The ten-year payback is here
One of the things 2005 will be remembered for is oil prices. We’ve seen the biggest hike in prices since the 1970s and the signs are that it’s not about to come back down anytime soon, if ever. Oil is the key in determining all energy prices and if the oil price heads north, then sure enough, gas and electricity will follow along in due course. But how soon, and by how much?
It’s a subject I turned my attention to last week as I sought to update my now hopelessly inadequate table on comparative heating costs, on p208 of the 6th edition. This is a key table in my book, the one that is designed to be used to make that all-important decision about how a new house should be heated. The one currently in print is based on an oil cost of 19.5p/lt (equivalent to 1.9p/kWh), a mains gas cost of 1.5p/kWh and an electricity cost of 6.5p/kWh. Yet my last tank of oil cost 34p/lt, a 75% increase.
LPG, which tracks the oil price quite closely, is up by a similar percentage, so it remains about 30% more expensive than oil. But price rises in gas and electricity are much more muted. Making direct comparisons is not easy because of the opening up of the market to dozens of suppliers, each with their own tariffs and payment terms, but the basic drift is that gas is up to around 1.8p/kWh, a 20% rise, whilst electricity still seems to be widely available for under 7p/kWh. Energy analysts seem to think that significant price rises are about to come through in these markets but they haven’t happened yet.
So what effect will this have on comparative heating costs? Mains gas will continue to be a no-brainer for home heating, if you have access to it. But a large proportion of selfbuilds don’t and here the equations are changing. In my last edition, published late 2004, oil only narrowly beat electric ground source heat pumps (GSHP) over a 20-year timespan.
The equation isn’t difficult. The GSHP costs around twice as much to install as an oil boiler plus tank but is cheaper to run because it creates around three to four units of heat for every unit of electricity burned. With oil prices at 2004 levels, it took around 20 years to recover your investment in GSHP: but with current oil prices, this payback time has fallen to less than ten years. In addition to this, the installation prices of oil boilers and tanks is set to get more expensive (though admittedly more efficient) as new legislation takes effect, whilst the market for GSHP is expanding so rapidly that prices seem to be becoming keener. Plus GSHP is still eligible for the Clear Skies grant, worth £1200.
GSHP comes with a couple of other plus points. You don’t have an unsightly oil tank in your garden and the equipment is silent and has no flue. On the minus side, it works most efficiently at heating water to relatively low temperatures, such as you would use with underfloor heating (usually 55°C). It does therefore require a good-sized hot water tank to have a decent buffer of hot water on site. And it requires garden space of at least three times the heated footprint: thus if you are hoping to heat a 150m2 house, you will need 450m2 of garden in which to run the pipe.
Currently domestic heating oil is around half the price of electricity in the UK market. If this ratio holds, then GSHP will be the heating system of choice for all new off-mains gas homes Oil heating systems will only regain their competitive advantage if the price differential returns to its historical 1:3 (oil:electricity). For that we would need to see electricity prices rising to around 10p/kWh, or oil prices falling back to 2004 levels.