Heat pumps are a critical technology to improve air quality, protect public health, cut pollution, and provide efficient heating, cooling, and hot water. However, policymakers in California have wrestled with how strongly to promote heat pumps, asking: “How much do heat pumps impact energy bills given California’s notably high electric rates?”

Heat pumps can reduce energy bills in California

RMI used the Green Upgrade Calculator to estimate the change in energy costs for a typical single-family home with air conditioning (AC) that installs a high-efficiency air-source heat pump (ASHP) and heat pump water heater (HPWH), looking at each IECC climate zone and utility service territory.

We found that a typical single-family household in California that upgrades to an ASHP and HPWH could reduce their annual energy bills by an average of $670 across all fuel types The energy bill savings are highest for single-family households that are currently reliant on propane (around 190,000 homes) or electric resistance (around 380,000 homes) for heating and hot water. These estimated annual bill savings averaged $620 and $3,260, respectively. Single-family homes heating with gas (over 6.1 million homes) could save an average of $370 per year, ranging from a $100 additional cost to $800 annual savings.

We also found that the average single-family household switching from gas to heat pumps would see energy bill savings in almost all regions, as shown in the map below. These savings were generally higher in warmer areas with specialized electric rates for heat pumps. For example, the highest savings were in San Diego County, driven by high cooling loads and San Diego Gas and Electric (SDG&E) having the most beneficial electrification rate. These regional results also align well with Silicon Valley Clean Energy’s recent home electrification bill impact analyses in the Bay Area.

Modern heat pump technology and specialized electric rates drive energy bill savings

The two most crucial factors driving energy bill savings in our analysis were a new heat pump’s superior efficiency, and low or specialized electric rates for heat pump users.

1. Heat pumps significantly lower cooling costs. Newly installed ASHPs in California (typically ~16-17 SEER2 variable speed) are commonly around 20 percent more efficient at cooling than the older air conditioning systems they replace (typically ~12–13 SEER2 single speed), thereby reducing cooling costs by about 20 percent. For the approximately one-quarter of California homes that don’t have air conditioning, an ASHP gives residents access to cooling — which is increasingly a necessity in more regions due to climate change. Heat pumps also heat three to four times more efficiently than gas-fueled equipment. Switching from gas to electricity for heating means that energy rates also play a large role in driving these bill impacts.
2. Heat pump customers pay low or specialized electric rates. Publicly owned utilities’ electric rates are, on average, 50 percent lower than investor-owned utilities’ (IOUs) rates, enabling heat pump users in these areas to benefit from low rates. IOU customers installing heat pumps also benefit by receiving a specific, lower electric rate that better reflects their true cost to the utility. Since these rates are cost-based, they are not a subsidy. IOU customers can leverage rate comparison analysis resources from utilities (PG&E, SCE, SDG&E) or third-parties to identify the optimal rate for their home. Their choices include:
   1. The default time-of-use rate but with electric heating indicated to increase their baseline usage, effectively lowering their volumetric (i.e., price per energy used) electric rate modestly (typically beneficial for below-average usage customers).
   2. A specialized electrification rate with a much lower volumetric electric rate but a higher monthly fixed charge (typically beneficial for average to above-average usage customers).

Low-income Californians should see an even higher percentage reduction in their energy bills with heat pumps because ratepayer assistance programs provide larger electric discounts than gas discounts. The California Alternate Rates for Energy (CARE) program offers a 30 to 35 percent discount on electric bills for income-qualified customers of IOUs, compared to a 20 percent discount for gas bills. Publicly owned utilities that do not participate in CARE offer their own income-qualified rates, such as the Sacramento Municipal Utility District’s (SMUD) Energy Assistance Program Rate, which provides electric bill discounts of up to $105 per month.

Policymakers need to act now to secure energy bill savings for all Californians

Expanding access to the benefits of heat pumps requires additional policy action:

1. Make getting on the right electric rate easy. Utilities, heat pump incentive programs, and “one-stop shops” should provide information on specialized rates that customers may be eligible for when installing a heat pump, including electrification rates and income-qualified discount rates. For instance, the Equitable Building Decarbonization Program guidelines specify that administrators must help participating households identify and enroll in the most appropriate electric rate offered by their utility. Utilities should also play a more proactive role in switching customers, and contractors need to be trained to support customers in doing this.
2. Implement solutions to reduce electric rates overall and minimize utility cost increases. Attention is needed to prevent the escalation of California’s electricity rates and ensure equitable allocation of expenses. For instance, policymakers should shift large societal expenses like wildfire mitigation costs out of electric rates and employ a range of complementary cost-control strategies to protect California households from high energy bills.
3. Invest in programs to overcome up-front cost barriers, especially for low-income Californians. Improved incentives, retrofit programs, and appealing financing options are needed to help more California households afford heat pump upgrades. A combination of deeper investment in equity-focused retrofit programs like the Equitable Building Decarbonization Program, incentive program reform, and green financing suitable for unplanned HVAC and water heater replacements — all paired with protections for low-income households — will enable heat pump adoption in low- and moderate-income homes.
4. Adopt regulations that reduce pollution from heating equipment. Regulations that encourage a transition to heat pumps (like the zero-emission heating equipment standards in the Bay Area, Southern California, and statewide) will help drive manufacturer supply of innovative and plug-and-play heat pumps, increase contractor awareness and training, and influence long-term utility planning.

By implementing these strategies, policymakers can help lower energy bills for California households and progress toward California’s goal of 6 million heat pumps installed by 2030.

To see the assumptions we used in our analysis, click here.