Heat Pump Economics

Table of Contents

Overview

This page collects some locally relevant data on how residential heat pump conversions change heating operating costs and carbon emissions. It also considers the cost-effectiveness of heat pumps as a carbon reduction strategy.

General heat pump economics literature

Many analysts have studied the economics of building electrification. The economics of heat pump conversions depend on (a) local climate and (b) current and future relative prices of electricity, natural gas, and heating oil. In general, heat pump conversions from oil and propane are more likely to be economical than conversions from gas.

One summary of the literature comes from the Building Sector Technical Report from our climate planning process:

The economics of electrifying buildings – particularly small residential homes – . . . [have] largely shown that replacing oil, propane and electric resistance heating with air source heat pumps in small residential buildings is economically advantageous for homeowners and residents. Depending on assumptions regarding the price of natural gas, electricity, discount rates, and heat pump performance, the costs associated with natural gas to ASHP [air source heat pump] conversions range from modestly higher to modestly lower.

Buildings Sector Technical Report, page 52

Favorable economics for heat pump conversions emerge especially when one assumes long term increases in gas and oil prices relative to electric prices. The short run price picture is less favorable.

[F]or the many existing homes currently heated with natural gas, electrification will increase costs at today’s prices, compared to replacing gas furnaces and water heaters with new gas devices. We find electrification is cost-effective for customers switching away from propane or heating oil, for those gas customers who would otherwise need to replace both a furnace and air conditioner simultaneously, for customers who bundle rooftop solar with electrification, and for most new home construction, especially when considering the avoided cost of gas mains, services, and meters not needed in all-electric neighborhoods.

THE ECONOMICS OF ELECTRIFYING BUILDINGS, Rocky Mountain Institute

The Acadia Center, a leading advocate for decarbonization and the use of heat pumps, published a clean heating pathways guide in 2020. They only chose to show operating cost comparisons for propane and oil heat and acknowledged that:

Clean heating faces unique challenges when it comes to fossil gas, which is often in direct competition with efforts to convert customers to clean, electric heat pumps.

Acadia Center, Clean Heating Pathways

An Acadia Center analysis of heat pump conversions from natural gas appeared in the Boston Globe. The analysis showed that, on its own, the heat pump conversion from natural gas for space heating is cost-increasing. The analysis assumed that the home already has air conditioning so that summer use of the efficient heat pumps as air conditioning will be cost-decreasing. The changes in air conditioning costs (red bars) are not sufficient to offset the changes in heating costs (pink bars). The analysis also identifies the potential for a cost reductions through elimination of natural gas service (reducing fixed connection charges).

Analysis from Acadia Center appearing in Boston Globe, August 21, 2021

Current local heat pump data

The data reviewed in detail below show that under current economic conditions, gas to heat pump conversions, and even oil and propane to heat pump conversions, may increase annual operating costs. However, the data also show that heat pump conversions reduce overall carbon emissions, even though our grid is still powered largely by fossil fuel. Finally, the data show that heat pumps are a relatively expensive way to reduce carbon emissions.

A few caveats about the analysis below:

  • The focus is mostly on annual operating costs, not on upfront costs or the total return of a conversion project. The upfront initial cost of conversions vary widely.
  • Weatherization investments often have high returns whether one is heating with oil, with gas, or with a heat pump. While weatherization should be part of many heat pump projects, it should not be part of the cost comparison for different sources of heat. Weatherization is not part of the analysis on this page.
  • For homes that already have central air conditioning installed, heat pumps may offer efficiency improvements and electric cost savings in the summer. For homes that do not have central air already, installation of heat pumps may offer summer comfort improvements but likely additional electric costs. Those considerations are properly part of the heat pump decision but the analysis will vary for different homes. This page focuses on heating with only passing mention of cooling considerations.
  • There are many good reasons to convert to heat pumps. My wife and I recently converted to heat pumps and feel good about it. The purpose of the analysis here is not to discourage heat pump conversions, just to be realistic about the costs.

Do heat pumps cut heating costs?

The data in this section pertain to annual operating costs, not upfront installation costs.

Homes heated with gas

For people who heat with natural gas in Massachusetts, at current energy prices, a conversion to heat pumps will likely increase annual heating costs. This is especially true for people served by utilities that are raising their electric prices sharply.

Even before the recent electric rate increases, the Mass Save Program Administrators reach a clear conclusion about heating cost increases with natural gas conversions to heat pumps:

In almost all cases, a customer switching from natural gas to a heat pump as their primary source of space heating would realize an increase in the cost to heat their home or business, in addition to the incurred capital cost for the system’s installation.

MassSave 2022-2024, full plan document at page 13.

The following table, extracted from data submitted by National Grid to the Department of Public Utilities, shows that most of the standard permutations for natural gas to heat pump conversions are expected to cause annual cost increases on top of installation costs.

Type of Gas to Heat Pump ConversionTypical Annual Cost
Savings/(Increase)
Central Ducted Heat Pump Partially Displacing Existing Furnace, Gas $              (405)
Central Ducted Heat Pump Fully Displacing Existing Furnace, Gas $           (1,229)
DMSHP* with Integrated Controls Partially Displacing Existing Boiler, Gas $              (358)
DMSHP* with Integrated Controls Fully Displacing Existing Boiler, Gas $              (867)
Air-to-Water Heat Pump displacing Existing Boiler, Gas $              (457)
Closed Loop GSHP** Replacing Furnace, Gas $              (208)
Open Loop GSHP Replacing Furnace, Gas $                   28
*Ductless Minisplit heat pump. ** Ground Source HeatPump More information on heat pump types here. Source for underlying data is Attachment DPU-Comm8-2.xls in Docket 21-124, the proceeding through which the current MassSave three year plan was approved. The underlying table as filed with DPU uses a wildly incorrect gas rate ($0.117 per MMBTU); for this presentation, that is corrected using MassDOER’s heating report to $17.60 (last winter’s value).
Get raw numbers, computations and link to original submission here.

My wife and I recently installed heat pumps in our own home and our experience offers a more transparent example: We converted from high efficiency natural gas furnaces with ducted hot air heat — one furnace for each unit. The conversion was relatively simple. Our installer was able to swap in the heat pump air handler to where the furnace air handler had been in each unit. We have removed the furnaces. So we now have ducted hot air heat supplied solely by heat pumps. The cost was $16,500 per unit. We had previously made energy efficiency improvements so energy efficiency improvements were not part of the project — the cost solely reflects the heat pumps and installation. Our installation costs were below the median project cost for whole-home heat pump conversions in a recent study by the Mass Clean Energy Center (~$21,000), and a little above the number estimated in the MassSave data underlying the table above ($16,163).

Computations for home gas to heat pump conversion
Historical annual heating load — high side of annual range (combined for two units)350 therms*
Gas needed to support heating load with high efficiency furnaces (98% efficient)357 therms*
Installed heat pumps rated efficiency (HSPFBTU‘s of heat generated per watt hour )9.5
Estimated electricity to support our heating load (350/HSPF * 100000/1000)3684 kwh**
Current National Grid Gas rates$1.421/therm*
Current BMLD Electric rates$0.19317/kwh**
Annual gas cost at current rates (what we would expect to spend this 22-23 winter if had not converted)$508
Annual electric cost at current rates (what we expect to spend this 22-23 winter)$711
Annual increased costs for heating as a result of heat pump conversion$203
*1 therm = 100,000 BTU of heat. **kwh abbreviates kilowatt-hour

The numbers above show that as a result of the conversion, we plan to spend an extra $203 on heating in the coming winter. We benefit from relatively low expected electric rates from the municipal light company. We’ll make up our cost increase because we will be able to disconnect our two gas services and save a total of approximately $280 in the monthly connection charges. We may also save some on cooling costs. Our home is well insulated; for a home with a greater heating load, operating cost increases would be greater, as in the Mass Save typical estimates above. We’ll see how the first winter goes.

Homes heated with oil

For people who heat with oil, especially those who have a very inefficient burner, a heat pump conversion may offer operating cost savings. The table below is extracted from data submitted by National Grid to the Department of Public Utilities.

Type of Oil to Heat Pump ConversionTypical Annual Cost
Savings/(Increase)
Central Heat Pump partially displacing Oil Heat $        (13)
Central Heat Pump fully displacing Oil Heat $      (644)
MSHP* partially displacing Oil Heat $        (34)
MSHP* fully displacing Oil Heat $      (384)
Air-to-Water Heat Pump displacing Oil Heat $        179
Closed Loop GSHP** replacing Oil Heat $        480
Open Loop GSHP** replacing Oil Heat $        716
*Ductless Minisplit heat pump. ** Ground Source HeatPump. More information on heat pump types here. Source for underlying data is Attachment DPU-Comm8-2.xls in Docket 21-124, the proceeding through which the current MassSave three year plan was approved. Get raw numbers, computations and link to original submission here..

The first four oil conversion options show cost increases. As to the others, the underlying data show that, except in the case of the Open Loop Ground Source heat pump, the modest savings are insufficient to provide a positive return when capital costs are included. As we learned when we priced heat pump options for our home, ground source heat pumps are hard to site in urban areas — they require clear space that few lots provide.

Homes heated with electric resistance heat 

Heat pumps offer roughly 2/3 cost savings over electric resistance heat — that relationship does not depend on commodity pricing and reflects the intrinsic efficiency of using electricity to pump heat as opposed to using electricity to generate heat.

Electric Resistance to Heat Pump ConversionTypical Annual Cost
Savings/(Increase)
Ductless Minisplit Heat Pump displacing Electric Heat$ 901.67
Source for underlying data is Attachment DPU-Comm8-2.xls in Docket 21-124 (for average rate of $0.27/kwh) combined with Attachment DPU-Comm3-15.xls in Docket 21-129 (NStar Electric for kwh savings, MeasYr3 Tab).

Price sensitivity of relative savings/costs

Except when replacing electric resistance heat, a heat pump conversion involves fuel switching, so energy market conditions affect the economics. Since Massachusetts still uses gas and oil to produce much of its electricity, electric rates do fluctuate with commodity prices. In fact, the Massachusetts DOER is projecting a relatively greater increase in statewide average electric rates than gas and oil prices this winter, making the operating economics of heat pump conversions from gas or oil less favorable.

Massachusetts Household Heating Costs, Massachusetts Division of Energy Resources, preliminary numbers accessed on 11/10/2022

The following chart uses the DOER data above to show the time variation of the costs of heating by gas, oil, electric heat pump or electric resistance:

Computations based on Massachusetts Household Heating Costs, Massachusetts Division of Energy Resources, preliminary numbers accessed on 11/10/2022. Raw numbers here.

The $/Million BTU of heat load served reflects both prices and relative efficiency of heating technologies. Efficiency levels presented are for the ‘best’ performing heating units in each category. Going to the ‘good’ level moves operating costs up for each technology, but does not change the basic ordering: In recent years, gas has been the cheapest option and electric resistance the most expensive. Oil and heat pumps are a bit above gas and trade positions as prices fluctuate. Heat pumps will mostly likely reduce costs when compared to an older inefficient oil burner.

The numbers above are illustrative of a broad pattern. However, each building is unique: particular economics may vary. Where heating costs comparisons are close, cooling cost changes can make tip the balance. Longer term price trends could change the economics.

Do heat pumps save carbon emissions?

Heat pumps do cut carbon emissions even now, while the Massachusetts electric grid is still powered largely by natural gas. As our grid gets greener, the carbon savings will grow.

The first question is how much CO2 we should attribute to each kilowatt hour of electrical power that we use. The following table shows several different views of emissions per kilowatt hour of power generated. The first three reflect generation sources reliant heavily on natural gas. The next three do a better job of reflecting the actual power source mix on our regional grid. The final line represents the hoped-for greening of the grid..

Different views for KgCO2E/kwh estimateKilograms of CO2E*
per kilowatt hour
Electrical generation by electric industry facilities in MA in 2021 (mostly gas plants).43
National average for electric power generation with natural gas.41
Estimating factor for emissions due to electricity consumed (EPA National Model).43
New England power grid — average 2020, including imports (source: ISO-NE).25
New England power grid — load weighted marginal generation (source: ISO-NE).33
2019 Estimating factor for emissions due to retail electricity consumed in MA from MassDEP (including renewable energy credits and other certificates as well as line losses — see Appendix 3) .23
MassDOER Factor recommended to MassSAVE for 2022-4 plan (attachment to National Grid response to DPU-Comm 3-15 in DPU Docket 21-124, 11/23/21).19 declining to .05 by 2040;
17 year avg. from 2022 is .12
*Note that this table mixes data showing CO2 only with data showing CO2 equivalents including other greenhouse gases.
At the two digit level of precision, this distinction is immaterial.

The chart below compares the carbon impact of using each heating technology. Again, efficiency levels presented are for the ‘best’ performing heating units in each category.

*Greening grid values use DOER factors in table above; **Today values use ISO-NE average 2020 factors in the table above.
5.3KGCO2e per therm of natural gas;10.2 KGCO2e per gallon of home heating oil. See EPA reference.
Resistance refers to resistance heat, as in baseboard electric. Raw numbers here.

For an example, we can use our example house and compare emissions from natural gas heating with the electricity to power heat pumps.

Computations for home gas to heat pump conversion Quantity
Gas needed to support annual heating load357 therms
Electricity needed to support heating load 3684 kwh
Kilograms of CO2 per therm of natural gas5.2
Annual emissions from gas heating (does not reflect gas transmission and distribution losses)1.8 tons CO2
Annual emissions from heat pump heating if all electricity consumed were from a gas plant
(.41 factor above)
1.6 tons CO2
Annual emissions from heat pump heating using MassDEP recommended emission factor (.23 factor above)0.8 tons CO2
Lifetime (17 yr.) average annual emissions from heat pump heating using MassDOER recommended declining schedule — reflects assumed greening of the grid (.12 factor above).04 tons CO2

Our heat pump conversion is saving a ton or more per year of emissions. It is noteworthy that the estimate of emissions using a gas plant as the source of electric power (1.6 tons) is still below the emissions from gas heating (1.8 tons); the following graphic illustrates why heat pumps win even in that unfavorable counterfactual.

Used with permission from Pasi Miettinen, Sagewell

How cost effective are heat pumps for emissions reduction?

In our own home’s case, the numbers work as follows:

Cost of Installation (both units together)$33,000
Operating SavingsRoughly zero
Emissions Reductions1.4 tons lifetime annual average*
Life of Equipment17 years
Emissions Reductions over life of equipment23.8 tons
Cost per ton* of reduction$33,000/23.8= $1,386 (excludes annual increased costs)
* Most favorable analysis line from above table, yielding lowest cost per ton.

In our case, the cost per ton of reduction — $1,386– is elevated in part because our emissions are already low. The table below shows a variety of more typical cases considered by MassSave in its three year plan:

Original FuelMass Save Heat-pump MeasureTypical lifetime net cost
per ton of
CO2 Reduction*
(Net costs are parenthesized)
OilCentral Heat Pump partially displacing Oil Heat $ (222.66)
OilCentral Heat Pump fully displacing Oil Heat $ (287.66)
OilMSHP** partially displacing Oil Heat $ (217.53)
OilMSHP** fully displacing Oil Heat $ (274.26)
OilAir-to-Water Heat Pump displacing Oil Heat $ (142.58)
OilClosed Loop GSHP*** replacing Oil Heat $ (102.61)
OilOpen Loop GSHP*** replacing Oil Heat $     8.01
GasCentral Ducted Heat Pump Partially Displacing Existing Furnace, Gas $ (574.67)
GasCentral Ducted Heat Pump Fully Displacing Existing Furnace, Gas $ (643.66)
GasDMSHP** with Integrated Controls Partially Displacing Existing Boiler, Gas $ (524.13)
GasDMSHP** with Integrated Controls Fully Displacing Existing Boiler, Gas $ (614.44)
GasAir-to-Water Heat Pump displacing Existing Boiler, Gas $ (383.39)
GasClosed Loop GSHP*** Replacing Furnace, Gas $ (379.06)
GasOpen Loop GSHP*** Replacing Furnace, Gas $ (183.53)
* Computed from MassSave submissions to DPU as lifetime customer costs (without reduction for incentives and including operating losses) divided by lifetime emissions reductions. Lifetime emissions reductions approximated as 2030 emissions reductions multiplied by lifetime. For longer lived ground source heat pumps, this may materially understate life time emissions reductions. Although this table uses Mass Save data, Mass Save uses a different methodology. See additional discussion here. Get raw numbers, computations and link to original submission here.
** Ducted minisplit heat pump. *** Ground source heat pump.

It is clear that in many homes, the costs of heat pump conversions will run well above commonly accepted estimates of the social cost of carbon emissions. The social cost of carbon is an estimate of the global social benefit of reducing emissions of carbon by one ton and is used in benefit-cost analysis. Currently, the federal government is using numbers in the vicinity of $51/ton for current social cost of carbon, although the Biden administration has a working group revisiting this number.

While my wife and I have no ambivalence about our personal investment in carbon reduction, the low carbon return of heat pump conversions (high cost of each ton of reduction) does raise questions that merit more exploration. See further discussion of heat pumps and the social cost of carbon here.

Will Brownsberger, November 2022

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1 Comment

  1. Thanks for the thoughtful discussion! I understood going into the decision to convert from gas to heat pumps that we might not see a reduction in our heating costs. We were willing to accept a modest potential increase our home heating cost in pursuit of a better outcome for the environment – and hopefully the environmental benefits will increase over time as electric generation comes to rely more on non-emitting sources. (We also had an old gas boiler – probably nowhere near 90-95% efficient). Beyond the heating season, we expect the heat pump to operate more efficiently for air conditioning than the central air system it replaced. I understand that heat pumps are not a panacea – there’s still much work to be done to achieve our GHG reduction goals.

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