Role of Rate Design in Electric Utility Decisions

During Winter Storm Uri, electric demand spiked to a record level. We don’t know exactly how high demand went, but ERCOT now estimates that next winter, in Uri-like conditions, demand would hit a whopping 92 gigawatts.

One of the best ways to reduce risk of outages, and one of the only ways to save money while increasing reliability is to replace inefficient heating units with high efficiency heat pumps.

That is just one of the reasons why I wanted to feature an entire episode on this amazing technology and what led me to invite Eric Wilson, a senior research engineer in the Buildings and Thermal Sciences Center at the National Renewable Energy Laboratory or NREL, to join me for this week’s episode. With a wealth of experience and expertise, Eric co-authored a recently released article “Heat pumps for all? Distributions of the costs and benefits of residential air-source heat pumps in the United States” in Joule.

During the interview, Eric provides in-depth insights into the world of heat pumps – what they are, how they work, and dispels common misconceptions surrounding them. 

But our dialogue went deeper. We discussed the impact of heat pumps on the Texas grid, a critical topic given our continuously rising demand and the pervasiveness of inefficient resistant heat in homes, which, in part, caused the Winter Storm Uri outages. 

We also discussed electric rates and the impact of rate design on consumer savings, workforce challenges and opportunities, and the gas heating to electric heating transition. 

I hope you enjoy this conversation as much as I did. If you like the episode, please don’t forget to recommend, like, and share on Substack, Apple Podcasts, Spotify, or wherever you listen.

I look forward to hearing your thoughts; don’t hesitate to share them with me and fellow listeners in the comments. Thank you for listening and for being a subscriber! Transcript, show notes, and timestamps are below.

Timestamps

3:15 - What is a heat pump?

4:15 - Common misconceptions about heat pumps (they work in the cold!!)

6:06 - The benefits of having a heat pump from a consumers’ perspective

10:59 - Grid impacts of inefficient heat and poorly insulated homes

11:12 - How much can we reduce energy consumption by replacing resistance heat with heat pumps in TX

13:43 - Do we need to get rid of resistance heat entirely?

23:51 - Workforce challenges 

28:14 - Heat pump efficiency ratings, explained

39:07 - Scenarios for savings

43:25 - Heat pumps plus demand response

47:03 - Natural gas to electric transition

51:11 - Electric rate structures 

Show Notes

Heat pumps for all? Distributions of the costs and benefits of residential air-source heat pumps in the United States

Quantifying the impact of residential space heating electrification on the Texas electric grid

National Renewable Energy Laboratory (NREL) ResStock

Eric Wilson, LinkedIn

Nate the House Whisperer Youtube Channel

Energy Skilled

Northeast Energy Efficiency Partnership’s (NEEP) Cold Climate Air Source Heat Pump (ccASHP) Product List and Specifications

"The Name of the Game is Flexibility," a Conversation with ERCOT's Pablo Vegas

Transcript

Doug Lewin

Eric Wilson, thanks so much for joining us. Welcome to the Energy Capital Podcast.

Eric Wilson 

Yeah, thank you Doug. Happy to be here.

Doug Lewin

Really excited about this paper you put out in Joule. It's called Heat pumps for all? Distributions of the costs and benefits of residential air-source heat pumps in the US. We're gonna dive deep into heat pumps and how they could be a core solution for reliability, affordability, and sustainability. But before we get into some of what you found in your research, would you please, just for our audience, start from a very high level. What are heat pumps, you know, how do they work? Why would somebody maybe who doesn't have a heat pump yet or doesn't even know if they have a heat pump, why would they want to look into getting one? What are they good for?

Eric Wilson

Yeah, well, a lot of people might not realize it, but they probably have three or four or five heat pumps already. If you think about any air conditioner or refrigerator is already a heat pump system in that it uses a vapor compression cycle to move heat from one place to another. So if you think about a refrigerator that is taking heat from within the refrigerator section or the freezer section and moving that to your kitchen.

And a heat pump for space heating is not too different. You can also think of it as an air conditioner that works in reverse. And it just has an additional small part reversing valve that can make it move heat instead of from the inside of the house to the outside of the house, can move it from the outside of the house to the inside. Even if it's really cold outside, there's been a lot of technology breakthroughs in recent years about and is making heat pumps that performing cold climates better and better at performing down to low outdoor temperatures.

Doug Lewin

Yeah, I think this is one of the most confusing things for people as they hear the word heat pump and they will often get confused, maybe think it's only for heating, but actually if you were to install a heat pump at your home, you can use it for both heating and cooling, right? So people that may have a furnace and an air conditioner could actually replace the two different pieces of equipment with just one, is that correct?

Eric Wilson

That's right. Yeah, it's two-in-one. Some people call them two-way ACs, just because yeah, they do provide both of those functions.

Doug Lewin

And I think the other people, the thing people get really confused about, and you were just alluding to this, right? Is that people will say, well, if it's super, super cold outside, it's down to five or 10 degrees. There's no heat in the air. So if a heat pump is grabbing heat from the outside and bringing it in, there's no heat to grab if it's zero or five degrees. But in, but in fact, that's not true because there, there still is quite a bit of heat in zero, even zero degree air, right?

Eric Wilson

Yeah, exactly. And if you think about your freezer, which typically cools that space down to around 0 degrees Fahrenheit, it's able to keep it that cool. So it will find heat in there, even if it's 0 degrees Fahrenheit. And modern heat pumps will go down to minus 15 degrees Fahrenheit, or even below that.

Doug Lewin

So why would somebody... So right now there's a $2,000 tax credit available for folks to use to get a heat pump. If somebody's thinking about getting a... Or even if they're not thinking about it, like what are the benefits to a consumer? We're gonna talk about the grid and obviously this podcast focuses a lot on the grid, but let's think about it from a consumer's perspective. What are the benefits they could expect if they were to change to a heat pump system?

Eric Wilson

Yeah, there's a variety of different benefits. And one of the things that I get at in my paper is those benefits can vary a lot depending on where you are in the country and what your house or building looks like. But one of the big benefits that people focus on is saving money on their energy bills. And whether they're using a more expensive heating fuel like fuel oil or propane or using electric resistance to heat, as I know is fairly common in Texas, those are all fairly expensive ways of providing space heating. And a heat pump can provide a lot of cost savings and money back in people's wallets by just being a lot more efficient at how they provide heating and cooling to a space.

Another reason people might be interested in heat pumps is just from the climate benefits. So, one of the findings from my paper is that no matter where you are in the country and kind of looking across a range of different scenarios about what the future electric grid might look like, heat pumps will reduce carbon emissions over their lifetime. And it can be pretty substantial, you know, anywhere from four to six times as much greenhouse gas emissions than other improvements like eating vegan food for a year or forgoing a flight to Europe or uh, or not driving a car for a whole year. Um, it's uh kind of yeah four to six tons per person for or per household compared to only one ton for those other situations. So it's quite a bit of climate benefits as well. One of the most significant things you can do, um in terms of your, you know, what you spend money on, the big household purchases is replacing a fossil heating system with a heat pump. 

And there are other kind of non-energy benefits as well. A lot of people like heat pumps because they can provide more consistent and comfortable heating and cooling to a space. A lot of the modern heat pumps, they're variable speed. So instead of kind of dumping a bunch of heat and then turning off or dumping a bunch of cooling and then turning off, which allows some rooms to get hot and other rooms to get too cold. They can run at a steady lower speed and provide a lot more mixing for homes that have duct systems, kind of a slow mixing or trickle of air throughout the ducts. And then they can ramp up when they need to provide more heating or cooling. But they can provide a lot of comfort benefits.

And a lot of people also like that because they can be filtering the air constantly at a really low volume and not use a lot of electricity to do that filtering. So you're taking a lot of potential pollutants, particulate matter out of the air by running that fan and filtering the air at a low speed continuously.

Doug Lewin

So cost, emissions benefits, comfort, increased comfort, and indoor air quality benefits all can accrue from heat pumps. 

So let's also then talk about some of the benefits that are there on the grid side as well. So you mentioned resistance heat. This is something that's being talked a lot about in Texas now. As I'm sure, as I know is not lost on you and certainly not on, on our audience, obviously Winter Storm Uri, um, a little over three years ago was a very traumatic thing for, for Texas where we had multiple days of outages. There were many reasons why those outages happened, including lack of winterization of, of the gas supply system, lack of winterization of power plants. But one of the headline items as well was really, really high demand which was mostly fueled by inefficient heat in poorly insulated homes. 

And so one of the things I love about the paper that you wrote is that you actually run these different sensitivity analyses of different kinds of heat pumps, different levels of efficiency, but also with or without insulation upgrades. And this is where I hope the state of Texas is kind of moving towards and the utilities that administer the programs are moving towards having a little bit of an integrated approach to looking at heat pumps and insulation. 

But let's just talk for a minute just about the grid impacts of inefficient heat and poorly insulated homes. What kinds of problems does that cause for a grid and what's kind of the scale of some of those problems, if you can just talk through that?

Eric Wilson

Yeah, definitely. So as you're alluding to, it depends a lot on what the existing heating systems are like in a given area in Texas where there is a substantial amount of electric resistance heating. Replacing that electric resistance heating with heat pumps can reduce the winter peak demand on the grid there. And that would be true of other places where there's a lot of resistance heating used, like across the Southeast US and in the Pacific Northwest as well, where electric resistance heating is common. 

And in other places where there isn't as much electric resistance heating, then switching to use electricity for heating can increase that winter peak. And there are a number of ISO and RTO organizations that are now doing load forecasting to look at different future scenarios and try to look at load growth and growth in winter peak due to deployment of heat pumps. Actually, I believe ISO New England and New York ISO are both now using the results from the ResStock tool to inform their load forecasting to account for uptake of heat pumps. 

So I think what a lot of people are finding is that there's a lot of headroom in the existing grid systems because so much of the country is currently summer peaking because of residential air conditioning primarily. And it will be some years before you see the effect of heat pumps and electrifying heating cause a winter peak that exceeds the summer peak. Now that's going to be different depending on where you go. And some areas will probably hit that sooner rather than others.

And then also, it's probably going to be a little bit different at the bulk power level versus at a distribution system level. So you could imagine a city in a cold climate where there's a big push for heat pumps. You may get some transformers or feeders on the distribution system that are starting to see the effects of the winter peak sooner rather than later. And this goes back to the envelope and efficiency improvements that we looked at in the paper. And they're are really a lot of benefits there, both to the consumer, but also to the grid in terms of mitigating that growth in peak demand. 

And also can help improve just the resilience of buildings as well, the ability to coast through power outages or coast through on peak periods when there's a lot of strain on the grid. All the envelope insulation and air sealing can really go a long way towards improving that comfort and resilience aspect of homes as well.

Doug Lewin

I want to dive a little deeper into both the electric-to-electric change and natural gas to electric change. So first of all, in Texas, I think it's very important to say this. We are 60% of homes that are all electric heat. And according to the most recent, the Residential Energy Consumption Survey that came out a couple of years ago, I believe the number was somewhere around about three and a half million homes that have resistance heat as a backup. And in some cases, and I don't think DOA actually counts as, correct me if I'm getting this wrong, I want to be corrected trying to get smarter on all this. They don't count.. there apparently are a no -trivial number of homes, a lot of contractors have been telling me, that are entirely heated by resistance heat, which strikes me as crazy, but apparently because there's not that many heating days in Texas, some builders are just building with resistance heat as the primary, um, method.

So, so with this electric-to-electric where you have resistance heat as a backup that kicks in under 32 or is the only form of heat you can be seeing. And you had a paper that you, um, published, I believe it was after, um, Winter Storm Uri, where you were one of the authors, Quantifying the impact of residential space heating electrification on the Texas electric grid that was cited in the NERC and FERC report post-Uri that shows that with resistance heat, you can have homes not uncommonly getting into the 15 or 20 kW kind of a range. So if you're replacing those, you're looking at, I don't know if you looked at this in your paper, but like, what are we looking at from a peak demand reduction? Can we get from 15 to 20 down to like, 8 to 10 or something like that? Is it like a having or are you not sure?

Eric Wilson

Yeah, on a per home basis, you're talking about?  Yeah, I mean, I'd say it's all over the place. You know, current homes that are large and super leaky, they may be heating with electric furnaces that have those huge, huge, huge resistance elements. And, you know, if you do a really, really aggressive envelope retrofit, think like passive house levels of adding on insulation and doing really good air sealing, you could bring that down to probably almost to 1kW through a really extreme envelope upgrade. So it's all about how far you go and how much that costs.

And that would still be using electric resistance, right? You could get it that low just by going to passive house level envelope improvements. Now, you can also help reduce that by switching from electric resistance to a heat pump. But it all comes down to how much money you want to put into it and what it's worth, both to the consumer and to the grid, to reduce those large peak demands.

Doug Lewin 

Yeah, and what that's worth to the grid is really an interesting kind of question, because if we're talking about, even on average, even if it's not as dramatic as reducing, you know, 10 kW per home, even if it's a kW or two, when you start timesing that by three million homes, and of course, homes still being built that have resistance heat in, as somebody put it to me, you know, it may cost just a couple of hundred bucks to put resistance heat in as a backup that kicks on under 32 degrees. It can cost 10, 15, $20,000 worth of generation on the grid to serve that resistance heat. 

So there's this mismatch, right, between the consumer or the builder on the one side and what their cost is and what everybody is paying through the grid. So that's really where that is probably the proper role of incentives, right, to maybe bring down that cost that wouldn't necessarily make sense to the individual homeowner, but can make a lot of sense to the grid.

Eric Wilson

Yep, yeah, exactly.

Doug Lewin

Let's talk a little bit also about the gas to electric piece, because it does. I think the electric to electric is actually pretty straightforward, as straightforward as any of this is. It's all very difficult. But you don't even have to take the extreme of a passive house, just adding some insulation, either removing resistance heat or, and I guess before we get to natural gas, let me ask this question too.

Does it make sense to, when you go to a heat pump, in some cases you might actually leave the resistance heat, but the idea is now instead of kicking on at 32 degrees, it's kicking on at five degrees or zero degrees or negative five degrees so that you're really barely ever using it. Is that part of the idea?

Eric Wilson

Yeah, I think in most situations, it would make sense to leave any existing electric resistance there, whether that's electric resistance baseboards or electric furnace elements. If the infrastructure is there, if you already have your electric panel that can handle that capacity, you already have the circuit going to the furnace for that electric resistance heat.

Maybe you would switch out to a smaller circuit if you're then using some of that power to power the heat pump compressor instead. So that could be a way that you can reduce the size of the elements and make use of that existing infrastructure. 

But yeah, from a consumer perspective, there's really no reason not to leave the electric resistance heating elements in place. Now, the answer might be different from a grid perspective if you really want to ensure that home won't use that electric resistance heat. I know somebody here in Denver that they put in a three-ton heat pump and put in a 10 kilowatt resistance element. The HVAC installer was just adamant about putting in that backup electric resistance element of 10 kW, which is pretty substantial. It's been switched off the whole time, and he's been through multiple cold snaps and has never felt the need to turn on that 10kW of resistance heat. 

So it's really kind of incredible just like how sensitive these infrastructure changes are to who is putting them in and how they did the sizing calculation and people's acceptance of risking the house being slightly, you know, a few degrees colder than set point on your very coldest day. It's pretty amazing just kind of how a small change in those preferences, either on the consumer side or the installer side, can make a huge difference in terms of what loads end up being seen on the grid.

Doug Lewin

Yeah, and I think in some ways, as with so many things in life, it's really good to be pragmatic about these things and to take what may be the path of least resistance. I have heard this over and over again from people I've talked to that have tried to do these retrofits themselves, and the contractors generally tend to be resistant to removing resistance heat or switching from gas to heat pumps. 

I think we should talk about the workforce, sort of the training aspect of this. And, and, but at the same time, these are folks that have worked in homes for a long time. They're smart. They, they understand homes and they're worried about this. And, and if you get to the example you just gave as a perfect one, if you're in Colorado and you've got a backup resistance heat and you're not using it in a Colorado winter, you're probably not going to use it in a Texas winter either. And if you do use it, you're probably using it for a very short period of time. And it's not putting the kind of strain on the grid as a resistance heat that is designed to just kick on at 32 degrees, which isn't a super uncommon occurrence down here. So I think there's something to be said for kind of taking a middle way. 

I used to say, Eric, when I was having these discussions a year or two ago, and as I was, I didn't really understand at all. I don't think many people did the problem that resistance heat was that caused during Uri until afterwards. And when I started to get smart on that and learn about it, I started saying, we need to get rid of resistance heat. I've kind of changed that. I don't think it's actually, we need to get rid of it. We just need to reduce its use and our reliance on it a lot to take that strain off the grid. Is that how you think of it as well?

Eric Wilson

Yeah, yeah, I would definitely agree with that. I think it definitely has its place. You know, I don't think it's completely evil or anything. I think there are some situations where it makes sense. And yeah, where electric resistance heat can be a good solution. I could give the example of my own house, actually. We had a gas boiler. And back in 2015, we replaced it with a ductless heat pump system.

And there were a few of the rooms where we didn't want to put in a separate head, indoor head, hanging on the wall. And we decided to put in some electric resistance. They're kind of cove heaters. They're mounted up high on the wall, and they provide radiant heat. And that was totally enough just to provide some extra heat to those rooms when it's needed, when the doors are closed. And even though this is an old house, we have pretty good insulation and air ceiling and windows. So it does pretty well when it gets cold. 

And this ended up being a much cheaper solution was to use the electric resistance cove heaters in a few of the rooms, just so we didn't have to have this big sprawling ductless heat pump system with an indoor head in every room. So I think there can be a place for it. But yeah, I mean, and obviously you have to be concerned with the potential grid impacts and kind of take the pros and cons with that sort of thing.

Doug Lewin

Yeah. And just a quick like Public Service Announcement here. I have heard this story from a lot. I have, because I talk about this stuff a lot. Sometimes people call me up and say, I want to get a heat pump. Like who should I go to? It is hard to find contractors that are like really up on this. Um, and so any HVAC company that's listening, like if you make this part of your thing, there's going to be a lot more people looking to do this. I think there's going to, there already are more incentives through the tax credit. There's more coming through the HOMES and HEEHRA program through the Inflation Reduction Act. 

Are you seeing, I don't know if this is something you work on, so feel free to just say, it's not what I'm into, but like, are you seeing efforts on the workforce side to, because I mean, this is, it's a different technology? It's different than what people have been installing typically.

Eric Wilson

Yeah, I am seeing efforts there. You know, both proactively, HVAC and sellers kind of seeing this opportunity in the market and going for it. I was listening to sports radio the other day and I heard an ad for an HVAC company who is advertising themselves as a home electrification company. And I was just totally blown away hearing that. 

So yeah, I think people are still starting to see it as a real opportunity. But there are still a lot of companies out there who kind of have this old notion of what heat pumps are and bad experiences from the past, which is totally valid. But I think there are some that are also kind of getting smart on it and seeing it as an opportunity. 

I'll throw a shout out to Nate Adams and his HVAC 2.0 effort to really try to help HVAC installers see this as a great opportunity to make it easier for them to sell things to consumers. And also within government programs, there's one that I just found out about called Energy Skilled, which is a program to help installers, I think HVAC installers is one piece of it, help them get the recognition of being a quality installer so that consumers can more easily find them and so that those installers can be more profitable and make it easier for them to acquire business. Because I think there's a real issue with the cost of heat pumps being pretty high because customer acquisition costs can be pretty difficult. If customers are out there getting five quotes and half the people won't call them back, it just adds a lot of pain on both sides of the transaction. So I do think there's some efforts here. 

The other thing I'll mention is I'm seeing more companies start up to kind of be like a one-stop shop for home electrification and to not necessarily have the installers in-house, but to find quality installers and partner with them and just make things a lot smoother for homeowners, which I think is really needed because I've heard so many stories about how difficult it is to find somebody to actually call you back.

But I also say that I think that also varies a lot because I hear a lot that HVAC installers in rural areas where electric resistance heating is more common or where propane is more common, they're totally familiar with heat pumps. They've been doing it for years. It's more the installers in the urban areas where natural gas service is common that are less familiar with the technology just because it hasn't made sense there until more recently.

Doug Lewin

Oh, that's very interesting. Cause in the energy efficiency programs, right, a lot of times the rural areas are categorized as quote unquote, hard to reach. Um, it might be in this case that they, you know, the urban areas might be harder to reach. That's really interesting. I haven't heard that before, but that makes a lot of sense. Yeah. Cause you just don't have gas in some of those areas. So they're already dealing with, uh, that that's, that's very interesting. And I will say, we'll put this in the, in the show notes. I'm excited to learn more about Energy Skilled. I think that's really important to help those installers that are doing this work to be recognized and easily found by consumers. Nate, who you mentioned, I think goes by the gnome de plume of Nate The House Whisperer, right? Are we talking about the same Nate? Yeah. Okay, great. So we can put a link to his YouTube channel and the training videos he posts that are just excellent. And I noticed you cited him in your paper and linked the citation goes to one of his YouTube training videos, which I really like.

Alright, great. One more thing on efficiency. I do want to talk about gas to electric switching, but before we do that, this is from the paper, I'm reading from it, “for the 48 million homes that currently heat primarily with electricity, fuel oil or propane and have central or room window AC. Almost all homes have positive bill savings, regardless of heat pump efficiency level, 95 to 100 percent nationally and median savings of $300 to $650 per year, depending on efficiency.” So at the higher levels, you could see $650 in savings. Of course, there's a bunch of different factors, including the air sealing and things like that, but $300 from a lower efficiency. So basically in all cases, if you're electric-to-electric, if you're going to a heat pump, you're going to see savings on your bill and depending on the amount of resistance heat we're gonna see grid reliability benefits as well. 

What I want to drill into a little bit on this one Eric is the, that range and that depending on efficiency. So you model sort of the you know, like lowest efficiency heat pumps the medium ones and then the very high ones. Can you talk through a little bit the cost differential as you sort of move up that scale? And this is where for the consumer, you have to do some cost benefit, right? And like, and weighing whether or not going to the highest efficiency makes sense or whether foregoing some of those savings and keeping some resistance heat is, you know, this is one of those classic, like, don't let the perfect be the enemy of the good. If you can afford the perfect or you have an incentive system set up that reduces that price enough that you can afford it, that's great. But if you can't, that medium one is still probably way better than the system you probably have from an efficiency perspective. Can you kind of talk through the different levels?

Eric Wilson

Yeah, that's right. Yeah, it's really all over the place. Our goal was to really capture a broad, the full spectrum of how heat pump performance may vary. But at the end of the day, we only did three different models. And there's just a huge space in between those. And the, the NEEP, the Northeast Energy Efficiency Partnerships. They have a list of cold climate heat pumps that has data there on how they perform at different temperatures. And that's a great resource just for trying to understand how heat pumps will perform under different conditions. And it's really amazing looking at that, just how much variety there is in terms of the performance, how much the heat output can be retained down to cold temperatures as well as how the coefficient of performance changes. 

It's also kind of just amazing how you might see just in the model number for a heat pump and there's like one or two digits that change and the performance that's for that system, that combination can be pretty different, substantially different just based on one or two digits being different. 

So anyway, just goes to say that there's a big variety of performance out there and people talk about heat pumps broadly, but they can mean a lot of different things to different people. And as you were saying, on the low end, we modeled a single stage heat pump that's the minimum efficiency that you can buy according to the federal energy conservation standards. I believe this is like a CR14 in the South. And there's some subtleties about the CR1 or CR2. But I'll refer readers to the paper to see the exact specs there. But imagine this is the old school heat pumps that have been used across the southeast and parts of the mid-Atlantic area for decades. And they're just on or off, in a lot of ways similar to a traditional air conditioner, in that the compressor is on or off. And these really don't have good performance under cold temperatures. And they're the ones that you typically see paired with electric resistance backup when they're below 35 degrees Fahrenheit, or perhaps a dual fuel system that uses a fossil furnace as backup below a temperature like that. 

And then in the middle, we modeled a medium efficiency heat pump where it was variable speed and it was not cold climate designated, so it didn't have great cold climate performance. The heating output degrades quite a bit as you go to colder outdoor temperatures, but is still very efficient at milder temperatures and very efficient at cooling as well. And has those comfort benefits that we mentioned because it's a variable speed unit.

Doug Lewin

Eric, can I just ask you about that? So how far down is that medium one heating? Is it still going to heat above a COP, coefficient of performance like 2 at 20 degrees or something like that, give or take?

Eric Wilson

So that one, yeah, both the minimum and the medium efficiency units that we ran had 50% capacity retention. So if they were rated at three tons, then they were still putting out 1.5 tons of heat at 5 degrees Fahrenheit.

Doug Lewin

So they're still, they're still going to work pretty well down to five degrees. This is the medium one, not the high performance? 

Eric Wilson

Right, the high performance, yeah, had a higher capacity retention. I guess one thing that's worth pointing out, though, even if the medium has that 50% capacity retention rating at 5 degrees Fahrenheit, the way we modeled it is we sized it to meet the full heating load. So if the heating load for a home at 5 degrees Fahrenheit was 3 tons, we would oversize it. We would basically put in a 6-ton system that doesn't exist.

But we would put in a 6-ton heat pump that can deliver 6 tons worth of heating at the rated condition so that at the design condition, in this case, 5 degrees Fahrenheit, it could put out 3 tons to meet the full heating load of the home. We did model it with electric resistance heat, but it didn't get used very much.

So, it's one of the things I think people miss a lot when they look at this capacity retention. And it's very confusing. I wish we could kind of get past this and just if we get heat pumps where they have 100% capacity retention, where you basically can think of them as putting out the same amount of heat regardless of the temperature outside, I think that might make things a lot easier to communicate. But we're not really, really there yet.

Doug Lewin

Mm-hmm.

So does that mean ultimately though it's gonna make, that would actually would make the cost much higher? 

Eric Wilson

Yes.

Doug Lewin

So as a practical matter, these savings that you're saying might actually be higher if somebody used a medium system but didn't make it six tons. So again, they might need resistance heat. So that's where, and this will be a process, we don't have to figure this all out today, but that's really where I think we need to figure out, particularly, again, this is all about Texas, what we're talking about here. And it's extremely rare that you get down below 10 degrees. That's where Uri, the average statewide temperature was like six. But during the last two winter snaps, which were pretty serious ones, Heather and Elliot, we're talking like 15. 

So that's where like we, I think it, and this is so important for the utilities, whether they be Austin Energy and CPS Energy, the municipals that design their own programs or the statewide programs through Oncor and CenterPoint, that the incentive, and I hope the audience realizes why I'm spending so much time on this, because where you set that incentive for what kind of heat pump system, if you really go to the perfect, you may need to do that. That is an empirical matter. We need to be able to figure this out for the grid benefits. But if you do go that side, you're going to exclude a lot of folks who just aren't going to have, even with an incentive, enough upfront money to get it. But if there's somewhere, it's kind of a Goldilocks thing, right? Not, not the minimum side where you're putting tons of resistance heat and really stressing the grid, not necessarily like the Rolls Royce edition, which I hope people will put in their homes if they can afford it, but isn't practical for a lot of people. There is kind of a in between Goldilocks kind of system that lowers people's bills, increases their comfort, gives all those benefits we talked about and reduces the stress on the grid in the wintertime. And that's what we're looking for here, right?

Eric Wilson

Yeah, yeah, definitely. And I should say, you know, the medium efficiency unit that we modeled was just one example of different definitions of quote unquote medium efficiency. You could find a system that has great cold climate performance. It's not the top of the top in terms of overall efficiency level and maybe more affordable than the, you know, the, the top, top of the line efficiency units, but is maybe they're the sweet spot where it has good, good cold climate for performance and the overall annual performance is not quite as good, but is perfect for some of those in-between situations that you were describing.

Doug Lewin

Okay. Go ahead and finish though with the high efficiency one. What did you model for that?

Eric Wilson

Yeah, so think of this. This is like the top 1% of units that are out there. We just kind of want to max out the performance levels. So this is a fully variable speed. The capacity retention we modeled was 85% of the rated capacity at 5 degrees Fahrenheit. There are ones that are out there that are 100%. So you can get better from that regard. But it kind of doesn't matter when it comes down to the sizing because we size it to meet the full heating load in all situations anyway. And yeah, it was a 24 CEER using the CEER 1 metric and 13 HSPF using the HSPF 1 metric. So it's, yeah, like I said, it's kind of the top of the top. It's, yeah, probably might be hard to find units that actually perform that well in practice. Although there's this ongoing DOE Cold Climate Heat Pump Challenge that is really pushing the envelope and has various manufacturers signed up to really push the envelope even more in terms of heat pump performance. So I'd say this is kind of equivalent of like cutting edge efficiency level because we really want to to bound the problem here.

Doug Lewin

So you have a graphic in the paper that shows several different sensitivities of different prices and all that. And I just want to direct people's attention if they're looking at the article, if you're not, basically under sensitivities of different prices, different efficiencies, whether the minimum like we were just talking about or the medium or the high efficiency, there's a percentage on there of how many people would experience positive bill savings from going to a heat pump. And Texas has a vast majority on all 12 of these different scenarios. The lowest one is like 78% of Texans, but most of them are 98, 99%. So we are talking about a wide variety of different scenarios where Texans would get bill savings from using heat pumps. I don't know if there's anything more you want to say about that graphic, but it was pretty striking.

Eric Wilson

Yeah, that's right. I mean, yeah, Texas is a great place to do heat pumps. It's kind of hard to go wrong there. And yeah, one thing that's important to point out here is we're quantifying the savings you would get on the air conditioning side in addition to the heating side. So a lot of people, they may find a calculator and plug in the expected COP of the heat pump and their electric rate and their gas rate.

And they may find out that even with a pretty good heat pump, it may be more expensive to heat with gas. But heat pumps, most heat pumps, as long as they're not that minimum efficiency level, are going to be performing with a cooling efficiency and provide air conditioning much more efficiently than whatever type of air conditioner it was replacing. 

And in some cases, it's more comfortable, too, if you're going from actually a home that doesn't have air conditioning or has just relies on window air conditioning units. Heat pumps will be a lot of times quieter and provide more even comfort, all the things we were talking about previously. But yeah, in Texas at least, it's pretty easy to see bill savings, even if you're switching from a natural gas furnace. And the savings on the air conditioning side contribute to that.

Doug Lewin

Yeah, obviously in Texas, if we're talking about year round bill savings, we've got to obviously, the winter is particularly important from a grid perspective, but from a bill perspective to the consumer, it's going to be much more obviously driven by the summertime when we're, you know, we have what is now, I guess, a six to eight month summer in Texas, endless summer, not in the positive sense.

Eric Wilson

Yeah, I guess one other note here on this figure and looking at bill savings. So obviously we were doing a national level analysis of the 48 contiguous US states. And we weren't able to model the exact electricity rates for every single utility. We were using state average rates. We did split out the fixed costs that you pay regardless of how much electricity you use or how much gas you use. So we split that part out, but we were using state average rates.

So in some states that have a lot of variety in what the rates are, then we could be kind of smoothing over some differences you would be seeing in those states. So it's always good to kind of consider your own local utility rates when deciding on this sort of thing. And we did look at those multiple sensitivity scenarios. Our main case was using rates from the winter of 2021 and 2022. That was kind of around the time when we did the analysis and what was available there.

We looked at sensitivity of the rates for all fuels, electricity, fossil gas, fuel oil, and propane, if they would return to 2019 prices, as well as looking at what EIA was then predicting in the short -term energy outlook for winter of 2022 -23, which has come and gone. But the main point is we looked across at different rate scenarios not all of them were what ended up happening. But yeah, we did consider some sensitivities to those different rates.

Doug Lewin

Okay. Yeah. But across all those scenarios, yeah, across all those scenarios, you did see savings for a vast majority of techs and so now the other thing that you did talk about this in the paper that you didn't get into modeling the price of this, but I think this is very important and I actually had a discussion with Pablo Vegas, the ERCOT CEO about this, that there's a little bit of kind of a virtuous cycle between efficiency and demand response that they kind of go together. 

So, you mentioned early on, Eric, that there's these air quality benefits because the heat pump stays on even kind of at a low level circulating air. And that's because it has this, um, what I've heard compared to like continuously variable transmission on a car where it's, it can move up and down at infinite speeds instead of like most HVAC units that have two speeds on or off. And that's it. 

And that means that they are then very, they have a high potential to participate in demand response programs where consumers could potentially maximize even more savings by signing up for demand response, then add in that piece of the air sealing and insulation where the house would stay comfortable even when that heat pump, instead of running at 80 or 90%, maybe it does some pre-cooling on a day where in Texas we have so much solar power now, right? So two, three, four in the afternoon it's blazing hot. You could actually use more pre-cool your home. And then as the sun’s going down, the grid is getting tight. Prices are high. Your heat pump is running now at 20 or 30%, but you're still feeling cool because you've kept that cold air inside. 

So I know you didn't really look at that in the paper, but clearly there's potential there for homeowners to maybe, or business owners, whatever, apartment, whatever they might be, for consumers to actually add to the savings from demand response programs?

Eric Wilson

Yeah, definitely. I think there's a lot of potential there and you're seeing a lot of interest in people talking about virtual power plants and things like that. I do think you really need to make sure that consumers see the benefits and see the payments from those programs so that they actually participate.

And I think ideally, right, the consumer doesn't even have to think about it and they don't even notice what's happening. It's kind of all happening on the background. They're still happy and comfortable. Don't even notice maybe there's some preheating or pre-cooling that's happening. Um, but they're able to provide the service to the grid and get paid for it without even noticing or being, um, uh, yeah, being affected by it. And one, one interesting thing, um, I don't know if you've, you've seen this, but in the UK, there's a company Octopus Energy… 

Doug Lewin

They're in Texas too, actually. They have a retailer in Texas.

Eric Wilson

Oh yeah. They're starting to give away heat pumps. Uh, I believe with the incentive that that is present in the UK, they're basically able to give them away for free and then use them as a grid resource to help balance the grid and provide this extra resource to the grid. But I believe part of the reason they're able to give them away for free is because they're basically making money and subsidizing that by using it as a grid resource. So I thought that was pretty interesting when I saw that.

Doug Lewin

Totally interesting. And there's, there's a lot of potential for that, um, here in Texas. So I do want to ask about though, the natural gas-to-electric, uh, because there are a lot of people that have natural gas in their homes that for, um, usually for climate reasons, but could be for cost reasons as well, are looking at, um, switching over. So you mentioned that obviously you could then have higher load on the electric grid. 

I think my question for you here Eric is, the way I've heard it put. Let me see if I can get this right. And I'm interested if this is, if you think this is correct, I don't think you got into this in your paper, but if you're using natural gas to heat your space at your home or business or whatever, the highest efficiency you can get on there because you're losing some as you're combusting fossil fuel is like 70 or 80%. It's like 0.7, 0.8 coefficient of performance, whereas like resistance heat is one, these heat pumps are usually going to be two. So isn't there usually an efficiency gain from a systems perspective to actually use electricity in the home, thus freeing up natural gas to go to the power plants that are creating the electricity for the home? 

Did I, I don't know, I probably didn't describe that really well. So if you want to back up and describe what I'm trying to describe better than I did and tell me if that's right or wrong.

Eric Wilson

Yeah, no, I've heard that point made multiple times and I haven't really done those calculations myself, but I, you know, I'm not surprised if they were true. I kind of think about it like, why does the energy efficiency, like the efficiency of combustion… At the end of the day what I care about is emissions and cost right? So those are the metrics that I care about and through this paper we looked at the net impact on greenhouse gas emissions switching from different types of of heating systems including switching from gas furnaces or boilers to a heat pump. And accounting for the emissions from meeting that additional load on the grid side, which would be some mix of different generators, right? But it could include some gas generation there. 

So ultimately, I try to boil it down to what I think actually matters, which is the emissions. And then there's also the cost side, as we've been discussing a bunch. And so that's why I pay a little bit less attention to the source energy or primary energy.

Doug Lewin

Yeah, I think I hear you. I think though, like they're in, in, in Texas, as we're thinking about these things, um, emissions is important to a lot of people, to some it's not. But I think it's universally the affordability and the cost piece. And then there's the grid piece of this, right? Like how does this impact the grid? And so that, that you got into a lot of this paper, this paper is like a great, public service. And I know you didn't take this particular thing, but I wonder if this isn't a direction for future research is to look at, you know, during a cold snap, we are going to have a constraint on natural gas supply. Whatever's done with winterization, if you get down to five degrees, there's just going to be some wells that are, they're going to do what they call voluntary shut-ins, right? Some operators are just going to shut their operations off. I've talked to people in the industry, they're like, we do this. Whenever it gets down that low, we're not risking damage to our equipment. We're just shutting down. They can make us winterize. We're turning it off anyway. So that goes on. And again, we've seen that consistently. You can draw a through line from Uri to Elliot to Heather and all of those 25 to 30% of gas supply offline. So if you have a finite amount of gas supply, even as a state like Texas with all the gas out in the Permian, does it make sense to send it to the home to heat that home? Or does it make sense to maximize what you've got, optimize what you got, would be a better way to say that, and send it to a power plant to then heat that home that has a heat pump that is going to be more efficient in the way it uses each of those molecules? So I understand that may not have been a question you looked at. I just think it might be an interesting one for future research.

Eric Wilson

Yeah, yeah, definitely. Yeah, thanks for describing it that way. It does seem like an interesting question.

Doug Lewin

Yeah, yeah. All right, so just a couple other things here. I wanted to just drill down just a little bit into something you had a little further into the report where you talked about state, I'm just gonna read this couple of sentences. “State utility regulators, city councils and electric cooperative boards can direct electric utilities to update electric rate structures to promote electrification and avoid potential bill increases. They could expand awareness and access to rate designs for low-income customers as well as programs that guarantee bill stability after electrifying. There are examples of rate policies like this around the United States.” 

So I think this is really, really key. And I've written about it and talked about it in previous podcasts. But if you go back to the beginnings of the electric industry, rate design was really used as an inducement to get people to use more electricity. It's been a long time since the industry's thought in those terms because we thought we'd kind of reach this near ubiquitous, not everybody actually has electricity, but a vast majority in the United States do. It's basically ubiquitous. 

But now we're at a point where if you're an electric utility, you do have the opportunity through electrification of heat, electrification of transportation, to potentially really grow load. But if you just have this kind of flat rate or if you have a poorly designed rate structure, you could actually disincent or disencourage. Disencourage, is that a word? I think I just made up a word, but I'll just, I'll go with it. You could really discourage would be the word. Thank you. I guess I need more coffee. You could discourage people from, from electrifying. So can you talk a little bit about that? The rate structures and how those might induce people to get heat pumps or to have an early change out of equipment or how they might actually push people away.

Eric Wilson

Yeah, yeah, definitely. So yeah, I think, you know, until actually very recently, a lot of progressive rates, electric rates were designed to spur energy efficiency. You know, you think of like tiered rates where the more you use, of course, there was the inverse tier where the more you use, the cheaper it got which in a way makes sense in terms of paying for the infrastructure that needs to serve that load. But yeah, you saw tiered rates where it became more expensive the more you use. Those are common in California. And then time-of-use rates was kind of the next evolution with trying to incentivize using electricity at different times. 

But yeah, like you said, I think there's still a lot of rates out there that are kind of unintentionally discouraging people from switching to use electricity. And in some cases that maybe go against what the decision makers in that area, whoever's controlling rates may want to encourage if they have aggressive climate goals. 

So I think you actually, there's some places that have had electrification or electric heating specific rates for a long time one is ComEd in Chicago has electric rating heat, electric heating rate that has a lower rate for homes that are on electric heating. I believe Commonwealth Edison in New York has also had a rate like that…

Doug Lewin

That would be, yeah, Consolidated Edison in New York. Yeah…

Eric Wilson

And then actually in California, the rates are pretty complicated with these baseline allocations, depending on which region you're in. But I believe in most places, they have higher baseline allocations that tend to lower rates if you have electric heating. And our paper did definitely not try to get into those details in terms of representing rate structures. But you're hearing more and more people interested in exploring rates that are more aligned with their climate goals, for example. And I think there's various approaches to that. For a while, California was looking at fixed charges that vary with income level, which ultimately did not go forward. But there's a lot of other things that rates pay for. And in some cases, it's preventing wildfires and moving wires underground and things like that. 

So there's all these objectives in terms of rate making. And I think it comes down to whoever's involved in that rate making to kind of weigh all those and figure out what kind of signal they want to be sending. And it's definitely not super straightforward all the time.

Doug Lewin

Yeah. But I think as much as possible to align those rates signals with, and I think in Texas at a statewide level, obviously climate goals aren't usually what rises to the top, but grid reliability is quite far up there. So particularly for these electric-to-electric change outs, like having something where you have a rate that is aligned. And I think that's really where it's either it's some combination probably of time of use and demand response payments to reduce. And that's really where that variable speed aspect of the heat pumps come in. There'll be emissions benefits, Texas for the foreseeable future, that's not going to be like the orientation, but the grid reliability and affordability pieces actually kind of line up, which is kind of beautiful in a way. So.

Eric Wilson

Yeah, yeah, you know, you could imagine like in a far future when say there's, you know, if there's no like, fuel, no marginal costs of generating the next kilowatt hour, it's just all about the infrastructure to deliver those kilowatt hours from say the wind, wind farm to, to the buildings. You can imagine a scenario where we pay for electricity, kind of like we pay for Wifi, or, you know, internet service where, you know, you might pay more for 100 megabit connection compared to 50 and so on. It's more about the size of the wire coming to your house than how much you end up using from that. So I don't think that's realistic or necessarily desirable, but it's an interesting thought experiment about how things could be.

Doug Lewin

I actually think it might be realistic and potentially desirable. It was particularly in Texas where you have a competitive retail. So you were talking about Octopus before, but there's David Energy and OhmConnect and Tesla's got a retailer now. So you have all these sort of innovative retailers and even the incumbents, the Reliance and TXU’s in that are trying to innovate a little bit in there. The innovation is, you know, it's crawl, walk, run. And the crawl was like, you know, free nights and and weekends. There's a lot of programs like that right now, right? 

So if you, but if you have an electric vehicle and you charge it up overnight, like that could be quite a savings. I do think it needs to get more sophisticated than that. And one of those might come to some kind of a flat bill where in order to have that price certainty and that low cost, then the supplier gets to, you know, optimize the use of the equipment inside the house within your accepted parameter, right? That's the key because customers don't want their house to be 82 degrees in the summer. You don't want it to be 58 in the winter, right? So you, you say how high or low you'll let that go and, and your price can vary based on that. 

And I think a lot of people assume that's not going to be good for low income customers, but actually even if your parameters are pretty tight and you don't want it to be hot or cold in your house in the various seasons, you actually still within that band, there's quite a bit that the supplier can do and that you could actually reduce your bill, not only from the energy efficiency of the heat pump, but from the demand response capability that's there throughout the year. 

I think we might see that. And if it happens, I think it might happen in Texas before it happens other places. So we'll see. We'll see. 

Eric Wilson

Yeah, definitely.

Doug Lewin

Hey, Eric, I really appreciate it. Is there anything else you want to share with the audience before we end? I know there's so much in this paper, obviously a lot. I didn't ask you about anything else you'd like to talk about before we end.

Eric Wilson

Yeah, I guess just something else related to rates and what we were just talking about. I think a lot of people may assume that electrification will increase electricity rates and make it more expensive, which I definitely think can be true. But I think there is a scenario where, especially if you look at electric vehicles and if they're just adding this relatively flat load, you're taking the the amount of revenue that the utility has to collect and spreading it over a lot more kilowatt hour sales. Ideally, that would be over the same set of infrastructure. And there doesn't have to be a lot of upgrades to that infrastructure. I'm sure that will come. But it's interesting to think about just like, if you're selling that much more electricity, you are actually now bringing a lot more revenue that's available to pay for some of these upgrades and improvements that need to happen. And it could actually start to put some downward pressure on rates overall. So I think that's just an interesting point that a lot of people haven't necessarily thought about.

Doug Lewin

It's a great point. And again, it actually goes back to the, to the history and the roots of the electric industry. I mean, this is how Sam Insull, you mentioned ComEd, he was the, the, you know, guy who really started ComEd or pulled all the 30 different, some odd electric companies in the Chicago area and pulled them into one, uh, utility. And that was kind of his thing was like, we can't just light, you know, have a whole system built for lights for two, three, four hours in the evening. It's too expensive. So they gave cheap rates to the, to the what they call traction company, the electric street cars, to factories. And as more and more load came on, it lowered the unit costs. And I think that that is possible with electrification. You're right. It's not inevitable. It could go the other way, but it is possible. We'll see a lowering of rates and bills from this.

Eric Wilson

Yeah, I really love that story about electric street cars and how it was kind of this byproduct of new electric lighting that was happening. So yeah, I think that's a really great story.

Doug Lewin

Eric, thank you very much for taking the time. This is a great paper. I hope folks will check it out. Any other place you want, where can people find you? I don't know if you have like a social media presence or a website or anything. Where would you direct people if they wanted to know more about your work?

Eric Wilson

Yeah, they could contact me on LinkedIn, or they can also reach out to the ResStock team at NREL, ResStock at NREL.gov. That team has really been carrying forward and doing a lot of great work in this space, a lot of which doesn't involve me at all. So yeah, definitely check that out.

Doug Lewin

Awesome. Thank you so much, Eric. Appreciate it.

Eric Wilson

Yep. Thanks, Doug.

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