It’s Time to Stop Overcharging Heat Pump Customers. Electrified Heating Rates Can Help.

Implementing electric heat and heat pump rates that more accurately reflect customer costs can save customers money and encourage wider adoption.

Heat pumps can help millions of Americans save money, cut energy waste, and reduce pollution thanks to incentives in nearly every US state. However, several utilities in these states currently overcharge heat pump users relative to their cost to the electric grid, limiting peoples’ full potential energy bill savings.

Fortunately, as a recent RMI publication highlighted, regulators have a range of solutions at their disposal to curb these overcharges. These include implementing seasonal and time-varying rates, adjusting the distribution between fixed and volumetric rates, and differentiating between residential customer types.

This article explores how policymakers and regulators can implement “electrified heating rates” — a strategy that incorporates some of these solutions — to more fairly charge customers using heat pumps, making home electrification more affordable and accessible to a broader number of residents.

Standard rates overcharge heat pump customers while electrified heating rates do not

Standard residential electric rates pose two main challenges for heat pump customers:

1. Many standard rates are artificially high in winter. That’s because most utilities charge the same price for electricity year-round for simplicity and to lessen bill fluctuations. This occurs even though electric grid costs are higher during peak summer usage and lower in winter for most utilities.
2. Most heat pump customers use more electricity in winter, unlike non-heat pump customers whose peak usage is typically in summer. That’s because while both customers use electricity for cooling (using the heat pump or an air-conditioner), heat pumps also use electricity, often to a greater extent, for heating. Standard rates don’t account for this fundamental difference in energy demand because they don’t differentiate residential customer types.

To confront this issue, utilities can implement electrified heating rates that align with actual electric system costs. These rates charge a materially lower price of electricity in the winter than in summer months for customers using electric heating, including heat pumps. In cases where the standard rate already includes seasonal rates, the electrified heating rate has an even larger difference between the winter and summer rate. Some electrified heating rates also include design features such as time-of-use rates or tiered use rates, but these are not inherent to electrified heating rates.

There are two main types of electrified heating rates: electric heat rates and electric heat pump rates. Electric heat rates apply to customers using any form of electric heating and have been in place for decades, traditionally for those with electric resistance heaters. Conversely, electric heat pump rates are specifically for customers using heat pumps and have become more prevalent as heat pumps have gained in popularity.

Heat pump customers can lower their energy bill by switching from standard to electrified heating rates

Leveraging RMI’s Green Upgrade Calculator and Arcadia’s Signal utility rate database, we quantified the energy bill impact for a heat pump customer in an average home who switches from their utility’s standard electric rate to the utility’s electrified heating rate.  We conducted this analysis for all utilities currently offering electrified heating rates.

Our analysis found that heat pump customers switching to electrified heating rates would lower their energy bill by 10 percent on average, or around $240 per year. However, annual bill savings varied significantly by utility, from 0 to 50 percent, as shown in the table below. This wide range underscores the variability in electrified heating rates due to differences in rate design, cost allocation methods, and local system costs.

The bill savings from electrified heating rates also varied regionally, with the highest savings in the Upper Midwest, as shown in the map below. This suggests that in the Upper Midwest there is a significant difference in the utility’s cost of providing electricity to electric heating customers compared to those without electric heating.

Electrified heating rates can be particularly beneficial in states where gas heating is currently cheaper than heating with heat pumps. In such cases, these rates may be the key to ensure heat pump retrofits lead to meaningful bill reductions and more widespread electrification.

Many utilities already offer electrified heating rates

Today, 88 utilities offer electrified heating rates, as shown in the map below. The majority offer legacy electric heat rates while 13 offer heat pump rates. Most of these utilities are municipal utilities and utility cooperatives, but the few investor-owned utilities (IOUs) account for over 90 percent of the total customers enrolled in these rates. This highlights the significant customer reach and impact that larger IOUs can have when implementing electrified heating rates.

Access to electrified heating rates is limited but growing

While less than 20 percent of residential electric customers nationally are served by a utility that offers an electrified heating rate, in some states the percentage is much higher, as shown in the map below. For example, in Illinois, the largest IOU utility, Commonwealth Edison Company (ComEd), provides service to around three-quarters of the state’s residents. So, with ComEd and other smaller utilities offering an electrified heating rate, 80 percent of the state’s residents are eligible to switch to this type of rate if they install a heat pump.

Conversely, there are other states where a very small portion of residents have access to electrified heating rates. Notably, in only 5 of the 22 US Climate Alliance states committed to 20 million heat pumps by 2030 are a majority of residents served by a utility with an electrified heating rate. Directing utilities within these states to offer these rates could help meet their heat pump targets.

Fortunately, some states are already taking action, with Colorado and Massachusetts leading the way.

• A new Colorado law requires IOUs in the state to submit a heat pump electric rate for approval by 2027. This will grant over 50 percent of state residents access to a more affordable and equitable rate for heat pump heating, up from nearly none today.
• Massachusetts regulators recently directed Unitil and National Grid to provide heat pump electric rates. Once implemented, over 90 percent of residents in Massachusetts will have access to an electrified heating rate when installing a heat pump. Eversource, the second-largest IOU in Massachusetts, already offers an electric heating rate, but they’re considering a heat pump rate that better reflects system costs from heat pump customers.

States should consider offering electrified heating rates to align with a growing trend toward clean, efficient heat pump heating

Electrified heating rates are one effective rate design solution to more accurately reflect heat pump costs to the grid while lowering utility bills for customers using them. States seeking to accelerate heat pump adoption and more fairly charge customers should consider offering these rates.

Designing effective electrified heating rates is complex and requires substantial stakeholder engagement to get the details right, so it’s important to start now. Even utilities with legacy electric heating rates may need to reevaluate them to more accurately reflect current costs and modern rate design approaches.

Designing and offering an electric heating rate isn’t the only regulatory approach and shouldn’t be considered a one-size-fits-all solution. A flexible and adaptive approach to rate design is critical to making sure both customers and the nation’s grid benefit from increased heat pump adoption as technology and market conditions continue to evolve.