High energy bills coupled with strong financial incentives are making residential heat pumps increasingly cost-competitive compared to traditional fossil fuel heating systems.
Despite the advantages there are still obstacles to overcome, according to a new research report by Frost & Sullivan.
The obstacles include a higher proportion of aging households, inadequate insulation, higher installation and capital costs, and a shortage of skilled installers and consultants.
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.
Frost & Sullivan forecast the global residential heat pump market to grow from 7.59 million units in 2024 to 17 million units by 2035, with revenues reaching $US80.42 billion.
This is a CAGR of 8.5 per cent during the forecast period.
In 2024, Europe and the US dominated the market, accounting for nearly 75 per cent 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.
Frost & Sullivan industry analyst, Neha Tatikota, said these challenges highlight the difficulty of scaling heat pump adoption quickly enough to meet Europe's decarbonisation targets.
“In the US 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,” she said.
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 US 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, Tatikota said 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,” she said.
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. To tackle high installation costs, many firms are integrating financing solutions, making heat pump adoption more accessible.
"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,” Tatikota said.
“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."
Tatikota said the industry slowdown is concerning, with manufacturers wary of political uncertainty around subsidies.
She said clear policies and supportive regulations are crucial to revitalising investment.
“With strong demand for renewable heating, the right regulations could drive growth, while policy setbacks risk stalling the market,” she said.