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Science
Course: Advanced Engineering and Management
Module: Finance and Marketing
Abstract: The objectives for this project is to explore the ground source heat pumps market in the United
Kingdome by clarifying the market segments, trends and positioning, studying the competitors and stakeholders,
establish and prioritizing customers needs and developing a secure business strategy for a start-up business that
will operate within this industry. This business report covers basics financial assumptions based on the factors
that influence business, analyzing the risks involved and consider the operational and organizational strategy that
a company should have. The ultimate goal is to establish whether or not the ground source heat pump is a viable
investment for a start-up business and customers.
1
Business Report Summary
ANEXES
3. Competitive Environment
9.1. Financial model: Cost structure, projected revenues and profits by segment
2
ANEXE
List of Figures
1. Final energy consumption in primary energy equivalents by fuel type
2. The GSHP technology
3. GSHP - open loop systems
4. Closed loop GSHP systems
5. Geothermal heating capacity in Europe 2017
6. UK GSHP market growth increase over a decade
7. Technology market S-curve
8. Environmental Agency Growth Projections
9. Growth Scenerio
10. Market segmentation
11. UK bedrock conductivity
12. UK population density
13. GDP per capita
14. Levels of attractivness of different factors
15. Levels of satisfaction of customers
16. Factors influencing the decision of the customers
17. SWOT Analysis
18. Expected Government Strategies
19. Developing succesful strategies
20.PESTEL Analysis
21. Total cost over 5 year forecast
List of tables
1. UK GSHP market in 2008
2. Government Grants in UK
3. BSRIA Estimated annual market growth rates
4. Key factors on domestic sector
5. Ket organizations involved in GSHP market
6. Average cost of GSHP installation
7. Cost variation dependency on the size of GSHP
8. Initial financial considerations
9. Cash flow analysis
10. Financial assumptions
11. Payback Period
12. Return of Investment
13. 5 year forecast for 2% cost increase
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1. Introduction
Environmental pollution and energy impasse have become major challenges in UK’s
economic progress, which has triggered the demand for alternative energy sources and promoted
the popularization of ground source heat pump technology. The fundamental outlooks in
exploring the ground source heat pump (GSHP) industry are to minimize the environmental
impact by reducing the dependency on fossil fuels and to increase the energy efficiency by
guaranteeing long-term cost savings and providing the perfect comfort of a British home and
organizations.
The overall mission is to achieve a reduction of CO2 emissions, in anticipation with the
present legislation, to be up to 50% by 2020 and up to 57% by 2030. By achieving the
environmental targets, UK will be able to deliver an optimal energy system with low carbon heat
that will bring many benefits to the country. To make sure these targets are managed correctly and
achieved, it is important to establish a clear and regular communication between industry
stakeholders: customers, designers, manufacturers, installers, suppliers, distributors, trade
association, drillers and consultants. The Government plays an important role as they offer
subsidy schemes to cover a large amount of cost of switching from an old heating method to a
renewable heating system.
According to the UK National Statistics, the year 2017 depicted a visible change for the
main sources of electricity generation. The renewable sector showed a growth of 19.5 % , while
the coal generation felt by 27%. Due to this increase in renewable generation capacity, the gas
generation was also affected with a decrease of 4.6% compared with the previous year.
Fig 1. Final energy consumption in primary energy equivalents by fuel type (Source: BEIS ECUK, 2017)
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The overall energy consumption has grown annually by about 7%, and so we will soon find
ourselves in the position of exhausting carbon energy sources, and so efforts have yet to be made
to conserve energy. The final energy consumption in the UK based on the fuels types is
represented in the figure 1 and as it demonstrates that the fossil fuels remain the dominant source
of energy supply with a record of 80.1%.
One of the main advantages of GSHP technology is the ability to produce more energy
that it consumes, ensuring safety by excluding the combustion old heating methods. This
technology has low running costs and is proven to be reliable and efficient, having a life-span up
5
to 50 years. It requires a minimum maintenance and it can be included in the renewable incentives
government schemes. The disadvantages are represented by the high installation costs, followed
by a special planning permission from the local authority and the fact that the GSHP are not
entirely carbon neutral, requiring a small amount of electricity.
The GSHP can be installed in residential or commercial sector as:
- an open loop system, having the possibility of 2 wells system or a water body system
(figure 3);
Fig 3. Open loop - Ground source heat pumps system types (Source: iter-geo.eu)
- A closed loop system divided in vertical loop, horizontal loop, slinky loop or pond loop
as in figure 4.
Fig 4. Closed loop - Ground source heat pumps system types (Source: KCPL 2008)
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and the cost involved for the process. The importance of this process is to be as accurate as
possible for determining the necessary capacity of the equipment regarding the residential or
commercial sector. (J. Busby, H. Reeves, 2012)
There is an uncertainty in the number and capacity of GSHP systems installed worldwide
but it several authors demonstrated a significant growth of the market. Le Feuvre and Kummert
(2008) estimated growth surpassing 10% annually over the years from 1998 to 2008, with most
growth in the US and Europe, though other countries such as Japan and Turkey were showing
significant progress.
Lund (2004) conclude there to be 1,100,000 GSHP units installed globally in 2004, with a
total estimated capacity of 12,000 MWt , with an annual energy use of 72,000 TJ or 20,000 GWh.
These estimates were updated by Goetzler et. al. (2009) for the US Department of Energy GSHP
market overview, giving a global installed capacity of 15,4000 MWt, of which about 56% was
installed in the US, with over 50,000 units per year.
Europe presents a large market for GSHP as the climatic and geological conditions differs
from area to area. Another reason for diversity of GSHP market implies economical and political
circumstances and different construction methods. The European Market Statistics established that
there are over 1 million units sold in Europe and 2018 was the 5th consecutive year of growth,
presenting a grow rate of 13% compared with 2017. Most developed countries are Sweden,
Norway, France, Germany and Italy driven by a mature market and modern building regulations.
Fig 5. Geothermal
heating capacity in Europe
(Source: European Geothermal
Energy Council, Brussels)
From figure 5 we can see that there are not many countries that have a consistent
geothermal heat pump market, with Sweden being the leading country. One of the largest Swedish
manufacturers named IVT, was purchased by BBT Thermotechnik GMBH (part of the BOSCH-
group) in 2004.
The market is strongly influenced by the following constraints:
- technological requirements and complexity of the GSHP for new entrants in the market;
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- legal policies that differs region to region;
- the social attitude as not many are aware of such technology;
- high installation and preparation costs;
- the availability of cheaper heating systems;
- the requirements of professionals, specialized equipment and raw material;
Table 1. UK ground source heat pump market in 2008 (Source: Environmental Agency Report)
GSHP
25000
Units
installed
20000
15000
10000
5000
0
2008 2010 2012 2014 2016 2017 2018
Fig 6. UK ground source heat pumps market growth increase over a decade
According to Ground Source Heat Pump Association the industry has a remarkable
progress but the number of units sold is nowhere near the expectations, as 10 years ago the total
number estimated for 2018 should have been at least 100,000 units required for the market to
sustain itself, without the help of subsidies. From a technology perspective, the main barriers have
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constantly been the cost of the investment, the confusing installation in case of the system
refurbishment and the poor insulation of British residences and commercial spaces.
The UK market is relatively small and the majority of units installed systems are domestic/
residential scale units of 4 to 12 kWth capacity, but the energy demand for heating is triggering
the opportunity of an increase installation of geothermal heat pumps. Some of the factors affecting
the energy demand for heat are the following:
- Population demographics and total number of residential and commercial buildings;
- The building size and type;
- Income level and ability to pay;
- External weather and location of dwelling;
- Thermal properties and energy efficiency of the building;
- Heating system choices.
Approximately 48% of all heat pumps are sold in the existing market and 52% of them (i.e.
approximately 11,500 heat pumps per year) are sold in the new build sector. The vast majority of
heat pumps sold are for individual dwellings (K. Beckmann, 2016).
One of the elevated reasons to implement this technology in the UK is that a GSHP
connected to the electricity grid will lead to overall reduction in CO2 emissions of 40% to 60%
immediately.
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- high equipment and installation cost can be overcome by using the government
schemes;
- accessing the existing home market can be overcome by finding solutions to retro-fit a
GSHP without being disruptive or expensive;
- insufficient installer network can be overcome by improving the stakeholders
communication and behavior regarding the GSHP market.
Renewable Heat Feed in Tariff: Feed in Tariff: ▪ Domestic: only available for new installations;
20.46 p/kWh 9.36 p/kWh the property must have its own EPC; installation
Incentive (RHI) requires MCS compliant; under some
circumstances the heat metering can be applied;
quarterly payments for 7 years;
▪ Commercial: or non-domestic applications needs
to have a shared ground loop array; the system
requires MCS; the COP level of the pump must be
2.9; capacity must be specified based on the
conditional quarterly payments for 20 years
Warm Home Direct rebate of £140 N/A Only if receiving Pension Credit Guarantee
to their electricity or and The mandatory criteria and guidelines
Discount (WHD) gas account
are set out in the Warm Home Discount
regulations.
Energy Company Available N/A For domestic customers living in specific (CERO,
CSCO, HHRO) areas can utilize this fund.
Obligation (ECO)
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INCENTIVES Domestic Non- Terms and conditions
Domestic/Commercial
Cleaner Heat Cash N/A £10 million funds have been • Targeting SMEs, providing 35% cash back for
allocated switching from old heating
Back Scheme system to a new one. Companies should have 12
months’ pay for and complete
installation process of the ground source heat
pump can use this fund;
• The replaced system must be in working
condition and produce 70KW energy. For the
replaced system, there is ten years age limitation
for gas, oil or LP
boilers but no age limit for biomass boilers;
•The new system should provide 90 per cent
efficiency and emit no NOx
Emission;
B) Another market driver would be the reduction of the running costs; such renewable
technology is experiencing constant improvements and it is well known that will significantly
decrease the running costs over the years which makes it a very attractive technology compared to
the gas boilers.
C) Building regulations has the objective to make the new residential buildings as “zero
carbon homes” that will increase the awareness of GSHP and will encourage the installations.
D) Service commitment in geothermal heat pumps. In UK the utilities supply over 90% of
customers and recently these organizations start offering GSHP installations services feeling more
confident on the sector growth.
The annual growth rates can be observed in the technology-market “S-curve” illustrated in
the figure below:
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Fig 7. Technology market S-curve (Source: Environmental Agency UK 2009)
The Building Services Research and Information Association’s (BSRIA) report of growth
rates identifies the following:
Table 3. BSRIA Estimated annual market growth rates(Source: Environmental Agency UK 2009)
As the number of installations increases every year and the market mature, the growth rates
decrease because of the higher starting point and several constrains that limited the growth.
1.4.3. Future market trends
All stakeholders of the GSHP Association agreed to the assumption that the rates of annual
installations will regularly grow, and will be stabilized until 2020, without any anticipated
inactivity. The experts suggest that the rapid
growth is driven by the RHI tariffs and
service incentive.
The overall market of GSHP changed
in 2017 when the oil prices increased and
also the lifetime conditions of the RHI,
extended until 2021. The BSRIA research
suggest that there is an increase of 18% in
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2017 compared to the previous year and that customers(domestic or commercial) are satisfied by
the significant increase in the tariff rates and the positive advertising of the product through TV
channels and marketing campaigns.
According to the Environmental Agency projection around 320,000 GSHP systems are
installed by 2020, with an annual installation rate of 40,000 units. This corresponds to 6,714
MWth of installed capacity and an output in the region of 21 TWh. The anticipation is that 7,750
installations would be open loop systems, with 1000 systems installed each year.
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Behavioural Segment (Energy
Demographic Segment by Income Segment (GDP per consumption per household)
Geographic Segment
region - population in 2015 capita in 2017)
MWh
•England • 84% - 54.79 million • £ 62,338 • 16.5 MWh
•Wales •4.8% - 3.099 million • £ 20, 002 • 16.6 MWh
•Scotland •8.4% - 5.373 million • £ 31,367 • 17.1 MWh
•Northen Ireland •2.9% - 1.875 million • £ 30,810 • 14.6 MWh
Fig 10. Market segmentation based on geographic, demographics, income and behaviour areas
Giving the geographic segment, we can notice that the conductivity of the bedrock is more
intense down south in Wales and England; but quite weak up in Scotland and Northern Ireland.
As we discussed before it is highly important to understand the geographical considerations and
characteristics for a better efficiency of the GSHP systems.
From the Environmental Agency Report we
found out that the number of installations is higher
in Scotland compared to England and Wales,
giving an insight into how the future business can
develop. Most of the GSHP systems are domestic
installations especially in Wales and Scotland but
experts suggest that now is a good opportunity to
explore the commercial installations and large
capacity GSHP systems.
Judging by the density of the population, South
England and Wales have a higher density, that can
contribute to substantial savings if installing large
GSHP systems. In the figure 12 can be clearly
seen that from the population point of view,
England and Wales have many factors that increase
the chances for a better market.
Fig 11. United Kingdom bedrock conductivity
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Fig 12. United Kingdom population density (Source: World Population 2018)
15
Fig 13. GDP per capita ranked by region in the UK
Through GDP per capita we can consider the economic output based on the number of
people living in a certain region. The figure 13 represents the collected data from UK National
Statistics based on all regions from UK and it is clearly that London is the region with the highest
GDP per capita.
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The attractiveness of the GSHP systems is based on several factors but the main ones that
we will get into consideration, will be the incentives or government grants, the installation cost,
the total savings and payback period and the coefficient of performance of the GSHP that will
influence the efficiency and saving costs. In the figure 14 we can see that the most attractive
factors are the usage of incentives that will have an estimative of payback period of 5 to 7 years if
we consider a typical 3 room residence. More details will be analyzed in the financial assumptions
chapter.
Fig 14. Levels of attractiveness of different factors affecting the GSHP market
In March 2017 the Energy Institute build a study case based on the customer satisfaction
and level of attractiveness regarding the installation of GSHP system on residential level. The
customer satisfaction analysis was based on the estimated bills, the degree of comfort that the
GSHP systems provide, the environmental impact regarding the reduction of the CO2, the noise
level, technical integrity and controllability of the system. The results are presented in the figure
15. The levels of satisfactions differ from household to household and as we can see from the
graph there are some customers very unsatisfied for the reasons of inexperienced installers
causing different maintenance issues, but the overall result is a market with satisfied clients with
the main reasons being the saving costs, constant heat and environmental benefits.
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Fig 15. Levels of satisfaction of the customers regarding GSHP systems (Source: Energy Institute 2017)
Considering the group report establish by my team, we identify two large customers: the
residential houses and the commercial buildings based on different factors discussed in the
previous chapter: the geological conditions based on the geographic area, the population density,
income and behavior represented by the energy consumption per household. In this chapter we
will discuss the key factors that influence the customers on the residential level based on the
average energy consumption, cost effectiveness, coefficient of performance, incentives and
savings and others presented in the figure below:
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Based on the data collected, considering the Renewable Heat Incentive benefits, we assume
the average savings per household around £1,200/year and giving the lifecycle of the GSHP
technology over 20 years there are numerous monetary advantages when decided to install such a
system.
MIN MAX
Savings P.A: £395 £2,000
Lifecycle Years: 20
Total Savings: £7,900.00 £40,000.00
RHI Grant P.A: £2,325 £3,690
RHI Grant Total
Payment: £16,275.00 £25,830.00
Table 4. Key facts on domestic sector
3. Competitive Environment
3.1. Identify the competitive profile
In UK, there is the Ground Source Heat Pumps Association (GSHPA) composed of a team
of authorized members (installers, service and maintenance, consultants, drilling companies,
suppliers, training providers, trade associations) required to sign the Code of Conduct and respect
the GSHPA Standards. A list of most known organizations based on their activity is listed below:
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Organization name Activity Location and InternetLink
Chelmer Heating Solutions Installer of GSHP Systems Essex CM2 7SY /
http://www.chelmerheating.co.uk/
Cotswold Energy Group Ltd Installer of GSHP Systems Gloucestershire, GL6 8HN /
https://www.cotswold.energy/
Daly Renewables Ltd Installer of GSHP Systems Lisburn BT28 1RW /
http://www.dalyrenewables.com/
Earth Source Energy Installer of GSHP Systems Worcestershire B60 3EU /
https://www.earthsourceenergy.co.uk/
Eco-Coil Heating Ltd Installer of GSHP Systems Glasgow G72 0JQ /
https://ecocoilheating.co.uk/
Elite Technical Services Ltd Installer of GSHP Systems Surrey CR6 9TP / http://ets.uk.com/
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Organization name Activity Location and InternetLink
BBH Energy Strategies Ltd Consultants on Ground Berkshire RG20 0BP /
Source Energy http://www.bbhenergy.co.uk/
Building Energy Solutions Consultants on Ground London SW4 7QD /
Source Energy www.energysolutions.co.uk
GeoScience Ltd Consultants on Ground Cornwall TR11 4SZ /
Source Energy https://www.geoscience.co.uk/
Holymoor Consultancy Ltd Consultants on Ground Derbyshire S40 4BW /
Source Energy http://www.holymoor.co.uk/
ICAX Ltd Consultants on Ground London NW5 1LB / https://www.icax.co.uk
Source Energy
ATB Drilling Limited Drilling, Piling and Ground North Ayrshire KA15 1HP /
Works Services http://www.atbdrilling.co.uk/
to the Ground Source
Industry
Drilcorp Ltd Drilling, Piling and Ground County Durham SR7 8SW /
Works Services https://www.drilcorp.com/
to the Ground Source
Industry
Elliott Ground Source Drilling, Piling and Ground Newcastle upon Tyne NE13 6JP /
Drilling Services Ltd Works Services http://elliottgroundsource.co.uk/
to the Ground Source
Industry
Geo Tech Drilling Drilling, Piling and Ground Kent TN17 4LA /
Works Services https://www.gtdscotland.com/
to the Ground Source
Industry
Nicholls Countryside Drilling, Piling and Ground West Sussex, RH14 0LW /
Construction t/a Nicholls Works Services http://www.nichollsboreholes.co.uk/
Boreholes to the Ground Source
Industry
Alto Energy Ltd Suppliers of Ground Oxfordshire OX28 4BN /
Source Heat Pumps https://www.altoenergy.co.uk/
Solid Energy A/S Suppliers of Ground DK-6900, Skjern, Denmark /
Source Heat Pumps https://www.solid-group.dk/en/solid-
energy/
Kensa Heat Pumps Suppliers of Ground Truro TR4 8RJ /
Source Heat Pumps https://www.kensaheatpumps.com/
Star Renewable Energy Suppliers of Ground Glasgow G46 8JW /
Source Heat Pumps http://www.neatpumps.com/
Vaillant Group UK Ltd Suppliers of Ground Belper DE56 1JT / https://www.vaillant.co.uk/
Source Heat Pumps
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Organization name Activity Location and InternetLink
British Drilling Association Trade Associations Daventry NN11 6DP /
Ltd http://www.britishdrillingassociation.co.uk/
In a competitive environment there are many factors that can influence the market but most
of the customers are looking for a realistic benefit between the investment and the return of the
investment.
Based on the current installations, the Energy Saving trust documented a survey for a
period of 1 year between 2008 and 2009 for the purpose of checking the GSHP systems
effectiveness. The conclusion was that the systems were well designed and installed and were
operating in optimal conditions demonstrating that even if the market is not so diverse in UK, the
experience and knowledge were delivered in quality conditions. The main suppliers considered
were Alto Energy Ltd, Kensa Heat Pumps, Solid Energy A/S, Star Renewable Energy and the
international company Vaillant Group UK Ltd. Their description of the offering was more than
the product itself but different factors that were representing additional value for the customers
such as availability, convenient delivery, technical support or quality of service.
The Energy Saving Trust survey estimated the installation costs between £13,000 and
£20,000 and the running costs depend on the size of your home and how well the home is
insulated. The costs of heat pump systems can vary significantly between system size,
manufacturer and type, with the less effective air source pumps also costing less than the ground
source variety. Based on the data collected we have the following table showing the average cost
of an installation considering the type and the number of rooms:
Table 6. Average cost of a GSHP installation depending on its type and the number of rooms
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4. Market Positioning and Strategy
STRENGHTS WEAKNESSES
The power of incentives and Government support Relatively young market
Reduce dependency on fossil fuels that help achieving the Small income per household
environmental impact restrictions
Urbanization rate Poor insulated houses
Market growth rate Limited strategies and awareness
Heating demand Limited period of time in applying for Government support (RHI available
until 2021)
OPPORTUNITIES THREATS
Many external sources of expertise Weak bedrock conductivity for the overall market
Feasibility of the market Existing properties are many and hard optimize
Adjustments in energy price Cheaper costs represented by gas boilers and electrical sources
Raising feed-in tariffs BREXIT uncertainty
Increase in overall energy efficiency and decrease the energy
consumption
Fig 17. SWOT Analysis of the ground source heat pump market in UK
From the SWOT analysis we can notice that the young market in UK could be a threat in
achieving the CO2 emissions and there are many reasons why the domestic sector are confused
about their knowledge towards GSHP systems. The analysis presents many strengths and
opportunities if the British market is able to create a strong collaboration between the most
developed countries in Europe such as Sweden, France, Italy and Netherlands
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4.2. Market Development Strategies
“Low carbon technology is perceived as being relatively expensive, but actually we found
it to be quite cost-effective. Certainly the running costs are very cost effective, and the capital cost
to us was quite modest “.(David Oldham, Director of Capital Investments, Edge Hill University)
There are some expected Government strategies that needs to be taken into consideration
when consider joining the GSHP market:
24
Fig 19. Developing successful strategies (Source: Porter M.E. 1989)
25
POLITICAL
● The UK government provides incentives through the RHI
(Renewable Heat Incentive) that help to recoup the installation costs
(Eyre & Baruah, 2015). Furthermore, the government also provides
interest-free loans to its citizens through the EST (Energy Saving
Trust) that enable new installations specifically in Scotland.
●The UK government subscribes to the 2008 Climate Act that target
reduction of carbon emissions by about 80% by 2050. The legislation
encourages adoption of renewable technologies like GSHPs.
ECONOMICAL
●The high prices of energy in the UK support the purchase of GSHPs since
they save finances. As compared to other heat pump technologies, GSHPs
provide considerable energy savings that make a considerable purchase option.
SOCIAL
●The level of public awareness is considerably low. The lack of
awareness has negatively affected the confidence of both the
investors and users (Karytsas & Choropanitis, 2017). For instance,
the users are not aware of the cost reduction benefits that make the
installations an attractive proposition.
●Consumers prefer to be associated with known technologies of
which they have knowledge as regards to their cost efficiency and
performance (Eyre & Baruah, 2015). Exposure to expensive
technologies like GSHP of which the consumers have little knowledge
regarding their performance may make them change their
preferences.
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TECHNOLOGICAL
●Karytsas & Choropanitis (2017) indicate that the reliability of the GSHP
technology is demanding because it primarily relies on electricity as the major
source of energy. Instances such as power surges and blackouts increase its
susceptibility of failure since it does not have a backup energy source.
ENVIRONMENAL
● GSHP need a small amount of electricity, but in combination with another
greenhouse technology such as solar panels, can reduce the electricity to zero.
● UK has serious pollution problems and one of the main sources of it are the
old heating methods through burning coal, wood or other solid fueld. Reducing
the usage of solid fuels will help achieve the pollution targets in air quality.
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LEGAL
● Every consumer should be aware that there is a law that protect their rights when buying
goods and services. This law should help the consumers gain the confidance to invest.
●The Copyright, Designs and Patents Act 1988, is the current UK copyright law. It gives
the creators the right to control the ways in which their material may be used. This should
encourage more implications in researching and analyzing 100% efficiency to GSHP
● Free and fair trade is fundamental to the prosperity of the UK and the world economy.
The Trade Bill Legislation prevent disruption to UK business and consumers by creating
powers to make regulations, if needed, to assist in implementing trade agreements that we
transition with existing third country trade partners. This will help to ensure continuity of
existing trade and investment arrangements across the UK, providing continuity to workers,
consumers, businesses and international trading partners; maintain UK businesses’ access
to public contract opportunities worth approximately £1.3 trillion per year, and ensure that
we get the best deal for the taxpayer, by making provision for the UK to implement
obligations under the World Trade Organization (WTO) Agreement on Government
Procurement (GPA) as an independent member. While the UK is a member of the EU, we
participate in the GPA via the EU.
The number of these macro-environment factors is virtually unlimited and, moreover, they
are independent of each other, but they influence each other. Also, at least theoretically, any
element in the company's macro-environment may have an influence on its strategy, although the
enterprise cannot identify and control all these influences.
5. Financial Assumptions
The Department of Energy and Climate Change has address an important question in 2016
report about how the cost will vary from smaller to larger GSHP installations, respectively from
12kW to a maximum of 600kW. The details are presented in the table below:
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12 kW 600 kW
29
12 kW 600 kW
Higher: Total non-equipment costs / kW
higher than for 90 kW, particularly
because of ground works costs: Drilling
costs per metre are higher than for a 90
kW system – the drillers’ startup costs are
the same whether for a small or large
installation. NB This is based on the
costs only for vertical boreholes. If we
consider horizontal trenches as an
option, the overall cost/kW is lower Higher: Higher proportion of costs than for
than for boreholes. The likelihood of 90 kW: Typical larger-scale project (i.e.
using trenches instead of boreholes is above ~250 kW) generally include not just
dependent on the physical land space a HP but a wider building solution
Non-equipment available for trenches, which take up including e.g. ventilation, cooling => need
costs much more space. It could be argued for more contractors with a wider range of
that there is a greater chance of skills (e.g. not just heating engineers) and
horizontal trenching in a 12 kW system significantly more complex project
than in a 90 kW system, simply because management.
the chances of finding enough land to
capture the heat needed for 90 kW
could be more challenging than for 12
kW. In this case, the groundwork’s
cost could be lower for a 12 kW using
trenches than a 90 kW using
boreholes). Project management costs are
estimated to be lower than for the 90 kW
because the project is simpler – but this
Biggest Cost Component: Ground Biggest Cost Component: Ground
works, Commissioning and works (including drilling), design,
distribution project management, commissioning
and labor
Table 7. Cost variation explanation depending on the size of the installation (Source: Department of Energy and
Climate Change 2016)
5.2. Financial Assumptions: Cash flow, Payback period and Return of Investment
The financial analysis helps to identify the unsatisfactory activity of the enterprise and to
determine the measures that will influence the results in the future. By the post-factual, current
and predictive knowledge of the economic activity of the economic agents of the internal results
and the causes they have generated, the analysis contributes to the continuous knowledge of the
efficiency of the use of human, material and financial resources. Since the primary objective of an
enterprise is to maximize the value of the assets, the efficiency with which invested capital was
used is the central objective of financial diagnosis.
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The basic objectives of the financial analysis are:
By performing a dual function of diagnosis and regulation, economic and financial analysis
is an indispensable tool for efficient management of the enterprise's business. The financial
analysis fundamentals the entire future economic and financial policy of the enterprise, it is a key
condition for the development and application of rational decisions, it is the basis for conducting
expert assessments and negotiations to estimate the value of the enterprise in case of privatization,
reorganization or sale of assets.
In our study case we have the following initial considerations:
Installation Cost: £5,500.00
Equipment Cost: £10,400.00
Overhead Recovery: 20%
Yearly Price Increase: 2%
Table 8. Initial financial considerations
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In business, the discount rate (DR) is used to determine the present value (PV) of a future
financial analysis but the discount factor (DF) is used to establish the net present value (NPV),
that will subsequently determine the expected profits and losses on future payments. In our case,
the NPV or the net future value of the GSHP system investment is £1,570. As we can see, a
positive value after a 5 year period, considering the RHI and the saving costs, it make it a good
short term investment, but even more profitable if we consider the lifespan of the GSHP system to
be up to 20 years.
The operation of a business depends on the ability to generate profit that can be achieved
through profitability indicators, which are:
Profitability of production achieved = outputs from output / output volume - shows
which part of each £ pound received was spent to cover direct expenses.
Net profitability = net profit / volume of output achieved - characterizes the
company's ability to generate profit on the total output.
Asset profitability = net profit / average asset value - reflects the effectiveness of
capital use by the enterprise.
Financial profitability = net profit / average value of equity - reflects the welfare of
shareholders.
In practice, there are several methods of repaying credits. Drawing a table of payback
period implies knowledge of specific terminology:
Master rate - The portion of the borrowed capital that is redeemed in each period.
Annuity - The amount of money refunded in each period. This sum contains both
principal and interest for the period.
Remaining amount to be repaid - The remaining capital to be reimbursed. It is equal to
the difference between the amount to be reimbursed in the previous period and the mainstream.
Our payback period shows a positive value between year 4 and year 5:
Year Average (£) Cost (£)
0 0 -17,980.00
1 4,204.00 -13,776.00
2 8,408.00 -9,572.00
3 12,612.00 -5,368.00
4 16,816.00 -1,164.00
5 21,020.00 3,040.00
Table 11. Payback period
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Return on investment is a performance indicator used to measure the efficiency of an
investment or to compare the efficiency of several different investments. The indicator is
calculated as the ratio between the net profit (total revenues - total costs) and the total investment
costs. ROI measures the cost of an investment relative to its cost and can be considered a very
important milestone when a company or person decides to invest a sum of money in various
projects. Return on investment usually has a direct correlation with risk, in most cases higher risk
may also mean better returns. Although it is one of the main indicators of investment project
evaluation, it has to be calculated in addition to the other returns (capital, assets, etc.) and
compared to a non-risk investment (eg a bank deposit). If the two percentages are relatively close,
the investment (assuming any risk) is not justified and it is advisable to pursue another more
profitable opportunity. Therefore we have the Return of Investment table as follows:
Year Average (£)
1 £4,204.00
2 £8,408.00
3 £12,612.00
4 £16,816.00
5 £21,020.00
20 £44,989.00
Table 12. Return of Investment
From our data, we can see that the average return of investment on a period of 5 years will
be over £20,000, but if we consider again the lifespan of GSHP systems, we will have an average
of almost £45,000.
The inflation rate in the United Kingdom increased in August 2017 to the highest level in
the last five years. UK inflation rose to 2.9% in August from 2.6% in the previous month. The
devaluation of pound sterling, which began with the UK Referendum on UK retreat, continues to
be the main driver of price increases, according to BBC's National Bureau of Statistics.
Other factors that have led to rising inflation are the rise in oil prices. According to the
ONS, the oil price rose 1.8p per liter in August to 115.7p, while diesel grew by 2p to 117.6p per
liter. Frances O'Grady, the secretary-general of the Trade Union Congress, warned that inflation
exceeded wage increases. Considering the high installation costs, the equipment costs, the
overheard recovery and the total cost we establish the following table:
Table 13. 5 year forecast for 2% cost increase considering data given
By compiling our data into a graph, the total cost over the years will look like this:
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Fig 21. The total cost over a 5 year period
6.1. Conclusions
6.2. Recommendations
For such a young market, one of the main recommendations for a new business is to fully
analyze all the risks and external key factors that will influence the business, including the
location, the consumer behavior, the average income, marketing methods and others. There are
many GSHP systems available for domestic and for commercial sector but it is important to fully
understand the process before installing and all the requirements. Ground source heat pump is
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