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Economy

Where Heat Pumps Win — And Where They Lose

Five findings from an extremely thorough study by the National Renewable Energy Lab.

A heat pump house.
Heatmap Illustration/Getty Images

Some Americans install heat pumps because they care about climate change. But most people aren’t going to make the switch until it makes sense economically. Pinpointing where and for whom heat pumps are a good investment is surprisingly tricky because U.S. housing is so diverse, with a wide range of building sizes and ages, situated in different local climates with different utility rates.

But for the first time, researchers at the National Renewable Energy Lab have sorted through much of this complexity to get deeper to the truth about the costs, benefits, and challenges of deploying heat pumps in the U.S.

Ultimately, they found that heat pumps are a cost-effective choice in roughly 65 million U.S. homes, or about 60% of the country — and that’s before taking into account available subsidies. But there are substantial economic barriers to widespread adoption.

It’s hard to overstate how detailed the study is. The authors started with a model of 550,000 statistically representative households — basically housing archetypes that typify different combinations of building size, age, occupancy level, local climate, heating usage patterns, and existing heating systems. Each one represents about 242 real-world households. Then the authors looked at how switching to a heat pump would affect greenhouse gas emissions and energy bills across all of these different homes in a wide range of scenarios. They considered heat pumps with lower and higher efficiency ratings, and whether or not the building owner pursued insulation upgrades. They looked at different scenarios for how quickly the grid would decarbonize, how sensitive the results were to energy prices, and how subsidies from the Inflation Reduction Act affect the economics.

The paper has many interesting findings beyond the top-line result. Here are five things that stood out.

1. Heat pumps will lower greenhouse gas emissions immediately, period.

Eric Wilson, a senior research engineer at NREL and the study’s lead author, told me one of his motivations was to try to settle the question of whether heat pumps reduce emissions.

“I see a lot of people saying, well, the grid is still dirty in this state, and maybe it makes sense to wait five years to put in a heat pump because it could increase emissions,” he said.

But he found that in each of the 48 contiguous U.S. states, switching to a heat pump reduces emissions today, even if that heat pump is one of the cheaper, less-efficient models. Heat pumps are just so much more efficient than other options that they still reduce emissions despite today’s relatively dirty grid.

On average, each home could cut between 2.5 to 4.4 tons of carbon over the approximately 16 years the equipment lasts, meaning widespread adoption could result in a 5% to 9% drop in national economy-wide emissions. The effect is much more pronounced in some states, like those in the Northeast, where a lot of homes currently use fossil fuels for heating. A household in Maine that installs a high efficiency model, combined with completing insulation upgrades, would reduce emissions by an average of 11 tons per year — or about the equivalent of taking two cars off the road for a year.

2. The best heat pumps need to get a lot cheaper.

The study breaks down the costs of switching to a heat pump in a few different ways.

First, there’s the up-front costs of upgrading to a heat pump, which are relatively high. A lower-rated, less efficient heat pump system may be a cheaper option than a new furnace or boiler for about 43% of households. But a higher-performing heat pump is almost always more expensive, costing an extra $8,000 to $13,000 before government subsidies (more on them later). That alone might keep heat pumps out of reach for many households.

Next, there's the potential for bill savings — which is significant. Using state average electricity and gas rates in the winter of 2021 to 2022, the study found that 86% of households can save money on their utility bills by switching to a medium-efficiency heat pump, and a whopping 95% of households will see their bills go down if they install the highest efficiency system.

So in theory, if homeowners do have the extra cash to put down, there’s a chance they could make up for high up-front costs in bill savings over time. But how good a chance?

Putting this all together, the authors looked at what percentage of households that upgraded to heat pumps would see a positive cash flow, calculated as the “net present value,” from the initial investment. Here, the results were less rosy. In many cases, high up-front costs cancel out potential savings. For example, despite the near-certain bill savings from buying one of the most efficient heat pump models, only 21% of households would see an overall economic benefit from the switch.

Still, more than half of all homes would see a positive cash flow by switching to a cheaper, minimum-efficiency heat pump.

NREL chart of savings. Distribution of energy bill savings, upgrade costs, and unsubsidized net present value, relative to a reference equipment replacement scenario, using energy prices from winter 2021 to 2022 Courtesy NREL / Wilson et al., Heat pumps for all? Distributions of the costs and benefits of residential air-source heat pumps in the United States, Joule (2024), https://doi.org/10.1016/j.joule.2024.01.022

These findings underscore the importance of bringing down the cost of more efficient heat pump models, which are out of reach for many Americans but can provide significant energy bill savings. The authors suggest that policymakers can help by deploying incentives more strategically and pursuing research on “lower-cost, higher performance, and easier to install equipment.” There also may be opportunities for bulk purchasing and aggregating installations across an apartment building or neighborhood.

3. Heat pumps almost always beat propane, fuel oil, or electric resistance heaters. Natural gas is more complicated.

When it comes to bill savings, the study found that those who have systems that run on propane, fuel oil, or electric resistance heaters will pretty much always lower their bills by switching to a heat pump, no matter how efficient it is. But those who use natural gas are far more likely to lower their bills if they can afford to switch to one of the pricier, better-performing heat pumps — which cuts into the value proposition.

The following maps show the percentage of homes in each state that would see a positive cash flow from switching to a heat pump, looking at those switching from natural gas, electric resistance, or fuel oil and propane, illustrating how the value proposition is most challenging for those using natural gas.

NREL chart of savings, by state. Percentage of homes that currently have air conditioning that will see a positive cash flow from switching to a heat pump from natural gas, electricity, and fuel oil and propane. Courtesy NREL / Wilson et al. 2024

The authors also note that fixed charges on natural gas bills can play a significant role in the economics of switching to a heat pump. Most natural gas utilities charge customers a fixed amount each month, regardless of how much gas they use. If a homeowner switches to heat pumps but continues using gas for cooking, they’ll still have to pay the full fee, which can be as high as $34 a month, whereas homes that fully electrify can avoid these fees.

4. Heat pumps might increase costs for homes without air conditioners.

The results I described in the previous two sections include homes both with and without existing air conditioning systems of some kind. (With the exception of the maps, which only consider homes that have air conditioning already.)

But since heat pumps provide both heating and cooling, the economics are actually quite different for those households who already have air conditioners versus those who don't. If a household already has A/C, heat pumps appear more favorable, because a family would be able to replace two systems — an air conditioner and a furnace — with just one. If there is no pre-existing air conditioner, the heat pump will not only have higher up-front costs, but it’s more likely to increase energy bills, since the family might start using the heat pump for cooling in addition to heating.

Here are the same maps included in the previous section, but looking just at homes that do not have air conditioning.

NREL chart of savings, by state, for homes without AC.Percentage of homes that do not have air conditioning that will see a positive cash flow from switching to a heat pump. The first column is homes that currently use natural gas, the second column is those that us electricity, and the third is those that use fuel oil and propane. Courtesy NREL / Wilson et al. 2024

There are basically zero cases where a house with natural gas heating, and no A/C, will save by switching to a heat pump. However, that result doesn’t take into account the benefits of getting air conditioning for the first time.

“They didn't include the new value that someone has, especially in a warming world and a world with more heat waves, of now having an air conditioner in your home,” Kevin Kircher, an assistant professor of mechanical engineering at Purdue University, told me. “So if you add that in, I think the economics look better.”

5. All signs point to the economics of heat pumps improving.

None of the results in the previous sections take into account the various subsidies that states and the federal government offer for heat pumps. For example, the Inflation Reduction Act included a $2,000 tax credit for heat pumps and an additional $11,500 in rebates for low- and moderate-income households. Both will increase the percentage of households for whom the investment will pencil out.

The study also doesn’t take into account the potential for homes to use smart controls that optimize their systems, or the opportunity for households to participate in demand response programs which will pay them to turn down their thermostats by a few degrees when the grid is taxed. Kircher, the Purdue professor, recently published a study of a real-world house in a cold climate where smart controls reduced heating energy costs by 23-34%.

Finally, one big takeaway from the study was that the results are very sensitive to the price ratio between natural gas rates and electricity rates, and there are reasons to believe that may become more favorable. For example, as more renewable energy is deployed, electricity could become more affordable. Meanwhile, if the U.S. increases exports of liquified natural gas, the cost of domestic natural gas could go up. The study cites a 2022 survey of oil and gas executives which found that 69% expect ‘‘the age of inexpensive U.S. natural gas to end by year-end 2025.”

“Big modeling like this entails a lot of assumptions about the future that are really hard to pin down with any real precision,” said Kircher. “But I think there's cause for optimism there.”

Blue

Emily Pontecorvo

Emily is a founding staff writer at Heatmap. Previously she was a staff writer at the nonprofit climate journalism outlet Grist, where she covered all aspects of decarbonization, from clean energy to electrified buildings to carbon dioxide removal. Read More

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