Overcoming a Heat Pump Disincentive

Highly efficient modern electric heat pumps will cut energy costs for homeowners who have them installed, right? 

Well … not necessarily. 

Depending on where in the country a home is located, the type of HVAC system being replaced, and the way the local utility prices the electricity needed to run the equipment, a heat pump could end up increasing, rather than reducing, a home’s utility bills. 

A University of Michigan study, published last year, of 51 homes in Southeastern Michigan found that switching out existing gas furnaces with cold-climate heat pumps would increase energy costs by an average of 58%, or more than $1,100 a year per household, at those homes. 

The homes in the study were serviced by DTE Energy, which provides natural gas and electricity in the Detroit area and many other parts of Michigan. They were, on average, 60 years old and built in an era before energy-efficiency codes, the authors noted. 

Advocates for increased adoption of heat pumps point out that the study’s results reflect particular climate and energy circumstances that vary from region to region. They also say there are ways to overcome the disincentive of higher energy costs, such as seasonal rates or a discount for heat pump users, or a combination of those. 

“Historically, most electric utilities recover their costs through flat, volumetric rates,” said Zach Pierce, senior director for state and regional policy at Rewiring America, which promotes electrification. “We need to move beyond that model and more accurately reflect the price of electricity in different seasons” and at different times of the day, Pierce added. 

“I would favor a bit more seasonality in the rates for all sorts of reasons, but one of them would be that it would enable people to afford heat pumps,” said Douglas Jester, a principal at 5 Lakes Energy, a consulting firm that helps businesses, nonprofits, and government agencies move toward clean energy goals. 

Indeed, Unitil Corp., which provides electricity and natural gas in New Hampshire, Massachusetts, and Maine, just launched a seasonal discount program for households with heat pumps. The utility will charge residential heat pump users a distribution rate of $0.03435/kWh from November through April; from May through October, those customers will pay the standard residential rate of $0.09621/kWh. (Unitil also charges a supply rate that’s separate from the distribution rate.) 

But millions of homes in the U.S. — Pierce estimated about 40 million — rely on delivered fuel, such as propane or fuel oil, for heating appliances, or on electric resistance heating. The owners of those homes, Pierce said, could save quickly on their energy bills by switching to heat pumps. 

“That’s a big opportunity, and one that we’re focused on,” he said. 

Jester, referring to the U-M study, said about 10% of DTE customers heat their homes with electricity, mostly in apartments and mostly with electric resistance heating.  

“Those customers would benefit — their bills would go down if they used heat pumps instead,” Jester said. 

Ted Tiffany, senior technical lead at the Building Decarbonization Coalition, said the greater efficiency of heat pumps, compared to electric resistance heating, should be considered in any discussion of how electricity for heat pumps is priced. 

“We’re not transitioning to electric resistance and breaking the grid. We are making a very efficient design for heat pumps, and even thermal energy networks, that are much more efficient than electric resistance,” Tiffany said. “And right-sizing the grid, and the cost to the grid, is something we really want to have some deep thought on, and that takes the regulators and the utilities and the advocate community coming together to really talk about what is the right rate for heat pumps.” 

The grid, heat pump fans say, is built for peak usage in the summer, when people in many parts of the U.S. are running air conditioners and electricity is generally more expensive to deliver. Demand is significantly lower in the winter, they say, leaving room for more heat pump adoption at lower delivery costs, and for revenue-neutral ways to give heat pump users a break on electricity rates. 

“When you have electric heat, that produces winter demand, and it generally can be served without any increase in (grid) capacity. You just make use of the capacity they already had to have for summer,” Jester said. “And in that circumstance, I think it makes a lot of sense to have seasonal rates as a way of helping heat pumps be adopted.” 

In fact, according to Jester, there is enough wintertime grid capacity in the DTE service area for estimated 60% of the houses to switch to heat pumps before the peak winter demand equals the current peak summer demand. 

Yes, Jester said, grid capacity will eventually have to be increased to accommodate widespread adoption of heat pumps. But there is time. 

“At the current rate of conversion, it’s going to be decades before we would hit those kinds of numbers ... It’s not an urgent problem. It just is something we have to deal with at some point.”