It’s Time to Rethink Gas Energy Efficiency Programs

Updating regulatory frameworks can help optimize ratepayer dollars for cleaner energy solutions

Utility energy efficiency programs have long delivered energy and customer bill savings and driven investment in efficient equipment and services. However, evolutions in state energy policy and market conditions now require realigning energy efficiency programs — especially for gas utilities — to better support state goals and customer benefits. In recent years, several states have begun refocusing household energy efficiency programs towards weatherization and beneficial electrification and away from appliances such as furnaces and water heaters that rely on gas combustion. This strategic shift reflects two drivers:

1. Energy efficiency programs have evolved to better align with state energy and emissions goals, and
2. The market itself has transformed, caused by years of increasing efficiency standards, building codes, and utility programs that have led to the widespread adoption of high-efficiency appliances.

While some states have made progress in this evolution, many others have not. The result is that many are not well aligned with emerging market and policy conditions and ratepayer dollars in those states are not being put to their best and highest use. These programs only achieve modest energy savings and can miss opportunities to help customers adopt newer electric technologies that deliver greater energy and pollution savings. This brief explores the conditions under which states are evolving their utility energy efficiency programs and presents practical paths forward to ensure that gas efficiency investments align with state policy goals while continuing to deliver benefits to ratepayers. 

Many states have well established energy efficiency programs and ambitious climate goals but aligning them remains a challenge.

As states work toward achieving their energy and environmental policy goals, there is an opportunity to make better use of gas utility efficiency programs and funding. Even for states that have committed to significantly reduce emissions and electrify buildings, a significant portion of energy efficiency funding continues to support the installation of new gas-burning appliances. While it’s difficult to obtain granular data on every program in the United States, we examined a sample of utility-led residential gas energy efficiency programs to get a sense of the broader trends. This sample was chosen based on existing goals and availability of historical efficiency program data.

In addition to overarching state policy goals, several of these states have pursued policies to advance building electrification. For example, in 2023 New Jersey Governor Phil Murphy issued Executive Order 316, committing the state to electrifying 400,000 residences and 20,000 commercial properties and converting 10 percent of low-income households to electric-ready by 2030. In 2024, Maryland enacted HB 864 to reform the state’s energy efficiency program, EmPOWER, by requiring it to achieve GHG reductions in line with the state’s climate goals and to develop fuel-switching electrification incentives. These developments signal a growing commitment to building decarbonization but are in tension with legacy spending on gas equipment.

In 2023, regulated utilities in six states — New Jersey, Minnesota, Washington, Maryland, Colorado, and Illinois — spent an estimated $127 million on incentivizing gas appliances such as furnaces, boilers, and water heaters for the residential sector, which serves about 12 million customers in total, through ratepayer-funded energy efficiency programs.

The table above shows that gas appliance replacements ranged from 16 to 61 percent of the total utility spending on residential gas efficiency for existing buildings. These percentages are likely a conservative estimate given they do not fully account for the appliance incentives offered through whole-home or new construction programs. In five states, weatherization made up 50 percent or less of residential gas efficiency expenditures. The remaining balance of gas efficiency expenditures generally went to shorter-lived measures such as direct install (e.g., faucet aerators and thermostats), efficiency kits, and behavioral reports.

This trend has significant implications for states aiming to meet clean energy and emissions reduction goals. While new gas furnaces produce energy and emissions savings compared to less efficient furnaces, these savings are significantly lower than what could be achieved through weatherization and electrification. For example, Xcel Energy’s Minnesota program, which focused on sealing air leaks and adding insulation to homes, saved the equivalent of about $1,080 worth of natural gas per participating household in 2023. In contrast, the utility’s rebate program for efficient gas appliances saved only about $213 worth of natural gas per participating household.^[1] Yet despite having five times greater impact per household, the whole-home weatherization program received just one percent of Xcel’s residential energy efficiency budget in 2023, while gas appliance rebates received 51 percent of the funding.

As another example, Maryland’s Office of People’s Counsel, the state’s consumer advocate office, found that if Washington Gas & Light had incentivized builders to install ENERGY STAR electric appliances instead of gas equipment in 12,000 new homes, the environmental benefits over 20 years would have exceeded all the emissions reductions the utility claimed from its entire three-year efficiency program portfolio. In other words, redirecting incentives to all-electric new home construction would have delivered more GHG reduction benefits than all the utility’s energy efficiency program combined did between 2021–2023.

Why do efficiency programs still prioritize gas appliances? 

Energy efficiency programs are designed and implemented according to the regulatory framework that governs them. In most states, this regulatory framework evolves over time to address changes to savings goals, cost-effectiveness methodologies, market conditions, and other state policy changes. Two of the most significant drivers of utility portfolio investment decisions are (1) the primary savings target or metric and (2) the cost-effectiveness test. Utility programs are often also designed and expected to produce energy bill savings for participants. Together, these components guide program administrators in deciding which types of programs and measures to prioritize.

Historically, energy efficiency regulatory frameworks were often designed to prioritize reducing incremental annual energy use at the lowest cost, usually with goals separated by fuel type. This prioritization results in utility portfolios that optimize measures that achieve shorter-lived savings, rather than programs that drive larger lifetime energy savings and emissions reductions, such as comprehensive retrofits or fuel switching.

As a simplified example, a cost-effectiveness test may be designed to consider a $100 measure that saves 20 therms of gas over a 1-year life as a “better” investment than a $100 measure that saves 100 therms of gas over a 10-year life. This — combined with the fact that appliance rebates are considered more straightforward to administer than weatherization and envelope measures — can lead to gas efficiency portfolios that look like some of those referenced above, with a heavy focus on achieving targets through gas appliance rebates.

A common argument for not investing more in weatherization or whole-building approaches is that it is more expensive on a dollar-per-therm-saved basis compared to prescriptive appliance rebates or behavioral programs such as home energy reports. While unit cost is an important metric to ensure limited funds are spent wisely, relying on it alone deters investments in more impactful, cost-effective measures that align better with other policy goals such as bill savings, emissions savings, and comfort and health benefits.

Changing market conditions can also impact the efficacy and necessity of some efficiency measures. This happens when efficient appliances begin to saturate the market and utility incentives for these appliances no longer result in incremental energy savings. This can be a good policy outcome — e.g. people are buying more efficient equipment across the board. But if utility cost-effectiveness tests and other references are not updated to reflect these conditions, they could be over-estimating the savings from these measures, making gas appliance programs appear more cost-effective than they really are.

As one example, an Efficiency Maine study from 2023 found ENERGY STAR gas water heaters already comprised the majority of gas water heater sales in the Maine, even absent an incentive.  In 2022, California Public Utilities Commission staff found that “a significant percentage of funding for gas EE goes to measures that are not cost-effective” under the Total Resource Cost test — a majority of which were appliances incentivized under the residential and commercial portfolios. While cost-effectiveness is typically evaluated at the program or portfolio level, these measure-level findings led both Maine and California to wind down those incentives.

A common hesitation for regulators in evolving these frameworks is the concern that phasing out incentives for gas appliances would halt this progress and even lead customers to choose a less efficient replacement option. Another concern is that prioritizing weatherization and electrification is more expensive per household and therefore would reach fewer customers, absent any budget changes. There are multiple ways to address these concerns:

• As noted above, many customers are already choosing higher efficiency gas equipment, even without incentives. States can conduct appliance saturation studies to confirm whether they have already achieved market transformation dynamics.
• The focus can be not only on phasing out incentives that are no longer cost-effective or needed to drive market transformation, but also on using that funding to increase support for measures such as weatherization and electrification.
• In geographies where high electric rates pose a barrier to fuel switching from gas, regulators can explore rate design solutions to avoid overcharging heat pump customers.
• Program reforms can be phased in over time to ensure that, with limited exceptions, low- and moderate-income households, affordable housing, and other hard-to-electrify buildings receive support for near-term gas access and bill savings while still planning for electrification.

Leading states are paving the way

Several states, including New York, Massachusetts, Maine, California, Connecticut, and Washington DC have already begun evolving their energy efficiency programs to align with their state goals and priorities by increasing investments in weatherization and electrification and winding down incentives for gas appliances. We highlight two recent examples below.

In 2023, the New York Public Service Commission issued an order directing energy efficiency and building electrification proposals creating a new strategic framework for energy efficiency, defining measures and programs as “strategic, neutral, or non-strategic according to their alignment with state policy objectives.” The order also explicitly prohibits the use of ratepayer funds for residential gas fired appliances and redirects the majority of investments toward long-lasting measures that reduce lifetime energy costs and GHG emissions.

The resulting impact of this policy shift is evident when looking at a breakdown of the program administrators’ historical efficiency spending compared to the proposed budgets for the 2026–2030 period, as shown in the chart below. For further context,

• Strategic measures permanently reduce or eliminate electricity or natural gas on an annual or peak basis, improve the building envelope, or permanently reduce or eliminate on-site combustion of fossil fuels through electrification;
• Non-strategic measures jeopardize the advancement of strategic energy efficiency and/or building electrification, increase fossil fuel use, have an effective useful life of 6 years or less, do not encourage conservation behaviors, or are natural occurring; and
• Neutral measures neither advance nor jeopardize strategic measures and do not meet non-strategic criteria.

The proposed 2026–2030 budgets reflect investments in majority-strategic measures, with about 63 percent of total spending going to building envelope upgrades and heat pumps. In May 2025, the NY Public Service Commission largely approved the program administrators’ proposals, maintaining the emphasis on weatherization and electrification investments across both gas and electric portfolios and the elimination of gas appliance incentives for residential customers.

Massachusetts’ efficiency program, Mass Save, stopped providing gas appliance incentives in 2024 as part of a broader effort to incorporate GHG reduction targets into its efficiency framework. The program has maintained an exception for income-eligible households upgrading their existing fossil fuel equipment to more high efficiency models. However, Mass Save also now offers enhanced incentives to income-eligible customers for weatherization and electrification. In their 2025–2027 plan, the Mass Save program administrators commit to several reforms that expand access and accelerate participation in electrification and weatherization, especially among income-eligible customers.

These examples demonstrate how states are evolving their efficiency frameworks to more effectively deliver energy and emissions savings while working through the changes to investments, program design, and customer support necessary to support this evolution.

Six ways to change the status quo of energy efficiency programs

For states with electrification and climate policy goals, gas energy efficiency portfolios are an untapped policy and funding lever to achieve these goals while easing costs for gas customers. Increasing gas efficiency funds for weatherization, for example, supports customers in reducing their heating demand, which generates both near-term savings in energy bills and long-term savings in avoided gas capacity and electric capacity (e.g., by reducing summer air conditioning energy use at the same time).

For states considering an evolution of their energy efficiency frameworks, a key first step is to reevaluate the use of ratepayer funding for gas appliances and identify opportunities to increase support for higher-impact measures, both through the gas and electric portfolios. Complementary program reforms may also include redesigning program objectives to achieve deeper lifetime energy and GHG savings; allocating additional funding to support such measures; centering program design around whole-home and whole-building approaches (rather than fuel-specific approaches); and updating electric rate design.

Below, we highlight six approaches for states to consider, drawing from the leading state examples above.

1. Assess the current program effectiveness in light of state policy.

As a starting point, states should assess the effectiveness of their efficiency programs beyond simply hitting annual incremental targets. Are the programs driving the types of savings necessary to align with state energy and emissions goals? Are the programs driving investment in long-lived savings that improve customer affordability, health, and satisfaction? Conducting such a review can provide an informative basis on which to address gaps and propose programmatic reforms.

2. Incorporate GHG reductions as part of the efficiency framework

Incorporating a GHG target and/or metric explicitly drives investment in measures that result in greater GHG emissions reductions, including weatherization and beneficial electrification, while still ensuring that the resulting portfolios are cost-effective and deliver real savings and benefits to customers. States can achieve this through two primary approaches: (1) establishing a policy that explicitly allows or encourages the use of energy efficiency programs to support carbon reduction goals, and (2) establishing targets and metrics that prioritize emissions reductions. For example, Massachusetts sets an emissions reduction goal every three years for the state’s efficiency program, Mass Save. This goal is tied to the statewide GHG limits established adopted under the Global Warming Solutions Act.

3. Remove programmatic barriers such as fuel-specific targets, prohibitions against fuel switching, and limited cost-effectiveness tests

Many programs were established with fuel-specific targets and in some cases, rules against fuel-switching, which limit the potential for total energy savings across fuels. Addressing these barriers is key to unlocking additional investment in weatherization and beneficial electrification.  Additionally, many states have chosen to update cost-effectiveness tests to incorporate the social cost of carbon and accurately measure lifetime energy savings based on up-to-date and primary research

4. Establish utility performance metrics and incentives for desired goals

In addition to ensuring that the basic aspects of the program framework are set up to encourage policy-aligned outcomes, regulators may also consider establishing performance incentive mechanisms to encourage utility innovation and achievement on particular goals. For example, Con Edison has a performance incentive mechanism (PIM) for “smart building electrification,” which rewards the company for implementing higher energy-saving measures such as envelope upgrades, ground source heat pumps, waste heat recovery, and heat pump controls. Additional examples can be explored via RMIs PIMs database.

5. Ensure adequate and sustainable support for heat pump adoption and affordability

As utility incentives for legacy appliances are scaled back or phased out, it is important to ensure that adequate support exists to help customers adopt efficient alternatives like electric heat pumps. This includes both up-front incentives (such as rebates and financing) as well as on-going affordability support, such as heat pump-friendly rates, weatherization upgrades, and bill assistance as necessary. Recognizing that electrification and weatherization measures tend to be more costly than historical program investments, it is also key to assess how best to fund these incentives. Many states have historically relied on electric ratepayers to fund these investments; however, several are increasingly exploring options to incorporate gas ratepayer funds (e.g., CO, MA, MN) as well as taxpayer and other sources of non-ratepayer funding.

6. Consider exceptions for Low-to-Moderate Income (LMI) customers and develop a pathway to cost-effectively transition these customers to avoid inequitable impacts

There may be some instances where LMI or multifamily customers could meaningfully benefit from energy efficiency investments, but where electrification is not yet technically or financially feasible. Regulators can consider how to equitably allow for some exceptions for gas appliance incentives, while still ensuring that these customers receive maximum support for weatherization and other electrification-ready investments. Many states employ different cost-effectiveness thresholds or requirements for LMI programs, which can help reduce barriers to investment.

States may employ one or a combination of the above approaches to better align their gas utility efficiency programs with energy and emissions goals. A key initial step is to evaluate existing programs in terms of whether they are aligned with state climate and energy goals and assess the regulatory barriers and solutions available to correct them. Looking ahead, regulators have the opportunity to invest in the needs of the future and not those of the past by utilizing limited funding to support measures that result in cleaner, affordable, and healthy buildings.

[1] Estimates based on average dekatherm savings achieved per participant in 2023 multiplied by the average Minnesota residential natural gas price in 2023, per EIA data.