Heat Pumps: Good Enough for Queen Elizabeth so Why Not for the Northeast?

George W. Bush, the Queen of England, Sir Elton John, and Sir Richard Branson probably don’t have much in common, but they all have installed ground source heat pumps. And it’s not just a technology for the rich and famous. Habitat for Humanity installed heat pumps in its Oklahoma City development, Hope Crossing, because the low operating costs would help future residents save on their utility bills.

Sixteen percent of America’s 18.8 million barrel per day oil consumption is burned to heat our homes and businesses, and two-thirds of that demand is in the Northeast (New England, New York, New Jersey, and Pennsylvania). Swapping out oil consumption for electric ground source heat pumps offers a low cost, low pollution heating source that can generate $20 billion in savings and is a crucial step to achieving RMI’s Reinventing Fire vision in the Northeast.

The region spends over $14 billion every year on fuel oil—consisting of both distillate fuel oil, which is nearly identical to diesel fuel, and residual fuel oil, which is a heavy, viscous fuel also called “bunker fuel.” That means the six million residential and 450,000 commercial customers who use oil spend an annual average of $1,700 and $8,900, respectively, to heat their homes and businesses.

Along with the economic drag from using this high-priced fuel, 43,000 tons of nitrogen oxides, 69,000 tons of sulfur oxides, and 57 million tons of CO2 are added to our atmosphere every year, negatively impacting our health, air, water, and climate.

If residents and business owners in the Northeast switch entirely from oil to heat pumps they could save a total of $5.5 billion per year in heating costs, which is more than the healthcare expenditures of the entire state of Vermont. Over the lifetime of a heat pump system, each resident in the state could save $3,000 (present value), and each business could save $50,000 (present value). Emissions of NOx, SOx and CO2 would be reduced by 81 percent, 66 percent, and 81 percent, respectively. Those CO2 emissions reductions alone are equivalent to taking 8.2 million cars off the road.

How Does it Work?

A heat pump exchanges heat to and from the surrounding earth into the conditioned space of a building. The technology is similar to a refrigerator (an electrically-driven vapor-compression refrigeration system) that can be operated in both directions to provide heating or cooling as conditions require.

Heat pumps are cheap to operate primarily because they are able to generate three to five units of heating or cooling for each unit of electricity consumed (a 300 percent to 500 percent efficiency gain, or a 3.0–5.0 coefficient of performance in industry-speak).

And, because heat pumps are powered by electricity, they offer not only near-term emissions reductions (since the Northeast grid already emits low greenhouse gases due to its reliance primarily on natural gas and nuclear energy) but offer a pathway to low or zero emissions heating through renewable generation.

Converting from oil to heat pumps amounts to a large economic opportunity for the region. If 50 percent of oil customers were to convert to heat pumps over the next 20 years, they would generate $37 billion in direct investment that flows directly to the contractors installing these systems, helping to support local jobs. The $20 billion in net savings that investment generates can improve the balance sheets of residents and businesses while also allowing for reinvestment that further spurs economic growth. The cost to operate those heat pumps will be spent on electricity rather than oil, keeping money in the local economy instead of exporting dollars overseas.

What About Natural Gas?

Natural gas is cheap today, but even if we ignore its history of volatile prices and assume it will be cheap into the future, natural gas is not widely available in much of the Northeast. And the economics of natural gas pipeline permitting and construction mean that it likely will never be available for the rural Northeast.

In addition, an expansion into natural gas will actually make it harder for the region to reach its 80 percent greenhouse gas reduction target by 2050. Natural gas emits 27 percent less CO2 than heating oil. Yet, due to the long life of natural gas infrastructure, any expansion means that we may shut the door to renewable heating options.

Vaulting the Barriers to Widespread Adoption

The installation of ground source heat pumps is not yet widespread because there are a number of barriers that stand in the way: high upfront costs, long payback periods, lack of understanding of the technology, perceived uncertainty in performance, inexperienced designers, and a thin contractor base.

Of these barriers, high upfront costs and long payback times are the most pressing issues. The average residential system pays back its investment in 11 years, while the average commercial system pays back in 6.5 years. That leaves ample opportunity for savings over the 20-year (or more) life of the system, but most home or business owners do not know if they will be in the same building or even own their business six to 11 years from now.

There is a set of public and private financing tools well suited to address this barrier. Utilities can offer on-bill financing; pooling customers to get preferential interest rates while using customer’s payment history to reduce credit risk. The Plumas-Sierra Rural Electric Coop already provides a similar solution by offering a 30-year, zero percent financing, ground loop lease program. Cities and states can offer property-tax financing vehicles (similar to PACE bonds). Beyond providing access to low municipal financing rates, this structure ties the repayment of the loan to the building and not the occupant. The market can be opened to third-party ownership where an independent company owns the heat pump system and leases the heating or cooling output.

States may need to change regulations that stand in the way, such as requiring those third parties to be treated as utilities, but many have already taken this step to open the market to solar photovoltaic third-party ownership structures. Finally, states can allow for utility ownership of the ground loops. Since those assets often have a 40 to 50 year lifetime, utilities could invest in the system and sell the heating and cooling services to home and business owners no matter who occupies the building. States should adopt policies to unlock financing solutions and help jump-start the heat pump market. Heat pump systems are eligible for a 30 percent federal investment tax credit through 2016, so first mover states stand to benefit even more.

There is precedent for this type of transition. Sweden has moved from being entirely dependent on oil heating in 1970 to using a mix of biomass, district heating, and ground source heat pumps today (with only a small amount of oil remaining). Heat pumps now make up 40 percent of their heating market, but this transition took Sweden 40 years.

Can it be done more quickly here in the Northeast? Probably, but the time to start is now and targeted interventions by states can help speed the process. The region must not keep burning oil for heat simply because it has always been done that way.

Inaction is a choice, but the better choice is to take concrete steps to support growth in heat pumps.