How closing the ‘spark gap' can boost heat pump adoption

Yahoo

11-03-2025

For most U.S. homes, heat pumps are a no-brainer: They can lower energy bills and eventually pay for themselves all while slashing carbon emissions. But the economics don't work in favor of heat pumps for every home — and particularly not for those in states that have high electricity prices relative to those of fossil gas.
Adjusting the structure of customer electricity rates could turn the tables, according to a report out today from the nonprofit American Council for an Energy-Efficient Economy, or ACEEE.
The ratio of average electricity prices to gas prices (both measured in dollars per kilowatt-hour) is known as the 'spark gap' — and it's one of the biggest hurdles to nationwide electrification. A heat pump that is two to three times as efficient as a gas furnace can cancel out a spark gap of two to three, ensuring energy bills don't rise with the switch to electric heat. But in some states, the gulf is so big that heat pumps can't close it under the existing rate structures.
Worse, heat pump performance can decrease significantly when it's extremely cold (like below 5 degrees Fahrenheit), so without incentives, the economic case is harder in states with both harsh winters and electricity that's much more expensive than gas, like Connecticut and Minnesota. In these places, heat pump adoption is 'hit by double whammy,' said Matt Malinowski, ACEEE buildings director.
The weather might be hard to change, but the spark gap is malleable: Utilities, regulators, and policymakers can shape electricity rates. By modeling rates for four large utilities in different cold-climate states, ACEEE found that particular structures can keep energy bills from rising for residents who switch to heat pumps, without causing others' bills to go up.
Flat electricity rates are a common practice. They're also the worst structure for heat pumps, Malinowski said.
When utilities charge the same per-kilowatt-hour rates at all hours of the day, they ignore the fact that it costs more to produce and deliver electricity during certain hours. That's because, like a water pipe, the power grid needs to be sized for the maximum flow of electrons — even if that peak is brief. Meeting it requires the construction and operation of expensive grid infrastructure.
Flat rates spread the cost of these peaks evenly across the day rather than charging customers more during the high-demand hours that cause a disproportionate amount of grid costs.
But heat pumps aren't typically driving peak demand — at least, not for now while their numbers are low. Demand usually maxes out in the afternoon to evening, when people arrive home from work, cook, do laundry, and watch TV. Households with heat pumps actually use more of their electricity during off-peak hours, like just before dawn when it's coldest, than customers with gas, oil, or propane heaters.
Heat pumps 'provide the utility a lot of revenue, and they do that at a time when there isn't that much electricity consumption,' Malinowski said.
Under a flat-rate design, cold-climate heat pump owners 'are basically overpaying,' he added. 'Adjusting the rates to better reflect their load on the system — and the benefits to the system that they provide — is only fair.'
A rate design that bases charges on when electricity is used would help course-correct. Known as 'time-of-use,' this structure charges more for power consumed during periods of peak demand and less for power consumed at other times, or 'off-peak,' coinciding with heat pumps' prime time.
Utility ComEd serving the Chicago area is working to finalize time-of-use rates for households, joining the ranks of several other U.S. providers that already offer this structure, like Xcel Energy in Colorado, Pacific Gas and Electric in California, and Eversource in Connecticut.
Demand-based rates are another way of accounting for a customer's peak demand profile and can help reduce a heat pump owner's energy bills. This approach tacks on fees scaled to a customer's peak demand that month. If it's 3 kilowatts, and the demand charge is $10 per kilowatt, the fee will be $30. But importantly, this structure also lowers the rates charged for the total volume of electricity.
Even though households switching from gas to heat pumps under such a program would see higher charges for peak demand than before, Malinowski said 'they'll be using so much more electricity overall that they end up benefiting much more from that lower volumetric [per-kilowatt-hour] charge.' As a result, their energy bills can be lower than with a flat-rate program, the report finds.
Winter discounts also help heat pumps make financial sense. In most states, electricity usage waxes in the summer — when people blast their air conditioners — and wanes in the winter, when many residents switch to fossil-fuel heating.
Some utilities offer reduced electricity prices in winter to drum up business, a structure that benefits households who heat their homes with electrons. Xcel in Minnesota drops its June-through-September summer rate of 13 cents per kilowatt-hour to 11 cents per kilowatt-hour during the rest of the year for all customers. For those with electric space heating, including heat pumps, the rate is lower still: 8 cents per kilowatt-hour — a discount of 39% from the summer rate.
According to ACEEE's modeling, the winter discount alone can save Minnesota Xcel customers in single-family homes on average more than $350 annually once they swap a gas furnace for a heat pump. Combining the winter discount with existing time-of-use rates or simulated demand-charge rates (given in the study) can further reduce annual bills by another $70.
In Colorado, another state ACEEE analyzed, Xcel provides both time-of-use rates and a much shallower winter discount of about 10%. Even taken together these structures aren't enough to close the spark gap for heat pumps. Pairing that discount with demand-based rates wouldn't do the trick either, the team found. Only when they used the much steeper discount that Xcel deploys in Minnesota were they able to keep customers' modeled heating bills from climbing when they switched to heat pumps.
One more option for utilities and regulators: discounts specifically for customers with heat pumps. More than 80 utilities in the U.S. currently offer discounted electric heating rates, with 12 providing them specifically for households with heat pumps, according to a February roundup by climate think tank RMI.
Massachusetts regulators approved a plan by utility Unitil last June to offer a wintertime heat-pump discount — the first in the state — and directed National Grid to develop one, too. Unitil's discount amounts to at least 20% off the regular per-kilowatt-hour rate, depending on the plan customers choose. Colorado policymakers are also requiring investor-owned utilities to propose heat pump rates by August 2027.
The takeaway from ACEEE's results is that in some states, the above rate designs could be promising avenues to ensure switching to heat pumps doesn't raise energy bills for most single-family households.
But in other cases, additional policy might be needed. Connecticut's electricity prices are so high that these rate structures weren't enough to close the spark gap, the authors found. They recommend policymakers consider broader changes like putting a price on carbon emissions, implementing clean-heat standards that require utilities to take steps toward decarbonized heating, or investing in grid maintenance and upgrades to make electricity more affordable — for all customers.