How Heat Pumps Reduce Energy Bills and Air Pollution in the San Francisco Bay Area

Rent, mortgage, groceries, utilities…the squeeze is real, and San Francisco Bay Area families feel it every month. Here’s a rare piece of good news for their bank accounts: RMI analysis estimates that 19 out of every 20 homes will see energy bill savings when replacing their gas water heater with a heat pump water heater. And for low-income households, even more save.

Heat pumps cut pollution, improve air quality, and save households money. Previous RMI research showed that switching to a heat pump can lower energy bills across California, and new analysis modeling the Bay Area single-family housing stock — roughly 1.4 million homes with gas appliances — provides even stronger evidence.

Heat pump water heaters lower bills for nearly every Bay Area home

The results are clear: Nearly all single-family homes in the Bay Area would lower their energy bill when they replace a gas water heater with a heat pump water heater. The average household would save about $360 a year, or $30 a month.

And the households that need it most save most reliably.Across the roughly 128,000 Bay Area homes we modeled that qualify for California Alternate Rates for Energy (CARE), the state’s discount program for lower-income customers, more than 99% saw their bill go down.

These cost reductions span all nine Bay Area counties, with average yearly savings ranging from $320 to $430.

The math behind the savings: efficiency meets rate reform

Savings come from two main sources: energy efficiency and recent electricity rate reform. Because heat pump water heaters move heat rather than burn fuel to generate it, they are typically more than three times more efficient than gas water heaters. When this efficiency is paired with beneficial electric rates, the savings grow.

In March 2026, California’s investor-owned utilities rolled out new rates to encourage electrification and reduce strain on low-income customers. The rate change, mandated by the California Public Utilities Commission, shifted part of the per-unit cost of electricity into a flat monthly charge of roughly $24, lowering the price for each kilowatt-hour by roughly 10%. In practice, this means households that use more electricity and less gas pay less overall.

The benefits are even more substantial for low-income customers. All CARE customers now pay about $6 a month in fixed charges instead of $24 and receive a  a discount of 35% or more on their electricity rates, which is larger than the 20% discount they receive on gas. As a result, shifting away from gas places more of the bill under the larger discount. CARE customers, the households most at risk of high energy burden, have the most to gain from moving off gas.

In addition to these rate mechanisms, bill savings depend on actually enrolling in an electric home rate, and today that step falls to the customer. Utilities could streamline this for ratepayers by automatically enrolling customers who receive heat pump rebates in these beneficial rates, as Xcel Minnesota and Eversource Massachusetts do.

Nearly 90% of homes save when they replace both appliances

These bill savings are not limited to water heaters. When a home replaces both its gas water heater and its gas furnace with heat pumps, nearly 90% of homes still see lower bills, saving an average of $320 a year.  Homes with an existing air conditioner save even more, because they are upgrading an old, inefficient air conditioner for a heat pump that cools more efficiently, averaging $420 a year in bill savings.

For homes without air conditioning, the results are particularly noteworthy. When a heat pump adds cooling to a home without it, some may expect annual bills to increase. Instead, nearly three out of four homes we modeled still see lower annual bills. Savings on heating and water heating offset the new cooling costs while improving comfort and resilience. As heat waves in the Bay Area get longer and more extreme, heat pumps can ensure these families have affordable access to cooling.

Electrification can help put downward pressure on electricity rates

In PG&E, the gap between electricity and gas rates has narrowed by nearly a quarter since 2024 and is currently at its lowest point in five years. Volumetric electricity rates are roughly back to where they were in 2022, in part because of the rate reform mentioned above, while gas rates are up about 15% over that period.

The electricity and gas rate gap may continue to narrow given gas rate volatility, and heating homes with heat pumps can put downward pressureon electricity rates. Currently, California’s peak demand is significantly higher in the summer than winter, resulting in underused grid capacity in the winter. Heat pump heating adds load during those underutilized winter months, using infrastructure that is already built and paid for. This spreads costs across more electricity sales, putting downward pressure on rates for all.

The Bay Area’s zero-emission water heater rule will support cleaner air and lower bills

Additionally, the Bay Area Air District has adopted zero nitrogen oxides (NOx) emissions rules that will phase out the sale of NOx-emitting gas water heaters for most homeowners starting in 2028 — and NOx-emitting gas furnaces starting in 2029. The potential savings above are particularly important as households prepare for this transition, showing that cleaner equipment can also lower energy bills.

The Bay Area’s gas water heaters and furnaces release more NOx pollution than the region’s passenger vehicles or oil refineries, driving noncompliance with state and federal air quality standards. The Air District estimates that transitioning to zero-NOx equipment will prevent 15,000 asthma attacks and 85 premature deaths per year, and avoid approximately $890 million in annual health costs. 

With lower bills and cleaner air both pointing the same way, what remains is the installation costs, and the region is already moving to address it. Bay Area cities, utilities, and agencies announced roughly $85 million a year in incentives to help households make the switch, including $41 million for heat pumps

The Air District’s rules were adopted to clean the air. However, in addition to the significant air quality and public health benefits they will bring, this analysis shows the rules will also lower bills for nearly every home they reach, with the most consistent savings going to households with the least room in their budgets.

RMI found the same results across California, and in homes heated with electric resistance nationwide. For the Bay Area and beyond, cleaner air and smaller bills arrive together.

We thank  Xing Chen, Al Qarooni for their contributions to this analysis.

Methodology

In this analysis, we modeled single-family households across the Bay Area using Restock housing stock across nine counties, hourly loads, and RMI’s Green Upgrade Calculator. We used current PG&E rates including IGFC, gas, and electric bills together, annual operating cost only.

The homes were modeled on PG&E bundled service, meaning both electricity supply and delivery come from PG&E. Many Bay Area households instead buy their electricity generation from a Community Choice Aggregators, and the impact on bills will vary somewhat by provider.

Key modeling assumptions:

Homes modeled — 1,550 single-family archetypes covering 1.4 million homes in the Bay Area. Varying home age, air conditioner, heating fuel, water heating fuel, income, current tariff

Baseline energy use from ResStock

Heat pump energy use from RMI’s Green Upgrade Calculator

Electric rates

• Tariffs: Residential TOU (E-TOU-C), Residential TOU Electric Heat (E-TOU-C-EH), Residential TOU Electric Home (E-ELEC). (E-ELEC averages ~$0.36/kWh across time-of-use periods)
  • Criteria: CARE for low-income households (~38% discount) and Territory S, T, or X

Gas rates

• Tariffs: Residential (G-1) (~$2.77/therm
  • Criteria: CARE for low-income households (~20% discount), and Territory S, T, or X

Equipment specs

• Air source heat pump – ducted 8 HSFP2 and 17 SEER2, ductless 8.5 HSPF2 and 18 SEER2
• Heat pump water heater – 3.45 UEF
• Air conditioner – old varies by home
• Furnace/Boiler – new 90% AFUE
• Water heater – 70% UEF