Is Germany in the slow lane for low carbon heat? Our latest research challenges the conventional wisdom that the best growth opportunities for low carbon heat in Europe are in Germany Delta-ee Whitepaper October 2013 Contact: stephen.harkin@delta-ee.com T: +44 (0)131 625 1005 scott.dwyer@delta-ee.com T: +44 (0)131 625 3213 andy.bradley@delta-ee.com T: +44 (0)131 476 4259
Delta-ee s Roadmap Service is designed to help you make the right decisions regarding: Product development strategies Where to spend R&D budget Where and when to introduce new technologies How to build new business models In this Whitepaper we share selected outputs from our latest Roadmap Service report on Germany, which forecasts how the residential heating market in Germany will evolve to 2025. We characterise the current heating market, summarise some of the key drivers and profile some of the technologies that we believe will win out in Germany. We describe the dynamics that will make it much harder to decarbonise heat in Germany than in other European countries leading us to the following conclusions for low carbon heat: Germany is leading the way today in terms of low carbon heat, and the market will more than double by 2025. Spark spread However, a high spark spread limits the opportunity for electrifying heat. Germany will not be the biggest growth opportunity for low carbon heat in Europe. A mix of low carbon technologies will be competing for a share of the heating market - there won't be one winner. Germany is a pace setter for low carbon heat today Germany currently leads the way in Europe towards delivering a decentralised and low carbon energy system. Although conventional heating systems such as oil and gas boilers continue to dominate annual sales of heating appliances, already we estimate there are around 120,000 low carbon appliance sales per year going into residential homes and buildings in Germany. This is between 15 and 20% of the total market substantially more than most other European markets. ASHPs and gas boilers plus solar thermal are two technologies that currently account for the majority of the low carbon heating market in Germany. Delta Energy & Environment Ltd 2013 Page 2
Spark spread Spark spread Highlights of the German Roadmap Delta-ee Whitepaper October 2013 FIGURE 1: A DIVERSIFIED MARKET, LOW CARBON TECHNOLOGIES ALREADY PLAY A SIGNIFICANT ROLE IN GERMANY Annual sales of residential heating appliances by technology in 2012 ASHP Biomass GSHP Micro-CHP Gas boiler plus solar thermal Gas boiler Oil boiler Electric heating Source: Delta-ee analysis, 2013 The Energiewende is a critical influence on heating choices It is well understood that Germany s Energiewende is responsible for pushing up electricity costs for residential consumers. Over 20% of the end user price is currently funding the EEG tariffs for renewable electricity a politically hot issue which received a lot of coverage during the run-up to the recent election. While these costs are clearly causing householders a lot of pain, they are also having a critical impact on the competitiveness of different home energy technologies, because of the widening gap between electricity and gas prices. This trend naturally favours gas-based technologies over electricity consuming technologies. This is illustrated by the following charts. In Germany electricity prices are almost four times gas prices, whereas in most other countries this ratio is between two and three. Also, with electricity prices projected to grow more quickly than gas prices, the spark spread ratio is expected to grow even further in Germany. FIGURE 2: SPARK SPREAD IN GERMANY IS VERY HIGH AND CONTINUES TO GROW The spark spread (the ratio between electricity and gas prices) varies across different European countries, with Germany having the largest. This gap between electricity and gas prices will continue to widen to 2020. 5 2012 spark spreads in selected EU countries 5 Spark spread evolution in Germany & UK 4 4 3 3 2 1 0 Source: Delta-ee analysis and Roadmap Reference Scenario forecast, 2013 2 1 0 2012 2015 2020 Germany UK Delta Energy & Environment Ltd 2013 Page 3
If the gas prices weaken in Germany due to shale gas, and a weakening indexation to oil, it s even possible that the spark spread between electricity and gas prices will widen further than our Reference Scenario forecasts. As a result, the situation in Germany naturally favours gas-based solutions. This is not great news for the electric heat pump market and German heat pump manufacturers. But we do see significant drivers for demand response and the growth of smart grids in Germany to facilitate the expansion of renewable electricity. Flexibility is a buzz word in the electricity sector, and the opportunity for electric heat to act as a storage mechanism for intermittent renewables is getting increasing attention. This could open up plenty of opportunities for smart heat pumps in the longer term to help manage fluctuating supply and demand (see our recent Whitepaper on smart heat pumps for more on this topic, available at www.delta-ee.com). How s the future shaping up? In our German Roadmap Report we develop three scenarios to capture and quantify key uncertainties of the future low carbon heating landscape. In our central Reference Scenario we see: A continuing strong commitment to decarbonising electricity. Although future EEG support for solar PV will be reduced, this is very unlikely to stop the capacity being installed annually from growing significantly. Electricity from solar PV is now very competitive on price with grid electricity. The new government continuing with modest support for low carbon heat technologies but this support will fall as the overall MAP budget declines, and as some of this budget is used to support storage technologies. New technologies gaining traction in the market and confidence in new technologies growing. Initial high costs steadily reduce as volumes in Germany, and globally, gradually grow. Customers and installers remaining positive towards low carbon alternatives. Customer interest in low carbon technology is high and they continue to engage with new technologies. An increasing number of installers actively promoting low carbon appliances alongside the traditional heating appliances. The energy industry and other players taking careful steps into the low carbon technology space. The heating industry will continue to invest along the supply chain in low carbon and bring new products to Germany ahead of other markets. We expect energy companies to start with careful steps to generate revenue from new technology offerings. Delta Energy & Environment Ltd 2013 Page 4
Marginal payback period ( years ) Highlights of the German Roadmap Delta-ee Whitepaper October 2013 Which technologies stand to win? Within our Reference Scenario, we forecast that low carbon heat sales will more than double by 2025. The widening spark spread between electricity and gas prices strongly influences the roadmap. This is discussed in full within our Roadmap Report but some impacts include: There is a clear opportunity for micro-chp to gain traction if cost reductions can be delivered. If the right products become available at the right price, gas heat pumps can grab a significant slice of the market. Some opportunity exists for hybrid heat pumps, but electric heat pumps will find it tough to grow sales. How would the picture look without the EEG costs? We ve used our Pathways Tool to model the impact that the EEG subsidies are having on different technologies. What s clear is that ASHPs would still struggle to compete in many on-gas homes, even if electricity prices did not include the EEG surcharge. So EEG costs alone cannot take all the blame for the lack of competitiveness for electric heat pumps in on-gas homes in Germany. This is illustrated in the following chart: FIGURE 3: PAYBACK PERIODS FOR ASHP IN GERMANY EXCLUDING EEG COSTS This chart plots the marginal payback period (years) for ASHPs in different housing segments to 2025. Each line represents the marginal payback versus the base case condensing gas boiler in a specific housing segment. Even without the EEG costs included in the electricity price, ASHP payback periods remain longer than 20 years for virtually all on-gas homes until close to 2025. 100 80 60 40 Each line on this chart represents the payback period of ASHPs in a different housing segment in Germany. 20 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Delta-ee Pathways Tool, 2013 To have real success in on-gas homes, ASHPs clearly need further support such as a renewable heat subsidy or more support from utilities offering attractive heat pump specific electricity tariffs. And it wouldn t do any harm if the installed price could be significantly reduced, something that can be strongly influenced by installers. Delta Energy & Environment Ltd 2013 Page 5
Installer power is strong and will remain a key feature of the market Our research shows that two characteristics of the German heating market are very positive for low carbon heat. Firstly, installers are very highly trained and willing to invest in learning how to install and service new technologies. Secondly, customers also show that they are willing to invest in sustainable long term solutions, and are less driven by financial returns than in other markets. However, the power of the German installer is such that it can result in very high installed prices installers can command a high margin on top of the manufacturer selling price given the very fragmented and local nature of the German installer market. This may create inertia with customers. Reducing the fully installed total cost will be one of the key challenges required to kick-start the market for products such as micro-chp, fuel cells and gas heat pumps which will have high fully installed upfront costs in the next few years. What are the implications of our Reference Scenario? Under our Reference Scenario of our German Roadmap Report: Gas will still have a key role to play in residential heating in Germany to 2025. Our analysis suggests there will be only a small reduction in gas consumption over this period and that gas boilers will still account for a large proportion of the market. In fact, the total number of gas-based appliances remains stable to 2025 but the mix of technologies, and the associated value changes quite significantly. The value of annual gas boiler sales falls by 500 million to 2025, while that of low carbon gas appliances grows by more than 1 billion. Rising electricity prices means electric heating systems (storage heaters, electric & hybrid heat pumps) will remain expensive to run. As a result, we see slow growth in electric heating meaning growing electricity sales in the residential heating sector will be very difficult. The Reference Scenario identifies five key technologies that make up the bulk of the low carbon heat market in 2025. ASHP is one of these technologies, which only sees a slow growth in annual sales and market value from today. Three technologies in particular present a strong opportunity to grow revenues from developing new customer propositions. Importantly, no one technology will win out. Each of the five technologies will have an important role to play in different types of building, appealing to different types of customers. Conclusion Germany is still a strong growth market for low carbon heat. But it is starting from a high base today, and the quantum of growth will be less than other markets such as the UK. A good mix of technologies will deliver this growth to 2025, with no single technology clearly dominating the market. So is Germany moving into the slow lane? We think it s much too early to say this. There are still strong growth opportunities and prospects, even if they may no longer be the best in Europe. But it s clear that companies need to consider their opportunities in Germany very carefully and target the right parts of this large market with the right products. Delta Energy & Environment Ltd 2013 Page 6
How to develop a roadmap for success Commercialising new technologies is a complex, dynamic process. Staying on top of all market, technology and policy developments is one challenge. But understanding the implications of these changes for your business is even more time-consuming. That s where having a roadmap which integrates all the key factors influencing future home energy markets can be a great aid for product and strategy development. In an effective roadmap we believe you need to understand: What you are competing with (i.e. the competitive position of each technology in different types of home) How and why some technologies will win out What types of customers represent the best opportunities, and how big the prize is in different countries How sensitive the opportunities are to different scenarios and changing drivers What the implications are for incumbents, and their likely responses to the growing competitive threats The Pathways Tool and the Roadmap Service have been developed to help companies identify the best opportunities for new home energy technologies in Europe. Who will this help? This will help manufacturers, utilities, and policy makers cut through the complexity in the market, limiting the uncertainty and providing a continually updated forecast that will never cease being relevant. The research will support product managers, business developers, strategists, marketers and those in corporate or R&D roles to make the best informed decisions. What decisions will it help you make? It will help you decide which technologies have the greatest potential over the next decade, in different housing segments within each market. Quantifying the size of the opportunities and the implications for gas, electricity and heating appliance sales will help you decide where and how to focus your resources, and to develop the right strategy for your company. Delta Energy & Environment Ltd 2013 Page 7
Roadmap Service An Excel-based tool to assess the competitive positioning and addressable market potential of home energy technologies across the housing stock in each country. Data and technology benchmarking in a tool that allows you to develop your own scenarios and sensitivity analysis. Consulting reports that provide product sales forecasts in different scenarios; identify the opportunities and key battlegrounds; and evaluate the strategic implications. The Delta-ee scenarios and product sales forecasts, helping you develop the right strategy for your business. If you would like to learn more about our Pathways Tool and Roadmap Service, please do one of the following: 1. Access our free downloads and listen to webinar recordings on our website: see Research Services > Pathways Tool & Roadmap Service at www.delta-ee.com 2. See the Service Prospectus available on our website 3. Contact andy.bradley@delta-ee.com, +44 (0) 131 476 4259 Delta Energy & Environment Ltd 2013 Page 8