Decarbonizing Heat: The Decade of the Heat Pump
You may have recently seen a headline or an article touting the decarbonization potential of heat pumps. Interest in this technology intensified as a result of Russia’s invasion of Ukraine (as a way to reduce Europe’s reliance on natural gas) and will continue to grow due to the recently passed Inflation Reduction Act in the US, which includes up to $8,000 in rebates on heat pumps for qualifying customers.
So, let’s take a few minutes to better understand heat pumps. What is a heat pump? Who makes them? What benefits do they provide versus alternative solutions, and what challenges have held them back? Finally, who is innovating in this market today?
What is a heat pump?
A heat pump is a simple product — it “moves” heat to where it is needed. You can think of them as a two-way air conditioner. In the winter, they move heat from the outside-in, and in the summer, they move heat from the inside-out.
There are two broad categories of heat pumps: air-source and ground-source, often abbreviated as ASHP and GSHP. The difference here is in the name. An ASHP is installed aboveground and draws heat from the ambient air. A GSHP is installed underground, and benefits from a consistent ambient temperature year-round (for example, in the winter it is more efficient to draw heat from 50°F underground than 20°F aboveground).
So, why are heat pumps considered a key piece of the residential decarbonization strategy?
First, they are electric, and thus fit well in the “electrify everything” strategy for decarbonization (electric equipment + decarbonized grid = emissions reduction).
Second, they are much more efficient than their fossil fuel competition, furnaces. COP is a commonly used measure of heating efficiency, calculated as heat energy out / energy in. The COP of a heat pump is typically 3+, meaning for each unit of energy provided, you get 3 units of heat energy out. This is because the heat pump is not actually creating heat — it is moving it. Conversely, the COP of a gas-powered furnace is 0.5–0.7.
Who makes heat pumps?
Heat pumps are a fairly mature technology and are made by all the same folks that make other HVAC equipment: Daikin, Carrier, Mitsubishi, Trane, Goodman, etc. There are also a handful of startups that play in the space, which we will discuss later.
One natural question to ask here — are there significant performance differences in the equipment available in the market today? To answer this question, I analyzed the performance of all ~500 Energy Star rated heat pumps. You can see this data below.
In the graph, you will observe that there is not significant spread in the performance of ASHPs. Most range from 3–4 in COP, and 12–15 in EER (a similar measure as COP, but for cooling efficiency). Any differences are primarily explained by the size of the system (smaller systems can be more efficient). It appears that ASHPs are a fairly commoditized technology today.
However, there is a meaningful spread in the performance of GSHPs. There are some very expensive and very efficient GSHPs on the market. You will also observe that GSHPs as a group are more efficient than ASHPs. As mentioned above, this is driven by a more advantageous ambient temperature — cooler in the summer, and warmer in the winter — from which to pull or place heat.
GSHP vs. ASHP
So, does this mean that households should be installing GSHPs? Actually, the answer is generally the opposite. Although GSHPs are more efficient than ASHPs, they are much more expensive.
Below I compared the “TCO” (total cost of ownership) of GSHPs and ASHPs over 15 years. As you can see, GSHPs use less energy (green bar) than ASHPs over a 15-year life, but they are much more expensive in TCO due to the upfront cost of installation (digging the trench / hole).
So, although there may be certain situations that could justify a GSHP, they are generally better suited for larger applications (commercial or multifamily buildings). Most heat pumps installed in homes are and will be ASHPs.
How many heat pumps are installed today?
You may be surprised to learn that the heat pump market is already relatively large in the US, with ~4M units shipped in 2021. Additionally, heat pumps have grown more quickly than other forms of HVAC equipment, rising from ~22% of HVAC shipments in 2009 to ~27% today. While they still trail ACs (dark orange line) and furnaces (gray line) in total shipments, they have almost caught up to furnaces over the last two years.
This is an encouraging trend, but the industry must move more quickly to meet sustainability goals.
So, why aren’t heat pumps growing more quickly?
There are quite a few barriers to heat pump adoption, which I will summarize below.
Economics
Are heat pumps cheaper than alternatives like AC or furnaces? There is no broadly applicable answer to this question, as it will depend on the specific situation of each homeowner. This will include the local climate, the local electricity price, and the local gas price.
But, to get a rough sense of the economic comparison, let’s discuss heat pumps versus furnaces.
As we discussed above, heat pumps are ~3–5x more efficient than a furnace. However, in the US, natural gas has historically been ~3–4x cheaper than electricity (today, with high natural gas prices, this is more like 2x). So, in most cases, the heat pump will net out to a lower operating cost, but it is not a huge difference. For an average family home, a heat pump may save ~$100 annually in energy costs.
However, heat pumps are typically $1–3K more expensive to install than furnaces. This is due to the equipment pricing, but also a difference in installation location. Heat pumps are installed outside (like an AC), which requires more extensive ducting than a furnace, which is installed inside.
If you plan to install both an AC unit and a furnace, then choosing an ASHP instead is more likely to make economic sense. The AC would require ducting and would add to the up-front equipment cost, erasing most or all of the advantage of the furnance alone. As an aside, there was a recent proposal in the US to place a tax on the sale of ACs without the ability to “reverse” flow — essentially, turning every AC into a heat pump. This is a relatively cost effective way to further proliferate heat pumps, and would bring the US more into line with the rest of the world, where 80%+ of ACs are two-way heat pumps. But, this proposal has not yet been passed.
However, if you are only installing a furnace, choosing an ASHP instead would likely be a 10+ year payback on the initial investment — not an easy decision for a homeowner.
Still, there are other considerations. Users of heat pumps rave about the level of comfort versus a furnace, as the heat pump can produce a more precise and consistent heat. More importantly, the recently passed Inflation Reduction Act includes up to $8K in incentives for the purchase of heat pumps (for qualifying buyers, defined by income brackets). Given that a heat pump for a moderately sized single family home costs ~$4–5K, this will make a heat pump a compelling option for many consumers.
New vs. Retrofit
The economic discussion above implicitly assumed we were making a decision for a new home, but this is not usually the case. Heat pumps are now ~40% penetrated in new builds in the United States, but new builds are a small fraction of all homes in the US each year. A significant portion of new HVAC equipment, 80%+, is installed in existing homes.
These “retrofit” purchases can be an uphill battle for heat pumps. If your home was designed around a furnace system, installing a heat pump may require non-trivial construction work. Unlike a furnance, heat pumps are installed outside. So, getting the heat to where it needs to be will require installing ducting, penetrating walls, and even digging. This makes the economic case for a heat pump more challenging (as well as causing a lot of disruption for the homeowner!)
Consumer Education
Further, do consumers understand the potential benefits of heat pumps? A study by startup Sealed in 2020 suggested that the answer is no. In a survey of 200 homeowners in the Northeast, they found that 47% of consumers had never heard of heat pumps, while 70% had never considered installing heat pumps in their home.
This is unsurprising when you consider that HVAC equipment is not really a “consumer” purchase. Instead, the decision on which type of equipment to install is typically outsourced to an HVAC contractor.
Channel Inertia
That brings us to the channel — HVAC technicians and installers. These are generally small to medium sized business (although there are some very large shops as well) that are in the business of installing, servicing, and replacing HVAC equipment.
However, these technicians are not incentivized to install heat pumps. Replacing a furnance with a similar furnance is something that any HVAC technician knows how to do well. Installing a heat pump, on the other hand, remains unfamiliar to many HVAC technicians, and will (as discussed above) likely introduce additional complexity to the process. With this context, it is unsurprising that most HVAC technicians do not promote heat pumps.
Outdated Equipment Information
Finally, there remains a bias in the HVAC industry against heat pumps due to some outdated information. ~20 years ago, heat pump equipment did not work well in the cold (say, under 30°F). However, thanks to technology improvements (most notably the introduction of variable speed inverters) heat pumps can now deliver COPs > 1.5 down to very cold temperatures (-10⁰F).
Still, many consumers and HVAC technicians have not internalized these improvements. If you live in a cold climate today, and attempt to buy a heat pump, there is a decent chance that you will be told that heat pumps do not work in your area. This is unlikely to be true, although it may be the case that you want to install a “back-up” heat source in very cold climates.
Where will innovation emerge?
So, this is the state of play in the heat pump market today. Despite challenges, this is a growing market, and given incentives in both the US and Europe, it is likely that this market will accelerate over the next 10 years. With this contex — where will start-ups emerge and create value in this space?
I see a few potential areas, that many entrepreneurs are already pursuing.
New Heat Pump Technology
As we discussed previously, heat pumps are a well understood technology, but there are always improvements to be made. I see a couple areas of innovation.
Ease of Install: Companies like Gradient are developing heat pumps that can be “self-installed”, which cuts down the complexity for consumers (and opens the market to renters!)
Lower TCO: Companies like Stash and Stow are integrating thermal storage with heat pumps to allow the system to generate heat when electricity is cheapest and /or cleanest.
Tech-Enabled “Installers”
Although better heat pump equipment will help the market, it will not change that fact that HVAC equipment is simply difficult for a consumer to buy thoughtfully.
As a homeowner, it is difficult to understand your options, to decide which option is the best for your situation, and to ensure you get the product installed well.
So, companies are emerging to try to fill this “consumer decision” gap. Companies like Sealed, Helio Home, Retrofit Zero, Elephant Energy, and Duckling are leveraging technology to help consumers make the optimal decision to improve the efficiency and comfort of their homes. Then, they partner with local HVAC contractors to execute on installation and maintenance. You can think of these businesses almost as value-added marketplaces — connecting supply to demand, in a way that makes it easier and more efficient to buy.
HVAC Contractor Tools
As touched on throughout this article, the HVAC installer will be critical to this transition. Technology enabling these small/medium sized businesses to easily train techs on new equipment, then sell and service that equipment efficectively, has a significant part to play in driving this shift toward heat pumps.
There are serveral companies working on this problem. For example, Bluon offers an “app” that allows HVAC techs to easily find information on any piece of equipment they may find in the field, while SmartAC offers monitoring devices that allow HVAC contractors to better understand the performance of equipment in the field (and avoid “urgent” replacement cycles). Further, companies like ServiceTitan, Jobber, HousecallPro and others enable HVAC contractors to run their businesses more efficiently — they may be well positioned to help HVAC contractors both drive and benefit from this transition.
Conclusion
The 2020s should be the decade of heat pumps — but, there are still significant hurdles to clear. If you are a company innovating in this space — we would love to speak with you.