Can low-temperature heat in factories be electrified competitively?

Around the world, manufacturers are looking at how to optimise their supply of heat, which is crucial to industrial processes. This can boost their competitiveness, but there can also be trade-offs, including with energy security and climate objectives. In addition, low- or near-zero emissions heat options often cost more upfront than conventional alternatives, can be difficult to integrate, may involve higher operating costs, and are not always available on a commercial scale.

However, there is a potential sweet spot in industrial sectors that are less energy-intensive (such as food processing, textiles and machinery production) that represent around 30% of total industrial energy use. Globally, about 75% of heat demand in these industries is below 200 °C. This is relatively modest and can often be met by commercially available low-emissions technologies – with costs that are comparable to fossil fuel-based options under certain circumstances. Energy-intensive industries, by contrast, rely more on high-temperature heat that is more difficult to supply without fossil fuels.

The IEA’s tracking of recent projects around the world demonstrates growing momentum towards the adoption of low-emissions heat technologies by industrial firms that are less energy-intensive. In Spain, for example, a brewery is using a 30 megawatt (MW) solar thermal system to provide heat for its processes and reduce natural gas use. In Hungary, a corn processing plant recently installed 56 megawatt-hours (MWh) of electrified heat and thermal energy storage to provide process heat. In Norway, a fishmeal manufacturer installed 5 MW of heat pumps to produce process steam, while a thermal storage company installed 100 MWh thermal storage unit powered by on-site solar PV in the United States and a 33 MWh unit in Thailand.

Electric heating technologies – one driver of the emerging Age of Electricity – can be applied in a wide range of industrial settings. They offer operational advantages such as accurate temperature regulation and fast rates of load ramping, allowing for operators to rapidly increase or decrease the amount of heat supplied. Heat pumps and electric boilers are promising technologies for low-temperature heat, in particular – although each comes with its own competitiveness considerations.

Although electric boilers cost about the same to buy and install as natural gas boilers today, their energy costs are considerably higher. In the United States, it is around 4 times more expensive to run a standalone electric boiler than a natural gas boiler, whereas in China, it is twice as expensive. However, operating electric boilers in combination with existing natural gas boilers or thermal energy storage (TES) can improve their cost competitiveness, as discussed in more detail in the following section.

The efficient performance of heat pumps means they use less electricity than electric boilers to generate the same amount of heat, so they have lower running costs. However, equipment and installation costs are substantially higher.

Calculating the levelised cost of heat (LCOH) is useful for comparing the cost competitiveness of different heating technologies. Generally, this value is largely set by capital expenditures and energy costs, the latter of which can vary widely by region.

This metric indicates that the high energy costs of electric boilers prevent them from being competitive across regions. Meanwhile, for heat pumps, the capital costs alone are almost as high as the overall LCOH for natural gas and coal boilers in the United States and India, respectively. However, in other regions, the cost gap between heat pumps and boilers that run on fossil fuels is smaller – and the wide range of energy prices on the ground at different industrial sites means that heat pumps will be cost competitive in many cases.  

Grid connection costs can pose a significant challenge, though they vary considerably across countries and regions, and they may change as the uptake of renewables increases. Industrial sites may even have spare grid connection capacity, particularly if recent energy efficiency upgrades have reduced their electricity use or if other nearby sites have closed. Given the uncertainty, we have excluded grid connection costs from this analysis, although they remain a significant barrier to electrification for many sites.

Since electricity makes up a large part of the overall LCOH for electrified heat – especially for electric boilers, for which electricity costs are roughly three times higher than for heat pumps – finding ways to reduce these costs is a priority for improving competitiveness. End-user electricity prices in industries that are less energy intensive are typically based on fixed retail rates, although there is growing interest in direct wholesale market contracts, generating renewables on site or nearby, or a combination of both. In the wholesale market, electricity prices range from periods of negative wholesale prices to periods of higher prices.

Hybrid systems that combine two or more technologies can be used to accommodate this variability in electricity prices. Options include pairing electrified heat with existing natural gas boilers or thermal energy storage, both of which can be easily integrated with the steam networks used in non-energy intensive industries. Thermal energy storage (TES) systems – which store heat by raising the temperature of materials and changing their phase, or by using reversible chemical reactions – have the advantage of being able to capture and retain heat at times of low energy prices for later use. Some thermal energy storage systems are separate from the heating equipment, while others are combined into one integrated system.

Using natural gas boilers when electricity prices are high and switching to electric boilers during cheaper hours can decrease overall heating costs. While this does not achieve full system electrification, it reduces the carbon intensity of industrial heat and can enable wider uptake among facilities that already have gas boilers.

The ability for hybrid systems to improve cost competitiveness ultimately depends on whether energy savings can offset greater investment needs and operating expenses. Adding thermal energy storage and keeping existing boilers significantly reduces the LCOH for electric boilers, whereas the benefits are lower for heat pumps. The higher capital costs needed for heat pumps can even exceed the savings, especially when larger equipment is needed to charge the TES. As a result, hybrid configurations are generally better suited to systems with electric boilers, while heat pumps tend to perform more effectively as standalone solutions.

In Germany, for example, hybrid systems that operate electric boilers at utilisation rates of around 20%, with existing natural gas boilers covering the remaining hours, can achieve a LCOH that is 15% lower than natural gas boilers operating 100% of the time. Should carbon costs rise, it could further increase the optimal share of heat provided by the electric boiler. In power markets with a greater number of hours when electricity prices are lower than natural gas prices, the optimal utilisation rate of the electric boiler increases significantly.

In Germany, based on 2024 prices, using a hybrid solution with thermal energy storage could result in a more than twofold reduction in the average cost of electricity for heating compared with a standalone electric boiler, benefitting from storing heat generated when electricity prices are low. Even lower average electricity costs can be achieved with hybrid setups involving the natural gas boilers many industrial sites already have, and the additional capital expenditure could be paid back in five years.

As the uptake of renewables boosts the number of hours with low electricity prices, the cost competitiveness of these hybrid solutions is expected to improve. They can also provide considerable additional revenues if sites can access markets for grid balancing, frequency regulation and other ancillary services, while also enhancing a site’s resilience to energy supply risks. Thermal energy storage systems can support the integration of on-site variable renewables as well, reducing reliance on electricity purchases and grid costs.

To improve the cost competitiveness of electrified heating in industrial settings, governments, businesses and industry groups are taking four primary approaches:

1. Energy prices: Some countries are working to rebalance energy taxation to account for the environmental impacts of fossil fuels, reducing their cost advantage. Finland, for example, has lowered its industrial electricity tax and increased taxation on fossil fuels, and Germany is lowering network costs and taxes. Though fixed tariffs are attractive for their financial certainty, time-of-use pricing, locational price signals and other tariff adjustments can also support more affordable electricity and encourage flexible demand (in California, industrial customers are required to use them). However, this depends on the ability to forecast low-cost periods and respond to real-time flexibility incentives, which can be difficult for operators. AI-enabled tools could significantly enhance forecasting capabilities.

2. Building awareness and expertise: General awareness of low-emissions industrial heat options and sector-specific expertise remains low since the deployment of these technologies is still relatively limited. Initiatives to change this include the OECD’s work with Indonesia’s textile sector, the establishment of the Alianza Q-Cero in Spain, a collaboration on expanding the use of heat pumps in the paper sector, and the heat pump taxonomy the IEA is developing. Similarly, Heat as a Service models can enable industrial sites to outsource some considerations to specialists while minimising upfront capital investments.

3. Reducing financial risks: Many industrial firms are sensitive to risks associated with large upfront investments, especially small and medium-sized enterprises and those in emerging and developing economies. This is a significant barrier, particularly for heat pumps. While equipment and installation costs will decline with continued deployment and equipment standardisation, loans, subsidies and tax credits can support uptake in the interim. Existing schemes include international programmes from the World Bank and Climate Investment Funds, a pilot EUR 500 million Industrial Heat Auction in the European Union, and an established fund in New Zealand. Equipping installers and engineers with the right skills is also crucial for scaling up deployment and cutting installation costs.

4. Action on grids: Investments to expand transmission and distribution networks are critical, as is guaranteeing access to reliable electricity. Brazil’s experience highlights how a strong regulatory framework can unlock billions of dollars in private grid investments. Reducing lead times for grid connections is another challenge; the United Kingdom has responded by prioritising low-emissions energy projects in connection queues, and the Netherlands has unlocked 40% of the country’s peak capacity for new connections to users who can offer flexibility. Furthermore, adjusting grid tariffs to reflect real-time congestion, as through Germany’s new dynamic grid fees, can drive demand-response adoption and the integration of hybrid systems. In parallel, developing capacity and ancillary services markets can further enhance system flexibility and provide additional revenue streams.

Thanks to reviewers from Aalto University, Austrian Institute of Technology, BVES, CEFIC, Danish Technological Institute, EnergyNest, ERM, KTH, Regulatory Assistance Project, Schneider Electric, the IEA Technology Collaboration Programme on Heat Pumping Technologies, and the University of Leeds for reviews of this article.