Future growth hinges on accelerating the transition from gas-based heating to renewable solutions
LONDON, Jan. 31, 2025 /PRNewswire/ -- High energy bills coupled with strong financial incentives are making heat pumps increasingly cost-competitive with traditional fossil fuel heating systems for residential use.
Despite advantages such as higher efficiency and the acceleration of heat decarbonization, the market faces several challenges. A higher proportion of aging households, inadequate insulation, higher installation and capital costs, and a shortage of skilled installers and consultants are limiting growth potential.
However, the expansion of hybrid heating technologies and manufacturers scaling up production are set to increase competition and further drive cost competitiveness between heat pumps and conventional boilers.
Heat Pump Market Faces Slowdown Amid Economic and Policy Uncertainty
The global residential heat pump market is projected to grow from 7.59 million units in 2024 to 17 million units by 2035, with revenues reaching $80.42 billion, driven by an 8.5% CAGR during the forecast period. In 2024, Europe and the U.S. dominated the market, accounting for nearly 75% of total sales, followed by China and Japan. However, after strong momentum in the early 2020s, growth has stalled in 2023 and 2024 due to an easing in gas prices, high electricity taxes, policy inconsistencies, shifting regulations, and reduced funding. These challenges highlight the difficulty of scaling heat pump adoption quickly enough to meet Europe's decarbonisation targets.
In the U.S. which has offered generous federal subsidies, the market has been strong in 2024, shrugging off the impact of higher electricity prices and low gas prices. The incoming administration is reviewing many of the existing incentives, so these may not be retained, presenting a challenge for the market.
Manufacturers Expand Capacity and Innovate Commercialisation Strategies
The heat pump market remains highly competitive, with both global and local players focusing on cost optimisation, efficiency improvements, and localised production to reduce import costs. China and the U.S. are leading adoption efforts, driven by supportive policies, while the EU faces the challenge of requiring long-term incentives to scale up production capacity and transition away from gas boilers.
To overcome market barriers, new entrants are introducing smaller, modular, and more affordable heat pumps, designed for compact residential spaces such as window-sill units and sleek, space-saving models for compact residential spaces.
Expansion in the heat pump manufacturing sector involves adding new production lines, converting existing facilities - such as transitioning from boiler production to heat pumps - and building new facilities. In addition to scaling production, some companies are making significant investments in research, development, and innovation (RD&I) to enhance efficiency and product performance.
While smaller manufacturers are rapidly increasing output, they face challenges in achieving the economies of scale that larger players can leverage, impacting their cost competitiveness and market positioning. Overcoming these barriers will be key to ensuring sustainable growth and broader market adoption.
Service-based models like Heat-as-a-Service (HaaS), subscriptions, leasing, and pay-per-use are gaining traction, reducing upfront costs by shifting expenses from capital to operational. These models enhance energy efficiency and serve as entry points for whole-home electrification, including solar and EV solutions. To tackle high installation costs, many firms are integrating financing solutions, making heat pump adoption more accessible.
Neha Tatikota, Industry Analyst at Frost & Sullivan, states: "Political tailwinds will shape industry dynamics. Despite high upfront costs, heat pumps can offer savings over gas boilers if key factors align - favourable gas-to-electricity price ratios, rebalanced electricity taxes, improved efficiency, and grant availability. Local manufacturing and competition may ease supply bottlenecks, though material vulnerabilities remain. The sector also varies across regions due to differing national laws and requirements."
She adds: "The industry slowdown is concerning, with manufacturers wary of political uncertainty around subsidies. Clear policies and supportive regulations are crucial to revitalising investment, particularly in Europe, and strengthening EU manufacturers through economies of scale. With strong demand for renewable heating, the right regulations could drive growth, while policy setbacks risk stalling the market."
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Kristina Menzefricke
Marketing & Communications
Global Customer Experience, Frost & Sullivan
kristina.menzefricke@frost.com