Value Management - Overcoming barriers to smarter heat solutions in UK homes - Annex 3b: Payback period drivers

Abstract:

This project studied how value can be delivered across a smart energy value chain - in the context of the UK. It built a clear understanding of how smart energy systems can deliver combined consumer value alongside commercial value for market participants - producers, suppliers, distributors. The analysis will help to make the commercial deployment of smart energy systems more likely. This £600,000 project was delivered by Frontier Economics, a leading economic consultancy.

The final report has 11 annexes. This is Annex 3b: Payback period drivers.

The payback period of an intervention refers to the time taken for the ongoing stream of cost-savings to outweigh the initial investment. For long-run optimising models of intervention take-up (like ESME and BMET), the payback period is only of tangential relevance: interventions with a high net present value overtheir lifetime will be taken up, regardless of whether there is a significant delay before these benefits are realised.

However, both customers and business model providers face limits on the length of payback period they are likely to accept. Since many low-carbon interventions are associated with high initial investments and long payback periods, this leads to a barrier to uptake.

Contents of this annex:

• Why customers are more likely to take up interventions with relatively short payback periods
• Whether business model providers can help overcome these constraints
• This analysis is primarily focussed on household-level interventions (HEMS,cavity, internal and external wall insulation, and heat pumps). District heat also has long payback periods, and we briefly consider the issues for this technology. While the nature of district heat means that individual consumer contracts might prove less of a barrier, systematic uncertainties are likely to require risk-sharing with government.
• Quantitative modelling from BMET is used to examine the likely payback periods of different types of low-carbon interventions for different customer groups, and look at what might be required to bring these to within a 5-10 year window.

Overall, we find that HEMS and cavity wall insulation are the only interventions which are likely to have payback periods within such a window given BMET default assumptions.

This document was prepared at the time to contribute to ETI internal thinking and planning only.

Publication Year:

2015

Publisher:

ETI

DOI:

https://doi.org/10.5286/UKERC.EDC.000538

Author(s):

Frontier Economics