Switch on the Savings: A Heat Pump Cost-Effectiveness Study

Here in Cambridge, MA we’re all too familiar with frigid winters. We may consider ourselves all-star thermostat programmers, but how many of us know in detail where the heat comes from? Most of us, knowingly or not, count on electric resistance baseboards, oil furnaces, or gas boilers to warm our homes and occupy our heating bills. But there’s another option that may be worth a look: heat pumps.

Synapse conducted a study to determine whether heat pumps are a cost-effective alternative for consumers in the Northeast. We analyzed scenarios for customers with various types of existing heating systems and fuels.

What’s a heat pump?

Heat pumps are powered by electricity, but they are much more efficient than electric resistance heating familiar to most homeowners (such as space heaters and baseboard heating). Rather than directly converting electrical energy into heat with electric resistance heating or converting heat from fossil fuels through combustion, heat pumps redistribute heat that is already present in the outside environment. Adoption in colder climates was not feasible until recently as heat pumps have not traditionally performed well at or below freezing temperatures. Technological advances in recent years, however, have led to the development of cold climate air sourced heat pumps (ccASHP), which can provide sufficient heating even in wintry New England.

How do they work?

Heat pumps use liquid refrigerants and copper coils to extract heat from the outside air, ground, or water—even in frigid winter weather—and feed it into homes. Unlike other heating options, heat pumps provide both heating and cooling services. In the summer, heat pumps act like a regular air conditioner by reversing the direction of the refrigerant flow. They cool rooms by extracting warm air and moisture from inside the house and expelling the excess heat outside. Heat pumps can either be ducted (forcing air through ductwork into each room’s vents) or ductless. [1]

Why would I want a heat pump?

They can save you money. Depending on your existing heating system, you could have a lower heating bill by switching to or adding a heat pump. Our analysis showed that customers with electric resistance heating would see the highest monthly savings by switching to a heat pump. Heat pumps are approximately three times as efficient as electric resistance heating, which means you could lower your heating consumption by two thirds. Switching from electric resistance heating to a heat pump simply reduces electric usage, but what if someone were to switch from propane heating to an electric heat pump?

This option, referred to as fuel switching, is more multifaceted. While you can rejoice in no longer needing to refill your propane or oil tank, thereby cutting fuel bills substantially or entirely, you will have to prepare for a higher monthly electric bill. While savings from electric resistance heating are predictable and guaranteed, savings from fuel switching fluctuate based on fossil fuel prices.[2] Our analysis used current fuel prices to determine annual operational savings.[3] As summarized in Figure 1, we found that customers who would otherwise heat their homes with propane would see high annual energy and bill savings, customers who would otherwise heat with oil would see moderate annual savings, and customers who would otherwise heat with natural gas would end up with higher annual bills.

Figure 1. Annual operational savings with a ccASHP

Fig 1 Annual operational savings with a ccASHP

In addition to these heating savings, we found customers who also use heat pumps for cooling needs, rather than window AC units or central AC, could save between $50-$200 annually.

They are versatile. Unlike furnaces—which require central ducting—or boilers—which distribute heat through radiators—ductless heat pumps can integrate easily into your home. Ductless heat pumps only require space outside for compressors and small copper wire connections to indoor units (evaporators) that provide heating or cooling directly to each room. Ductless heat pumps are a popular choice for customers because they minimize losses caused by ducting and can target specific areas of the house. Furthermore, your home doesn’t need to be near a natural gas pipeline to access affordable heating.[4]

They can reduce your carbon footprint. As we move towards a cleaner electric grid, electrifying the heating industry will be vital to emissions reduction. When paired with renewable technologies, such as solar, heat pumps have the potential to fully decarbonize heating energy use in the residential and commercial building sectors. If the environmentalist in you feels guilty about keeping your apartment comfortable all winter by burning fossil fuels, heat pumps could be your solution.

I’m intrigued! What options are available for my home?

If you want to install a heat pump there are few options depending on your current heating and cooling systems. If your heating system is nearing the end of its life, the most practical option is to fully replace it with a new heat pump. However, if your heating system is still operational and you’re not ready to make a full switch, you can keep your existing equipment to supplement the heat pump during extremely cold days. You may choose to keep your existing system if it performs more cost-effectively than the heat pump during the coldest days or hours in the winter. Heat pump performance typically degrades as the temperature drops to well below freezing. In addition, you may be able to reduce the size of the heat pump and the associated upfront capital cost by relying on the existing system for the coldest days.

What’s the catch?

A major drawback for most homeowners is the upfront cost of a new heat pump. However, depending on your situation, the annual bill savings may justify the costs. We performed a payback analysis to determine how long it would take to recoup the initial upfront costs in each current heating system scenario, assuming the customer receives no incentive or rebate from a program administrator to reduce costs. We also ignored the savings from cooling for a more conservative estimate. We calculated the payback period for (a) customers whose existing equipment failed and who needed a new system anyway and (b) customers whose existing systems were still operational and were kept as supplemental heating for the coldest days of the year.[5],[6] As a frame of reference, heat pumps have a fifteen to twenty year life.[7]

Table 1. Payback periods for each modeled scenario without incentives or rebates

Payback periods for each modeled scenario without incentives or rebates

Table 1 shows that even without incentives, consumers who primarily use their heat pump but keep their existing electric resistance system as supplemental heating will save enough in monthly energy bills to recover the upfront costs in just four years. Over the full life of the heat pump, that could be thousands of dollars in savings. While consumers with existing propane systems have a slightly longer payback period of six to nine years, the savings over time could still be significant.

If your home is heated with oil, you may be disheartened by a payback of over 25 years, but don’t despair! Potential cooling energy savings compared to window AC or central AC may shorten payback years significantly. Further, program administrators in Northeast states offer customers incentives to lower upfront costs, which may shorten your payback period. Anyone considering a new heat pump should check out their state’s offerings. The Northeast Energy Efficiency Partnership (NEEP) created a useful summary of heat pump incentives available in Northeast states: http://www.neep.org/sites/default/files/resources/2017ASHPSnapshot.pdf

Until recently, customers in cold climates who were interested in improving heating efficiency, reducing costs, and reducing environmental impacts converted to natural gas from other fuels. Now, these customers have another cost-effective option to consider—electric heating through a cold climate air source heat pump. Heat pumps can provide sufficient heating throughout the year, even during the coldest months in northern climates. The value proposition for heat pumps becomes even more compelling if these customers also electrify their transportation use and size a rooftop solar installation to meet their increased electricity needs. For more on electrification, please see our “Strategic Electrification” webinar at http://www.synapse-energy.com/project/strategic-electrification-webinar.

It may be June, but it’s never too soon (or too warm) to think ahead to how you’ll warm those toes come next winter. Switching to a cold climate heat pump might be the (cost-effective) answer. 

Are heat pumps cost-effective from an energy efficiency program administrator’s perspective? In our next heat pump blog, we’ll cover the cost-effectiveness of residential heat pumps for program administrators in Massachusetts. Stay tuned!


Note: Our installed cost assumptions for heat pumps are based on MA CEC's clean heat program database. Our costs for oil and propane furnaces are based on Homeadvisor.com's average costs in Barnstable County, MA. Our costs for gas systems are based on Homeadvisor's average gas furnace costs in Barnstable County, MA and average ducting costs, available at http://www.homeadvisor.com/cost/heating-and-cooling/install-ducts-and-vents/

[1] For the replace-on-failure scenario, we used the incremental costs and savings between buying a new heating system of the existing fuel type, and buying a new ccASHP. We assumed a larger ccASHP capacity for this scenario so that it could heat a home sufficiently on the coldest days of the year.

[2] For the keep existing scenario we modeled a smaller ccASHP capacity because we assumed the customer could use their existing system on the coldest days of the year. We used the full cost of the new heat pump.

[3] University of New Hampshire Sustainability Institute & Climate Solutions New England, “The figure of heating and cooling in New England,” https://sustainableunh.unh.edu/sites/sustainableunh.unh.edu/files/media/Fellows/reid-shaw_-_final_ashp_report_2.pdf

[4] Boston Globe, “As electricity costs rise, market for heat pumps takes off,” https://www.bostonglobe.com/business/2014/10/05/new-heat-pump-technology...

[5] In our analysis, we assumed a customer whose electric resistance heating system failed would replace it with a natural gas system, rather than install a new electric resistance system. Because of this, a new natural gas system became our baseline if an electric resistance system reached the end of its useful life. We did not model a scenario in which a customer had an existing natural gas system and switched to a ccASHP.

[6] Oil, natural gas, and propane prices are based on 2017 EIA data for Massachusetts. Electricity prices are based on the 2017 residential retail rate on Cape Cod, MA.