It’s basic economics

18th Jul 2022

 

Back in the day, I used to teach economics. One of my favourite topics centred on economic costs and how they are lowered – in the short run and then the long run. For the latter, at its simplest, one way of costs being reduced is to achieve “economies of scale”.

A classic explanation was bulk buying, which enabled a lower unit price to be paid for material than buying individual units; the same logic applies to manufacturing processes, with higher volumes reducing the overall unit costs. So the logic goes, if we can sell more heat pumps the average unit cost will reduce. And there is some truth in this.

Eventually though, as volumes increase, the unit cost reduction for each product gets smaller as the efficiencies become less easy to make. So for new product lines or technologies, the initial reductions are quite stark, but as the product becomes established and reaches maturity, then the cost stabilises.

The Government have made a big punt on heat pump costs coming down dramatically, a 25-50 per cent reduction by 2025 and reaching parity with a gas boiler by 2030. That is a “bold” call. The underlying logic in their argument is that as volumes increase in the UK, economies of scale will kick in and costs will come down. In theory, fine. In practice, it’s total bunkum.

The UK heat pump market by 2028 is predicted by BEIS to be 600,000 a year – now that’s quite a leap from 2021’s 50,000 but compared to the rest of Europe, it’s peanuts. Last year, 2 million heat pumps were sold in Europe; 3.9 million in the US and a further 1 million in China. According to the CCC, there are 180 million heat pumps installed globally. If the unit cost hasn’t fallen by now, when will it?

Now some claimed heat pumps would reach parity last April, they didn’t. The same body now claims they’ll fall to £1000 a unit. Given three Chinese manufacturers make over 50 per cent of the component parts for the global market, I think I’m right to be sceptical of these claims, it’s basic economics. Next week I’ll write about snake oil.

 Best wishes

Mike Foster, CEO

 

Mike Foster

EUA's Chief Executive

 

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