How innovative finance products can unlock the market for heat pumps

Will Jones at the Carbon Trust details insights on innovative financial models developed as part of the government’s Heat Pump Ready programme that can help drive heat pump adoption.

In this article and podcast, we explore innovative financial models developed under the UK government’s Heat Pump Ready programme, funded by the Department for Energy Security and Net Zero as part of the £1 billion Net Zero Innovation Portfolio (NZIP). We share insights from two Heat Pump Ready Projects – Energiesprong and Hometree Finance – about how innovative financial models can address one of the primary barriers to heat pump adoption – the high upfront cost of installation.

Hometree Finance provides consumer finance for home decarbonisation retrofits, including heat pumps, solar panels, and batteries. Hometree offers low-cost, long-term loans and leases to make these technologies more affordable for homeowners. With its loan offering, Hometree seeks to provide loans with monthly payments at a similar cost to those used to purchase a gas boiler. This monthly payment helps spread the upfront cost of a heat pump, which can be delivered at the point of sale by a certified green vendor, such as an independent heat pump installer. Hometree’s approach includes a comprehensive performance and reliability assessment to ensure financed installations deliver the expected benefits. They also offer a leasing model that bundles maintenance and reliability guarantees into this monthly payment, providing consumers with peace of mind.

Energiesprong is a market enabler focused on catalysing the retrofit industry. It does not perform retrofits but aligns clients, funders, innovators, and solution providers to achieve scalable and performance-guaranteed retrofits. Energiesprong’s Comfort Plan concept can enable social landlords to undertake deep retrofit on properties and recoup some of that investment through a Comfort Charge paid by tenants in exchange for guaranteed levels of comfort and performance. This project aims to finalise the set-up process and technology requirements to offer a seamless end-to-end Comfort Plan management service and then develop and test the technical solutions required to deliver it.

Incentivising social landlords to invest in retrofit and heat pumps

Energiesprong focuses on the social housing sector. A key objective of the Comfort Plan is to overcome the problem of split incentives – where landlords pay for retrofits, but cannot recoup any of that investment through energy bill savings, which are paid by tenants. The Comfort Plan is a pay-as-you-save cost recovery mechanism, where a portion of the energy savings from retrofit measures is recouped from the resident, underpinned by a performance guarantee. This ensures that residents always benefit from the retrofit, saving at least 20% on their energy bills while also enjoying additional comfort and health benefits. Landlords also receive a portion of the savings, incentivising them to invest in retrofit.

Making loans for heat pumps more affordable

Hometree’s primary market is private homeowners looking to retrofit and decarbonise their homes. They offer loan and lease products specifically designed for this purpose, working with the debt markets and large institutional lenders to secure low-cost financing (~APR 7-8%). They aim to make heat pumps as affordable as gas boilers by offering finance terms that match the expected working life of the technology (15 years for air-source heat pumps and 20 years for ground-source heat pumps). In collaboration with Barclays and the Canada Pension Plan Investment Board (CPPIB), Hometree has secured £300 million for domestic retrofits, making it easier for homeowners to finance these upgrades. Hometree is the first company to bundle together individual loans for domestic retrofit into a securitised asset that can be invested in by institutional investors and this is critical to being able to offer loans over longer periods at lower interest rates.

Delivering high-performing and reliable systems

Consumers want to ensure their heat pump systems perform well and reliably. Energiesprong addresses this by guaranteeing the performance of their retrofits, ensuring that the promised energy savings and comfort levels are achieved. This involves setting clear targets at the start of the retrofit journey and engaging contractors to complete the works to guaranteed performance standards. Hometree also directly addresses performance concerns through its lease model. In this model, Hometree owns the heat pump and is responsible for verifying and validating that installations and maintenance are carried out to a high standard. To ensure standards are kept high Hometree utilises a network of trusted installers and is currently expanding its in-house installer base with a view to providing nationwide coverage. This is all included in the monthly fee charged to the consumer.

Educating customers and raising awareness

Consumer awareness of heat pump technology is low, with the traditional gas boiler remaining the default choice for many consumers. This is especially true in situations like distress purchases when a quick install is necessary. Both Energiesprong and Hometree emphasise the importance of educating consumers and providing transparent information about the benefits and performance of heat pumps.

Energiesprong often works closely with tenant engagement officers to clearly communicate the benefits and realities of retrofit to them and, through the Comfort Plan, sets out clear expectations of how the home will perform post-retrofit. Hometree is a point-of-sale finance provider where installers are the primary point of contact for reaching new customers. Hometree trains installers to introduce their finance products alongside information on the retrofit option for their homes.

In conclusion, Energiesprong and Hometree are developing finance models that will allow customers to overcome the upfront cost barriers of retrofit, address performance concerns and increase consumer awareness in two separate markets. Both approaches seek to provide scalable systems that make heat pump and retrofit financing more accessible and affordable, overcoming a key barrier to deployment.

For an in-depth discussion on how innovative finance can enable the mass rollout of heat pumps, listen to the Heat Pump Ready podcast, hosted by Nathan Gambling of Betatalk in conversation with representatives from Energiesprong and Hometree Finance.

More information on the projects can be found here:

Energiesprong – https://www.energiesprong.uk/

Hometree – https://hometreefinance.co.uk/

The learnings from Heat Pump Ready are intended to help the sector overcome barriers to heat pump deployment. Please visit our website for more information on individual project initiatives.

The Carbon Trust and Betateach are hosting an action-focused heat pump workshop at elementalLONDON on 19 November. To register for your free ticket, click here.