is around 5300 and 3150, respectively. Hence, £14,000 support for unrefurbished houses and £7500 for refurbished ones could provide the required financial support to the consumers.
