Finance and Marketing

Ground Source Heat Pump Market Research and Financial Viability

• Background
• Macro Environment Research
• Micro Environment Research
• SWOT Analysis
• Segmentation
• Positioning
• Targeting
• Market Growth
• Financial Appraisal
• Conclusion
The Ground Source Heat Pump was developed
as a renewable way to heat homes.

A fluid inside a loop of pipe extracts heat from

underground, where temperature stays fairly
constant all year round.

Fluid is compressed to a high temperature and

pumped through the building heating water,
floors and radiators.

The system uses little electricity. Pipes can

aligned vertically or horizontally depending on
the space available. (Energy Saving Trust, 2017)

Coefficient of performance – from 4 to 8 (GSHP Association, 2017).

Macro Environment Research
1. PESTLE Analysis undertaken (detailed analysis in appendix).
2. Short term and Long term development.
3. Summary of Opportunities and Threats.
Short term
• The UK’s renewable energy target is 12% of heat from renewable sources by 2020
in UK. 15% in EU (Fullfact.org, 2017).
• In 2015 the UK showed fairly average prices for gas and electricity compared with
other European countries. UK prices have been cheaper since 2008 due to the
strength of the Euro (Hooley, Piercy, Nicolaus, & Rudd, 2017).
• A Microgeneration Certification Scheme (MSC) accredited installer is needed to
complete the work to qualify for the RHI scheme (Which?, 2017).
Long term
• The government are focussed on long term decarbonisation and are promising
incentives to companies to change to GSHP and other renewable energy sources.
They are offering payments for 20 years, based on the amount of heat generated
by the pump (Ofgem, 2017)..
• The National Grid has predicted that energy prices could double in the next 20
years (The Guardian, 2014). In the west the over 60’s makeup approx. 23% of the
population, this is projected to reach 33% by 2050. (Hooley, Piercy, Nicolaus, &
Rudd, 2017).
Macro Environment Research
Summary of Opportunities and Threats
Opportunities
• The ECA Scheme is available.
• The GSHP manifesto suggests investment
into heat pumps could create a lot of jobs
and opportunities for economic growth
(GSHP Association, 2015).
• Suited to new build homes, digging and
trenches can be taken into consideration
when plans are drawn up (Which?, 2017).
GSHP’s are very efficient for heating large
buildings (Which?, 2017).
• Many users have found the instructions
for GSHP’s complicated, has had a knock-
on effect on the performance/efficiency
of the pumps, (Which?, 2017).
Threats
• Gardens of existing builds needs to be
accessible to digging machinery to dig trenches
to fit the pipes (Which?, 2017).
• Increased life and recent economic shutdown
has led to many challenges to pension funds.
This could have significant implications for
tomorrows pensioners purchasing power
(Hooley, Piercy, Nicolaus, & Rudd, 2017).
• Not suitable for homes which have pre-existing
gas fired heating, as GSHP’s technology works
at much lower temperatures (Which?, 2017).
• Planning permission required if a borehole is
needed or if in densely populated areas
(Which?, 2017).
• The RHI currently incentivises other forms of
renewable energy, such as biomass generators,
over the GSHP. It is not given a chance in the
market. (GSHP Association, 2015).
 Micro Environment Research
 5 known suppliers of Ground Source Heat
Pumps to the UK industry (GSHP, 2017).
 700,000 installations projected by 2020,
660,000 of these being in the domestic
sector.

https://www.theccc.org.uk/

 Incentives and grants available for

customers to reduce cost.
 Cost of pump and installation is
anywhere from £13,000 - £20,000.
Porter’s Five Forces
Bargaining power of Suppliers
•5 known suppliers to the UK market.
•Kensa, amongst others, produce various models: 25-
75kW, 12-30kW and 3-6kW model.
•Government incentives mean people get paid for the
electricity produced.
• Suppliers threat of forward integration i.e. business
increase control over suppliers. Threat of entry of new
• Offers protection over fluctuating fuel prices. competitors
•Companies with
experience in energy
Threat of substitute industry launching GSHP's
products/services Competitor rivalries within the industry
heavily resourced.
•Air source heat pump. •Increasing demand of GSHP in new builds.
•Disruptive innovation
•Biomass heating •Existing companies have their ground strong.
from non-traditional
•Solar heating •Existing energy companies entering GSHP market.
sources.
•Infrared heating panels. •Brand image is also a influential factor.
•Significant brand names
•£2m BEIS Fund venturing into the market.
•Alliances and joint
ventures formed between
Bargaining Power of Buyers companies investing in the
• Approx. 60 known installers in the UK market. technology.
•Due to high number of installers, buyers have leverage
over the price point.
•Supplier-buyer relationships become very important
to sustain in this market.
SWOT Analysis
Opportunities
● Suited to new build homes, digging and
trenches can be taken into consideration
when plans are drawn up (Which?, 2017).
● GSHPs are very efficient for heating large
buildings (Which?, 2017) Opens a large target
market for new build eco-friendly office
buildings, hospitals, schools etc.
● The National Grid predicts energy prices
could double in the next 20 years. Opening
the market for cheaper renewable energy
sources (The Guardian, 2014).
Strengths
● Reduce energy costs by up to £1,500 a year
● Very good energy efficiency between 2-5
times the energy input
● Financial incentives have been setup to
reduce installation costs
● Creates a lot of new job opportunities such as
Microgeneration Certification Scheme (MSC)
accredited installers
Threats
• There are more developed technologies i.e. solar,
wind, and biomass.
• Highly populated places reduces the possibilities
for GSHP installation
• Gardens in existing builds needs to be accessible
to digging machinery to dig trenches to fit the
pipes (Which?, 2017)
• Planning permission required if a borehole is
needed or if in densely populated areas (Which?,
2017). May be a lengthy process due to
objections.
Weaknesses
• Lack of consumer awareness
• Lack of policymaker knowledge
• Limitations in the design and business
planning infrastructure
 Segmentation Matrix
Segment Profile Principle Choice Factors

Residential Homeowners, average to high • Save money on bills

household income. Large enough land
around house. May be in areas that do • Concerned with sustainability and
not have access to the gas network. climate change

• Low maintenance

Commercial New build projects. Flats, holiday parks • Ability to use a single ground array for
or affordable housing. multiple dwellings

Large companies who want recognition • Low carbon footprint

as being sustainable.
• Attractiveness to buyers / tenants

Government/ Public Large government buildings, hospitals • Meet renewable energy targets
Sector or schools. Recognise long term
potential savings. Obeying UK and • Save money in the long term
European policies for carbon emissions.
Segmentation
Existing Home

Residential

New Builds

The GSHP Market Commercial

Industrial

Government/
Schools/Hospitals
Public Sector
 Market Positioning
• “Standard Product”
• Equipment and installation costs are £9400 and £6500 respectively – less than market
average.
• Porter’s generic competitive strategy

Competitive Advantage
Lower Cost
Broad Target Small, new build affordable
living estates, a single GSHP
installation can provide for
multiple neighbouring houses.
Competitive Scope
Differentiation
Rural country houses, plenty of
land for trenches, although large
buildings may require more
energy than can be provided by

a single GSHP.

Narrow Target New build flats in cities can use
a single ground array. May
encounter problems with
planning due to borehole
needed.
Holiday parks with a range of
accommodation types from
cabins to small apartments using
a single ground array.
Targeting the New Build Market
• The average UK property price in February 2016 stood at £283,565 and is expected to
increase 23 per cent by 2020 to £349,300 (Santander, 2016).
• Leading to an expected multiple of 9.7 times the average income in 2030.
• As of February 2016 the home ownership in England was 64% the lowest since 1986
(Guardian, 2016), with the majority of non-homeowners below the age of 36.
• Assuming that the vast majority of affordable housing owners and tenants will be below
the age of 40 this inter links with the public attitudes towards renewable energy
technology.
• The UK’s renewable energy target is 12% of heat from renewable sources by 2020.
• A survey completed by Bulb energy company in October 2016 found that 65% of 18-24
year olds would use a renewable source of energy supply if the price was the same as
fossil fuels compared to only 44% of those over 55, Sticking with fossil fuels even if
there was no financial penalty to switching (Carbon Commentary, 2016).
• This is followed by another statistic that 74% of 18-24 year olds(including a number not
yet on the property market) thought that ‘Renewable energy is something we should all
buy’ and 48% among those over 55 (Carbon Commentary, 2016).
Market Growth
• Selecting this segment of the market to target from identifying the strengths and
weaknesses of the market. Further investigation was undertaken to assess the
growth of the market.
• Approx. 89% of affordable homes provided in 2015-16 were new-builds - and the
trend is set to continue (Which?, 2017).
• In the recent autumn budget, the government confirms the total budget for the
Affordable Homes Programme will reach £9.1 billion by 2020-21, this will provide
at least 25,000 new affordable homes (HM Treasury, 2017).
• Assuming this to be 5000 houses per year.
• As a new entrant to the market we initially aim to achieve a 2% share of the market
totalling a number of 100 sales in year 1 (2018).
• The company aims to increase its market share by 0.25% each year as the business
grows and becomes more reputable.
(Assuming 5000 builds in 2022).
Year Market Share Sales
1 (2018) 2.00% 100
2 (2019) 2.25% 112
3 (2020) 2.50% 125
4 (2021) 2.75% 137
5 (2022) 3.00% 150
 Calculating Selling Price
Year Cost 106% 108% 110% 112% 114% 116% 118% 120%
1 -£18,250 £19,345 £19,710 £20,075 £20,440 £20,805 £21,170 £21,535 £21,900
2 -£18,798 £19,925 £20,301 £20,677 £21,053 £21,429 £21,805 £22,181 £22,557
3 -£19,361 £20,523 £20,910 £21,298 £21,685 £22,072 £22,459 £22,846 £23,234
4 -£19,942 £21,139 £21,538 £21,936 £22,335 £22,734 £23,133 £23,532 £23,931
5 -£20,541 £21,773 £22,184 £22,595 £23,005 £23,416 £23,827 £24,238 £24,649
Graph to show sales in year 1 wih varying profit margins
£600,000

£500,000

106%
£400,000
108%
Profit (£)

110%
£300,000
112%
114%
£200,000
116%
118%
£100,000
120%

£0
50 60 70 80 90 100 110 120 130 140 150
Assumptions: Sales
o Discount factor 6% - As a new entrant in to the market, it was decided to have a relatively
high discount factor.
Consumer Incentive
• Discounted Payback period- 8.1 years.
• Renewable heat premium payment- £1250
• Government Incentives for domestic properties with no other source for gas - 19.64p/Kw
• Incentives ranges from £2700-£3200
• Discount rate- 6%
 Breakeven Analysis
Assumptions
• Selling price calculated as presented in the previous slides
• Selling price is to be increased by 3% per year in regards with inflation as equipment and installation costs
also rise 3% annually.
• Equipment costs are fixed costs as the ongoing expenses the company shall encounter are took into account
by 25% overhead absorption rate which is based upon the direct equipment costs.
• Company’s market share increases 0.25% per year.
• Total Fixed Cost = Fixed Cost * Budgeted Units
• Contribution = Selling Price – Variable Cost
• Breakeven Units = Total Fixed/Contribution
Initial Data
Variable Costs = Installation Cost = £6500
Fixed Costs = Equipment Costs + Overheads = £9400 + £2350 = £11750
Increase by 3% per year
Conclusion
• Comparing the breakeven analysis to the company aims it is possible to see that the
initial required units of sales to breakeven is 85 units. This would amount to a market
share of 1.7%.
• From the customer perspective the investment is viable over a long term period but
initially may not provide a great enough incentive to invest.
• The opportunity to enter this market appears attractive as there is a growth in new
domestic builds along with the increasing demand for renewable energy.
• Although there is need to take into consideration, that the vast majority of data
collected is from online sources, and the plausibility must be taken with a pinch of salt.
• We therefore recommend that to seize this opportunity further investigation is
required, along with a period of time to allow the government to honour their
promise within the autumn budget, as well as the grants and incentives.
References
Carbon Trust. (2015, April). The Enhanced Capital Allowance scheme for energy-saving technologies. Retrieved 10 10, 2017, from www.gov.uk:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/421006/ECA272_Capital_Allowance_v7_April_2015.pdf

Dempsey, N., Barton, C., & Hough , D. (2016, March 7). Energy Prices, 04153. Retrieved 10 10, 2017, from researchbriefings.files.parliament.uk:
http://researchbriefings.files.parliament.uk/documents/SN04153/SN04153.pdf

Department for BEIS. (2015). THE DOMESTIC PRIVATE RENTED PROPERTY MINIMUM STANDARD. Retrieved from
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/650467/27_09_17_Domestic_Private_Rented_Landlord_Guidance_-_Final_Version.pdf

Department for BEIS. (2016). Domestic Renewable Heat Incentive. Retrieved 10 10, 2017, from renewable-heat-calculator.service.gov.uk: https://renewable-heat-
calculator.service.gov.uk/StartCalculation.aspx

Fullfact.org. (2017). UK Renewable energy target. Retrieved 10 10, 2017, from Fullfact.org: https://fullfact.org/economy/uks-renewable-energy-target/

Ground Source Heat Pump Association. (2011). Increasing deployment of GSHP in Europe - market, incentives, regulations. European Geothermal Energy Council. Peterborough.
Retrieved 10 10, 2017, from http://www.gshp.org.uk/GroundSourceLive2011/PhillipDumasGSHP_Europe_gsl.pdf

Ground Source Heat Pump Association. (2015). Encouraging the growth of the ground source heat pump industry in the United Kingdom. doi:2015

Hooley, G., Piercy, N., Nicolaus, B., & Rudd, J. (2017). Marketing Strategy & Competitive Positioning. Pearson.

Ofgem. (2017). About the Non-Domestic RHI. Retrieved 10 10, 2017, from ofgem.gov.uk: https://www.ofgem.gov.uk/environmental-programmes/non-domestic-rhi/about-non-
domestic-rhi

Sanner, B., Karytsas, C., Mendrinos, D., & Rybach, L. (2003). Current status of ground source heat pumps and underground thermal energy storage in Europe. In Geothermic,
32(4-6), 579-588. Retrieved from http://www.sciencedirect.com/science/article/pii/S0375650503000609

The Guardian. (2014). Price of electricity could double over next 20 years, says National Grid. Retrieved 10 10, 2017, from theguardian.com/environment:
https://www.theguardian.com/environment/2014/jul/10/price-electricity-double-next-20-years-national-grid

Which? (2017). Get The Most Out Of Your Ground Source Heat Pump. Retrieved 10 11, 2017, from Which.co.uk: http://www.which.co.uk/reviews/ground-and-air-source-heat-
pumps/article/ground-source-heat-pumps-explained/get-the-most-from-your-ground-source-heat-pump

Which? (2017). Heat Pump Energy Labels. Retrieved 10 11, 2017, from Which.co.uk: http://www.which.co.uk/reviews/ground-and-air-source-heat-pumps/article/ground-source-
heat-pumps-explained/installing-a-ground-source-heat-pump

Which? (2017). How Ground Source Heat Pumps Work. Retrieved 10 11, 2017, from which.co.uk: http://www.which.co.uk/reviews/ground-and-air-source-heat-
pumps/article/ground-source-heat-pumps-explained/how-ground-source-heat-pumps-work - Which?

Which? (2017). Installing a Ground Source Heat Pump. Retrieved 10 11, 2017, from Which.co.uk: http://www.which.co.uk/reviews/ground-and-air-source-heat-
pumps/article/ground-source-heat-pumps-explained/installing-a-ground-source-heat-pump

D. Arent, et. al. (2006) Energy Sector Market Analysis. Retrieved 9 11, 2017, from www.nrel.gov: https://www.nrel.gov/docs/fy07osti/40541.pdf
Detailed PESTLE Analysis
Detailed PESTLE Analysis
Detailed SWOT Analysis
Internal:
Strengths
● Reduce energy costs by up to £1,500 a year
● They have a very good energy efficiency of between 2-5 times the energy input
● Financial incentives have been setup to reduce installation costs
● Runs from electrical grid, does not require other resource supply
● The National Grid predicts energy prices could double in the next 20 years. This could open up the market for cheaper
renewable energy sources (The Guardian, 2014). – Greater demand for clean energy.
Opportunities
● Despite the number of heat pumps installed since 2004 declining, there is an increasing interest in the technology for larger
heat pump installations and thermal storage
● Growth rate for larger buildings could increase
● Increasing energy prices
● It attracts cooperation between different expertise; drillers, installers, geologists etc
● Generate a lot of job opportunities
● The Enhanced Capital Allowance Scheme; incentive for businesses to invest in energy saving technology without paying the
cost of the equipment, GSHP is on the Energy Technology List (ETL) for qualifying machinery (Carbon Trust, 2015). – Reduce
costs significantly.
● For domestic properties the government is offering Domestic RHI payments of approx. £3000 per year depending on
property size and location for 7 years (Department for BEIS, 2016). – Reduced payback period.
● Suited to new build homes, digging and trenches can be taken into consideration when plans are drawn up (Which?, 2017).
– With increasing population this may be a successful segment to explore.
● GSHPs are very efficient for heating large buildings (Which?, 2017),-Opens a large target market for new build eco-friendly
office buildings, hospitals, schools etc.
● Many users have found the instructions for GSHP complicated, has had a knock-on effect on the performance/efficiency of
the pumps, (Which?, 2017). – Take advantage of competitors mistakes.
Detailed SWOT Analysis
External:
Weaknesses
• Installation costs upwards of £20,000
• They take up facility ground space
• Ground source heat pumps do not work in section of building with existing gas radiators
• In some cases it could not be used in existing buildings as the existing heating systems need to be removed and this could
cause damage to the buildings
• Increased life and recent economic shutdown has led to many challenges to pension funds. This could have significant
implications for tomorrow's pensioners purchasing power (Hooley, Piercy, Nicoulaud, & Rudd, 2017). – Payback period
meaningless.
• Not suitable for homes which have pre-existing gas fired heating, as GSHP technology works at much lower temperatures
(Which?, 2017). – Rules out a significant percentage of properties.

Threats
• Gas costs are similar: 3.5p/4p per kW
• There are more developed technologies i.e. solar, wind, and biomass
• District heating and cooling (insulated pipes) can be available at a cheaper price
• Market has become saturated for family houses
• Highly populated places reduces the possibilities for GSHP installation
• The garden in existing builds needs to be accessible to digging machinery to dig trenches to fit the pipes (Which?, 2017)-
Home owners reluctant to install GSHP.
• Planning permission required if a borehole is needed or if in densely populated areas (Which?, 2017). – May be a lengthy
process due to objections.
• The RHI currently incentivises other forms of renewable energy, such as biomass generators, over the GSHP. It is not given a
chance in the market. (GSHP Association, 2015)- Other forms of renewable energy having more success at current.
• Department of Business, Energy and Industrial Strategy are providing a grant of up to £2,000,000 to fund innovation in the low
carbon heating sector, threatening to bring new competitive technologies into the market. ((BEIS, 2017)