The Opportunity for Heat Pumps to Put Downward Pressure on Electricity Rates

Executive Summary

Residential energy affordability is an increasing concern as energy prices continue to rise. As electricity demand continues to grow, particular attention has focused on whether additional load growth will further increase electricity rates. Historically, however, the United States has shown that load growth does not necessarily increase rates. Between 1980 and 2000, electricity demand grew by more than 70% while inflation-adjusted retail electricity rates fell by approximately 26%, due in part to grid utilization improving by roughly 18%.

This report identifies residential heat pumps as an overlooked opportunity to further improve grid utilization by strategically adding additional electricity sales within available winter headroom — the available winter generation capacity after reserves above winter peak demand. In doing so, heat pumps can simultaneously put downward pressure on electric rates (i.e., lower rates relative to what they otherwise would be) and reduce greenhouse gas emissions.

Using seasonal generation capacity from EIA derated to meeting seasonal peak demand, and hourly load modeling from Evolved Energy Research (EER) and National Lab of the Rockies (NLR) normalized to real-world demand data, we evaluated:

• how many residential heat pumps could be deployed using available winter headroom,
• the resulting downward pressure on residential electricity rates,
• the resulting greenhouse gas emissions reductions, and
• the policies that could accelerate deployment.

Key findings

Seasonal grid headroom varies substantially across states. Grid headroom can differ substantially between summer and winter. Most states in the Southwest, Upper Midwest, and Northeast have significant winter headroom (with peak demand in the summer), resulting in unused winter grid capacity. In contrast, many states in the Southeast and Pacific Northwest have similar summer and winter headroom, in part because of widespread electric resistance heating.

Roughly 109 million US homes — three out of four — could heat and cool with heat pumps within available winter headroom. This means an additional 86 million homes could install a heat pump, adding to the 23 million homes today. The appropriate deployment strategy varies by state based on existing seasonal capacity and demand:

• In milder states with substantial winter headroom, nearly all homes can adopt all-electric heat pumps within winter headroom.
• In colder states with more limited winter headroom, a combination of all-electric and hybrid heat pumps can enable substantially greater heat pump use within winter headroom.
• In some states without winter headroom, upgrading electric resistance-heated homes to all-electric heat pumps can create additional winter headroom. This newly created headroom can then accommodate all-electric and hybrid heat pumps in some homes currently heated with fossil fuels.

These estimates reflect the capacity available under today’s grid and should not be interpreted as a limit on longer-term heat pump deployment as the grid evolves.

Strategic heat pump deployment can improve grid utilization and put meaningful downward pressure on residential electricity rates. In summer-peaking states, filling available winter headroom increases electricity sales without requiring new generation capacity, improving grid utilization and lowering the average cost of providing electric service. We estimate that:

• An all-electric heat pump only deployment strategy within winter headroom could reduce residential electric rates by an average of 6% across summer-peaking states. This would total $6.7 billion per year — or $86 annually per customer.
• A mix of all-electric and hybrid heat pumps within winter headroom could reduce residential rates by an average of 13% in summer-peaking states by adding significantly more electricity use within headroom. This would total $15.6 billion per year — or $200 annually per customer.

Given the caveats explored further in the report, these results should be interpreted as directional estimates that identify where the greatest opportunities exist rather than precise forecasts for individual utilities.

Heat pumps can substantially reduce greenhouse gas emissions when deployed within winter headroom. Nationally, an all-electric heat pump only deployment scenario within winter headroom reduces annual residential emissions by approximately 101 million metric tons of carbon dioxide equivalent (MMTCO₂e), while a mix of all-electric and hybrid heat pumps increases reductions to approximately 182 MMTCO₂e per year. These results demonstrate that strategically combining all-electric and hybrid heat pumps can maximize emissions reductions within winter headroom while putting maximum downward pressure on residential electric rates.

Future changes to the grid, home energy efficiency, and weather will influence the headroom available for heat pumps. The winter headroom identified in this report represents today’s electric grid; future deployment of data centers, electric vehicles, commercial building electrification, and generation resources could increase or decrease the amount of headroom available for residential heat pumps. This analysis also does not include weatherization, demand response, or warming climate, which would further increase heat pump deployment within available headroom.

Policy recommendations

Capturing these affordability and climate benefits will require policies that align heat pump deployment with each state’s seasonal grid profile while addressing the higher up-front cost of heat pumps. This report recommends five policy priorities:

1. Set heat pump installation goals within electricity affordability plans to establish clear targets and align funding, programs, and policies around achieving them.
2. Redesign incentive programs to shift funding toward the heat pumps that maximize affordability benefits in each state.
3. Redesign electric rates to better reflect real seasonal electric system costs, increasing customer bill savings with heat pumps.
4. Encourage replacing air conditioners with heat pumps through building and energy codes that strongly incentivize heat pumps at the natural equipment replacement cycle.
5. Adopt electric-friendly standards for new construction to encourage higher efficiency systems and avoid locking in future retrofit costs.

Introduction

Americans are increasingly feeling the effects of rising energy costs. US residential electricity rates have increased by more than 8% over the past two years, and continued growth in electricity demand has raised concerns that rates could climb even higher.

Thankfully, we’ve successfully dealt with this before: US electricity demand grew by over 70% between 1980 and 2000, while inflation-adjusted average retail rates fell by approximately 26%. One major reason was improved utilization and efficiency of the electric grid. During this same time period, utilization of the bulk power system (i.e., average load relative to installed generating capacity) improved by roughly 18%, allowing utilities to spread fixed infrastructure costs over more kilowatt-hours sold and put downward pressure on rates.

Today, most discussions about improving grid utilization focus on demand flexibility, distributed energy resources, and virtual power plants. While these resources are important, one technology has received comparatively little attention: electric heat pumps for home heating and cooling.

In many parts of the country, electric demand peaks in the summer and drives investments in generation, transmission, and distribution capacity to meet that peak demand. In winter months, when demand is lower, much of this infrastructure is underutilized. In these regions, electric grid headroom — the available generating capacity after reserves above peak demand — is greater in winter than in summer. Winter headroom enables heat pump upgrades in fossil fuel-heated homes to add load during these underutilized winter months. This presents a key opportunity: By making better use of underutilized grid assets, heat pumps can lower average system costs and put downward pressure on electric rates.

The opportunity depends on both the deployment strategy and the type of heat pump installed.

• All-electric heat pumps fully replace a home’s existing heating and cooling systems. When replacing fossil fuel heating, they increase winter electricity demand, which is beneficial in states with winter headroom. However, when replacing electric resistance heating, they reduce winter electricity demand because high-efficiency heat pumps are much more efficient. This reduction is typically beneficial in all states. In colder climates, cold-climate heat pumps can maximize efficiency and minimize supplemental electric resistance heat.
• Hybrid heat pumps, which pair an electric heat pump with an existing fossil fuel furnace or boiler, add winter electricity demand, but can switch to the furnace to limit demand during the coldest hours. This makes them an effective option in colder states lacking sufficient winter headroom.

For both heat pump designs, they typically reduce summer electricity demand when replacing existing, older air conditioners (ACs), and increase summer electricity demand when adding cooling in homes without, or with only partial home, ACs.

While this report focuses exclusively on air-source heat pumps given they represent the vast majority of the current market, ground-source heat pumps could achieve even higher levels of adoption with available grid capacity since they are even more efficient.

This report explores the opportunity to strategically deploy heat pumps in US homes based on a snapshot of today’s electric grid to improve electricity affordability, while reducing emissions. Specifically, we aim to answer 6 questions:

1. Electric grid winter headroom: What is the electric grid’s winter headroom — or difference between winter capacity and demand — in each state?
2. Headroom-limited heat pump deployment: How many all-electric heat pumps and hybrid heat pumps can be installed within available winter headroom?
3. Residential rate reduction potential: How much could this heat pump deployment put downward pressure on electric rates?
4. Residential climate pollution reduction potential: How much climate pollution could this heat pump deployment reduce?
5. Headroom changes over time: How might the winter headroom for heat pumps increase or decrease given changing generation and demand?
6. Policy recommendations: What policies can further this heat pump deployment?

1. Electric Grid Winter Headroom

Electricity demand in each state reaches its highest level — or peak demand — at different times of the year depending largely on the climate and how buildings are heated and cooled. The generation capacity available to meet that peak demand also varies by season and time of day, particularly for renewable resources. Because summer and winter peaks often occur at different times of day, the generation capacity available during those peaks can also differ.

The difference between available generation capacity, after accounting for reserve margin requirements and electricity imported or exported, and peak demand is the grid’s available headroom, as illustrated in the Exhibit below.

Winter headroom represents the amount of additional electric load that can be added without reducing grid headroom below its minimum summer level, and therefore without requiring additional generation capacity for resource adequacy. While headroom varies across utilities and local grid conditions within each state, we use statewide headroom to characterize the broader opportunity for heat pump deployment.

We estimated statewide hourly electricity demand and seasonal available generation capacity to calculate winter and summer headroom across the continental United States. See our methodology for additional details.

• Statewide hourly demand: Using balancing authority-reported hourly demand data and utility-reported summer and winter peak demand data, we calibrated EER’s Annual Decarbonization Planning (ADP) state-level hourly load data to observed data from 2020 to 2024 to estimate average summer and winter peak demand for each continental US state.
• Statewide available seasonal generation capacity: Using EIA’s 2025 generator-level summer and winter rated capacity, we applied state- and technology-specific summer and winter derating factors to estimate the generation capacity available to serve the summer and winter peak demand in each state.

We found that most states in the Southwest, Upper Midwest, and Northeast have winter headroom, as shown in blue in the maps above. This is partly because most homes use ACs while relatively few use electric heating, resulting in substantial unused winter grid capacity. Illinois, for example, averaged 8.9 gigawatts (GW) of winter headroom (30.4 GW of available winter capacity after reserves minus 21.5 GW of winter peak demand). This 8.9 GW of winter headroom can accommodate electricity demand from millions of heat pumps without grid capacity expansion, as explored in the next section.

In contrast, many states in the Southeast and Pacific Northwest have little to no winter headroom, with similar winter and summer headroom, as shown in white in the maps above. This is driven in part by widespread inefficient electric resistance heating, which increases electricity demand during colder weather. Georgia, for example, averaged similar summer and winter peak demand, 27 GW and 25 GW respectively, with similar summer and winter available generation capacity, leaving little winter headroom for heat pump upgrades in fossil fuel-heated homes.

Across the nation, these results represent a snapshot of today’s electric grid and recent load patterns. The winter headroom available for heat pump deployment will change with large new electric loads, broader electrification, new generation resources, and weather changes. We discuss these interactions further in section 5: Headroom Changes Over Time.

2. Headroom-Limited Heat Pump Deployment

The winter headroom shapes the modeled heat pump deployment strategy in each state:

• States with sufficient winter headroom: Where relative winter headroom exceeded 10%, we modeled heat pump deployment proportionally across electric resistance- and fossil fuel-heated homes.
• States with limited or no winter headroom: Where relative winter headroom was below 10%, we first modeled heat pump upgrades in electric resistance-heated homes to increase winter headroom. When these upgrades increased winter headroom above summer headroom, we modeled additional heat pumps in fossil fuel-heated homes.

Using NLR’s 2024.2 ResStock hourly residential load model, normalized to our calibrated EER’s ADP hourly statewide load model, we estimated the number of residential heat pumps that could be deployed within winter headroom and without increasing annual peak demand for two scenarios: 1) all-electric heat pump deployment only, and 2) a mix of all-electric and hybrid heat pump deployment.

We limited the analysis to homes with individual gas, oil, propane, or electric resistance heating systems (i.e., excluding shared central systems) due to ResStock modeling limitations.

We also staged the analysis to prioritize heat pump adoption in homes with existing cooling systems to limit summer demand increases when a heat pump adds cooling. This enabled us to better explore our core hypothesis around winter headroom accommodating significant new electric heating demand. However, in some regions with higher shares of partial home cooling from window ACs, such as the Northeast, the results are still limited by summer peak demand increases. Additional methodological details are provided in the methodology.

1. All-electric heat pump deployment only

We first evaluated a scenario in which only all-electric heat pumps are deployed within available winter headroom and without increasing annual peak demand. This scenario establishes a baseline for understanding how much all-electric heat pump deployment can occur within today’s grid constraints.

The opportunity for all-electric heat pump deployment varies considerably by climate and winter headroom available.

Warmer states: In most warmer states, all homes with cooling — and most homes in the state overall — can convert to all-electric heat pumps within available winter headroom. California, for example, could install all-electric heat pumps in 100% of homes with cooling, and 82% of all homes, within available winter headroom. In this case, modeled deployment is constrained by increased summer peak demand, which decreases statewide minimum annual headroom, from installing heat pumps in homes without existing cooling, even though winter headroom remains. If these homes were instead assumed to add cooling in the future regardless of heat pump adoption, all California homes could upgrade to heat pumps within available winter headroom.

Colder states: In most colder states, however, an all-electric-only strategy allows for fewer homes to upgrade within available winter headroom. For example, in Illinois, approximately 30% of homes could convert to all-electric heat pumps. However, this leaves no headroom for heat pump upgrades in the remaining homes, where additional heat pump deployment would increase winter peak demand, require grid expansion, and put upward pressure on electric rates. The following section explores how incorporating hybrid heat pumps changes this deployment potential.

2. All-electric and hybrid heat pump deployment mix

Combining all-electric and hybrid heat pumps increases potential heat pump deployment by approximately 65% compared with all-electric heat pumps alone, while staying within available winter headroom.

This potential increases to approximately 120 million homes — nearly all US homes — if future cooling adoption in homes without whole-home cooling today is included in the baseline rather than attributed to heat pump deployment (i.e., a warming climate drives AC adoption which would drive higher summer peaks). Under this scenario, heat pump deployment can utilize all of the winter headroom without being constrained by increased summer peak demand in homes without whole-home cooling. We exclude this scenario from the rate analysis that follows to maintain the report’s core modeling constraint for heat pump deployment to not reduce the minimum grid headroom available today and therefore not increase associated generation capacity costs.

The all-electric and hybrid deployment mix maximizes total heat pump deployment while giving preference to all-electric heat pumps whenever sufficient winter headroom is available. As a result, the mix varies considerably by state depending on climate and available winter headroom.

Warmer states: In most warmer states, 100% of all homes can install a heat pump within winter headroom, with nearly all installations being all-electric.

Colder states: In colder states, both all-electric and hybrid heat pumps are needed to maximize deployment within available winter headroom. In Illinois, for example, 100% of all homes can install a heat pump within winter headroom — up from 30% in the all-electric only scenario — with a mix of 21% all-electric and 79% hybrid heat pumps. The affordability and climate benefits of this all-electric and hybrid deployment strategy are explored in the following two sections.

In some western and northeast states, the total heat pump deployment is instead limited by increases in summer peak demand as homes without cooling gain it through a heat pump. If this additional cooling were included in the future baseline rather than attributed to heat pump deployment, nearly 100% of homes in these states could also install heat pumps within winter headroom.

Potential variations in heat pump deployment

In each of these scenarios, the deployment estimates represent a baseline based on today’s grid and modeled conditions. In practice, the heat pump deployment potential given winter headroom could increase or decrease depending on future load growth from other sectors and corresponding grid expansion, future generation capacity, weather conditions, and complementary measures installed alongside heat pumps. We discuss these interactions further in section 5: Headroom Changes Over Time.

3. Residential Rate Reduction

The opportunity for heat pumps to put downward pressure on electric rates (i.e., lowering rates relative to what they otherwise would be) depends on the winter headroom.

In states with winter headroom, strategically deploying heat pumps can add load during underutilized hours. This spreads fixed generation, transmission, and distribution costs across more kilowatt-hours, improving grid utilization and reducing volumetric electric rates. We estimated the impact on residential electric rates associated with the winter headroom-limited results from the prior section (i.e., including constraints from increased summer peak demand).

• Under the winter headroom-limited all-electric heat pump only scenario, we found that maximum deployment could reduce residential electric rates by an average of 6% across states with winter headroom. This would total $6.7 billion per year — or $86 annually per customer.
• Under the winter headroom-limited all-electric and hybrid heat pump mix scenario, we found that maximum deployment could reduce residential electric rates by an average of 13% across states with winter headroom. This would total $15.6 billion per year — or $200 annually per customer. Thus, for stakeholders in colder states prioritizing energy rate affordability, a mix of all-electric and hybrid heat pumps has larger electricity rate reduction potential.

In both scenarios, these results varied significantly based on climate, winter headroom, and existing heating equipment.

The largest savings occur in colder states with substantial winter headroom, whole-home cooling, and relatively little electric resistance heating.

The Upper Midwest conveys this most clearly. For example, Michigan’s cold climate and approximately 7.6 GW of winter headroom could allow for deploying only all-electric heat pumps in an additional 1.1 million homes, or deploying a 24%/65% mix of all-electric and hybrid heat pumps in an additional 3.6 million homes, within available winter headroom. Deploying all these heat pumps over the coming years would reduce residential electric rates by approximately 11% (all-electric only) or 27% (all-electric/hybrid), respectively, relative to today’s rates. For context, Michigan’s residential electricity rates have increased by 19% over the past five years.

To estimate these impacts, we assumed that no additional generation and transmission investments are required because the minimum grid headroom does not decrease. However, we do include the cost of the additional wholesale electricity consumed by heat pumps, as well as distribution upgrade costs given some local distribution systems are more constrained and will require upgrades to support the heat pump deployment. We estimated wholesale energy costs using average hourly locational marginal prices from 2023 to 2025 and distribution costs using state-specific estimates of $/kW-year distribution system capacity costs, winter headroom, population density, cost of living, and grid infrastructure characteristics.

The impact on electric rates should be interpreted as directional estimates rather than precise forecasts for any individual utility. This is because distribution system costs vary widely across utilities and are not consistently reported. Additionally, heat pump deployment will occur over decades rather than immediately during which grid conditions, investments, and rates will evolve. Nevertheless, these results point to significant affordability benefits from identifying where strategically deployed heat pumps have the greatest potential to put downward pressure on electric rates and the approximate magnitude of that opportunity. Additional methodological details are provided in the methodology.

The opportunity to put downward pressure on electricity rates is different in states with limited or no winter headroom.

Rather than increasing electricity sales, the primary benefit comes from reducing winter peak demand by replacing inefficient electric resistance heating with high-efficiency heat pumps. Lower peak demand can defer future investments in generation, transmission, and distribution infrastructure needed to support additional electrification or other large electric loads. With appropriate cost allocation, these avoided infrastructure investments can also put downward pressure on long-term electricity rates, but we did not estimate them in this report given its separate methodology. See RMI’s recent article “Lower Bills, Better Grids” on this topic for a more detailed discussion of this opportunity.

Lastly, it is important to note that this level of heat pump deployment in both scenarios will decrease residential natural gas usage significantly — by roughly 29% country-wide in the all-electric heat pump deployment scenario and 59% in the all-electric and hybrid mix scenario. This will impact the economics of the gas utility system, likely increasing residential gas rates. In both the all-electric and hybrid scenarios, utilities will need to revisit their trajectory of gas system spending to avoid overinvesting in capacity for a system with declining usage. They will also need to reexamine the rate designs they offer to spread costs fairly across customers while securing adequate cost recovery.

4. Residential Climate Pollution Reduction

In addition to putting downward pressure on electric rates, heat pumps substantially reduce greenhouse gas (GHG) emissions because they are typically three to four times more efficient at heating than conventional furnaces and boilers and can be powered by clean electricity.

To estimate these emissions benefits, we combined NLR’s ResStock hourly marginal emissions factors with our calibrated EER’s ADP model in each state.

• The maximum number of US homes upgrading to heat pumps within available winter headroom could reduce emissions by 101 MMTCO₂e per year with all-electric only heat pumps and 182 MMTCO₂e with a mix of all-electric and hybrid heat pumps.
• If our model assumed that homes that don’t have ACs today adopt ACs in the baseline, rather than attribute the additional cooling load to heat pump deployment, the US could reduce emissions by 209 MMTCO₂e per year with a mix of all-electric and hybrid heat pumps. This would be equivalent to converting 53 coal-fired power plants to renewable energy facilities.

We found that GHG reductions are greatest when maximizing heat pump deployment within available winter headroom. Emissions reductions per home are highest in states with colder climates and cleaner electric grids, while the largest total emissions reductions occur in states that also have large housing stocks.

New York illustrates this opportunity. Its cold climate, cleaner electric grid, and large housing stock result in the nation’s largest residential emissions reduction opportunity.

• When constrained within the available winter headroom, all-electric heat pump only deployment in New York would reduce emissions by roughly 10 MMTCO₂e per year. With an all-electric and hybrid heat pump deployment mix, that grows to a reduction of 15 MMTCO₂e emissions per year — approximately 40% of statewide residential GHGs.
• If our model assumed future cooling adoption in homes without whole-home cooling today is included in the baseline rather than attributed to heat pump deployment, the all-electric and hybrid heat pump deployment mix in New York would reduce emissions by approximately 25 MMTCO₂e per year (achieving 90% of the maximum potential GHG reduction if all homes convert to all-electric heat pumps without considering headroom constraints).

These climate pollution results, combined with the prior electric rate results, illustrate one of the central findings of this analysis: strategically deploying the appropriate mix of all-electric and hybrid heat pumps can deliver most of the available climate benefits while also maximizing downward pressure on residential electricity rates.

These results assume well-designed hybrid heat pump systems that operate the heat pump for the vast majority of annual heating demand, using the existing fossil fuel system only during the coldest hours of the year. Achieving these benefits requires appropriately low changeover temperatures (i.e., when the fossil fuel heating kicks on) and controls that maximize heat pump operation. Hybrid heating systems that switch to fossil fuel heat too early or too often would reduce winter electricity sales, limit emissions reductions, and diminish the downward pressure on electric rates identified in this analysis.

5. Headroom Changes Over Time

The heat pump deployment and corresponding affordability and climate benefits estimates in this report represent a snapshot based on today’s grid, load profiles, and modeled conditions. In practice, winter headroom — and therefore the number and mix of residential heat pumps that can be deployed within it — will evolve over time.

Several developments could create more winter headroom than estimated in this analysis:

• Complementary technologies: Weatherization, thermal storage, battery storage, and other technologies that reduce winter peak demand could limit winter peak demand and create additional winter headroom. These measures could enable more heat pumps — and a greater share of all-electric heat pumps — to be deployed without expanding the grid.
• Data center deployment: Data centers typically operate at high load factors throughout the year but can consume moderately more electricity in summer — typically 5%–10% more than in winter, depending on the climate, data center type, and cooling design. As the grid expands to accommodate this growth, the higher summer load could create additional winter headroom. For example, if summer demand were 10% higher than winter demand for the additional 34 GW of data centers projected in PJM by 2035, it would increase winter headroom in PJM by roughly 20%.
• A warming climate: Climate change could alter seasonal peaks. If extreme summer heat increases peak demand more than extreme winter cold, relative winter headroom could increase in those states.

Other developments could create less winter headroom than estimated in this analysis:

• Transportation electrification: EV adoption is also expected to substantially increase electricity demand over the coming decades, at a scale comparable to data center growth. Because EV charging occurs throughout the year, growing EV adoption will generally increase both summer and winter demand, with seasonal differences depending on the state’s climate. With managed charging, much of this demand can shift away from constrained hours, which would reduce additional winter headroom in summer-peaking states today. While this would also likely put downward pressure on rates, it is helpful to understand how it may impact the results in this report.
• Commercial building electrification: Electrification of commercial space heating will increase winter demand. Because commercial space-heating loads are driven by many of the same weather conditions as residential heating, they may coincide with residential heat pump demand and consume winter headroom. High-efficiency heat pumps, thermal storage, building controls, and other forms of demand flexibility can reduce these peak impacts. While this would also likely put downward pressure on rates, it is helpful to understand how it may impact the results in this report.
• Changes in the generation mix: Increased deployment of resources whose available capacity is lower during winter peaks than summer peaks, particularly solar PV, could reduce winter headroom. Pairing these resources with short- and long-duration energy storage could mitigate this effect by increasing the capacity available during winter peak periods.
• Extreme winter weather: Our analysis uses a representative weather year, while utilities plan their systems for more extreme conditions. During severe cold events, heat pump demand could be higher than in our modeled year, and all-electric heat pumps may rely more heavily on supplemental electric resistance heating, reducing winter headroom.

The heat pump deployment potential presented in this report will evolve based on the above factors. The broader objective should not be to preserve today’s winter headroom for heat pumps, but to encourage all solutions that serve growing electricity demand while making efficient use of the infrastructure needed to serve it.

Demand flexibility — including virtual power plants, managed EV charging, energy storage, and flexible building loads — can further improve utilization by shifting consumption away from constrained hours, whether those constraints occur in summer or winter.

At the same time, large new loads such as data centers may require substantial grid expansion. Policymakers and regulators should ensure that these customers contribute appropriately to the infrastructure investments required to serve them, rather than shifting those costs disproportionately onto residential customers. Done well, grid expansion can accommodate large new loads while creating a better-utilized system capable of supporting continued growth in heat pumps, EVs, and other beneficial electrification.

6. Policy Recommendations

To capture the electric rate affordability and climate benefits of heat pumps, governors, regulators, and other policymakers should include heat pump policies in their affordability plans. Policies should prioritize scaling the types of heat pumps, and homes, that make best use of winter headroom, reducing electric rates and maximizing climate benefits. This means prioritizing fossil fuel-to-heat pump upgrades in states with winter headroom, while prioritizing electric resistance-to-heat pump upgrades in states with limited or no winter headroom.

The following five policy recommendations can help maximize downward pressure on electric rates while accelerating beneficial electrification.

1. Set heat pump installation goals, including within electricity affordability plans

Clear, time-bound targets are what turn a clean energy technology from a nice-to-have into an infrastructure priority — and heat pumps are no exception. States have used this playbook before: California’s GW-scale solar and storage targets and the growing list of state EV sales mandates gave utilities and manufacturers a fixed point to plan around, rather than a moving target tied to whatever incentive dollars happened to be available that year. Heat pump targets do the same work.

For example, Maine’s governor set a heat pump goal of 100,000 new heat pumps by 2025 and achieved it two years early — cutting heating oil use by nearly 20% — in large part due to the associated incentive reform, improved electric rate design, and contractor training. And in 2023, 25 states representing more than half the US population banded together through the US Climate Alliance and pledged 20 million heat pumps by 2030 — a target that requires quadrupling installation rates. These states are giving themselves something to mobilize state agencies and stakeholders around.

That logic should extend to affordability planning specifically. State affordability plans that leave heat pumps out are leaving a rate-suppression tool on the table. A specific heat pump deployment target that maximizes downward pressure on electric rates belongs in the same document as rate design reforms and low-income bill assistance — not off in a separate climate plan where its rate impact gets lost.

The appropriate goal and technology mix will vary by state. In states with substantial winter headroom, goals can prioritize all-electric heat pumps that make greater use of underutilized grid capacity. In states with more limited winter headroom — or as headroom declines over time — goals can incorporate hybrid heat pumps and prioritize replacing inefficient electric resistance heating to maximize deployment without increasing peak demand.

2. Redesign incentive programs to prioritize heat pumps that put downward pressure on rates

Achieving deployment at this scale will also require overcoming one of the largest barriers to adoption: heat pumps typically have higher up-front costs than conventional heating and cooling equipment.

In states with meaningful winter headroom, incentive programs should prioritize all-electric heat pump upgrades in fossil fuel-heated homes in the near-term to maximize immediate downward pressure on electric rates. States with limited winter headroom could prioritize all-electric heat pump incentives in electric resistance-heated homes to create additional winter headroom, and provide hybrid heat pump incentives for other customers. Hybrid heat pumps may have lower incentive levels initially, but could increase over time as available winter headroom declines.

In states with little or no winter headroom, incentives should prioritize replacing electric resistance heating and older, lower-efficiency heat pumps with high-efficiency heat pumps to reduce winter peak demand. Incentives for hybrid heat pumps should also be offered for homes currently heated with fossil fuels.

Across all states, incentive programs could increase funding for heat pumps by shifting funding away from conventional ACs and fossil fuel heating equipment. Incentive program best practices include being simple, standardized, designed for the market, durable, and equitable. For example, Efficiency Maine’s incentive program does not include incentives for ACs or fossil fuel heating equipment, and has included consistently large, income-tiered, midstream incentives for heat pumps for years.

While deploying heat pumps at this scale will require substantial investment for incentives, policymakers should encourage this given the energy cost benefits to residents.

3. Redesign electric rates to more accurately reflect seasonal costs

This recommendation is particularly relevant for states with sufficient winter headroom, where electricity consumption during summer peak periods imposes higher system costs than winter consumption. If retail rates are not aligned with seasonal costs, heat pump users can be overcharged for their usage. Correcting this to more closely reflect system costs also improves heat pump bill savings to customers, helping spur adoption.

States can accomplish this by requiring utilities, through their public utility commissions, to:

• Incorporate seasonal pricing that more closely matches grid costs into default residential rates (e.g., Ameren Illinois’s default winter volumetric rate for all customers is approximately 35% lower than the summer rate); and/or
• Offer technology-specific rates for heat pump customers (e.g., Eversource Massachusetts’s heat pump winter volumetric rate is approximately 23% lower than the default volumetric rate).

Regardless of seasonal peak, states can also consider shifting a portion of cost recovery from volumetric charges to fixed charges. Lower volumetric rates increase the operating cost advantage of efficient electric technologies like heat pumps. For example, California’s recently adopted income-graduated fixed charges reduced average volumetric rates by roughly 10%.

Importantly, these rate design changes should not alter the system-wide downward pressure on rates estimated in this analysis. Our results are based on average statewide costs and electricity sales, while revenue-neutral rate design changes primarily affect how those costs are recovered across customers and time periods. As heat pumps increase grid utilization, the average system-wide rate benefit estimated above would therefore remain, but its distribution across customers could change. For example, under a heat pump-specific rate, heat pump customers could experience greater bill savings while non-heat-pump customers receive a smaller share of the benefit, even as customers collectively realize the same average system-wide savings.

4. Leverage building and energy codes to encourage “AC-to-heat pump” replacement

Approximately 4 million central ACs are replaced each year (not including new home construction), presenting a major natural replacement opportunity to upgrade to a heat pump. Policies that encourage heat pumps at the time of central AC replacement can accelerate adoption at relatively low incremental cost while making use of winter headroom. Rather than mandating heat pumps, residential energy codes can encourage installation of a two-way heating and cooling system (i.e., a heat pump) when an existing AC is replaced, while preserving alternatives such as installing a conventional AC paired with additional energy efficiency improvements. Coordinating this policy with heat pump incentives can eliminate or substantially reduce the incremental cost of a heat pump relative to an AC.

This approach preserves customer choice by allowing homeowners to install either a heat pump sized to meet cooling loads while retaining their existing heating system (hybrid) or a heat pump sized to meet the home’s full heating load (all-electric). As a result, AC-to-heat pump policies work well in states with or without winter headroom because of the flexibility in heat pump design.

For example, at least a dozen California cities have recently adopted rules that strongly incentivize heat pumps during AC replacements.

5. Adopt electric-friendly standards for new construction

Residential electric ratepayers in all states can benefit from all-electric new construction with heat pumps. Roughly 1.5 million homes are built each year, creating a once-in-a-building-lifetime opportunity to install heat pumps and electric infrastructure from the outset. In all states, all-electric new homes can support electricity affordability because states should either (1) have winter headroom to accommodate additional heating load, or (2) have mild enough winters that efficient heat pumps add similar winter and summer peak demand. As a result, all-electric, high-efficiency new construction can improve grid utilization and put downward pressure on electric rates in all states.

Beyond grid impacts, new construction is the least-cost opportunity to electrify. Installing electric heat pumps and infrastructure up-front avoids the substantially higher cost of future retrofits and eliminates the need for new gas service.

Policy options include:

• electric-ready construction requirements;
• fuel-neutral or fuel-debiased energy codes; and
• all-electric construction standards.

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