“Heat Pump-Friendly Cost-Based Rate Designs“ is one of eight white papers from ESIG’s Aligning Retail Pricing with Grid Needs Task Force. The task force examined ways that retail pricing may be used more widely and more efficiently to allow flexible demand to respond to grid needs as the role of demand becomes increasingly important for the reliability of the grid. It brought together experts in rate design and electricity markets, transmission and distribution planning and operations, consumer advocates, and others to explore current issues, potential solutions, and practical implementation challenges involved in utilizing the flexibility in price-sensitive loads.

All of the white papers can be found here.

A Summary of “Heat Pump-Friendly Cost-Based Rate Designs” by Sanem Sergici, Akhilesh Ramakrishnan, Goksin Kavlak, Adam Bigelow, and Megan Diehl

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. If the operating costs for heat pumps turn out to be favorable compared to the operating costs for natural gas equipment, it is possible to see a significant uptake of the heat pumps even before the technology cost declines. In this white paper, we examine the role of alternative “cost-based” and “cost-reflective” electricity rate designs in improving the economics of heat pumps by reducing their operating costs. We use a proprietary dataset of gas and electricity usage for 80 single-family residential customers of a large investor-owned utility for modeling customers’ electric and gas heating bills before and after electrification. We find that the operating cost gap is positive for all 80 customers under the default electricity rate (energy costs for operating the heating equipment are higher post-electrification). However, moving to one of the three alternative rates flips all 80 customers from a positive cost gap to a negative cost gap, in which energy costs for operating the heating equipment are lower post-electrification.