Closing a gap in our climate plans
Report says the state's heat pump incentives are inadequate
THE RECENT report from the Commission on Clean Heat is short on numbers and, like any “consensus report,” it leaves some important issues unresolved. But it does identify the challenges we face in decarbonizing buildings in Massachusetts and offer an inventory of options.
The state’s basic strategy for cutting carbon emissions is to electrify almost everything while making almost all of our electric power sources carbon-free. Electrifying buildings means converting their heating sources to electric heat pumps; conversion to heat pumps usually requires weatherization. As the commission notes, the scale of the transition is huge. According to the state’s climate plan (page 8), in 2050:
- All or nearly all new buildings will have been built according to very high standards of energy efficiency and weatherization . . . and will utilize clean heating technologies.
- The vast majority of the Commonwealth’s more than 2 million individual buildings that were already in existence in 2022, including [low and moderate income] housing units, will have undergone significant energy efficiency and weatherization retrofits and will use high-efficiency electric appliances for heating, cooling, cooking, and hot water.
The Commission inventoried (at page 2) the challenges in converting 2 million existing buildings:
- a heterogenous building stock,
- high housing costs,
- a limited workforce with experience in decarbonization design and installation,
- infrequent replacement cycles of building systems and equipment (and prevalence of replacement at the point of failure),
- existing socioeconomic and racial inequities,
- the upfront capital costs of energy efficient electric heating equipment and installations,
- the complexities of government program implementation and coordination,
- . . . the real and perceived relative costs of fossil fuels and electricity.
- [lack of] public awareness of effective building transitions and
- the role individual decision-makers play in achieving our collective goals
Last year’s climate legislation — a “Next Generation Roadmap” — is forcing planners to grapple with the nuts and bolts of cutting carbon emissions. The legislation requires state planners to set five-year emissions reduction targets for each sector of the economy, instead of generally pointing towards overall emissions reductions for 2050.
The Secretary of Energy and Environmental Affairs recognized the gap and formed the Commission on Clean Heat to identify solutions.
Currently, the price of electricity is high enough relative to oil and gas that converting to an electric heat pump will often raise annual heating costs. People doing heat pump conversions from gas almost always face increased costs and people doing heat pump conversions from oil face uncertain savings. It may be that over the next 20 years, relative prices will change. The Commission emphasizes the importance of a successful electric sector transition. (Page 12. But that transition hasn’t happened yet.
A well-conceived heat pump conversion that includes substantial weatherization may generate annual savings, but the savings will be due to the weatherization, not the heat pump conversion:
The Commission notes at page 16. that heat pump installations on their own (absent pairing with energy efficiency and weatherization measures) do not consistently pass [the test of reducing operating costs] under current market conditions. For more detail on the operating costs of heat pumps as compared to fossil heat sources, see this page.
In addition to the likelihood of higher operating costs from a heat pump conversion, the capital cost of a heat pump conversion may be greater than the cost of simply replacing an existing gas or oil burner, even with currently available incentives. (The commission report does not directly speak to relative upfront costs; for more, compare this recent study from the MassCEC on heat pump costs with this post on Angie’s list about burner costs.)
People need to care deeply about reducing carbon emissions to want to install a heat pump, and even for those who do care deeply, the costs may be daunting. People of low and moderate income are unlikely to be able to afford heat pump conversions.
One of the fundamental judgments of the Commission, expressed delicately at page 13, is that we need to offer much greater incentives for heat pump conversions:
While current Mass Save incentives are significant and reasonably scoped for near-term adoption, the Commission strongly suggests that these incentives will not be sufficient to inspire the broad, cross-sector change needed to meet our emissions reduction requirements and equity goals in the coming decades.
Additionally, especially for lower income people, we need to directly address the higher operating costs of heat pumps, through some kind of pricing mechanism or bill credit:
The Commission recommends at page 24 EEA and its agencies evaluate opportunities for addressing the operating costs barrier to adoption of clean heating technologies, such as air-source heat pumps. This effort should include an evaluation of near-term programs or credits to help defray costs for those that face additional operating costs from electrification, particularly in LMI households, and an evaluation of cost-reflective rate structures that can encourage conservation and reduce consumers’ costs of operating electric heating systems.
The Commission does not put numbers on how much we need to increase incentives or how deeply we need to subsidize electric rates, but the report, at pages 12-13, does identify some options for funding the incentives/subsidies:
- Utility ratepayers — surcharges on utility rates currently fund most of our incentives for heat pump conversions. The Commission at page 14 expresses the view that ratepayer surcharges “cannot sustainably bear the full burden of funding the transition. While electric ratepayer-funded programs are a critical tool, adding to program costs can make it more difficult to incentivize customers to switch from fossil fuel to electric appliances by increasing electricity rates, at least in the short term.”
- Taxpayers — we have not generally applied taxpayer funds to subsidizing energy measures. The current high level of resources available to the legislature opens the conversation about applying some taxpayer funds towards heat pump conversions and related weatherization. However, there are many competing priorities for taxpayer funds — now and over the longer term.
- Consumers and developers — one could just put all the costs on building owners by mandating that all new construction use heat pumps — or go even further and require and ban fossil fuel system replacements, forcing conversions to heat pumps. The Commission was divided on mandates and heavily debated the creation of a schedule to phase out fossil fuel heat installations. They reached no consensus, except to agree that much more information is required about the consequences of mandates. As a bellwether for the political challenges of the mandate approach: It was only after heavy debate and negotiation that the legislature recently reached agreement on a pilot to allow just 10 communities to mandate electrification in new construction (not in replacements/retrofits).
- Fossil fuel suppliers — a requirement that all companies selling fossil fuels for building heat (natural gas, oil or propane) either demonstrate that they are implementing conversions and weatherization among their customers at a certain target rate or, if they cannot meet their electrification and weatherization targets, make “alternative compliance” payments. This approach is known as a “Clean Heat Standard” or “CHS.”
The Commission gave a lot of thought to the last idea, requiring fossil fuel suppliers to meet a “Clean Heat Standard.” The idea of a standard seems to follow a precedent — the Renewable Portfolio Standard (“RPS”), the mandate that we currently place on electric utilities to generate a certain portion of their electricity from renewable sources.
However, a clean heat standard is vastly more complicated than the RPS. It is easy to measure how much electricity is coming from renewable sources, but measuring progress on energy savings within homes is complex. It will be hard to agree on a workable methodology for defining how particular projects count towards a clean heat standard. There will be political elements to the process — different methods will benefit different industry players. Additionally, companies that deliver oil are smaller and more numerous than electric utilities.
The costs of doing weatherization and heat pump conversions to meet a clean heat standard will be spread across the customers of the fuel suppliers covered by the standard. This will mean raising costs for people who heat with oil. This may not be unfair, since gas customers pay a Mass Save surcharge, but those who heat with oil will push back, especially while oil prices are high. It would be more transparent (although even less popular) to put in place an oil fuel surcharge as we already do for gas ratepayers.
The commission at page 46 implicitly acknowledges that a clean heat standard could raise only limited funds without creating unsustainable pushback. It would contribute to incentives, but could not fully support them:
We believe it is highly unlikely the [clean heat standard] program could be designed in a manner that sets a price that will compel consumers to convert from fossil fuels to electric heating without other incentives, requirements, or motivation.
The appeal of a clean heat standard is not so much as a funding mechanism but as a market mechanism for steering resources toward efficient projects. If an understandable methodology could be developed, then perhaps utilities and fuel providers would bring new energy and creativity to achieving the standard in the most cost-effective ways they could find.
A clean heat standard would also solve a conceptual problem intrinsic to Mass Save. Mass Save is only allowed to run programs that have a benefit-cost ratio greater than one within a certain accounting framework. That framework, even as recently updated by the legislature to include the social cost of carbon, excludes many investments in electrification. For more on Mass Save accounting issues, please see this post.
The massive question left unanswered by the report is whether any politically sustainable combination of the identified funding sources will be adequate to support the incentives we need to transform the building sector.
Economic challenges aside, for people considering weatherization projects and heat pump conversions, the options are confusing and the process complex. Every home is different. There are no off-the-shelf solutions. People need to develop familiarity with home energy technology and often need to negotiate with multiple contractors. Some contractors have limited expertise in home energy technology. Most people will do well to find a knowledgeable consultant/coach who can give them objective advice.
To help consumers (and contractors) through the process, the commission at page 48 proposes the creation of a new “Building Decarbonization Clearinghouse.” The clearinghouse concept marries the idea of a consultant/coach with the idea of a one-stop shop for government assistance:
The role of the Clearinghouse will be to serve as the key Administration point of contact and information for customers seeking to implement measures in buildings, in order to seamlessly connect them to the suite of building decarbonization programs available to Commonwealth residents and businesses. The Clearinghouse should prioritize customer engagement by providing dedicated liaisons and on-going engagement to ensure support throughout implementation of measures to transition buildings, including increasing energy efficiency, electrifying heating when and where feasible, and encouraging solar where economically beneficial.
This idea has obvious appeal, but the report (on page 49 and elsewhere) overstates the need for cross-program coordination, suggesting that the new clearinghouse would coordinate across Mass Save, the Climate Bank, EEA, DOER, MassDEP, and MassCEC. This is a padded list of agencies. Almost all electrification funding currently flows through Mass Save; the other existing agencies do not primarily serve weatherization and electrification consumers.
Mass Save already combines the ideas of a one-stop shop and coaching, using similar language to that above to describe the Residential Coordinated Delivery program:
The RCD Initiative offers customers comprehensive support and education to better understand the energy use of their home and provides technical opportunities for efficiency solutions. The goal of these solutions is to help customers identify and fund energy efficiency improvements resulting in a more comfortable home for the customer, as well as whole home energy savings and costs and GHG emissions reductions.
From my own experience and that shared by many others, the coaching that Mass Save offers is not the sustained coaching that most homeowners need to succeed with a heat pump conversion. Yet, it is not obvious that we should stand up a new agency at a time when the necessary expertise is scarce. The better solution may be to try to up-skill Mass Save’s workforce.
The Commission points out that a new clearinghouse could fold in solar programs — solar installation goes together with heat pump conversion in the sense that solar may help offset increased electric costs. However, solar projects do not need to be coordinated with heat pump conversions — unlike weatherization, installing solar does not reduce the needed size of a heat pump. Putting solar and electrification assistance in the same agency is less compelling than combining electrification with weatherization as Mass Save already does.
A new clearinghouse could also reach homeowners who are not covered by Mass Save due to utility service area boundaries. A new clearinghouse might also facilitate the implementation of a new funding mechanism and new project benefit accounting as noted above. On the other hand, Mass Save’s service limits, funding, and project benefit accounting could all be altered by legislation. And the Mass Save brand is already well known.
Whether or not it makes sense to rebrand and reconstitute Mass Save under a new umbrella, the report’s observations encourage us to take a hard look at Mass Save on the following dimensions:
- Funding sources — Mass Save’s funding could be expanded to include some contribution from oil suppliers, whether through a CHS or through some other mechanism.
- Eligibility — Mass Save’s eligibility rules could be decoupled from utility service areas.
- Program benefit-cost accounting methodology. A “clean heat standard” methodology for scoring projects could be adopted within Mass Save to prioritize electrification.
- Coaching quality — Mass Save could undertake a sustained effort to build a deeper consumer coaching capacity.
- Conflicts of interest — while electrification benefits electric utilities by creating new customers, gas companies lose customers as they electrify homes. It should be possible to structurally address the conflict for gas companies through governance changes.
- Coordination with solar installation.
A fundamental question that the commission report does not raise is whether we should rely more heavily on private companies to do outreach and sell electrification projects. Both the proposed Building Decarbonization Clearinghouse and our existing Mass Save programs are bureaucratic organizations.
The problem with a utility-run Mass Save may not be a conflict of interest, but rather the utility mentality — utilities are local monopolies that do not have to market their services. We might see a dynamic new business model evolve if we gave entrepreneurial companies (a) access to data about customer energy use that utilities have, so they could target the homes most needing services, and (b) strong incentive payments for verified successful electrification projects. Block Power is an example of the kind of company that we might nourish. The Commission at page 36 does raise the idea of making building energy use data more available, “to spur innovation around leveraging this data for building decarbonization,” but does so in the context of supporting research and development.
Other ideas in the report
The commission at page 55 spoke to the well-recognized need to expand the HVAC and weatherization workforce:
To create a robust pipeline of building trade professionals, the Commonwealth should work with partners to develop curricula aligned to employer-needs and designed for multiple delivery options (including hybrid learning), offer training and technical assistance, and provide mentorship and funding opportunities. This should include connecting with current and future workers of all ages and demographics and across geographies. Opportunities should be accessible through all state education and training institutions and include programs with high schools and vocational-technical schools (that engage both parents and students), unions, trade schools, associations, and veterans’ groups, and include a focus on programs serving environmental justice populations. Training opportunities should be made available during the school and workday, as well as on nights and weekends to accommodate a variety of students. While attracting workers from all these backgrounds is important, there should be a strong focus on high schools where young adults are deciding on a career and educational next steps, to ensure they are aware of opportunities in the trades, and especially in the energy sectors.
These are mostly familiar ideas. The Mass Save 2022-24 three-year plan similarly outlines a broad collection of workforce development concepts. A new idea that the commission at page 34 surfaces is to impose continuing education requirements on HVAC contractors.
Develop clear and concise messaging to engage diverse populations to increase awareness of Massachusetts’ commitment to a building sector transition, the role of individual actors in achieving this transition, and the benefits of clean heat solutions. A successful information campaign will help to build momentum and accelerate customer adoption. A campaign that also reports success stories about adoption and usage can then drive more momentum.
Other ideas brushed in the report include:
- Shifting capital from proposed new gas infrastructure to electrification, perhaps by creating a new coordinated planning process to drive electrification in localities where it could obviate the need for gas infrastructure spending.
- Creation of a green bank to capitalize electrification projects. The commission notes that the absence of savings from electrification projects makes it impossible for the private sector to finance them. CCHR at page 36. Creation of a public bank does not solve this fundamental economic problem — a public bank needs to pay for its capital somehow — but federal resources might allow a green bank to offer more advantageous financing for electrification projects.
- Developing specialized programs for affordable housing — Mass Save already does target low and moderate-income housing with specialized programs.
- Building energy performance scoring to inform buyers and renters and to generally build awareness. If fully public, efficiency scoring could also encourage contractor direct marketing to owners of inefficient buildings, but the commission appears to contemplate disclosures to customers when properties are listed for sale or rental.
- Expand research and development for building decarbonization. This is currently a focus of the Massachusetts Clean Energy Center.
- Expand public sector leading-by-example programs.
SummaryThe Commission on Clean Heat made a serious effort to consider a gap in our climate plans: Our current incentives for heat pump conversions are inadequate to drive the transition that we need. However, the report leaves open how large incentives need to be and how to assemble the necessary funding for them. We should not let uncertainty on these fundamentals paralyze us. Over the months to come, we should work to narrow the uncertainties and rethink Mass Save with the commission’s work in mind.
We need to keep before us the prospect of banning fossil fuels in new construction, but there is no prospect of banning fossil fuel replacements in existing buildings. When a burner goes out in winter, it needs to be replaced immediately. Most of the buildings that will be here in 2050 are already here. The question of how to drive voluntary heat pump retrofits is the central dilemma in the climate plan for the building sector.