Heat Pump Subsidies: Never Enough

By Mark Krebs -- September 18, 2024

“The Competitive Enterprise Institute is leading a coalition of free market advocates attempting to organize support to stop the IRA’s obscene and consumer abusive funding. In response, the Biden (mis)Administration is attempting to shovel IRA funding out the door as fast as it can to contractually shield it.”

Early this month, Lucas Davis, a Professor in Business and Technology at the Haas School of Business, University of California, Berkeley, published an article titled: How Do We Pump Up the Impact of Heat Pump Subsidies? In April, Professor Davis published a precursor article titled: Why Are Heat Pump Sales Decreasing?

The upshot is that despite Federal rebates of up to $8,000 per the “Inflation Reduction Act,” real-world economics of electric heat pumps are dismal.  Several commenters to the second article aptly summarized why from a consumer perspective.

Case Study One

As the owner of a 30-year-old gas furnace, I was in the market for a heat pump during all of 2023. As a low-income retiree, I also looked forward to an $8,000 subsidy from the Inflation Reduction Act passed in November of 2022. Well, as readers of this blog probably know already, the IRA subsidies did not take effect in 2023 (and are now projected to be available in California no sooner than late summer 2024).

I had gotten a bid in the summer of 2022 of $25,000 for a heat pump, but I was waiting for the IRA subsidy to take effect. Then I discovered that the bidder had failed to mention that installing a heat pump would also require new ductwork because the existing ducts were too small to handle the larger air volumes required by a heat pump. Two subsequent bids in mid- and late-2023 ranged from $30K to $40K when ductwork was included.

So when the furnace failed in December 2023 at age 31, I had to make a quick choice: a replacement gas furnace (costing $12K with an 18-month 0% loan, and a 2-day wait for installation), or $30K+ for a heat pump with a couple month wait for installation. The estimated fuel savings from the heat pump worked out to under $1000 per year, not even close to enough to outweigh the $18K capital cost differential. The fact that the estimated life for the heat pump was 15 years, versus 30 years for the gas furnace, didn’t help at all.

So there’s my anecdotal story: it wasn’t interest rates, it wasn’t tax law, it largely wasn’t fuel prices, it was mostly capital costs. Had the original bid of $25K been legit and had the $8K subsidy been available by mid-2023, I would have chosen the $17K heat pump over the $12K furnace based on environmental concerns. But at $30K versus $12K, I didn’t.

Case Study Two

I also got pricing for a 6 head mini-split heat exchange system that would be mounted in each room, and it came to $26,000 for the two pumps and 6 heads wired, installed and tested. Pricing is important.

Yes, pricing (meaning total installed cost) is important.  Total installed costs for heat pumps (as evidenced by the above commenters) can include expensive retrofit expenses that normally are avoided when not switching from a traditional gas furnace to an electric heat pump. And heaven forbid something like a motherboard failure out of warranty (that tend to be much shorter than furnace warranties).

Alas, however, our Federal energy efficiency “experts” are also making sure that traditional/inexpensive (non-condensing gas furnaces are going to soon be illegal as a result of their abuse of regulatory authority regarding minimum appliance efficiency standards under the Energy Policy and Conservation Act of 1975 ( EPCA)  in  response to the “1973 oil crisis by creating a comprehensive approach to federal energy policy.”

The American Public Gas Association (APGA) explains:

The Office of Energy Efficiency and Renewable Energy (EERE) within DOE issued a notice of proposed rulemaking establishing a new 95% annual fuel utilization efficiency (AFUE) standard for furnaces. This proposed standard can only be met by condensing furnaces, effectively banning non-condensing furnaces that have been in millions of American homes for a generation or more.

“But wait, there’s more” (in the immortal words of Ron Popeil). EPCA also states that DOE can include “any such other factors as the Administrator deems appropriate.”   The social cost of carbon SCC is a prime example of how DOE is using this nebulous authority to impose carbon reduction benefits within its cost/benefit analyses.  The Competitive Enterprise Institute’s (CEI), Ben Lieberman, explains SCC:

Junk Science Behind Federal Appliance Regs About to Get Junkier

The Biden-Harris administration has embarked on a wave of anti-consumer home appliance regulations over the last several years. Each was justified in part by overblown claims of climate change benefits. And now, the Department of Energy (DOE) has proposed using a new methodology that would further inflate these hypothetical benefits to justify even worse regulations in the years ahead.

DOE is in the process of creating new energy use limits for stoves, dishwashers, furnaces,  washing machines, water heaters, ceiling fans, refrigerators, and more. The agency always asserts that consumers experience net gains from these regulations, but CEI has filed comments highly critical of these rosy assumptions. In reality, such rules often raise the up-front costs of appliances more than is likely to be earned back in the form of energy savings. Some rules also compromise appliance choice, performance, and reliability.

But DOE’s fictitious consumer benefits are only part of the problem. CEI has also taken issue with the agency’s assertions that these regulations deliver quantifiable climate change benefits. For example, DOE’s costly 2023 final rule for residential furnaces was estimated by the agency to provide $16.2 billion worth of such benefits.

The agency arrives at this figure by calculating the reduced energy use attributable to the efficiency standards and then estimating the amount of greenhouse gas emissions avoided as a result – mostly carbon dioxide emitted to produce electricity at coal or natural gas-fired power plants. Then it multiplies the tons of emissions avoided by the calculated per unit dollar cost to society of such emissions.

Until now, DOE has relied upon the 2021 Interagency Working Group on the Social Cost of Greenhouse Gases (IWG 2021). IWG 2021 provides the agency with the per ton Social Cost of Greenhouse Gases (SC-GHG) values.

Relying on IWG 2021 was bad enough, but in its most recent proposed rule for commercial refrigeration equipment DOE is switching to an updated 2023 version of SC-GHG provided by the Environmental Protection Agency.

The new methodology takes several already-dubious assumptions in IWG 2021 and stretches them further. For one category of commercial refrigeration equipment covered in the proposed rule, DOE calculates the climate benefits of $48-$320 million dollars under IWG 2021 but a whopping $564-$1,713 million under the new way. That’s around 5-10 times higher.

More Concerns

In May of 2022, I wrote an article published in Real Clear Energy titled Fallacies of Supplying American LNG and Electric Heat Pumps to Europe to Fight Putin and Global Warming. Primarily, it summarized the flawed “energy efficiency” physics behind this Biden administration plan that has since been regurgitated in the so-called Inflation Reduction Act a few months later.  This article, which I stand by, received 189 comments.

This leads to my overarching concern:  What is the fundamental motive behind all of this.  It is:

1. Globalized social control through the establishment of an all-electric energy monoculture.
2. The transformation and growth of energy efficiency regulations into carbon efficiency regulations.

The following graphic cogently illustrates:

“Transitioning” energy efficiency to carbon efficiency grows the regulation business

Source: “Electrification – What Does It Mean for Energy Efficiency?”

In short: DOE and its minions are running out of stuff to regulate under existing energy efficiency statutes within EPCA. A move to carbon efficiency regulation vastly expands their regulatory empire. The IRA is providing obscene amounts of taxpayer funding to force-feed this anti-consumer agenda.  For more information, see Dangerous ‘Deep Decarbonization’ (Krebs PowerPoint to Cooler Heads Coalition). For the record, that presentation identified the $8,000 heat pump tax credit stated at the beginning of this article.

As Travis Fisher testified before the House Energy & Commerce Subcommittee on Energy, Climate, and Grid Security on September 11^th, “ The subsidies in the IRA for wind, solar, and batteries alone could cost American taxpayers $3 trillion by 2050.” Fisher also testified: “Between the IRA subsidies and the EPA rules, I would summarize the administration’s power grid policy as this: Green the grid and brace for blackouts.”

The Competitive Enterprise Institute is leading a coalition of free market advocates attempting to organize support to stop the IRA’s obscene and consumer abusive funding. In response, the Biden (mis)Administration is attempting to shovel IRA funding out the door as fast as it can to contractually shield it.  For further information, see Inflation Reduction Act Two Year Anniversary Letter.

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Mark Krebs, a mechanical engineer and energy policy consultant, has been involved with energy efficiency design and program evaluation for over thirty years. Mark has served as an expert witness in dozens of State energy efficiency proceedings, has been an advisor to DOE and has submitted scores of Federal energy-efficiency filings. His many MasterResource posts on natural gas vs. electricity and “Deep Decarbonization” federal policy can be found here. Mark’s first article was in Public Utilities Fortnightly, titled “It’s a War Out There: A Gas Man Questions Electric Efficiency” (December 1996). Recently retired from Spire Inc., Krebs has formed an energy policy consultancy (Gas Analytic & Advocacy Services) with other veteran energy analysts.