Category Archive: Blog

Hybrid Heat: the Cool Path to Home Heating

The opportunity: If the over 50 million US homes that have central air conditioning and a separate heating system just replaced their AC with a look-alike and more efficient “two-way” heat pump unit, those households could not only cool over the summer, but they could also heat during the spring and fall. This would produce the immediate benefit of cutting a home’s fossil-fuel bill and its carbon emissions.

On a practical level, how easy is it to replace a failed central AC unit with a heat pump?

In a webinar last month, Make the Swap: Why It’s Time for Heat Pumps, Not ACs, CLASP,  RAP, and their guests answered this and other questions.

SPOILER ALERT:  It’s pretty easy.

“Make the Swap” assembled a panel of speakers to provide manufacturer, installer, and policy perspectives.  Camille Kadoch from RAP moderated a discussion with Matt Malinowski of CLASP;  Weston Berg of the American Council for an Energy-Efficient Economy (ACEEE); Nick Harbeck of Johnson Controls; and Nate Adams of HVAC 2.0.

What follows are excerpts from their discussion.

The Premise

Matt Malinowski, who spent over a decade supporting the federal Energy Star efficiency programs and is now CLASP’s director of climate research, framed the discussion with a short presentation that builds on CLASP and RAP’s recent study, Combating High Fuel Prices with Hybrid Heating: The Case for Swapping Air Conditioners for Heat Pumps. In a nutshell: Today, the homes that cool during the summer with central AC, heat during the cooler months with a separate furnace or boiler. When that AC unit dies, if it’s replaced with a heat pump, then that efficient appliance could not only cool the home more efficiently in the summer months, but it could also heat the home in the fall and spring, displacing less-efficient fossil or electric resistance heating.

“It’s a little sneaky,” admitted Malinowski when questioned by Kadoch. “Getting at heating load through cooling allows people to keep their current heating systems and does not require a full change out.”

Why Is This Hybrid Approach Possible?

According to Malinowski, Americans buy 4 million heat pumps and 4 million gas furnaces each year.  But they also buy 6 million central AC units each year. If, over ten years, those AC units were replaced with heat pumps, then more than half the US housing stock would have installed heat pumps, independent of any other efforts to swap out furnaces and boilers.

Kadoch noted, “So, this approach is about ‘displacing’ and not ‘replacing.’ ”

“Yes, our modeling for the lower 48 states and Washington DC, found that under very conservative assumptions — the ‘changeover,’ where the heat pump hands back home heating to the furnace at 40 degrees Fahrenheit — we could eliminate 39% of fossil fuel heating.” Furthermore, he explained, “under those assumptions, household utility bills and CO2 emissions would drop by 11%, and emissions reductions would grow to about 50 million tons of CO2 annually by 2032.”

As Matt’s summary made clear, there are many advantages to this approach. They include reduced consumer costs, increased choice, a cold climate backup with the existing furnace (but avoided fossil-fuel emissions when that furnace doesn’t need to be used) and ease of installation: heat pumps can be “dropped in” to replace central AC.

How Can Heat Pumps Just Be ‘Dropped In’?

Kadoch then turned the conversation to Nate Adams, the “House Whisperer” who has been electrifying homes since 2014 and is CEO of HVAC 2.0, a nascent network for HVAC contractors that lean towards electrification.

Kadoch: “Nate, so, what does it look like when you replace a failed central AC unit with a heat pump? Are we ready for this?”

Adams: “The answer is there’s not a big difference. The way that I compare a heat pump and an air conditioner, it’s like two identical cars, but one [the heat pump] has a reverse gear and the other doesn’t.”

“Are we ready, largely, yes. It doesn’t take much more time to install — 20 or 30 minutes.  Fundamentally, it’s the same piece of equipment; all the connections are the same.”

Kadoch: “Is it going to be challenge finding someone to do this installation?”

Adams: “One  of the reasons this hybrid approach came up in the first place — it lets everyone keep their existing heating system — their safety blanket. You can do this in any home with central AC with little pushback from contractors.”

“But the critical thing that needs to happen — because the vast majority of installs are done on an emergency basis when the AC fails on a hot day — is that a heat pump needs to be available in the contractor’s supply house.  Otherwise another air conditioner will get installed. A contractor puts in what’s on the shelf.”

“The wholesale cost difference, what the contractor pays off the shelf at the supply house, runs generally between $300 and $600 difference for the same type of unit.”

Getting Heat Pumps on the Shelf

Kadoch then questioned Nick Harbeck, manager of regulatory and environmental affairs at Johnson Controls, a company manufacturing residential and commercial heat pumps in Wichita, Kansas and Norman, Oklahoma.

Kadoch: “Nate, given that there are more ACs sold today than heat pumps, are manufacturers now targeting the AC market with heat pumps?”

Harbeck: “Yes. We view this as an enormous opportunity both from a market perspective and with respect to CO2 reductions.”

“It is also important to recognize that there are programs out there to incentivize the installation of heat pumps. So, in addition to the low cost of switching from an AC to a heat pump, there is the Inflation Reduction Act, for example. Section 25C provides homeowners with a tax credit for investments in certain high-efficiency appliances, and the HOMES program is a rebate program for housing energy retrofits. Both provide strong encouragement to install heat pumps. Those incentives are very rich and can be expected to move the needle toward the more advantageous equipment to install.”

The Policy Environment

Kadoch also explored the policy landscape for heat pumps with Weston Berg, a senior researcher with ACEEE who provides research and technical assistance related to utility regulations, and is one of the authors of ACEEE’s State Energy Efficiency Scorecard since 2016.

“We are seeing the greatest amount of activity from states that have recently passed clean energy legislation and want to secure carbon reductions from the power sector,” Berg said. “California and Massachusetts get mentioned a lot, but just in the past year we’ve seen activity in the Midwest — Minnesota’s Eco Act, Illinois’ Climate Equitable Jobs Act, and energy legislation and other policies coming out of Colorado.”

“Perhaps the biggest barrier that we see is that utility energy efficiency programs are not inclined to support fuel switching from fossil fuel heating to electric. In some places it is actually prohibited.”

“That said, we are seeing states do the work and try to reform those types of policies,” Berg added, highlighting states such as Maine and New York that are setting particular targets for heat pump adoption, as well as others that are retooling their efficiency targets to emphasize total fuel savings or avoided emissions.

“The second point is that states are changing energy efficiency rules to make clear that programs can fund electrification as a form of energy efficiency, when it saves total energy and avoids GHGs,” Berg said. “Giving a green light for funding, of course, provides some certainty and enables utilities to go after those savings in a deliberate way.”

Berg went on to explain that cost-effectiveness tests are a key determinant as to whether utilities can go after these savings. Not valuing the full range of benefits skews the analysis and will impede heat pump adoption. Colorado, for example, now requires the analysis of heat pumps to incorporate the social cost of carbon. Some states are adopting performance incentive mechanisms to reward utilities for heat pump adoption. There are also cases where utilities are rewarded for building retrofit measures or where jurisdictions adopt building codes that incorporate electric-ready requirements.

Summary

This hybrid approach is available today for more than 50 million US homes. Doing it sounds pretty easy, too. Perhaps most important, this is urgent, as the authors of Combating High Fuel Prices with Hybrid Heating emphasized:

Every six seconds a new residential furnace or air conditioner starts up in the United States, and that decarbonization opportunity is lost until 2035-2040.

A Win for Building Electrification: EPA Elevates Heat Pumps over One-Way ACs

Millions of U.S. homes have central air conditioning for the summer and separate fossil fuel heating systems for the winter. A great way to boost home heating electrification is to replace those central air conditioners with look-alike “two-way” heat pump units, which can provide highly efficient heating in addition to cooling, at little extra up-front cost. CLASP and RAP analyzed ways to make this happen in a recent report. Our recommendations included revising appliance standards to require ACs to have two-way operation.

Central AC vs. Heat Pumps

Earlier this month, the Environmental Protection Agency put this idea into policy, saying that two-way heat pumps deserve the agency’s coveted Energy Star “Most Efficient” rating — and that even the best traditional one-way air conditioners no longer do.

This is big news for building electrification. It means that the hybrid electrification idea — where households ease into electrification, retaining their old fossil systems only for backup on the coldest days — is gaining ground. This approach has the immediate benefit of cutting fossil-fuel use, as households use their legacy fossil systems less. It also helps to smooth the path to full home electrification by boosting demand for heat pumps, increasing the capacity of heat pump contractors and installers, and raising consumer familiarity with heat pumps.

The details of EPA’s move: The agency issued final recognition criteria for specific products to qualify in 2023 as Energy Star Most Efficient. In its response to stakeholders who encouraged the EPA to remove one-way central AC units from the Most Efficient program, the agency wrote that it “expects 2023 to be the last year we recognize central air conditioners” as qualifying for the rating. It went on to state that it “agrees that hybrid heating is the logical next step for retrofits in existing homes, given the modest incremental cost to install a heat pump instead of an AC.” Furthermore, it indicated that it is adjusting its “marketing and communication strategy accordingly.”

In encouraging the EPA to reach such a conclusion, stakeholders pointed out that traditional central AC units only provide cooling and are currently paired with a fossil-fuel-fired furnace that delivers 100% of a home’s heating needs. By contrast, switching from central AC to heat pumps would allow consumers to use a cleaner and more efficient appliance for at least some of their heating needs. That in turn would avoid approximately 250 million tons of CO2 over 10 years, save $27 billion on heating bills, and produce an additional $80 billion in societal benefits.

The hybrid heating strategy, as a way to kickstart home electrification in the United States, is described in detail in CLASP and RAP’s report: Combating High Fuel Prices with Hybrid Heating: The Case for Swapping Air Conditioners for Heat Pumps. We make the case for appliance standards requiring ACs to have two-way operation, and the EPA decision is an important step in that direction. We also provide analyses of four major heating fuel types — oil, propane, methane and electric resistance — and outline key recommendations for how state governments and utilities can support accelerated heat pump adoption across the country.

The Energy Star Most Efficient designation is intended for use at point-of-sale on materials and product literature. The goal of the program is to encourage new, more energy-efficient products into the market more quickly by targeting early adopters. With the EPA’s decision, consumers will now have better information about the most efficient choices to make for cooling appliances.

This change should also have significant effects on state- and utility-run efficiency programs across the country due to their reliance on Energy Star information to decide what appliances to support. Fifty-four million American homes have one-way central ACs that can be easily swapped for a two-way heat pump, which would run in a hybrid configuration to both cool and heat the home, with the existing heating system as colder-weather backup. In a world where fossil fuel prices are high and volatile, the electric grid is getting cleaner, heat pumps are getting more and more efficient, and the demand for air conditioning is increasing, a big push for a swap of air conditioners to heat pumps over the next five to 10 years will smooth the way for full building electrification.

How the European Union incentivises inefficient renewable heating

The EU’s renewables directives count what fuel is burned for heating, as opposed to the amount of heat produced.

Never has the spotlight shone so brightly on Europe’s heating and cooling sector. And for a good reason. Fossil gas makes up around 39% of the energy used to heat buildings and much of Europe wants to rapidly phase it out.

To help do so, the European Parliament recently voted in favour of a key amendment to the Renewable Energy Directive (RED): raising the annual target for the share of renewable energy in heating and cooling.

The new goal—a 2.3 percentage-point increase each year until 2030—is roughly double the one proposed in the Fit-for-55 package unveiled in 2021.

The clear signal has been set, yet there is something off with the way the metric is measured. By counting fuel burned instead of heat produced and not including electricity used for heating or cooling, the RED favours inefficient technologies.

Ignoring the mushy peas on the floor

Imagine a toddler having lunch. Her father has prepared a bowl of 300 grams of mushy peas and figures that this meal should meet half of the two-year-old’s nutrient needs for the day. She is a messy eater though and jettisons around half of her food on the ground. Once her dad sees the empty plate, he pats himself on the back, thinking that he filled her belly. He should look at the floor.

Measuring the renewable share of heating and cooling in the RED is simple. It tallies all the energy used to heat and cool from renewable sources, then divides it by the total. The key question is: which energy counts as renewable?

Unfortunately, the RED’s answer to this is flawed. It only counts final energy use or, in other words, the fuel that is delivered to the customer to use in their heating appliance. That means if someone burns a log in a fireplace at 50% efficiency and it produces 100 kilowatt-hours (kWh) of heat, how much “renewable heat” does that account for?

If you were thinking “100 kWh” you would be wrong. The RED counts that as 200 kWh, since that is the energy content of the biomass that was combusted at 50% efficiency.

That is a big problem because heating systems have different efficiencies. An electric heat pump typically produces 100 kWh of heat with 33 kWh of input electricity. The remaining 67 kWh is drawn from the ambient air for free. An 85% efficient pellet boiler needs 117 kWh.

The point: Less efficient technologies need more input energy for the same useful heat outcome. The RED discourages switching to more efficient heating appliances and electrification. It counts the full weight of the mushy peas, not just those that were eaten.

Anti-electrification policy

The other problem with the RED methodology is its scope. It does not consider the renewable electricity used for heating and cooling at all. Whether it is used to drive a heat pump or just an electrical resistance heater, it does not count toward the renewable heating and cooling target. Even for cooling, which is virtually only based on electricity.

This is an effort to avoid double-counting. The data wranglers do not want to count renewable electricity in both the power sector and the heating and cooling sector. As a data wrangler myself, I appreciate their commitment to neat allocation. But in this case, neatness has its downside.

Electricity providing a heating or cooling service should be considered towards the renewable heating and cooling target. Otherwise, heat pumps could be undervalued in terms of their contributions. If the methodology does not even consider where the electricity comes from, the heat output of the heat pump can never be fully renewable.

If the renewable share of electricity would be considered in the RED’s methodology as a heating and cooling service, the incentive to promote heat pumps would even be stronger. Member States will thus be encouraged to implement policies that aim to achieve the heating and cooling target, with the ancillary benefit of growing the deployment of efficient heat pumps to do so.

As it stands, the least efficient and least electric technologies are those that have the most potential to meet the goals under the RED. More efficient and electricity-based heating appliances risk falling behind.

The way forward

Getting metrics right is crucial to ensuring a rapid and balanced transition to clean heating and cooling. The Renewable Energy Directive’s goal should be to promote efficient heating and cooling technologies that maximise useful energy while minimising input energy.

This means counting the useful heat that is produced by a heating system, not the input energy needed. It also means including the electricity used for renewable heating and cooling.

Since electricity realistically contributes to both the headline renewable energy target (32% in the RED II and voted to increase to 45% by the European Parliament), as well as the renewable heating and cooling target. Both calculations should factor it in so that the statistics are accurate.

Double-counting can be avoided by ignoring the electricity used in the heating and cooling sector when calculating the headline target.

Metrics matter. Only by counting the useful heat produced can the Renewable Energy Directive provide the right incentives for phasing out fossil gas and spurring the clean electrification of heat.

 

A version of this article originally appeared on Foresight Climate & Energy.

Photo: Holger Schué from Pexels.

An Escape from the “Jaws of Delusion”: Planning for the End of Cheap Gas

In 2013, Marty Kushler, senior fellow at the American Council for an Energy-Efficient Economy (ACEEE), gave a presentation in Chicago on gas efficiency programs. He argued that one should not make decisions about programs with lengthy multi-year effects based on the record-low spot market prices for domestic natural gas.  Gas at that time was $2 per thousand cubic feet (Mcf), due in large part to shale gas production from early high-production sites, price support of dry gas from high wet gas and liquids prices, and natural gas energy efficiency programs.

Although in the late 1990s and early 2000s international prices — illustrated below by Russian gas prices and Indonesian liquefied natural gas (LNG) prices — tracked U.S. prices closely, in 2009 domestic and international prices diverged. In October 2013, when European gas was about $11 per million British thermal units (MMBtu) and Asian gas was roughly $16, U.S. prices were a little below $4.

As illustrated below, Kushler referred to this gap as the “Jaws of Delusion” — the delusion being that the United States would continue living with very cheap natural gas while the rest of the world pays three to four times the price.

U.S. vs. Global Fossil Gas Prices (1995-2011)

U.S. vs. Global Fossil Gas Prices (1995-2011)

Spring 2022: Prices Surge

Fast forward a decade to 2022. In April, U.S. natural gas prices reached their highest level in more than 13 years — a surge due in part to Russia’s invasion of Ukraine. In May, the Financial Times reported that Henry Hub natural gas benchmark reached a price ($8.41 per MMBtu) more than double the price at the start of the year and nearly three times the roughly $3 per MMBtu average of the prior 10 years. In June, the American Gas Association reported that prompt-month futures at the Henry Hub reached $9.32 per MMBtu, noting that “Henry Hub had not seen such prices for prompt-month futures in over a decade.”

Despite this surge, these domestic prices are still far below those in Europe and Asia: $37 and $23 MMBtu respectively. But could that be about to change?

The United States started to export LNG from the lower 48 states in early 2016. We became a net exporter a year later. In 2019, we became the world’s third largest LNG exporter, behind Australia and Qatar. And once new LNG liquefaction units in Louisiana — Train 6 at Sabine Pass and Calcasieu Pass LNG export facilities — are placed in service by the end of 2022, the US will become the world leader in LNG export capacity.

U.S. Quarterly LNG Peak Export Capacity (2016-2022)

U.S. Quarterly LNG Peak Export Capacity (2016-2022)

Summer 2022: Why We Need a Plan

So was Marty Kushler mistaken? Not about planning.

Planning programs with lengthy multi-year effects based on spot market commodity prices — even with 2013’s record-low US spot market domestic gas prices — would have been a mistake. When he made his point, gas was $2 per Mcf. Two years later it was twice that. And today, 10 years later, prices are three or four times that.

Gas prices are not only uncertain, but that uncertainty is not “symmetrical.” History, Kushler argued, has shown that there is greater risk of prices increasing.

Nor was he wrong about what he called the “largest factor affecting cost not being taken seriously,” namely the potential effects of global gas prices on the U.S. domestic market. In 2013, when Kushler made his remarks, Russia hadn’t invaded Ukraine; U.S. LNG export capacity wasn’t about to dominate the world market; nor was there the ravenous worldwide demand for LNG that we have today.

In a little over six years we’ve gone from being LNG importers to the doorstep of becoming the world’s leading LNG exporter. How can international demand for our domestic commodity not affect its value, especially given current conditions and winter on the way?

In June we had a clear demonstration as to the effects that international demand for LNG will have on the prices that Americans will be paying for gas. There was a fire at the Freeport LNG plant in Texas, our nation’s second largest LNG export facility. The accident and the resulting outage produced a sharp reduction in export demand for domestic gas, producing a 40% reduction in U.S. domestic prices through early July. So, what will happen when Freeport comes back online, and the U.S. domestic market begins feeling the demand pulling in the other direction?

The Jaws of Delusion: The Summer 2022 Blockbuster We All Want to Miss

In “Jaws,” Roy Scheider’s character who had just been face to face with the great white shark tells Captain Quint, “you’re going to need a bigger boat.” That might have solved their problem. But a bigger boat is not going to help with the Jaws of Delusion.  We are already in a big boat — the global market for gas. That‘s the point: How can U.S. consumers escape the effects of international demand for our gas?

There are steps that regulators can take, given this looming uncertainty for domestic gas prices. How about starting with the one implied by Marty Kushler a decade ago: Let’s stop relying on one resource, and instead, diversify to reduce the exposure of utility customers to the uncertain prices and volatility of gas. This, of course means enabling alternatives:

  • Building weatherization, for example, continues to provide significant savings for consumers. It also puts Americans to work in our communities and keeps energy investment dollars local.
  • Electrification for cooling and heating is another alternative. Despite electricity prices, heat pumps and heat pump water heaters are three times more efficient than other gas end uses. This is one of the reasons that in late 2021, the U.S. Environmental Protection Agency decided to suspend ENERGY STAR Most Efficient recognition of gas appliances. Making efficiency available to consumers in the form of better building envelopes and appliances means making savings available.

This is a good time for utility regulators to reconsider the wisdom of allowing subsidies for gas system buildouts. Given what we know, does it still make sense to encourage gas system expansion? If electric options are cheaper and economically more attractive for consumers, why continue to put more pipe in the ground?

There are other steps that regulators and policymakers can take to protect their citizens’ exposure to gas prices, for example, coordinating planning assumptions around gas and electricity. Instead of letting gas and electricity utilities separately model the future, explore their use of common assumptions in order to be able to make apples to apples comparisons with the resources each provides.

To help incorporate voices from underserved and overburdened communities, states should remember to undertake planning in ways that engage the public to better ensure realistic assessments of the least risky options to heat and cool homes, especially homes of energy burdened Americans.

Today, more than any time in our recent history, energy security is a global challenge. Ironically, many of the solutions to this challenge can start at home. In fact, with the help of utility regulators, they can start in people’s homes.

‘Game on’ for Germany’s heat pump transformation

Time is of the essence if Germany hopes to meet its ambitious net-zero emissions target by 2045. To achieve this goal, the country will have to rapidly transform how it heats its buildings while ridding itself of Russian gas. Alongside increasing the renovation rate of buildings and rolling out clean district heating, heat pumps are one of the key technologies that can phase out fossil fuels and bring renewable heat to German buildings.

The situation has become even more urgent following Russia’s invasion of Ukraine and the ongoing fossil gas crisis. About two-thirds of German gas imports came from Russia in 2020 and the building sector is the country’s largest consumer of gas for heating. In the five years leading to 2020, gas boilers made up more than half of the market for space heating, while oil boilers made up another 12%. Heat pumps came in at only 16%.

Germany will need to install around 6 million heat pumps by 2030 to be on track for the 2045 target. That translates to a massive increase in annual heat pump uptake — from 154,000 installations in 2021 to 500,000 yearly by 2023. Up until now, most of these units have been installed in new buildings. The existing building stock will need to bear most of the load and, crucially, low-income households must receive enough support to make the transformation equitable as well.

The challenge is enormous. Despite generous subsidies during the past few years to encourage the replacement of fossil fuel boilers with heat pumps, the market has been stubborn. The year 2021 saw more than 920,000 heating appliances installed in Germany – 700,000 were still oil and gas boilers.

Germany has discovered first-hand that generous subsidies from the country’s federal subsidy program (previously the Market Incentive Program and now the Federal Support Program for Efficient Buildings) are not enough to spur a rapid heat transition in buildings. Recently, Agora Energiewende and RAP released new analysis prepared by the Öko-Institut and Fraunhofer ISE that looks at how to trigger this market transformation.

Germany’s 65% rule: Russian gas out, heat pumps in

To achieve its net-zero target and reduce gas consumption, Germany needs to end fossil fuel boiler installations as soon as possible. Financial incentives for clean alternatives did not trigger the necessary market shifts in the past. Regardless of much higher gas prices, subsidies are unlikely to be enough for the required transition. This is in part because German households pay more than six-times higher taxes and levies per kilowatt-hour of electricity than for fossil gas.

What else can be done? The federal government’s answer was announced in March 2022. Starting in January 2024, all new heating systems will need to run on 65% renewables. This political agreement should apply to heating system installations in new buildings as well as replacements in existing ones.

The 65% threshold must be implemented via laws, but the agreed wording leaves the door open to hybrid heat pumps where, typically, a heat pump is combined with a fossil boiler. That would be the bare minimum — standalone oil or gas boilers are de facto ruled out and even solar thermal systems combined with gas boilers would not meet the 65% baseline.

Hybrid heat pumps are cost-advantageous only in the rarest cases. According to the new analysis, standalone heat pumps hold the economic upper hand until the outside temperature falls to -7°C, at which point it is cheaper to heat with a gas boiler. For comparison, from 1991-2020, January temperatures in Germany averaged 1.7°C.

The plan is ambitious, but Germany is in good company. This policy attention towards heating systems is consistent with efforts at the EU-level, such as the Fit for 55 package, REPowerEU plan and Ecodesign performance standard regulation, and in various Member States, several of which have announced bans for new oil and gas boilers with diverse years of implementation.

Key actions for a swift transformation

Transforming a heating market based on 700,000 fossil fuel heating systems to a market predominately centered around heat pumps in only 18 months is a daunting task. Once implemented, the ‘65% rule’ will become the regulatory instrument that draws the borders of the field on which the game will take place. And in January 2024, it will blow the whistle to kick it off. Before that happens, a massive and swift industrial transformation will be required that sweeps along all members of the supply chain, from manufacturers to installers to households. Targeted support for low-income households will be crucial so they are not disadvantaged.

The total cost of owning a heat pump could slow down their future uptake or significantly increase the cost burden on homeowners. Without considering existing subsidies, the upfront cost of a first time, fossil-fuel-to-heat-pump switch in Germany is still around two- to three-times higher than a gas boiler replacement, though much of this is associated with radiator and pipe upgrades. Upfront costs, however, have risen significantly due to a shortage of skilled craftspeople. Installers say they can reduce costs by shortening the installation time from three to two days, while manufacturers have a 40% cost reduction potential in view based on new production methods as well as economies of scale.

To help reduce operating costs, the government has shifted its famous renewable energy surcharge away from electricity bills onto general taxation. On top of that, it is gradually phasing in a carbon price on heating fuels that should reduce this imbalance in the coming years. The new analysis recommends lowering the electricity price for heat pumps by exempting them from certain levies, reducing the VAT to the EU-minimum, and enabling the use of heat pump tariffs that maximize the contribution of heat pump flexibility to meeting power system needs.

To achieve the Germany’s ambitious net-zero target and provide transparent and predictable market conditions, the whistle is in the hand of the government. Kicking off the heat pump transition in a transparent, equitable and suitably ambitious manner means tabling a draft law to implement the 65% rule as soon as possible.

Read the analysis here (in German).

Making sense of India’s fast-changing policy landscape: Integrated modelling to inform decision-making

With several notable recent economic reforms, India is one of the fastest-growing emerging economies. The country aspires to become a $5 trillion economy by 2024-25 and a $10 trillion one by 2030. There is ample evidence that India’s growth has been highly unequal in the past. Therefore, transforming this vision of growth into reality will require a comprehensive approach based on a multitude of policies targeting multiple domains. Further, the development trajectory should also be capable of tackling the key environmental challenges that India faces.

In the fast-changing policy landscape of a country as diverse as India, striving for equitable growth will not be possible without gauging regional implications of policy shifts. Equally important will be to understand the direction and distributive impacts of ongoing policies consistently and on a regular basis in conjunction with various decarbonisation goals recently endorsed by India.

A book released in December 2021, Economy-Wide Assessment of Regional Policies in India, takes on these questions. Making use of the outputs from the integrated energy-economy regional model called E3-India, it provides hopeful insight and offers powerful recommendations for India’s energy, economic and environmental policymaking at the national and state levels.

The book (edited by the lead author of this post) is a compilation of articles describing how various ongoing and announced sector-specific policies will, or will not, advance India’s social, economic and climate ambitions in both the near and longer terms nationally and across different states. The focus is largely on recent policies implemented in the primary, secondary and services sectors, including agriculture, capital goods, automobiles, electronics, information technology (IT-ITeS) and energy. The analyses also account for the effects of the COVID-19 pandemic and evaluate the impacts of different policy choices — especially with respect to environmental consequences and energy use — at the national and subnational levels.

The book takes a realistic look at the economic sensitivities and interdependencies at the national and state levels across India. Its aim is to broaden the scope of future action by reducing ambiguity and uncertainty in achieving the key policy targets — that is, by giving policymakers greater confidence that desired outcomes can be achieved. The major policies evaluated against a business-as-usual scenario include: the Agriculture Export Policy 2018; National Capital Goods Policy 2016; National Steel Policy 2017; Electrical Equipment Mission Plan 2012-2022; National Policy on Electronics 2019; Digital India initiative; National Software Policy 2019; Automotive Mission Plan 2026; and several subnational initiatives in a variety of sectors. In addition, the book evaluates regional impacts of national energy targets, along with economic impacts of existing Nationally Determined Contributions for India and economic impacts of Delhi’s airshed management. The book also takes a closer look at impacts of liquidity infusion in the context of COVID-19 through the Atmanirbhar package.

Sector-specific impact analyses of national policies reveal critical regional insights. For instance, the existing policy regime will lead to Gujarat state becoming a leader in international agricultural exports. Maharashtra, Karnataka and Haryana perform exceptionally well in the capital goods sector. With appropriate incentives in place, Haryana also emerges as a leader under the Automotive Mission Plan 2026 along with Tamil Nadu.

Tamil Nadu exhibits diversified leadership by outperforming in the electronics and IT-ITeS sphere along with Delhi and Uttar Pradesh. The state emerges as a front-runner in renewable capacity installation as well, along with Maharashtra, Karnataka and Andhra Pradesh. In contrast, the resource-rich and income-poor states like Chhattisgarh, Odisha and Jharkhand show a greater growth potential only in the capital goods sector.

We find that the more advanced states, like Maharashtra and Tamil Nadu, are already in a position to take up diversified policy action in the short run and direct resources to expand their markets through further integration in the global value chains. Most other Indian states still rely on few specialised sectors and will be able to diversify in the medium to long run only if sustained policy support in terms of investment in both infrastructure and capacity-building is provided. In a country as large as India, with different states endowed with distinct economic and geographic characteristics, formulating policies to strengthen regional value chains is critical for equitable growth of states across all regions.

Regional analysis of sector-specific policies highlights the nuances of regional variations in a particular sector, but in reality, various sectors are highly interconnected. The implementation of a policy in one region therefore has direct and immediate effects in its implementation in other regions and sectors. An integrated analysis that captures the essence of multiple policies simultaneously working together in diversified sectors and development areas is demonstrated in the final synthesis of this book. The comprehensiveness and granularity of the modelling outputs will enable readers (and other researchers, who can download and use the E3-India model free of charge) to derive nuanced and more informed policy insights.

By clearly outlining the short-run as well as the medium- and long-run priority sectors at a regional level in conjunction with impacts of ongoing energy transitions, this book intends to serve as a comprehensive guide for evidence-based economic and energy policymaking in India. Shaping these regional insights into deliverable policy actions ultimately lies in the hands of the policymakers. The book and the E3-India model serve as a primer and a tool to facilitate evidence-based policymaking at the regional level, enabling policymakers to leverage and strengthen India’s unique socioeconomic and geographical diversity, while moving toward national economic growth targets equitably and with a lower carbon footprint.

The E3-India model: It’s come a long way

In 2016, the Regulatory Assistance Project approached Cambridge Econometrics about building a new macroeconomic modelling tool for India. The rationale for the model was simple: India needed to reduce its greenhouse gas emissions, but much of the policy to do so is set at the state level. A model that could identify the impacts of policies to boost state-level sustainable growth was therefore required.

Years later, the outputs of this work are presented in the book Economy-Wide Assessment of Regional Policies in India, edited by professor Kakali Mukhopadhyay. The book covers a range of topics relating to sustainable economic development in India, always with a focus on realistic (i.e., feasible) policy at the state level.

The model that was built came to be known as E3-India — “E3” for energy-environment-economy. It was developed by experts at Cambridge Econometrics, Professor Mukhopadhyay and former RAP colleagues Ranjit Bharvirkar and Surabhi Joshi. Without this collaboration, it is unlikely the model would have advanced to its present state.

The foundations of the model follow the Cambridge tradition, drawing on the demand-driven framework originally developed by Michal Kalecki and John Maynard Keynes. This approach provides several advantages over the more common equilibrium approach to modelling; it does not make assumptions about perfect information, rational behaviour or frictionless markets. In addition, it models labour markets, including involuntary unemployment — matters of particular importance to policymakers.

This demand-driven approach requires that behavioural parameters be informed by econometrics — that is, it requires, among other things, time-series historical data. With the model disaggregating India’s economy into both states and economic sectors, a substantial exercise in data collection and processing was required. Professor Mukhopadhyay led this herculean effort, yielding a tool that researchers today can download and use free of charge.

Another important feature of the model is its tight integration of energy consumption and greenhouse gas emissions within the wider economy. The model ensures consistency between physical and economic measures of energy consumption and prices — something that is critical for effectively assessing sustainability.

The power sector, which will play a crucial role in decarbonising India’s economy, is modelled in additional detail using an advanced framework developed by Jean-Francois Mercure. This allows the user to test policies such as feed-in tariffs, renewable subsidies and coal phaseouts, along with the standard energy and carbon tax policies that other models typically examine.

Each chapter of the book is dedicated to a different sector of the economy. A set of scenarios is used to explore different possible outcomes by implementing combinations of policies. The demand-driven nature of the model allows the analysis to start from a position in which the Indian economy has been set back by COVID-19; many of the scenarios look at ways to restore jobs and prosperity.

Eleven authors, experts in their respective fields, were involved in the production of the book. They put the E3 model to rigorous use, testing its capabilities and performance, and with it have revealed some important truths about the Indian economy and good news about its ability to transform itself into the sustainable, low-carbon powerhouse that it aspires to be.

The book is by no means the end of the E3-India project; in many ways, it is just the beginning. E3-India is a tool that policymakers can use for many years to come as they embark on the journey of promoting sustainable development. The model will continue to be updated. We encourage readers of the book to work with the model themselves, to challenge its conclusions and to examine other scenarios, all with the aim of developing public policies dedicated to improving the long-term welfare of Indian society and the environment. If India is to contribute to meeting global climate targets, much work remains to be done.

House power: the hidden powerhouse of the new energy landscape

Raoul Dufy’s 1937 fresco La Fée Électricité — an arresting 600 square metre tribute to “the great adventure of electricity” — depicts science and technology leaps such as Faraday’s discovery of electromagnetic induction, Gramme’s direct current dynamo, Baudot’s telegraph, and Edison’s incandescent light bulb. These developments changed the world in ways that were previously unfathomable.

Tackling the climate crisis while mitigating the impacts of the war in Ukraine and skyrocketing energy prices will require Europe’s policymakers to champion a new class of energy pioneers in the months and years ahead: households.

A spectrum of challenges

Europe faces a step-change within a step-change. Securing a clean, affordable and reliable energy system is no longer a case of moving fast without breaking things. We must now accelerate while fixing things.

This means ramping up green generation at an unprecedented scale and pace, shunning imported gas without over-relying on expensive alternatives — such as hydrogen in its rainbow of varieties — or relapsing on brown fuels. We also need to secure energy supply, ensure grid reliability and help families and businesses stay out of the red.

No matter how many supply-side resources we pour into the mix, the perfect blend will elude us until we stop treating demand-side flexibility as a final flourish of glitter.

In fact, it is more like the primer — often unseen but foundational to reliability, managing price volatility, enhancing grid performance, efficiently integrating renewables, facilitating newly electrified technologies and reducing cost. Flexibility adds adhesion and endurance to the core principles of energy policy.

Demand-side flexibility binds energy, climate and social objectives together.

graphic depicting how demand-side flexibility addresses reliability equity and sustainability of energy supply

Putting households in the frame

Demand-side flexibility means energy users changing how and when they use electricity in return for financial reward. They offer flexibility by drawing power from the grid at different times and by utilising energy efficiency, onsite generation and onsite storage, including electric vehicle batteries.

We need lots of flexibility and we need it now. The IEA estimates that, to reach net-zero emissions by 2050, a ten-fold increase of demand-side resources is required worldwide by 2030, compared with 2020 levels.

Industrial response receives most of the policy attention on the demand side, which is still only a fraction of that dedicated to supply-side resources. However, European Commission analysis concluded that the greatest potential for additional customer flexibility in 2030 actually lies within homes.

This is due to the, as yet untapped nature of this sector, plus projected electrification and digitalisation of buildings and vehicles. The proportions in the graph below are striking—even though the capacity levels themselves are likely to be a significant underestimate, given the fast-paced technology and market evolution since the 2016 study.

graphic depicting the theoretical potential in megawatts of demand-response capacity in selected European countries by 2030

Policy proposals

To take advantage of these untapped resources, there are three policy actions that should be enacted.

Firstly, make flexibility effortless and stress-free. Policymakers need to stop putting the onus on individuals to solve structural problems. People are busy; they have kids to get to school, shifts to work and boilers and cars that fail at the worst times. It is not their job to become energy market experts, it is the job of energy market experts to ensure that people make decisions — even unconscious ones — that boost flexibility and reduce energy bills.

There should be an EU-wide “mandate for smartness,” requiring products and buildings to be electrified and “flex-ready,” with clear labelling and high-quality customer support. Deployment schemes are urgently required, including subsidies to fast-track uptake and drive down future costs, replicating the success of renewables.

The regulators’ role is to ensure digital inclusivity of marginalised and vulnerable groups and to adapt customer protection rules so they keep up with new retail offers, without picking winners or stifling innovation.

Secondly, allow wholesale pricing to reflect the true value of flexibility. To uncover the value of flexibility and reveal its full potential, wholesale electricity prices should reflect real-time conditions on the power system.

Interventions such as price caps mask the increased costs caused by inflexibility, reducing incentives for efficient actions. Households should be rewarded to increase demand when there is a surplus of renewable generation, for example, but measures like minimum price guarantees prevent payment via the wholesale market.

Safeguards such as supplier hedging, price relief mechanisms for extreme events and targeted support for low-income customers become increasingly important. The baseline, however, should be wholesale pricing and smart network tariffs that reward flexibility in a fair and non-discriminatory way. This creates a positive feedback loop of households embracing flexible assets and seeing tangible benefits, which further incentivises flexibility.

Finally, develop robust metrics for flexibility. Europe lacks a common methodology for assessing and quantifying the multi-faceted benefits of customer flexibility.

Unless we make this value visible and measure it consistently and fairly, we cannot reliably assess flexibility potential or design mechanisms to unlock it. Developing robust metrics supports policies that can accelerate flexibility deployment such as targets, trading platforms and obligations on suppliers to procure demand-side capacity. Standardisation also enables progress to be tracked across Member States.

To create a masterpiece, start with a masterplan

“Art is not what you see, but what you make others see.” – Edgar Degas

Flexibility is a system resource, activating it requires systems thinking. That does not mean treating households like mindless cogs in the machine — a new social contract must be crafted for the age of automation, upheld by equity, agency and opportunity.

Europe’s policymakers should take in the whole picture, rooting out market distortions, barriers to access and bad practices, while proactively showcasing and replicating positive examples of household flexibility, beyond pilot schemes.

If the artwork La Fée Électricité were recreated in the year 2035, what would we see? The fresco could show millions of homes, interacting seamlessly with the power system, for the benefit of people and planet alike.

One thing is certain, we are going to need a bigger wall.

 

A version of this article originally appeared on Foresight Climate & Energy.

Photo: Guillaume Baviere via Flickr Creative Commons

Utilities Want to Provide EV Fleet “Advisory Services.” Should Regulators Approve?

As the electrification of vehicle fleets goes mainstream, fleet owners are facing a gauntlet of challenges, starting with engaging their electric service provider. The utility response of providing “advisory services” is both creative and presents new challenges for utility and air regulators.

Advisory services, whether offered by utilities or third parties, are designed to educate and enable fleet managers. The goal is to fill the gap between what fleet managers already know about transportation and what they need to know about electric transportation.

RAP recently facilitated a conversation on this topic, inviting a representative of a school district, a utility company, and several third-party transportation service providers to discuss their perspectives and better understand the challenges.

In our webinar, “So, How Does This Work Again? The Role of Advisory Services in Fleet Electrification,” Timothy Shannon, transportation director at the Twin Rivers, Calif., Unified School District; Matt Stanberry, managing director at Highland Electric Fleets; Ann Xu, founder and CEO of ElectroTempo; and Jason Peuquet, strategy and policy manager of clean transportation with Xcel Energy, shared their perspectives with RAP’s Camille Kadoch.

From my perspective as a former utility commissioner, I was asked to serve as the “respondent” and identify the pertinent regulatory issues.

Reviewing Advisory Services Proposals

At first glance, the expansion by utilities from offering a commodity to offering professional services may seem unprecedented. But actually, advisory services are a more visible form of what utilities used to refer to as “marketing key accounts,” a focus that utilities regularly had that helped them stay in touch with sizable commercial and industrial customer segments, and for which they were allowed to recover reasonable expenses.

The point here for regulators is not that this is different, but instead that this is more overt, and coming at regulators in a more robust and comprehensive manner. Advisory services also have a component of market development, a similar quality found in demand-side management programs. Note that third-party support to help utilities better serve fleets is not so different than the energy auditing support that contractors provide energy efficiency programs.

So what have we learned from those experiences, and how do we apply what we’ve learned in this context? This history can help regulators understand how to proceed when a utility says it wants to engage in these ways, that it will incur costs for which it wants recovery, and possibly even that it seeks earnings on those costs.

What is the right regulatory construct to apply here and what needs to change? The slide below provided by Xcel’s Jason Peuquet, does a good job of illustrating the range of comfort to discomfort of the regulatory process in this context. On the right-hand side, regulators are comfortable with rate design. We’ve had a 100-year history with that. Advisory services the new phenomenon over on the left about which we are less certain. The pieces in the middle come with a different levels of comfort.

Meeting Fleet Customers' EV Needs

Source: Xcel

Costs and Benefits

Electrification means that a utility is creating new load. But the regulator still has a key role to determine the answers to two questions: Is the utility proposal creating the kind of load that is appropriate? And is the load being managed effectively from a system benefit perspective? The regulator needs to ask:

  • What is the utility aspiring to do or become?
  • How does this new service change the utility’s current role as a public service?
  • Does investment in advisory services align with existing regulatory principles — i.e., are these investments just and reasonable? And are they least cost?
  • How should costs be allocated — i.e., who pays for them, and why?
  • Do today’s costs deliver future societal benefits, however difficult they may be to quantify?

A narrow interpretation would focus on who is the cost causer and what they should pay. That would put all the burden back on the fleet services. That is fine, and internally consistent in a narrow framework.

But recognizing that we are working in a broader arena, we acknowledge that we are not just making investment to help fleets. We are doing “demand creation.” This puts the regulator in a position to look at today’s costs that are known and knowable, and at future benefits that are speculative and uncertain — although we know they are out there. How do we get comfortable matching today’s costs with future benefits? Those benefits range from consumer savings, to lower-cost grid management, to the many societal benefits like reduced air emissions and improved health outcomes.

21st Century Load Forecasting

At the same time regulators need to recognize that doing this work — letting utilities build load through advisory services — ushers in a new aspect of load forecasting. Fundamentally, the regulator-utility relationship will need to further evolve. Effective regulatory oversight of load forecasting requires greater engagement of the utility, with lines of inquiry such as:

  • Will advisory services requests be strategic and narrow, seeking only to develop certain types of load?
  • What kind(s) of load do you want?
  • Do you just want maximum growth, no matter where it comes from?
  • Where on your system do you want it?
  • At what time of day do you want it?

Requests for approval of advisory services will bring with them a new complexity about understanding load. So, this is not only an inquiry into costs and benefits (both short- and long-term); it is also a challenge into understanding how the utility is changing its relationship with certain customers — from the traditional provision of a commodity, a blended commodity and service-based relationship. The regulator is confronted with understanding that this service-based customer engagement is interwoven into utility decisions concerning capital asset investments in infrastructure. For it is through effective advisory services that these capital assets become viable and reasonable assets.

Finally, in this world where the utility has the onus to make and justify these proposals, it is the regulator’s role to ensure that the utility is clear in what it aspires to become. And this will require even more questions for regulators to raise:

  • How does this service fit in the utility’s portfolio?
  • What is the utility’s longer-term sense of itself as a commodity and service provider?
  • Is the regulatory called to assist them and nudge them on their way? Or on the contrary, is your task to “keep them in their lane?”
  • How am I going to manage the commission’s relationship with that utility into the future?

One way or another, transportation electrification represents a new set of evolutionary forces upon the utility-regulator relationship. Awareness and preparation will make the ride more enjoyable.

Navigating towards net-zero power system: it is not the ‘heading’ but the ‘course’

The energy price and supply risks we are facing today are making the decarbonisation of the power sector by 2035 an even more significant challenge. But if we deviate the heading of our ship from the course for longer than necessary, we will lose the course we set for ourselves: cost-efficient power sector decarbonisation writes Zsuzsanna Pató.

The energy price crisis and the war in Ukraine opened a whole new dimension for the need to get off fossil fuels, alleviate energy poverty and assure reliable energy service for consumers. Pursuing these multiple objectives has always been challenging, but the urgency of action adds another facet: we need to accelerate power system decarbonisation and achieve a 75% renewable share by 2030.

We must ensure that the responsive, short-term actions taken to meet today’s security and price challenges are directionally correct for the long-term vision: a decarbonised and well-functioning economy by 2050. Building soon-to-be abandoned fossil infrastructure now is costly.

Similarly, distorting the merit order by capping gas prices slows down the replacement of fossil fuel capacities with clean resources. The scale of the challenge and the ‘need for speed’ is unprecedented. Old thinking will not deliver the new energy system we need.

With that in mind, RAP has developed a Blueprint for a decarbonised European power system, including the necessary regulatory solutions to navigate there by 2035.

A new baseline for clean investments

Recent events revealed the actual cost of gas. This is the new baseline for investment decisions into clean energy solutions. Gas and other fossil fuel prices can jump on a rollercoaster at any time and take Europe for a ride.

Decarbonising the energy system means decarbonising power generation first. Renewable-based generation technologies are proven technologies, and their costs continue to decrease steadily. The most efficient way of decarbonising heating and transport is via electrification. Both of these end-uses rely on imported fossil fuels in Europe.

Climate policy is now security policy

Rapidly displacing fossil fuels, including Russian gas, with renewable power generation capacity has its own challenges. It requires the parallel pursuit of the goals of minimising the cost of the transition, maintaining a reliable power system and safeguarding the equitable distribution of cost and benefits among consumers while alleviating existing inequalities. The ‘great energy capacity swap’ rests on a few key tenets explored below.

The basics of a zero-emissions power system

The core coordination mechanisms are markets and prices. Creating an integrated European power market has already delivered large benefits to European consumers. Prices — that are granular in time and space — are key in optimising production and consumption decisions and responses. The core European power market model is not broken and does not need a fix. However, it requires some safeguards and reinforcements to protect customers from extreme price impacts and ramp up the speed of change.

Energy Efficiency First must take its place as a key overarching principle, not just a slogan or a new name for energy efficiency. To minimise total system costs, the most efficient solution needs to be chosen from the pool of supply, storage and demand options when balancing the system, providing grid services and ensuring resource adequacy.

Low-cost management of a renewable-based power system needs a lot of flexibility from all possible sources: generation, storage and demand. Faster and larger markets further facilitate the integration of variable generation.

Consumers must wear two hats. They are the ultimate vendors, so they should be empowered to define what energy services they need. They also offer essential new system resources by their demand, storage and generation capabilities.

More grid and more generation assets will virtually always equal more reliability, but we need to ask if the gains are large enough to justify the costs each time. Optimal resource adequacy means full transparency over the cost of marginal supply-side capacity and full recognition of the value of demand-side flexibility. Thriving forward markets are key in triggering investment based on consumer choice and — unlike capacity mechanisms — without running the risk of supporting non-economic/fossil units.

Europe has ambitious offshore wind development plans. Scaling up requires new thinking: joint grid planning with anticipatory investment, multipurpose grid use (interconnection and linking wind parks onshore) and single system operation.

Power System Blueprint

RAP pulled the essential building blocks of a future zero-emissions power system in Europe by 2035. The Power System Blueprint takes a systems view, sketching out an integrated plan of regulatory solutions essential for a transition that is efficient and equitable. The solutions are designed to galvanise the dirty-for-clean capacity swap, optimise network investment and safeguard efficient spending and consumption decisions through transparent pricing. They are offered up as a toolbox to assist EU and national regulators as they identify the next steps and formulate strategies, each with its own starting points and priorities.

Conclusion

The war in Ukraine drastically changed the public discourse on energy — systems and markets. Calls for stepping back from the transition as planned to reconsider the fundamentals of markets are myopic. At this pivotal moment, it is incumbent on us to accelerate the transition while safeguarding consumers from extreme price impact while needed. Whenever you decide on next steps, you should keep the eyes on the horizon. Always. Not only on the direction of the wind.

This article previously appeared in Euractiv