Heating accounts for half of energy consumption globally, and over a quarter of total CO2 emissions — so decarbonising heat must be an urgent priority.
However, this is a complex, multifaceted, thorny issue — with no single one-size-fits-all solution, but rather a variety of possible technologies which are both competitive and complementary; and the real-life impacts of the transition to zero carbon heating will be significant, in terms both of investments required and of disruption at customers’ premises.
In this article, we explore the energy efficiency challenge — reducing the huge heat losses from buildings is essential for decarbonising heat — as well as low carbon heating technologies such as electric heat pumps, hydrogen and biogas combustion, solar thermal and heat networks.
They all have contributions to make and, at this stage at least, should all be pushed forward.
Many of these solutions are functional today — except for hydrogen, which remains to be proven at scale — but the challenge is to reduce their cost and to make them fully ready for rapid mass-market adoption.
Green Angel Syndicate has already invested in several technology companies solving some of these big problems, including:
- In the energy efficiency space: Shields Energy, which has developed an effective building control system with powerful analytics and real time alerts; and AirEx, a smart ventilation control system for the residential market.
- In home energy storage, which can play a role to facilitate the electrification of heat: Powervault.
- In the solar sector: Naked Energy, which has developed attractive solar PV and thermal hybrid collector tubes.
However, we know that there are plenty of potentially attractive opportunities for our specialist angel group to invest and to help companies in all these different sectors, from innovative insulation materials for energy efficiency to heat pump, biogas or heat network solutions — and we would be delighted to hear from ambitious entrepreneurs in these areas.
A gigantic problem
Heating — which technically includes space heating and cooling, in residential and commercial buildings, but also heating water, cooking and many industrial processes — accounts for half of energy consumption globally, and over a quarter of total CO2 emissions, according to the IEA.
And energy demand from buildings globally is rising, up by more than 20% since 2000, as efficiency measures do not offset the rapidly growing floor area.
Global buildings sector energy use and intensity by end-use, 2000–2017.
Source: IEA, Perspectives for the Clean Energy Transition, April 2019
Countries have different circumstances, but it is worth noting that the issue is particularly acute in the UK, where heating (space and water) for buildings alone represents 40% of the country’s energy consumption and around 20% of its greenhouse gas emissions. Indeed, most of the heating in the UK is delivered by fossil fuels, with 69% of heat produced by burning natural gas.
A gas boiler typically emits 2–4 tons of carbon per year, depending on the boiler and house type. As such, the way heating is supplied to homes, businesses and industrial users connected to the gas grid will need to change. In the UK, emissions from buildings have started to decrease (down around 20% from 1990 levels), but there is the need to do much more.
UK average household emissions.
Reducing demand — the energy efficiency challenge
To cut carbon emissions attributed to heat, the solution is not only to produce heat from lower carbon sources but also to minimise demand for heat, through improved energy efficiency.
Energy efficiency is a global challenge. As pointed out by the IEA, the number of new, high-efficiency buildings being constructed globally would need to increase more than 25-fold by 2030, and deep energy renovation of existing stock would need to more than double within the coming decade for the world to meet its targets in terms of emissions.
Focusing on the UK, our housing stock is one of the least efficient in Europe, losing three times more heat on average than Swedish homes due to poor insulation. The Committee on Climate Change has recently called for energy efficiency retrofit of the 29 million homes across the UK to be declared “a national infrastructure priority”.
A full upgrade of all homes to ‘passivhaus’ status would be impossibly costly, comparable in cost to rebuilding the entire housing stock — in the UK alone, more than £2tn. The good news, though, is that there are many cost-effective measures that can go a long way — for example insulating the easy-to-treat cavity walls.
Quantifying the benefits
The graph below by UK Energy Research Centre compares the estimated energy consumption in a ‘cost-effective’ scenario to what it would be in a ‘baseline’ scenario, and shows how much seven different types of measures could contribute by 2035:
- 47% of the savings could be achieved through building fabric improvements, boiler replacements and upgrades of heating controls within existing homes.
- A further 36% through heat pumps and heat networks (see below).
- Energy efficient appliances and lighting provide 11%, and behavioural measures the remaining 6%.
In total, the analysis shows that energy demand in 2035 can cost effectively be reduced by around by 140TWh per year, a figure comparable to the annual energy output of six nuclear power stations.
Quantifying the potential savings from energy efficiency measures (UK)
Source: Unlocking Britain’s First Fuel: The potential for energy savings in UK housing
However, none of this will be achieved without government intervention such as:
- Updating building standards, to increase the minimum mandated efficiency of buildings. Consultation on The Future Buildings Standard was concluded on 13 April 2021.
- Unlocking government funds to boost the pace of adoption of energy efficiency measures. Different types of interventions are required to stimulate the uptake of measures across the different segments of the market — from private owner occupiers to the social rented sector.
- Supporting innovation in energy efficiency products and processes.
Innovation in energy efficiency
Green Angel Syndicate is not the only investment specialist to see energy efficiency as an attractive investment opportunity. For example, the Bill Gates-founded Breakthrough Energy Coalition have focused two of their three heat decarbonisation ‘technical quests’ on energy efficiency:
- Buildings insulation, with the aim to find new inexpensive wall insulation methods and low thermal-loss or adjustable window technologies.
- Building energy management approaches: technologies such as sensors, controls and energy management systems exist today but they must become easier to roll out at scale.
Decarbonising heat supply — how to change the mix
At the same time as energy efficiency must be massively improved, the production of heat must also be decarbonised. There are two potential large-scale solutions for this: electric heating, using heat pumps, and adapting the existing gas grid to run on low carbon gas such as hydrogen, plus a range of hybrid solutions and alternatives such as bioenergy and solar thermal. In addition, the rollout of heat networks in dense areas could play an important enabling role.
Progress remains too slow. Globally, the sale of fossil fuel equipment (such as boilers) still outpaces that of both the more efficient heating alternatives (such as heat pumps) and of renewable options (such as solar thermal), but the UK is one of the OECD countries most dependent on natural gas for heating — as shown in the graph below.
Fuel share for residential and commercial heating in OECD countries.
Source: BEIS, ‘Clean Growth — Transforming Heating’, Dec. 2018
The UK’s Climate Change Committee recommends that the share of low carbon heating in the country must increase to 90% in 2050 — based on a scenario with the roll-out of heat pumps, hybrid heat pumps and heat networks, in conjunction with hydrogen, and combined with high levels of energy efficiency. However, changing the mix of heating sources will be a major challenge, with an estimated annual cost of the order of £15bn. Unlike the decarbonisation of the power sector, decarbonising heat at scale will have a direct impact on consumers, requiring changes to most of the heating systems currently in buildings and industrial sites.
What are the pros and cons of the different low-carbon heating solutions? What further progress — in terms of technology and/or costs — are required to enable a massive rollout? In the paragraphs below, we focus on heat pumps, hydrogen-based combustion, biogas, solar thermal and heat networks.
Heat pumps — still expensive
A heat pump is like a refrigerator in reverse — drawing heat from the ground, outside air or water, even when it is cold, and transferring the heat into the building. Heat pumps are efficient — much more efficient than traditional electrical radiators.
This technology is not meaningfully rolled out in the UK, but it is already widely adopted in several countries, such as Sweden and increasingly in France. In China, sales of air source heat pumps have risen to over one million per year.
The issue with heat pumps, at this stage, is their cost, especially when compared with gas boilers. In a recent study, Rocky Mountain Institute (focusing on several US regions) found that, for many existing homes currently heated with natural gas, converting to electric heat pumps will increase customer costs. Indeed, customers with existing gas service face high up-front costs to retrofit to electric heating, and then, depending on local energy prices, they either pay more for energy with electric devices than with gas, or they save too little in energy costs to make up the upfront cost.
However, RMI also points out that in several types of cases, electrification of space and water heating and air conditioning can reduce the homeowner’s costs over the lifetime of the appliances, when compared with performing the same functions with fossil fuels. This is the case:
- For most new homes, and for homes currently lacking natural gas service, as they avoid the cost of gas mains, services, and meters not needed in all-electric neighbourhoods.
- For customers in several retrofit scenarios: switching away from propane or heating oil; for gas customers who would otherwise need to replace both a boiler and air conditioner simultaneously; and for customers who bundle rooftop solar with electrification.
It is therefore logical that the UK Climate Change Committee recommends that most buildings off the gas grid in the UK should be equipped with heat pumps. Another recommendation is to couple heat pumps with improving building insulation — because heat pumps provide constant but low temperature levels of heat. Finally, a heat pump can be combined with another technology such as a gas boiler to create a hybrid solution — allowing a building to generate heat from either electricity or gas depending on the circumstances such as time of day or outside temperature.
Looking ahead, a broader-scale adoption of heat pumps would benefit from:
- Declining costs. This is expected to happen as the market grows and manufacturers realise economies of scale, but innovation can also be a key driver;
- Smarter home energy systems, which would enable customers to cut the lifetime costs of electrification by better capturing the value of a heat pump. Home energy storage devices, which act as smart energy management hubs for the house, like the ones developed by GAS portfolio company Powervault, can play a key enabling role.
- Carbon pricing or other climate policies which would increase the cost of natural gas supply.
Hydrogen-based combustion — years away at best
The combustion of hydrogen produces no direct greenhouse gas emissions, so hydrogen could play an important role in decarbonising heat. Theoretically, the big advantage of hydrogen-based heating is that it could be implemented with minimal disruption to homes and businesses, as it could make use of existing gas networks.
However, there are a number of issues with hydrogen. Firstly, it is not because burning hydrogen doesn’t generate CO2 that an end-to-end hydrogen-based heating solution would be carbon free: it all depends on how the hydrogen is produced in the first place. The most established production methods are methane reformation and electrolysis; without carbon capture and storage (CCS), production from methane comes with significant carbon emissions, whilst electrolysis is relatively inefficient (40–60% range).
Secondly, the safety of using high concentrations of hydrogen in the current gas system needs to be proven. Some countries have demonstrated that hydrogen can successfully work when blended into existing natural gas networks but only at low concentrations. Testing and trialling are therefore required to prove the safety and feasibility of converting the gas system to hydrogen — and this will take years.
Finally, even though a lot of the gas networks could be reused, the cost of converting to hydrogen seems higher than that of electrifying heating with heat pumps (£7,300 per household by 2025 versus £6,500 for an air source heat pump, according to the CCC).
Biogas — significant opportunity
Biogas is a renewable energy source comprising any low carbon gas that is generated from biomass. When used for heat, biomass can be used as a fuel for biomass boilers, heat networks, process heating in industry and in the production of biogas. One such biogas is biomethane, which is chemically identical to methane and can be used as a replacement for natural gas in the gas grid and in boilers. Biogas can be sustainably produced from anaerobic digestion and gasification processes and it can certainly contribute to heat decarbonisation.
However, the experts estimate that even by 2050, the supply of biogas available for heating in the UK could only reach a maximum of a third of current household gas use and the UK’s Committee on Climate Change points to a sustainable supply of biogas representing not more than 5–15% of primary energy demand.
Solar thermal — an underestimated resource
Harvesting heat directly from the sun is not a new idea, and solar heat is a mature sustainable energy technology capable of mass deployment.
Solar thermal is already very developed in countries such as China, but there is massive scope for increasing the installed solar heat capacity across the global, including in Europe. Indeed, only a few European countries are close to reaching the EU target of 1m² of solar-thermal installations per person.
A key challenge for the growth of solar-thermal comes from the intermittency of the solar resource, which means that solar-thermal systems must be complemented by either a storage or a back-up system — increasing the costs. As shown on the chart below, in countries such as the UK, solar thermal systems are usually designed as complements to boilers rather than replacements.
Source: Somerset Renewables
However, we see exciting potential for innovation in this sector. For example, solar thermal collectors can be combined with photovoltaic (PV) modules to produce hybrid PV-thermal (PV-T) collectors — delivering both heat and electricity simultaneously from the same installed area and at a higher overall efficiency compared to individual solar-thermal and PV panels installed separately. Such hybrid PV-T technology is promising for areas with limited roof space and when heat and electricity are required at the same time.
This is exactly the positioning of Naked Energy, one of Green Angel Syndicate’s portfolio companies, which has designed the particularly efficient ‘Virtu’ tubes, already installed in several locations across Europe. These tubes come with a higher upfront cost than traditional PV panels, but they generate a much higher net present value over their lifetime, thanks to the greater amount of energy (heat and electricity) generated per square metre.
Naked Energy’s Virtu PVT — Hybrid solar PV & thermal tubes
Source: Naked Energy
Heat networksHeat networks are distribution systems of pipes that take heating or cooling from a central source and deliver it to multiple customers — such as public sector buildings, shops, offices, sport facilities, universities and domestic buildings.
They are not low-carbon in nature (actually, today, 90% are powered by natural gas), but they are technology agnostic — and their advantage is that low carbon heat generation sources can be plugged into heat networks with minimal disruption to consumers — enabling to use biomass, heat pumps, heat recovery from industry, but also solar thermal and geothermal, depending on location.
In dense urban areas, heat networks can be a very attractive and cost-competitive solution. They are very developed in several European countries, with some networks serving up to 1 million people and businesses. In Germany, every town with a population of more than 80,000 residents has at least one heat network. And in New York City, Edison operates a historic steam network dating back to the late 1800s which is still today delivering steam to nearly 2,000 buildings throughout the city.
New York City’s steam network
In the UK, heat networks have struggled to compete with gas networks. They do exist within large institutional estates such as hospitals and universities — but they currently provide only 2% of all heat demanded by UK homes, business and industry.
However, most experts and reports, including from government sources and the Committee on Climate Change, foresee strong growth in heat networks over the coming decades in the UK — with most estimating that they will help serving around 20% of heat demand by 2050.
The main barrier to the rollout of heat network is the high upfront capital costs. Reducing these costs can be helped by government incentives, but innovative technologies and solutions could also be found.
At Green Angel Syndicate, we remain on the lookout for technology entrepreneurs developing solutions to any of these big problems, from energy efficiency (materials, sensors, software) to low-carbon heating (heat pumps, solar thermal, hydrogen, biogas) and heat network solutions.