Heating with wind: Economics of heat pumps and variable renewables

Abstract

The electrification of heat is discussed as a promising option to integrate a growing share of variable renewable electricity and to decarbonize heating. Wind power potentially benefits from the positive seasonal correlation with heat demand and from thermal storages providing low-cost flexibility. However, intrinsic fluctuations in electric heating may also challenge the power system. This study assesses the impacts of building heat pumps on the economics of wind energy, and vice versa. Using a numerical electricity market model, we estimate the marginal economic value of wind energy and its counterpart, the marginal cost of heat pump load. We find that, just as increasing the wind energy market share depresses its market value, the diffusion of heat pumps implies a rise in their load cost. This rise can be mitigated by synergistic effects with wind power, “system-friendly” heat pump technology, and thermal storage. Additional heat pumps raise the wind value, but this effect vanishes as additional wind energy is needed to serve their load. Thermal storage facilitates wind integration but competes with other flexibility options. We argue that efficient heat pump tariffs should reflect the economic cost of their load.