Header image created by Justin Lindemann
By: Justin Lindemann, Policy Analyst
With fluctuating natural gas prices, improvements in clean heat technology, and a plethora of financial incentives for electrification, consumers have been given more reasons than ever to turn off their gas in favor of electrifying their heating. Though there are a number of state legislative bodies restricting local action against fossil fuel heating, an upward trend in heat pump adoption and even a gradual embrace of clean heat in cold climates like New England beg the question: is clean heat the future of consumer choice?
Gas or Electric?
In early 2023, the Synthesis Report of the Sixth Assessment Report from the Intergovernmental Panel on Climate Change (IPCC) detailed that "rapid and far-reaching transitions" are critical to reach “deep and sustained emissions reductions and secure a livable and sustainable future for all.” This includes reductions in energy systems through "widespread electrification" and demand side management through energy efficiency improvements, among other actions. A critical piece of widespread electrification is the way in which we heat our homes; with the Center for Climate and Energy Solutions reporting that heating (and cooling) the totality of U.S. homes leads to an estimated 441 million tons of carbon dioxide annually – more than the annual emissions count of Australia.
Heating is also the largest energy expense in most U.S. households, even accounting for up to 50% of annual household energy bills among the nation’s coldest locations. The energy burden that heating puts on low-income households is even greater. In fact, a 2020 American Council for an Energy-Efficient Economy (ACEEE) study estimated that two out of every five low-income households face severe energy burdens and spend more than 10% of disposable income on their energy bills.
In the U.S., natural gas is the primary source of fuel for space heating, with 51% of households using the fossil fuel type, according to the U.S. Energy Information Administration’s (EIA) 2020 Residential Energy Consumption Survey. But with the relatively higher historical volatility of gas prices compared to electricity prices, doubling down on gas heating infrastructure hurts consumers as they try and manage the aggregate cost of living – especially in the coldest regions that generally require more energy for heating as we approach the next winter; with low-to-moderate income and other disadvantaged households bearing the brunt of price fluctuations associated with fossil fuel heating due to the higher energy burden. Worse yet, the Arctic polar vortex, which has long contained the harsh polar conditions, has gradually loosened over parts of North America due to the warming impact on the Arctic. According to a 2021 Science study, this bears a strong connection with the recent winter storms and freezing temperatures that struck Texas, among other warm climate states. Consequently, this increased likelihood of disastrous winters in the U.S. would prolong the above-stipulated energy burden related to gas heating, and engulf other communities that never had to worry about the cold.
Parallel to the issues facing gas heating, clean heat alternatives are becoming more efficient and prevalent as suitable choices for a variety of environments. Today’s heat pumps can reach more than 300% to 400% efficiency, and annual sales of the technology even managed to pass gas furnace sales in 2022. Monthly heat pump sales have gradually distanced themselves from furnace sales ever since 2019, and continue to do so based on linear projections. According to the Air-Conditioning, Heating, and Refrigeration Institute, data from June 2022 showed monthly heat pump sales reaching more than 460,000 units sold – currently the highest monthly sales total for the clean heat technology. The chart above illustrates how, even during one of the coldest months of the year, heat pump sales are going to grow and outpace furnace sales for the foreseeable future if current consumer choice trends hold up. The EIA also estimated that heat pump installations among apartments more than doubled between 2015 and 2020, showing support for the technology among various types of households. However, considering the nascent improvements made to heat pump technology for use in colder climates, adoption of this technology was still low among cold climate states at less than five percent of households in 2020 – according to the International Energy Agency (IEA).
Still, this kind of clean heat technology has a much higher energy efficiency than its gas furnace counterpart, as heat pumps transfer heat and need less energy to operate. Heat pumps can often transfer at least three to four units of energy in heat for every unit of energy input, and efficiency innovation in this space may even increase as demand rises. Gas furnaces, on the other hand, must generate heat, and have issues even reaching 100% efficiency. Even in freezing temperatures as low as -30 degrees Celsius, heat pumps manage to outperform other alternatives – whether electric resistance or fossil fuel heating systems. Financially, over the course of 15 years, switching to a heat pump can potentially save the average U.S. homeowner around $10,000 in upfront costs and energy bills.
It is important to mention that heat pumps are often times classified as clean heat technologies due to their higher efficiency, relatively lower load, and ability to pair with clean electricity sources when compared to fossil fuel heating devices. The duality of the technology also lends itself to the clean heat moniker as it lessens the need to purchase multiple appliances to cover heating and cooling throughout the year. Note that electric appliances may have varying levels of cleanliness due to the source of the generated electricity. Yet due to clean energy’s growth across the country, more homes will find themselves powered by low-emission resources, making electric appliances even cleaner.
The discrepancies that arise out of gas vs. clean heating technologies (e.g. heat pumps) transform the issue of home heating into more than just a piece of the climate puzzle, but also a critical part of the consumer choice conversation in the U.S. Fortunately for the clean heat front, one of the regions in the United States that seemingly is embracing clean and efficient heating is New England – a region that is not absent of cold winters or gas heating, and only at the beginning of its path to clean heat.
A New Day in New England
Again, New England is no stranger to the cold and predominantly uses fossil fuel-based heating to keep homes warm during the winter. However, that seems to be changing, as the region’s states – from Connecticut to Maine – have noticed the efficiency and climate benefits of cleaner heat technologies (e.g. the heat pump). Notable clean heat-related actions in this part of the Northeast, have been implemented, involve, or are under consideration by the following entities, among others: state agencies, state legislatures, and investor-owned electric utilities (IOUs).
State Agencies
State agencies among the region’s six states have been responsible for leading and administering a number of initiatives to better clean heat utilization and efficiency, including helping each state meet specific technology adoption goals. In Maine, the state’s Climate Council created a statewide plan for achieving numerous emissions-saving goals, such as installing 100,000 heat pumps by 2025. The council, co-chaired by agency heads from both the Governor’s Office and the Department of Environmental Protection, also stipulated a number of additional key actions related to clean heat, including reducing the number of households with legacy fossil fuel systems to 26,000 by 2050. With support from financial incentives and low-income housing programs from Efficiency Maine and MaineHousing – a quasi and independent state agency, respectively – the state was able to surpass the goal of 100,000 heat pump installations two years early. Therefore, Governor Janet Mills unveiled a new target in mid-2023 for installing an additional 175,000 heat pumps by 2027.
Rhode Island is also in pursuit of its own emission reduction goals, and with almost a third of the state’s emissions coming from the thermal sector and a significant share of that coming from heating spaces, the so-called “Ocean State” unveiled a new heat pump program known as Clean Heat Rhode Island – administered by the Office of Energy Resources. The program officially began accepting applications in early September 2023, setting up a trove of heat pump rebates for single and multifamily residential customers; as well as higher incentives for low-income households, among other customers.
Just north of Rhode Island, Massachusetts’ Department of Energy Resources has been charged with chairing the state’s Grid Modernization Advisory Council and leading the review of electric-sector modernization plans (ESMPs) that each of the electric IOUs is required to file with the Department of Public Utilities. Each plan must illustrate how the utilities will make sure that distribution system improvements are made to help expand building electrification, and other reliability and resiliency issues facing the grid. Out of the three electric IOUs in the state, Eversource’s plan would help enable 1 million residential heat pumps by 2035 through substation upgrades, solar integration, and storage infrastructure, among other grid enhancements. National Grid’s grid upgrades would help enable 4 GW of new system capacity by 2035, allowing for the installation of 750,000 heat pumps; and Unitil – with the smallest service territory out of all three IOUs – forecasts approximately 21,000 heat pumps that would be able to interconnect by 2050 if the utility’s hosting capacity improvements are made.
State Legislatures
Legislatively, Vermont and Massachusetts are at the forefront of potentially instituting a Clean Heat Standard. In May 2023, the Vermont legislators voted to override Vermont Governor Phil Scott's veto over a heat standard bill (S.B. 5). The Public Utility Commission must submit final proposed rules to implement the standard by January 15, 2025; which must then be given specific authorization by the legislature before a final filing. The standard must include a clean heat credit system and carve-outs for low to moderate-income customers, in order to reduce thermal sector emissions in the state. Eligible thermal technologies under this new system include heat pumps, heat pump water heaters, electric thermal appliances, clean district heating, among others.
Image (above) of county-level data detailing the most used fuel type for heating (Source: Southeast Energy Efficiency Alliance/U.S. Census Bureau)
Massachusetts is still in the early stages of considering a Clean Heat Standard bill (H.B. 3694), which would implement a similar clean heat credit system and include a mandatory 20% low-to-moderate income customer-sourced credit carve-out. The standard will help the Commonwealth meet its thermal sector emissions reduction goals as part of the Global Warming Solutions Act, which requires at least an 80% emissions drop below 1990 levels by 2050. The Commonwealth is also looking at implementing a thermal transition trust fund (H.B. 3203/S.B. 2105) to help customers substitute their gas appliances with electric alternatives – prioritizing those with low-to-moderate income –, as well as upgrade electric service to enable future renewable thermal infrastructure projects (including heat pumps).
Towards the tip of the region, Maine’s legislature was unable to pass a bill (L.D. 1611) to create a non-profit, customer-owned electric utility known as the Pine Tree Power Company. The bill would’ve required the new utility to administer low-income assistance programs and lower rates for low-income households; as well as buy up the state’s electric IOUs (Central Maine Power and Versant Power). The utility would not be allowed to use state tax dollars and would comprise a partially elected board. The legislature attempted to pass a similar bill two years earlier. Maine's voters will still have a chance to decide whether they want to get rid of the private electric utility system entirely in favor of public power, as they head to the voting booth for the state’s referendum election on November 5, 2023. The impact of this vote will heavily influence the state’s energy efficiency and clean heat future, considering the significant transformation of the state’s energy market and existing electric utility energy efficiency plans, rates, and incentives for electric-based heat. Whether such a non-profit, customer-owned utility will help meet the state’s aforementioned clean heat goals is still to be determined, as that does depend on how smooth and swift the implementation of a new public system will be in order to meet them in time.
Investor-Owned Electric Utilities
Electric investor-owned utilities – like Eversource, Rhode Island Energy, Green Mountain Power, and others – have also taken the initiative to view electric-based, clean heat adoption as an important cost-saving measure. For example, with each state authorizing electric decoupling – which is the act of disassociating an electric utility’s profits from it electricity sales – and most utility companies in New England having adopted decoupling as a result, IOUs are disincentivized from working against efficient, electric, and clean heat mechanisms like heat pumps as they are no longer recovering massive costs based on consumption. Instead, decoupling leaves electric utility companies searching for other ways to bring down and recover costs, which is where energy-efficient technologies come in. Since heat pumps utilize less energy than their gas counterparts to transport heat, and are several times more efficient while using electricity as a fuel, it provides the utilities with the chance to recover costs based on conservation (not consumption) and also incentivizes them to do more; as a result, customers also benefit from the efficiency windfall.
However, decoupling alone may not incentivize a utility to adopt more stringent energy efficiency goals or programs, and sometimes requires other regulatory mechanisms to provide an extra push. That is where performance-incentive mechanisms (PIMs) come in, which tie a utility's revenue to their level of performance, such as improving energy efficiency. IOUs in the uppermost Northeast of the country are authorized to implement PIMs, and most of them have chosen to pursue them too. NHSaves in New Hampshire – a collaborative grouping of the different electric and gas utilities created for the purpose of providing efficiency incentives and customer support – measures the electric IOU performance incentive by combining differently weighted components: the actual/planned lifetime kilowatt-hour (kWh) savings, annual kWh savings, summer/winter peak passive savings, and the net benefits associated. Electric utilities must meet a specific threshold of actual savings related to each of the components in order to earn an incentive. But in order to achieve savings and acquire the incentive, the utilities must successfully implement various energy efficiency strategies. For example, according to the most recent (not yet approved) NHSaves plan for 2024-2026, utilities have planned to replace any remaining electric baseboard heating with heat pumps, over the course of the three-year term.
A number of utilities have also started to provide specific rates for electric home heating. Central Maine Power offers a “Seasonal Heat Pump Rate” that charges a higher kWh rate for parts of summer and fall and a lower rate for parts of winter and spring. The other Maine electric utility, Versant Power, has put forward something similar through its “Home Heating Eco Rate” which allows electric resistance heating systems to participate as well. So does Eversource in Connecticut, which allows those using electricity for heating to be charged under its residential electric heating service.
Eversource, the largest utility in the region, also recently announced this year that it has officially left the American Gas Association – after it canceled its membership in early 2022. This is part of the utilities’ broader plan to focus on decarbonization for both its electric and gas divisions. This plan is already breaking ground, as the utility’s geothermal pilot project in Massachusetts is already in development as of mid-2023. The project will use a network of ground-source heat pumps using the ambient temperatures underground to transfer heat (as well as provide cooling) for around 32 residential buildings. Vermont’s Green Mountain Power is undergoing its own pilot project development as well, specifically building a resilient, all-electric neighborhood in South Burlington; with each of the 25 units being equipped with heat pumps, as well as battery storage systems and rooftop solar. While this is just a pilot, the utility has plans to build out the neighborhood in phases for a total of 155 affordable units.
The region’s electric utilities also offer several incentives for heat pumps. MassSave, a collaborative group in Massachusetts that is similar to NHSaves, lets customers of gas and electric IOUs in the Commonwealth benefit from various heat pump rebate incentives for up to $16,000 in cost savings. Connecticut does the same with an initiative known as Energize Connecticut to grant financial support for energy efficiency upgrades through support from the state’s IOUs – among other entities. The initiative provides up to $15,000 in rebates for residential heat pump installations. As for individual utility offerings, Rhode Island Energy furnishes its heat pump rebate on a per-ton basis.
Moreover, electric utilities in New England must also follow each state’s corresponding and binding Energy Efficiency Resource Standard (EERS) – regulated specifications for long-term energy savings targets that IOUs and some non-IOUs must follow. Electricity savings targets for each state vary depending on multi-year plans that must be updated every so often. Maine, for example, no longer utilizes set savings targets, instead opting to achieve “max achievable cost-effective” or MACE electricity savings. Others specify the total annual or lifetime savings that utilities are expected to achieve in a two to three-year period. Utilities and any corresponding non-utility program must detail plans to achieve said savings, with each including incentives and strategies for adopting more efficient technologies like heat pumps.
The above-mentioned actions illustrate merely some of the work that New England is doing, and that even previously unworkable cold climates are no longer precluded from applying or even considering efficiency and clean heat alternatives – like heat pumps. While this region has been a traditional stronghold for gas furnaces and other fossil fuel heating systems, that seems to be changing; although other parts of the country are not as interested in doing the same.
Consumer Choice in 2023
As for the rest of the country, 2023 has been an active legislative season on the consumer choice front as well, as multiple states already have bills in effect that leave local governments with less influence in determining a clean heat future. Some state legislatures – including Idaho, Montana, North Carolina, North Dakota, and Tennessee – successfully furthered bills that restrict local governments from banning certain utility connections based on fuel type through the adoption of codes, ordinances, and other regulatory actions.
A number of states even passed legislation targeting potential local restrictions on certain appliances based on the fuel source. South Dakota passed such a bill, but only specified gas appliances as those that may not be prohibited. Florida enacted legislation in June 2023 that eliminates the option for any governmental entity to ban appliances that use a specific fuel, including restricting local governments from introducing regulations that may have such an effect. Most of the states that passed bills restricting energy choice of utility connection based on fuel type also enacted restrictions on appliance bans – whether that is an air conditioner, water heater, or stove, just to name a few. Tennessee and North Carolina’s bills that prohibited any sort of ban on certain utility connections included similar bans on prohibiting appliance sales and installations based on the fuel source. Meanwhile, Idaho and Montana passed separate bills that disallow appliance restrictions, with Idaho curtailing any energy-related equipment adoption requirements.
Similar bills around the country are still awaiting further movement. Five states – Georgia, Iowa, Michigan, New Jersey, and Washington – may disallow appliance restrictions if their legislative attempts reach success. Then there are a total of five states – Minnesota, Nebraska, New York, Pennsylvania, and Washington - that could restrict any prohibitions on certain utility connections based on fuel source. Washington still has one active bill that would forbid the state energy code from outlawing the use of natural gas in buildings of any kind, as well as gas heating systems, among other appliances.
Nevertheless, while the types of bills mentioned above are intended to protect fossil fuel-based heating, there are others that would advance cleaner alternatives. Legislation in Michigan would ban local governments from prohibiting the use of energy-efficient appliances in new and existing residential buildings, while New York and Hawaii both are looking to ban fossil fuel appliances in new buildings starting in 2024 and 2025, respectively.
One can take into consideration the noticeable regional differences laid out among the many states looking at influencing consumer choice this year. Comparing the average fuel type used for home heating with the kinds of bills that have either been enacted or remain active, states that usually experience relatively significant cold winters compared to the rest of the country are showing various degrees of support for fossil fuels as a viable heating alternative. These states are also mostly made up of households that use gas as a heating source. The defense of fossil fuel-based heating in much of the Northern part of the country is not far-fetched, considering the long-standing practice and consideration of gas as a reliably efficient heat source for homes and other buildings alike. However, the rising efficiency of electrified alternatives (e.g. heat pumps) has the potential to change that narrative. As mentioned earlier, today’s heat pumps can reach a higher rate of efficiency, and they even work in freezing temperatures – a missing variable in previous generations of heat pumps that left the technology undesirable in colder climates.
Washington, Georgia, North Carolina, Tennessee, and Florida, on the other hand, have illustrated similar acts of support even though the average household in those states uses electricity for heating, with Florida having the largest coverage of electric-heated households in the nation. Noticeably, the Southeast and parts of the Pacific Northwest in which these states are situated would face an easier thermal transition to clean heat and heat pump adoption, since the infrastructure used is already largely electric; while switching to gas-fueled heating systems may prove more difficult. It is evident that support for anything other than electricity-fueled home heating in the South runs opposite of the region’s residential fuel of choice, electricity.
If states continue to block governmental action in the name of consumer choice, incentives from elsewhere can still promote beneficial electrification – albeit state support would help amplify clean heat adoption. As a result of the Inflation Reduction Act (IRA), households can receive a 30% tax credit off of the cost of a heat pump (up to $2,000 a year) starting this tax year. Not only that, a pair of rebate programs known as the Home Efficiency Rebates (HER; formerly known as the Home Energy Performance-Based, Whole-House Rebates program or HOMES) and the Home Electrification and Appliance Rebates (HEAR; formerly known as the High-Efficiency Electric Homes program or HEEH)) will soon be available to households. The HER program offers single and multifamily households a rebate depending on the energy savings that they receive as a result of a whole-house retrofit project, with low-income households being given a higher incentive. Low-income single and multifamily households also have exclusive access to the HEAR program, which offers up to $8,000 off the cost of a heat pump.
Notwithstanding, access to these rebates depends on whether a state accepts its share of federal funds to administer the programs. Florida, for example, has signaled a possible rejection of their portion of rebate program funds after the Governor vetoed federal grant money that could have helped administer said rebates. Though the Sunshine State and others still have until August 16, 2024, to officially apply for or reject their program funding shares, if Florida ultimately decides to forgo the incentives residents of the state still have access to a number of other federal tax credits and utility incentives – as do other states that choose to forgo federal support. However, states that choose to reject the programs will have a severe disadvantage when it comes to adopting clean heat and other energy-efficient technologies, as households, especially those with low-to-moderate income, will be left with fewer financial avenues to retrofit and strengthen the resiliency of their homes.
Is Clean Heat the Future of Consumer Choice?
With all that being said, what does the discrepancy between gas and electric heating, New England’s actions, and this year’s wave of legislation tell us about clean heat’s future market viability?
Well, for starters, most Americans are already quite supportive of transitioning to electric heating. According to the most recent nationwide customer survey from the Smart Energy Customer Collaborative (SECC) in 2020, Americans have voiced their support for a transition for heating, among other uses, as 62% are willing to switch from fossil-fuel based heating to electric. Considering this support was already present pre-IRA, and the demand for clean heat technologies has just started to outpace gas-based heating, the popularity of a clean heat transition is still in its infancy and hasn’t reached its peak. A significant number of states have also taken notice of clean heat’s potential, with the U.S. Climate Alliance having pledged in late September 2023 to expand the number of household heat pumps to 20 million by 2030. The bipartisan, 25-member state coalition, encapsulates 55% of the nation’s population and 60% of the national economy, and several of its members have announced new commitments in order to reach their goal, including the potential to develop clean heat standards, zero-emission space heating standards, phasing out fossil fuel heating, among other policy measures.
Then, with New England illustrating that electricity-sourced heat is viable and increasingly supported in cold climates, perhaps this may spark a clean heat renaissance in other parts of the northern U.S. The rest of the country may also benefit from witnessing these use cases and first-of-its-kind clean heat policies as they transform the Northeast region, especially as freezing temperatures creep into states that previously did not need to worry about the cold. Plus, with the advantageous duality of heat pumps – as they are able to cool, not just heat spaces – warmer climates are not absent from the trickle-down effect of higher demand and market competition, which may contribute to falling costs and more installations.
Furthermore, as more states realize the efficiency and economic benefits of electrification – paired with the gradual increase of cheap renewable energy – and distribute opportunities for communities to participate, more households might take the opportunity to look elsewhere rather than rely on fossil fuels for heating. Also, the recurring volatility of gas prices will continue to highlight the cost differences between fossil fuel and clean home heating, as households now have different choices that won’t risk worsening their energy burden. More so on the consumer side, federal incentive programs are giving low-income households the extra support that they need to access cleaner alternatives and thus be able to realize the benefits of clean electrification that are no longer just for wealthier income classes.
Lastly, with 2023 being the first tax year to offer the new heat pump tax incentives under the IRA – and additional rebates forthcoming –, available sales figures for the year have shown heat pumps continuously beating gas furnaces during the first half of the year; widening the divide between both technologies, with consumers noticing clean heat as a practical choice. As innovation and demand deepen within the clean heat market – even in previously unviable cold climate locations – the recent upswing in adoption and interest supports the idea of clean heat as the future of consumer choice. Now, one final question remains: Is the era of fossil fuel home heating coming to an end?
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