What is needed to phase out residential oil heating in Finnish single-family houses?

• Replacement of oil heating is usually not economical if a subsidy is not available.
• Early replacement of oil burner is not economical if oil price remains low.
• If oil price recovers and a subsidy is available, early replacement can be optimal.

There are approximately 200,000 single-family houses heated with oil in Finland and the substitution of oil heating embodies significant carbon dioxide emission reduction potential in the residential sector. We analyze the economics of replacing oil heating with a ground source heat pump (GSHP) or a pellet heating from the consumers’ perspective in alternative policy and oil price scenarios. We differentiated between cases where the oil burner is replaced in the end of its lifetime or before it.The results indicate that the level and uncertainty associated with future crude oil price are major factors in the profitability of replacement. If the international oil market price remains low, an early replacement is not likely to be economical for the consumer in Finland. Yet, with a recovering oil price even an early replacement can be optimal. If oil burner cannot be used anymore, it is in most scenarios economical to replace it with pellet or GSHP if some subsidy for heating renovation is available. Subsidies improve the profitability of both pellet and GSHP investments more than fuel taxation. Consumer discount rate also affects the results.