Thin markets, thick subsidies: local competition and the incidence of heat pump grants

Shefali Khanna, Ralf Martin, Florian Munch and Aurelien Saussay

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study how local supply shapes the incidence and quantity response of clean-technology subsidies. In October 2023, the UK government increased the grant for air-source heat pumps from #5,000 to #7,500 in England and Wales, while Scotland left its policy unchanged. Using 260,000 certified heat pump installation records in a difference-in-differences comparison of Northern England with Scotland, we find that the grant increase raised monthly installations by 24%, adding roughly 7,200 units over 20 post-reform months. Reported pre-grant installation costs fell by about #830, so household out-of-pocket payments declined by more than the #2,500 grant increase. The quantity expansion and the cost reduction were larger in local areas with more competition prior to the policy. Supply adjusted through local installer entry, wider geographic reach among existing installers, and a shift toward smaller, higher-efficiency heat pumps. While changes in heat pump size and model mix explain roughly half of the unconditional cost drop, within-installer-and-model price cuts account for a quarter of the average decline and half of the additional price drop in more competitive markets. Combining these estimates with engineering-based carbon abatement yields a marginal value of public funds of 2.1, rising to 2.5 in markets one standard deviation above mean competition.

Keywords: subsidy incidence; pass-through; imperfect competition; technology adoption; heat pumps (search for similar items in EconPapers)
JEL-codes: J01 N0 R14 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2026-10-28
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