Turning up the heat pump: the silent revolution in our basements

Recent swings in fossil fuel prices coupled with rising electricity costs have turned the spotlight onto energy efficiency. Heat pumps are three to five times more energy efficient than gas boilers and can also be used as an alternative to air conditioners. As a result, they are taking market share in heating and cooling applications, which may help mitigate climate change and satisfy future carbon emissions regulations.

March 31, 2023

Holger Frey

CAIA, Senior Portfolio Manager, Credit Suisse Asset Management

Turning up the heat pump

On December 23, 2022, a dangerously cold winter storm caused by a plunging jet stream across North America hit the US Upper Midwest and Northeast.1 Temperatures fell as low as –46°C (50°F),2  putting critical energy infrastructure at risk. Gas wells froze, causing the worst one-day fall in US natural gas output in more than a decade,3 and pushing natural gas prices above USD 100 in Washington D.C. and parts of New England by Christmas Eve.4

This harsh winter storm was a fresh reminder of how today’s energy infrastructure is struggling amid more frequent extreme weather events that cut off customers from supply and cause large price shocks. The rise in such events has catapulted the issue of energy security and energy efficiency into living rooms, where, until recently, due to the COVID-19 pandemic, the focus had been on setting up Alexa smart home devices and Netflix streaming.

Climate change is of course not the only driving factor behind an increased interest in building energy efficiency. Since Russia invaded Ukraine in February 2022,5 Europeans have seen the picture of reliable and affordable energy supply fading in the rearview mirror. With politicians making frantic attempts to secure new natural gas supplies and floating liquified natural gas (LNG) terminals, it has become clear that there is no silver bullet for the European energy crisis. Although concerningly high winter temperatures in Europe6 helped to avoid the worst-case scenario in the short-term, energy security will remain under threat without improvements in efficient energy use.

Higher energy efficiency provides a cushion against rising energy costs

The European energy crisis has triggered a sharp rise in energy bills. However, the magnitude of this increase depends to a large degree on the level of building energy efficiency in households. Homes that are more energy efficient have seen relatively lower absolute increases in energy bills, whereas less efficient ones saw 4.6 times-higher cost increases (see Figure 1). For example, B-rated UK households saw their annual energy bills for 2022 increase by USD 820 compared to 2019, while the lowest rated, G-rated homes, saw a staggering increase of USD 3,376.7 This must be the strongest argument for improving energy efficiency in buildings in decades.

Increase in typical annual UK household energy bills by building energy performance rating (USD, 2022 vs. 2019)

Source: IEA. License: CC BY 4.0; Energy Efficiency 2022 – Analysis | IEA.

Heat pumps dampen price volatility of fossil fuels

As natural gas is the dominant global fuel, accounting for 42% of residential heating needs,8 the recent price shock is fundamentally questioning its role as an affordable, transitional form of energy. In fact, households that use electric heat pumps have been much more protected from wild price swings. For example, the cost of operating a gas heating system for the average household in Denmark has risen by 330% amid skyrocketing gas prices, while heating the same floor space with an electric heat pump has risen by 100%9.For households able to consume self-produced renewable energy, switching to efficient electric heating increases energy security and adds price stability, since electricity prices can be locked in for many years, and with that, avoid the price volatility of fossil fuels.

Reducing your carbon footprint pays off 

Burning fossil fuels to heat homes is also a major contributor to global warming. In the US, heating and cooling accounts for 38% of greenhouse gas emissions from residential houses, with an additional 15% of emissions stemming from heating water.10 By switching to a heat pump heating system, homeowners can drastically lower their carbon footprint by 1 to 8 t per year.11 As a comparison, if you switch to a vegan diet for an entire year, you will save about 1 t of CO2 emissions,12 while the cost of emitting carbon is expected to rise in structural terms. On December 18, 2022, the European Parliament agreed to introduce a carbon price on buildings fuels, as part of the bloc’s Emissions Trading Scheme (ETS) reform, the biggest carbon trading market globally.13 From 2027 to 2030, carbon emissions from burning fossil fuels in road transport and heating will have a price ceiling of USD 45/t.14 This agreement goes further than the initial draft, with process heat from industrial activities and office heating now also included in the new ETS2.15

Environmental footprint of heating systems

Sources: The Parliamentary Office of Science and Technology, BBC 2020, Credit Suisse.

How do heat pumps work?

The technology behind heat pumps is nothing new, being similar to that used in refrigerators and air conditioners. Heat pumps extract heat from the surrounding air, the ground (geothermal energy), water or factory waste heat. Unlike traditional gas boilers and electric heaters, heat pumps do not generate heat themselves, but rather transfer and amplify heat from a given energy source. The process itself starts with a compressor that moves a refrigerant through a refrigeration cycle, with a heat exchanger extracting the heat from the source. The heat is then passed on to a heat sink via another heat exchanger.

Basic process of a heat pump

Source: Credit Suisse. Picture used with kind permission of Nibe Industrier.

A typical home heat pump will be at around four for its coefficient of performance (COP) – the unit of electricity input required to provide a unit of heat output – which is three to five times more energy efficient than a gas boiler.16 Furthermore, during warm periods, heat pumps can be used in reverse and extract heat from a room and move it outdoors.

While air-sourced heat pumps used to be less efficient in cold climates, due to technology improvements, they now operate efficiently in temperatures of –23ׄ°C (–10°F) and below.17 Market penetration of 60% in Norway and over 40% in Sweden and Finland confirm this.18 Next-generation heat pumps aim to provide the highest COP possible for a wider temperature range, further reductions of noise levels, and optimization for dual use (heating and cooling). Research and development efforts include rolling out new compression technologies such as solid-state (e.g. magnetocaloric, thermoelectric, and elastocaloric) and gaseous ones (e.g. Brayton and Stirling cycles), with particularly promising initial results for elastocaloric‐based cooling systems.19

Environmental Impact

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Installations set to reach new records

About 190 million heat pumps were in operation in 2021 worldwide, with air-source heat pumps being the most installed type.20 Installations surged by nearly 15% to reach a record high in 2021, with the biggest growth in Europe, which crossed the two-million mark in terms of new installations, up 35% year over year. This trend is expected to continue, confirmed by doubling growth rates in Europe in the first half of 2022. In order to reach climate and energy goals, installations could even rise to between five and seven million per annum by 203021 in Europe alone.22 Looking at the policy changes underway, it is fair to assume that we will see more records broken in the future.

Residential heat pump installations in Europe expected to rise significantly

This forecast was based on an integrated analysis of current targets (the UK’s Energy White Paper, the EU’s Fit for 55 package, and individual member states), historic heat pump deployment in line with existing policies, and our gas forecast models.
Sources: Credit Suisse, Wood Mackenzie. Based on Wood Mackenzie, 2022. Europe to install 45 million heat pumps by 2030 | Wood Mackenzie; retrieved on January 5, 2023.

With Europe currently in the eye of the storm of the energy crisis, seven European countries, including the UK – representing 80% of the continent’s residential gas use – have announced plans to ban new gas heating connections.23 Several states in the US are also introducing a ban on gas and oil boilers. In addition, the Inflation Reduction Act (IRA) provides significant new rebates and tax incentives to homeowners. Rebates can be as high as USD 8,000 on the purchase of a heat pump for low- and middle-income households, with a tax credit of up to 30% available for high-income households.24 One of the bottlenecks hampering even stronger growth so far has been the availability of skilled, licensed professionals able to install heat pump systems, with the industry reacting by expanding and training up their workforce. Easy-to-install window heat pumps are another new option, which can be installed as quickly as common air conditioners but provide energy-efficient colling and heating. Prices start at USD 2,000,25 which enables retrofitting for low- to middle-income households.


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Contact us to learn about exciting investment opportunities. We are here to help you achieve your investment goals.; retrieved on January 5, 2023. 
Jet Stream Bends Under Climate Change |; retrieved on January 11, 2023.; retrieved on January 9, 2023.; retrieved on January 5, 2023.; retrieved on January 3, 2023. 
'Feels like summer': Warm winter breaks temperature records in Europe | Reuters; retrieved on January 5, 2023. 
Executive summary – Energy Efficiency 2022 – Analysis | IEA; retrieved on January 9, 2023 
Energy Efficiency 2022 | IEA; retrieved on January 6, 2023.; 2022 versus 2019 time period; retrieved on January 4, 2023.  
10 How to cut carbon out of your heating | BBC Future; retrieved on January 4, 2023. 
11 3 ways to tap billions in new money to go green | The Washington Post; retrieved on January 3, 2023. 
12 Food’s Carbon Footprint | Green Eatz; retrieved on January 9, 2023. 
13 EU approves CO₂ tax on transport | Fleet Europe; retrieved on January 10, 2023. 
14 EU approves CO₂ tax on heating and transport, softened by new social climate fund |; retrieved on January 4, 2023. 
15 EU approves CO₂ tax on transport | Fleet Europe; retrieved on January 12, 2023. 
16 The Future of Heat Pumps | IEA; retrieved on January 5, 2023. 
17 The Inflation Reduction Act “pumps up” heat pumps | HVAC Solutions; retrieved on January 9, 2023. 
18 Gas crisis driving heat pump boom in Europe, IEA says |; retrieved on January 8, 2023. 
19 The Future of Heat Pumps | IEA; page 31; retrieved on January 12, 2023. 
20 Decarbonize Public Housing | BloombergNEF (; retrieved on January 3, 2023. 
21 Heat pumps: primed and ready to support Europe’s net zero and energy security goals | Wood Mackenzie; retrieved on January 9, 2023. 
22 Gas crisis driving heat pump boom in Europe, IEA says |; retrieved on January 5, 2023. 
23 Executive summary – Energy Efficiency 2022 – Analysis | IEA; retrieved on January 12, 2023. 
24 The Inflation Reduction Act “pumps up” heat pumps | HVAC Solutions; retrieved on January 7, 2023. 
25 Heat pump can decarbonize public housing | BloombergNEF; retrieved on January 5, 2023. 
26 Heat pump can decarbonize public housing | BloombergNEF; retrieved on January 8, 2023. 
27 The Future of Heat Pumps | IEA; page 45; retrieved on January 3, 2023. 
28 IEA’s renewables forecast grows 76% in two years after ‘largest ever’ revision | Carbon Brief; retrieved on January 11, 2023.

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