In a whitepaper prepared for the Energy Systems Integration Group (ESIG), Brattle consultants examine the role electricity rate design can play in improving the economics of heat pumps.

The economics of heat pumps relative to natural gas heating will be an important driver of customer adoption of these technologies and will determine the extent to which ambitious building electrification goals can be met in a timely manner. Using a proprietary dataset of gas and electricity usage for 80 single-family residential customers of a large utility, the authors analyzed the customers’ heating bills before and after electrification. They found that the operating cost gap was positive (energy costs for operating the heating equipment are higher post-electrification) for all 80 customers under the default flat volumetric electricity rate. However, by moving to one of three alternative rates, all 80 customers moved from a positive to a negative cost gap, where energy costs for operating the heating equipment were lower post-electrification. The alternative rate designs considered included a rate with a higher fixed charge, a rate with time-varying volumetric charges, and a rate with time-varying demand charges. All of the modeled rate designs were cost-based, meaning they do not constitute a subsidy and would be revenue neutral when applied to the average utility customer.

The analysis shows that designing and offering alternative cost-based, cost-reflective rates to electrifying customers can be an effective lever to reduce customer costs of electrification. Moreover, the rates need not be limited to electric heating customers and can be made available to all residential customers (not just the electric heating customers) on a voluntary basis.

“Heat Pump-Friendly Cost-Based Rate Designs” was authored by Principal Dr. Sanem Sergici, Associates Akhilesh Ramakrishnan and Dr. Goksin Kavlak, and Senior Research Analysts Adam Bigelow and Megan Diehl. The full whitepaper is available on the ESIG website.