Home heating is approaching an impasse—there is great opportunity to decarbonize through heat pumps for both heating and cooling, but rising electricity rates might discourage consumers from getting on board. Electricity costs in the U.S. have outpaced inflation in recent years; average increases were 10% in 2022 and another 6% in 2023. And, in 2023, utility commissions approved $9.7 billion in net rate increases with an estimated additional $8.4 billion to come by the end of 2024.
This of course creates a challenge in asking homeowners to turn to electric heating. That has utilities, power generators, and others in the energy sector asking: How can we incentivize making the switch in a way that makes it “worth it” for the average home? Twenty-five percent of households in the Northeast reported some form of energy insecurity in 2020. Asking homeowners to increase their electricity bills in a high-cost environment is an issue that cannot be ignored.
COMMENTARY
The adoption of decarbonization technology specific rates is not new—utilities have been offering time-of-use rates for off-peak electric vehicle charging for many years. The move into building decarbonization technologies is an acknowledgment that widespread heat pump adoption will be affected by capital and operating costs. Smart rate design can help ratepayers realize the financial benefits of the energy transition.
One example of an attempt at a solution lies within two Massachusetts utilities that will begin offering lower electric rates during the winter heating season for homes with heat pumps. The average residential electricity rate in Massachusetts is 25.36 cents per kilowatt hour. In nearby Connecticut, it is 24.24 cents per kilowatt hour. Only California ratepayers pay a higher rate in the continental U.S.
On the positive, the costs of installing heat pumps continue to drop, because of mass manufacturing and incentives from the federal government. For example, Inflation Reduction Act tax credits for heat pumps start at $2,000 and rise to $8,000 for income-qualified households. The rising cost of electricity, however, could make operating a heat pump more expensive.
In This Issue
Full issueFor a possible solution, let’s look at the state of Massachusetts and its work to support electric home heating to reduce greenhouse gas emissions and meet long-term goals. This past summer, Massachusetts received $100 million as part of a $450 million multi-state Climate Pollution Reduction Grant from the Environmental Protection Agency to create the New England Heat Pump Accelerator, with a goal of reaching at least 65% coverage of heat pump costs by 2030.
Customers want to see a reduction of their overall energy bills to validate their decision to switch fuel sources. But, a negative operating cost gap, in which the cost of heating goes down after switching from natural gas to electricity, is critical to scaling up the deployment of heat pumps. The answer may lie in rate design. Differentiated electric rates for homes with heat pumps could create that negative operating cost gap, increasing willingness to adopt the technology.
For example, the Massachusetts Department of Public Utilities (DPU) approved residential rates with lower base distribution kWh charges during the winter for 1.3 million households served by energy companies Unitil and National Grid, and that use heat pumps. The DPU in July approved Unitil’s heat pump seasonal rate after the utility proposed a lower seasonal rate for customers with heat pumps.
In contrast, National Grid proposed a broader electrification rate, available to all customers, a technology-neutral approach that replaced the volumetric distribution charge with a monthly fixed-base distribution charge. Several groups—environmental activists, advocates for low-income households, a solar industry group, the state energy department, and the state attorney general—all filed comments objecting to this approach and pushing for a heat pump-specific rate like Unitil’s.
In October 2024, the DPU rejected National Grid’s proposal and ordered it to adopt Unitil’s method, finding that the heat pump rate was a reasonable, cost-efficient solution to mitigate potentially high bills. This, it said, better aligns with the state’s goals to support electrification and energy efficiency. The regulators concluded that National Grid’s proposal did not meet the state’s legal mandates to consider the impact of rate design changes on greenhouse gas emissions and energy efficiency, as opposed to Unitil’s approach, which removes a barrier to lower emissions and greater efficiency.
Low-income customers in both utilities can be eligible for the rate and still qualify for energy assistance programs, such as existing low-income rate discounts. In this way, Massachusetts law and policy support the adoption of heat pump specific rates.
The DPU’s decision is in line with the state’s greenhouse gas emissions goals, aiming to cut emissions by at least half by 2030, with net-zero emissions by 2050. A 2022 plan from the state, the Massachusetts Clean Energy and Climate Plan, even sets a 28% reduction target for emissions from heating commercial and residential buildings by 2025, and a 47% reduction by 2030. It may take creativity and inter-agency cooperation, but Massachusetts has set the tone, showing a way to engage customers, meet bill payers’ needs, and forge ahead in environmental protection.
—Mark James is interim director for the Institute for Energy and the Environment at the Vermont Law and Graduate School.
