As part of a project on green industrial policy, I recently visited a factory in the East Midlands making air-source heat pumps (ASHPs). This is an example of just the sort of thing the government wants to see more of, at least according to the Modern Industrial Strategy (MIS) white paper that came out last summer. The MIS picks out 8 sectors where the UK has or could have internationally competitive industries; one of these is termed ‘clean energy technologies’ and these include heat pumps.

For the uninitiated, ASHP technology has been around for a long time, at least since the 1850s. So it is a mature technology, but at the same time a clever one, with cutting edge efficiency. ASHPs use fluids that boil into a gas at low temperatures. This can then be compressed into a liquid, releasing energy in the process, ASHPs effectively capture ambient heat from the air, even when it is below freezing outside.

The manufacturing on show at the East Midlands plant was also cutting edge. Autonomous self-driving trolleys trundle back and forth between a just-in-time parts warehouse and the shop floor. Most assembly is done by hand but each single component is tracked in the process, so for each finished heat pump, the company knows that each screw and bolt has been put in at the right angle with the right amount of torque. There are several rounds of machine-assisted testing, one of which ensures that the brazing work undertaken by highly skilled workers will not leak. The production process generates huge amounts of data for each individual unit, which can then be drawn on when it comes to maintenance and repair. It is easy to see why the government sees this as a competitive UK industry.

But the question is, who will buy the ASHPs coming off the production line? Workers in the plant are making a new heat pump every 90 minutes. But UK demand is so far underwhelming. Back in 2021, the Heat and Buildings Strategy had a target of 600,000 heat pumps a year being installed by 2028 (of which 300,000 should be manufactured in the UK) and 1.6m installations annually by 2035. In 2025, the Climate Change Committee called for a less ambitious 450,000 a year by 2030 and around 1.5 million by 2035. But in 2025, sales of ASHPs were around 105,000, a fraction of those targets. Just the plant I visited alone has the capacity to expand production to over 100,000 units a year, and this is one of several based in the UK. Demand remains the key constraint.

What will grow the heat pump market? The previous government had a phase-out date for new boilers, but this seems to have been dropped. The new Warm Homes Plan does extend and expand the £7,500 grant, but many installations will cost more than this, so at the moment it is mainly the wealthy who taking up the subsidy. The new Future Homes Standard means that new build housing will no longer have gas heating from 2028, but this again is small beer relative to the millions of existing homes that still have gas boilers.

The single most important thing the government could do to drive the UK ASHP market would be to reduce the gap between the cost of gas and the cost of electricity. For context, heat pumps in the UK produce around 3 units of heat energy per unit of electricity used, whereas gas boilers produce about 0.9 units of heat for each unit of gas. This means that when the ratio between electricity and gas prices starts to get down towards 3, heat pumps begin to become cheaper to run than boilers. At the moment, that ratio is over 4.5. The war on Iran and crisis in the Gulf will not help because electricity in the UK is still quite tightly linked to gas prices in wholesale markets. Over time, the big build out of new wind and solar should slowly break that link, but it will not have a major impact until the 2030s. There is no shortage of proposals on offer for getting electricity prices down before then, but it is still unclear what the government might do, if anything. The Modern Industrial Strategy makes passing reference to “ongoing work to consider how to address the price disparity between  electricity and gas” but this has been on the agenda since 2021. The point is that until this disparity is reduced, the ASHP market will not get anywhere near those ambitions of the early 2020s. And a potential growth industry in the UK will not have the chance to realise that potential.