Policy Solutions to Promote Equitable and Affordable Adoption of Heat Pump Retrofits in Existing Buildings
California’s progress toward statewide carbon neutrality relies on decarbonizing the state’s buildings. Transitioning buildings from natural gas to electric heat pump technologies (which replace traditional heating and cooling systems as well as water heaters) is among the state’s highest priorities. Heat pumps are a highly efficient technology that provides all-electric space and water heating and cooling, acting essentially as a two-way air conditioner. In January 2022, the California Energy Commission set out an ambitious target of deploying 6 million heat pumps by 2030. With more than 14 million existing residential homes in the state, more than 75 percent of California’s existing buildings built before 1978, and heat pumps installed in only 6 percent of new construction, the state has a long way to go to meet its goals. The transition presents significant regulatory, economic, and infrastructure challenges, from high retrofit costs to utility regulations that may inhibit the removal of gas service. These challenges could substantially hinder progress throughout the state, particularly in communities with limited capital to finance projects, high proportions of renters, and older construction. Ensuring heat pump deployment in existing buildings protects low-income tenants and decreases utility costs is an important policy consideration, given the cost of living in California.
Residential and commercial buildings are responsible for over twenty percent of California’s greenhouse gas emissions. Building decarbonization is a critical component of the state’s carbon neutrality plan. Heat pumps are perhaps the most important technology to reaching building decarbonization goals. Removing natural gas-powered furnaces and water heaters will also improve air quality and public health.
Heat pumps are growing increasingly important as warming temperatures require more Californians to invest in air conditioning. A heat pump system (often referred to as a mini-split) consists of a condenser unit that produces the heating or cooling, and an indoor unit and passes hot or cool air into the building.
Without adequate planning, deploying heat pump technologies in homes could unintentionally leave lower-income Californians responsible paying for the legacy gas grid and related gas infrastructure. State, utility, and local leaders must protect renters and low-income Californians from increased costs and risk of displacement. Leaders must also continue to develop community-based mechanisms for prioritizing resources, incentives, and technical support.
Enact a clear statewide building decarbonization roadmap that prioritizes heat pump adoption, including a specific date for phaseout of fossil fuel appliance sales
As seen in the Energy Commission’s Title 24 standards, energy regulators are already moving towards scaling heat pump deployment. However, decarbonizing existing buildings poses a different challenge. Legislation that provides a clear roadmap with a phase-out timeline for existing buildings would affirm regulators’ legal authority over existing structures and eliminate legal barriers to reducing gas service. Building off of the efforts of Senate Bill 1477 (Stern, 2018), a legislative roadmap could provide additional financial support for customers who cannot afford the full costs of a retrofit.
Enhance emissions regulations on gas-fired furnaces and water heaters or regulate baseline indoor air quality in residential and commercial buildings
Space and water heaters are the greatest source of nitrogen oxide (NOx) emissions in the building sector, and unlike other appliances, vent directly outdoors into the ambient air, affecting the local and regional air quality. Nitrogen oxides are a key criteria pollutant as a precursor to ozone and secondary particulate matter formation, which impacts lung and cardiovascular health. The California Air Resources Board Draft 2022 State Implementation Plan proposed a zero-emission standard at the point of sale for space and water heaters. Regional air districts throughout the state are considering zero-NOx appliance standards for space and water heating with compliance dates ranging from 2027 to 2031 based on equipment type, use, and size. The zero-NOx standards would essentially mandate electric heat pump systems upon replacement of existing furnaces.
Support electrical panel upgrades or smart panel deployment through regulatory policy or incentive programs
In order to accommodate heat pumps for either space or water heating, residential and commercial buildings often need to upgrade the electrical panels that balance the electrical current. Electrical panels contain all of the building’s breaker switches, and are built to handle a certain electrical load. These panels will fail to work if there is too much electrical current running through them. When adding electric appliances such as heat pump water heaters or air systems, upgraded or smart panels are needed. Smart panels can manage increased load from heat pumps, electric vehicle charging, and integrate battery storage. Smart panels can enable whole-home building electrification without transformer upgrades. The legislature, in coordination with energy regulators and utilities, could create a smart electrical panel incentive program to support existing homeowners to take the initial steps towards building electrification and heat pump adoption. Additionally, the legislature and Public Utilities Commission could redefine panel upgrades as a regulatory asset in order to help utilities spread the costs out over the life of the upgrade. A regulatory asset is a specific cost of service recovery that a regulatory agency permits an energy utility to defer to its balance sheet, allowing more aggressive financing of projects.
Develop a refrigerant management program that supports low global warming potential refrigerants
While significantly cleaner than gas appliances, each heat pump uses some form of refrigerant to operate. These refrigerants are often hydrofluorocarbons (HFCs) with high Global Warming Potential (GWP). The California legislature has already required that agencies consider offering incentives for low-GWP refrigerants in their existing energy efficiency programs, and the California Air Resources Board has developed a robust database on low-GWP incentive programs offered by utilities and local governments . Washington state passed a law directing state agencies to set a maximum global warming potential for HFCs used in new stationary air conditioning equipment, and established a state purchasing and procurement preference for recycled refrigerants.
Direct electric utilities to develop advanced dynamic rates to increase the financial benefits of heat pump adoption by compensating customers for real-time use changes in response to grid needs
Current rate structures have not integrated dynamic energy storage possibilities. Due to current rate structures and projected electric rate increases, customers may be discouraged from adopting heat pump technologies if they cannot see a reduction in utility bills. In order to maximize benefits of heat pump deployment in existing buildings, the Public Utilities Commission could ensure all heat pumps enroll in demand response programs to aggregate load management benefits. Additionally, the Commission could work with electric utilities to enact cost-based time-of-use volumetric rate structures for Californians, with larger time-of-use price differentials that accurately reflect grid costs and greenhouse gas emissions. The Commission could also direct electric utilities to develop advanced dynamic rates within its Long-Term Gas Planning Proceeding, or redefine panel upgrades as a regulatory asset in order to help utilities spread the costs out over the life of the upgrade.
Enhance existing low-income energy efficiency programs to target disadvantaged communities with aging or non-existent gas infrastructure
California has a number of successful programs to make energy efficiency upgrades or renewable energy accessible to all income levels. The California Alternate Rates for Energy (CARE) program provides discounted rates for income-restricted ratepayers. The California Public Utilities Commission could consider developing a “plus-up” as part of the CARE program to install heat pumps, where residents in disadvantaged communities could receive additional funds on top of existing programs. Also, in order to incentivize multifamily housing retrofits the Public Utilities Commission could include heat pump integration in the Multifamily Affordable Solar Housing program. Finally, the Public Utilities Commission could also bolster the Mobile-home Park Utility Conversion Program to support electrification of existing and manufactured homes.
Enact and enforce tenant protection policies to ensure heat pump deployment does not lead to rent hikes and displacement
While the legislature could pass statewide tenant protections and close existing loopholes, most of the responsibility to ensure heat pump deployment does not negatively impact renters will fall to local governments. Cities and local jurisdictions could limit pass-through costs for decarbonization retrofits to rent stabilized tenants in covenanted affordable units, and explore ways to protect renters in non-rent stabilized units. Heat pump and building decarbonization requirements could be added to local renovation requirements for multi-unit dwellings to ensure heat pumps are installed whenever a primary or seismic renovation occurs. This would not inconvenience existing tenants or put tenants at risk of displacement.
Develop trust-building processes that ensure equitable heat pump deployment
In order to overcome the landlord-tenant split incentive, renters first need to be motivated to seek these all-electric upgrades. Therefore, heat pump deployment success will depend on state, local, and industry leaders developing an outreach process that incorporates trusted sources and focuses on building relationships. Trusted sources, such as community-based or membership organizations, can help tenants interface with the electric utility or overcome digital or language barriers that prevent adoption. Community-based organizations have played an integral role as part of the deployment of the Solar on Multifamily Affordable Housing (SOMAH) program and may provide lessons for establishing similar successful organizational infrastructure. An additional example for other cities can be found in the Racial Equity Impact Assessment of the City of Oakland’s Building Decarbonization plan. The assessment worked with different racial and ethnic groups, renters of all incomes, and building owners and operators to discuss how decarbonization efforts will likely affect each community.
Develop midstream incentives to encourage contractors, retailers, and technicians to promote heat pump installations
Policymakers classify incentive programs for building decarbonization products as midstream, upstream, or downstream, depending on who receives the incentives. Upstream programs provide incentives for manufacturers to make more efficient products, while downstream programs provide rebates for consumers, encouraging them to purchase more efficient products. A midstream program provides incentives for retailers to stock and sell a higher percentage of highly efficient products than they would have otherwise.
Participants noted the need to concentrate on midstream incentives to overcome installer and customer resistance to heat pump deployment. While upstream (manufacturer credits) and downstream (customer rebates) incentives have received attention from policymakers, there is a policy gap around midstream support for retailers, distributors, technicians and installers. Participants supported the creation of installer rebates available to retailers, contractors, and installers who encourage customers to purchase heat pumps. Policymakers will need to ensure that installers are supported, educated, and motivated to increase heat pump adoption to boost both demand and job opportunities. Utilities have developed midstream incentives to transform the marketplace by financially supporting distributors who offer discounts on space and water heat pump equipment for installation on existing residential homes. Participants noted that any installation incentive should have multiple redemption opportunities , as the goal is to motivate installers to deploy heat pumps at scale
Develop and support installer training programs for heat pump installations and pre-qualify contractors
To achieve a just transition through decarbonization programs, the California Workforce Development Board framework emphasized a “high-road” approach based on high-quality jobs, high-quality work, and wages and benefits sufficient to support both, through demand-side, supply-side, and just transition policy strategies. These strategies, including skilled workforce and wage standards, job training programs, displaced worker assistance, and community workforce agreements, could be aligned with the specific policy mechanisms (such as public investments and incentive programs) that drive climate mitigation and may affect jobs in one or more sectors. “High road” jobs focus on employing economically disenfranchised communities, aiming to boost shared prosperity and environmental sustainability. The Board could build upon the High Road Training Partnerships by bringing together stakeholders to establish labor standards for workforce development in the electrification transition. In the San Francisco Bay Area, the state and local governments have established the High Road to Building Decarbonization partnership, bringing together employers, unions, workforce developers, and educational institutions with appropriate job training programs.