Setting a lower price for power in the winter is key to ensuring that consumers’ overall energy bills do not go up when they switch to heat pumps, according to a report released March 11 by the American Council for an Energy-Efficient Economy.
“We know that heat pumps cut climate pollution and can reduce home energy costs, even in the coldest states,” ACEEE Buildings Program Director and co-author Matt Malinowski said in a statement. “Utilities, regulators and policymakers need to further reduce costs by encouraging heat pump-friendly electric rates and energy-efficiency upgrades, especially for low- and moderate-income households.”
The discounted winter rate is vital in states with high electric rates and in cold regions where the economics of heat pumps can be the most challenging. Generally, maintaining the grid is more costly in the summer than in the winter, so ACEEE said flat seasonal rates effectively overcharge in the cold months.
Other changes that can help boost heat pump adoption are efficiency upgrades like insulation, so homes need less heat, and adopting time-of-use rates, the study said.
The report modeled bills using actual utility rates under different home heating electrification scenarios, specifically picking from among the most expensive for electrification. The models in the report were based on single homes in Colorado, Connecticut, Maine and Minnesota.
“In any cold-climate U.S. state, the ongoing bills are lowest with cold-climate heat pumps when heat pump adoption is accompanied by energy efficiency home envelope improvements and a favorable electricity rate plan,” the report said. “Heat pump-specific rate plans are best for incentivizing heat pump adoption, with winter discounts being a potentially important facet of those plans. These rates are generally based on the cost of service for heat pump customers, without subsidizing other customer classes.”
In Maine, all of the options studied led to no increases in bills when the modeling added a heat pump because the increased efficiency was enough to offset higher electric rates. Electrification increases costs in some months of the year but leads to lower overall bills.
Minnesota has an even bigger gap between electricity and gas costs, but one utility offers a 35% discount winter rate for customers using electricity for heat so adopting heat pumps leads to lower costs year-round for its customers.
The Colorado utility the study looked into offers a 10% winter heating discount — not enough to make heat pumps cheaper on their own, though time-of-use rates that the utility offers would also help cut costs.
In Connecticut, the study found that fuel oil and propane customers (representing 45% of residential customers in the simulation set) can save money through electrification, but the price ratio between gas and electricity was so high that even a discount like Minnesota’s and efficiency upgrades still would not fully make up the difference in costs.
“Here, as in other states where electricity is much more expensive than gas, the state should consider deep public investment (not ratepayer-funded) in making electric power more affordable to its residents,” the paper said. “This could include taking on some costs of grid maintenance and upgrades, putting a price on carbon or implementing clean heat standards that place performance requirements on all heating market actors. Fortunately, this type of electricity-gas price ratio is rare, and gas prices are expected to naturally increase in the coming years relative to electricity.”
Rates are not the only thing presenting roadblocks to heat pump adoption, with the report saying the biggest barrier is still lack of awareness, which means that ongoing marketing/educational campaigns are needed.
Another challenge is that some HVAC contractors have misperceptions about the technology’s efficiency and costs. The report recommends better training around heat pumps in the HVAC industry, providing incentives to contractors and encouraging them to focus on maximizing homeowner satisfaction over getting jobs done quickly.
