For most U.S. homes, heat pumps are a no-brainer: They can lower energy bills and eventually pay for themselves all while slashing carbon emissions. But the economics don’t work in favor of heat pumps for every home — and particularly not for those in states that have high electricity prices relative to those of fossil gas.
Adjusting the structure of customer electricity rates could turn the tables, according to a report out today from the nonprofit American Council for an Energy-Efficient Economy, or ACEEE.
The ratio of average electricity prices to gas prices (both measured in dollars per kilowatt-hour) is known as the “spark gap” — and it’s one of the biggest hurdles to nationwide electrification. A heat pump that is two to three times as efficient as a gas furnace can cancel out a spark gap of two to three, ensuring energy bills don’t rise with the switch to electric heat. But in some states, the gulf is so big that heat pumps can’t close it under the existing rate structures.
Worse, heat pump performance can decrease significantly when it’s extremely cold (like below 5 degrees Fahrenheit), so without incentives, the economic case is harder in states with both harsh winters and electricity that’s much more expensive than gas, like Connecticut and Minnesota. In these places, heat pump adoption is “hit by double whammy,” said Matt Malinowski, ACEEE buildings director.
The weather might be hard to change, but the spark gap is malleable: Utilities, regulators, and policymakers can shape electricity rates. By modeling rates for four large utilities in different cold-climate states, ACEEE found that particular structures can keep energy bills from rising for residents who switch to heat pumps, without causing others’ bills to go up.
Flat rates punish heat pump owners
Flat electricity rates are a common practice. They’re also the worst structure for heat pumps, Malinowski said.
When utilities charge the same per-kilowatt-hour rates at all hours of the day, they ignore the fact that it costs more to produce and deliver electricity during certain hours. That’s because, like a water pipe, the power grid needs to be sized for the maximum flow of electrons — even if that peak is brief. Meeting it requires the construction and operation of expensive grid infrastructure.
Flat rates spread the cost of these peaks evenly across the day rather than charging customers more during the high-demand hours that cause a disproportionate amount of grid costs.
But heat pumps aren’t typically driving peak demand — at least, not for now while their numbers are low. Demand usually maxes out in the afternoon to evening, when people arrive home from work, cook, do laundry, and watch TV. Households with heat pumps actually use more of their electricity during off-peak hours, like just before dawn when it’s coldest, than customers with gas, oil, or propane heaters.
Heat pumps “provide the utility a lot of revenue, and they do that at a time when there isn’t that much electricity consumption,” Malinowski said.
Under a flat-rate design, cold-climate heat pump owners “are basically overpaying,” he added. “Adjusting the rates to better reflect their load on the system — and the benefits to the system that they provide — is only fair.”
Alternative rate designs can improve heat pump economics
A rate design that bases charges on when electricity is used would help course-correct. Known as “time-of-use,” this structure charges more for power consumed during periods of peak demand and less for power consumed at other times, or “off-peak,” coinciding with heat pumps’ prime time.
Utility ComEd serving the Chicago area is working to finalize time-of-use rates for households, joining the ranks of several other U.S. providers that already offer this structure, like Xcel Energy in Colorado, Pacific Gas and Electric in California, and Eversource in Connecticut.
