In Part 1 of this blog series, we discussed  our recently published model rule on emissions standards for space and water heaters. In the course of preparing the rule, we considered an important question: Are heat pumps cost-effective compared to traditional fossil fuel systems? As part of the supporting documentation for the model rule, the Northeast States for Coordinated Air Use Management (NESCAUM) commissioned cost studies from technical consultant Energy Solutions on the installation and operating costs of air-source heat pumps (ASHPs) and heat pump water heaters (HPWHs), compared to traditional fossil fuel systems, across a dozen Northeast and Mid-Atlantic states.

The research suggests that while heat pumps often cost significantly more upfront than conventional fossil fuel systems, financial incentives can do a lot to lessen that gap. And once installed, HPWHs are cheaper to operate than any baseline equipment analyzed in any state (including compared to methane gas), and ASHPs offer considerable operating savings compared to propane, oil, and electric resistance equipment with AC. As such, heat pumps can yield significant lifetime savings when replacing delivered fuels in most Northeast and Mid-Atlantic states, and approach or exceed cost competitiveness with methane gas equipment when accounting for financial incentives.

This analysis highlights the opportunity for policymakers: If they address the upfront barrier to heat pump adoption, then more customers will install them — and go on to save big on their energy costs in the long run. As part of our work to advance building electrification, RAP and our partner organizations have written about how incentive programs are part of a suite of policy options available to state regulators, and how states can leverage their own policies to maximize the impact of federal Inflation Reduction Act (IRA) funding.

Comparing Installation Costs

Figure 1 below compares the estimated installation costs for 120-volt and 240-volt HPWHs with conventional fossil fuel systems. This analysis shows that HPWHs in any configuration are more expensive upfront than conventional fossil fuel-burning equipment. These high installation costs are a financial barrier for consumers, but subsidies can lower that barrier and make HPWHs more affordable for consumers, lowering their long-term energy costs significantly.

The cost analysis suggests that the high installation cost of heat pumps is driven by several factors. One is the cost of the equipment itself; heat pumps can be more expensive than conventional HVAC and water heating equipment. And installations may require other home upgrades, such as ductwork and electrical panel upgrades to accommodate the increased electrical load.

According to Energy Solutions’ estimates, if electrical panel upgrades are needed to install a 240-volt HPWH, that can add up to an additional $2,000 in installation costs. But the analysis also found that federal tax credits, such as the 25C credit that allows up to 30% back on energy-efficient home improvements, and further state rebates can bring the installation cost of HPWHs toward parity with fossil fuel systems.

Figure 2 shows a similar comparison for the installation of space heating equipment. The conventional fossil fuel systems included gas, propane, and oil-fueled units with and without central air conditioning (AC), while the heat pump costs are shown with and without panel upgrades. The results show that while three-zone ductless multi-splits are the most expensive systems to install, the installation costs for all heat pump combinations far exceed the costs for an average fossil fuel system. This analysis did not include the costs associated with any potential ductwork, nor did it factor in potential rebates that could lessen the cost difference between heat pumps and fossil fuel equipment.

Comparing Operating Costs

Figure 3 shows the estimated average annual operating costs for water heating equipment. To conduct this analysis, Energy Solutions developed an algorithm calculating the energy consumption and operating cost impacts for each water heater type, adapted from the Heat Pump Water Heater Measure in the New York State Technical Resource Manual, Version 10. The results show that due to their higher efficiency, HPWHs are less expensive to operate on average relative to every type of conventional water heating equipment included in Energy Solutions’ cost analysis. The average annual operating cost for heat pump systems is approximately a quarter of that of the average annual operating cost for fossil fuel systems.

Figure 4 shows the estimated average annual operating costs for heat pump space heaters compared to fossil fuel-based furnaces and boilers. For this analysis, Energy Solutions selected a three-zone multi-split as the ductless option to highlight because most whole-home heating retrofits will require multiple zones. They selected a ducted split unitary heat pump as the central heating option, since they are the most common type of unitary heat pumps in residential homes. For fossil fuel systems, they included an analysis of the operating costs of conventional systems that were heating only as well as systems that also included AC, since in many cases heat pump retrofits can involve going from two separate systems, such as a furnace plus a central AC, to a single piece of equipment that provides both heating and cooling.

The results show that once again, heat pump systems have a lower estimated annual operating cost. Although the difference is not as large, it can be more than five hundred dollars a year when comparing three-zone ductless mini-splits with fossil fuel heating + AC equipment. That’s a significant difference.

A Better Value Proposition

The analysis done for the model rule suggests that residential heat pump water heaters and heat pump space heaters are significantly more expensive to install than conventional fossil fuel burning systems in Northeast and Mid-Atlantic states. However, federal, state and utility incentives can make a big difference in reducing these disparities and making installing a heat pump a cost-effective option. And with their lower operating costs, heat pumps represent a much better value proposition for consumers over the long run, while also bringing significant climate and energy efficiency benefits to consumers.

Interested states can use the model rule, along with associated incentives, to advance building decarbonization policy that will send a strong market signal, help meet climate goals and save consumers money over time. As we mentioned in Part 1 of this series, codes and standards like those set out in the model rule represent one leg of a decarbonization table. A variety of other policies will be needed to make the table stand, and state-level incentives to promote affordability will be a key element. This cost analysis can help states consider how best to focus their resources.

You can find the text of the model rule, a technical support document that includes the cost analysis, and other zero-emission standards resources on NESCAUM’s model rule webpage.