Guest Author
Nate Kinsey

America’s heat-pump market has a sugar-crash problem

Incentive programs for heat pumps offer big consumer rebates that cause demand to spike, then they run out of money and cause demand to plummet. Here’s a fix.

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One Monday morning this past May, heat-pump contractors, customers and supporters in and around New York City awoke to discover that one of their major rebate programs was about to disappear. For the previous eight months, customers had been upgrading to heat pumps in droves, enticed by utility Con Edison’s generous Clean Heat rebate program, offered to anyone who installed a heat pump and hit the off-switch on their existing fossil-fuel-based heating system. Demand for the program was so high that Con Edison blew through its entire six-year program budget in two years, which forced the program to grind to a halt.

Whoops.

There’s a problem with the way America is transitioning to clean heating powered by electric heat pumps. Think of it like that 2 p.m. feeling you get whenever you reach for your favorite candy bar or can of soda: The sugar rush is great — until you experience a crash a couple of hours later once you’ve burned through it all. Welcome to our present clean heat transition. 

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Across the country, leading states and utilities have implemented generous consumer-facing rebate programs, creating sugar-high market expansions that crash once those programs suddenly use up all their funding. And now, with the passage of the Inflation Reduction Act of 2022, billions in federal funding to support heat-pump deployment could be hitting the market in the years ahead. Unless we dramatically rethink how we incentivize homeowners to make the switch to heat pumps, we’ll continue to experience painful sugar crashes in the clean-energy marketplace, potentially hurting the very industry that utilities and policymakers are trying to support.

The cycles of a market sugar high

Con Edison launched its Clean Heat Program in April 2020 as an effort to increase the adoption of heat pumps and meet its state regulator-mandated goal of saving energy through their deployment. To help this along, Con Edison experimented time and again with consumer-facing rebate values and structures. 

At the program’s launch, the offered rebate was rather simple: Homeowners who installed a 3-ton” heat pump, the standard size for most homes, received a $7,200 rebate. On August 1, 2021, to further increase the volume of installations and encourage higher-quality installs, Con Edison pumped up the rebate values. For that same 3-ton heat pump, homeowners now received an $18,000 rebate, but only if they decommissioned their existing fossil-fuel heating system. Suddenly heat-pump installations skyrocketed, with the monthly installations nearly doubling. 

Heat pumps being installed in droves is great; heat pumps being installed and fossil-fuel heating being ripped out is even better. But this rapid adoption wasn’t sustainable with a limited budget. 

Due to the market response to the new sugar-high incentives, Con Edison made a pivotal announcement at the end of 2021 in an attempt to manage the remaining program budget: starting March 1, 2022, rebates would be reduced by almost 50%. As a result, a homeowner getting a 3-ton heat pump would only be eligible for a $9,720 rebate. Fear, uncertainty and doubt (FUD) were infused into the market with this drastic rebate reduction, resulting in another rush in rebate applications from consumers trying to beat the new deadline, followed by a thundering sugar crash in March and April.

On May 9, 2022, Con Edison surprised the market again, announcing that after 5 p.m. on May 13, 2022, the Clean Heat program would no longer be accepting rebate applications. This announcement caused another FUD-driven market sugar high as customers and contractors rushed to meet the 5 p.m. Friday deadline. 

Two months later, after reviewing the influx of applications received, Con Edison confirmed it didn’t just blow through its $227 million program budget, as it had projected it would in a February 2022 petition filing with the New York Public Service Commission — it blew way past it. On July 18, Con Edison announced that the company received rebate applications worth $642 million in 2022, bringing total applications to the program since its launch to $755 million — $528 million more than originally planned. 

Again, this level of market interest in heat pumps is great, but it led to the biggest sugar crash yet. Even if incentives start back up on September 1, my colleagues and I project a 90% dropoff in program participation in the third quarter of 2022

This puts the heat-pump market in a bind. Should the HVAC contractor who trained and hired a new installation worker based on program rebates lay them off due to slow demand? Should customers move forward with a project with the hope that some rebate will emerge? 

The cost overrun and sugar crash also puts the Public Service Commission, which oversees utilities, in an awkward position. Should the commission approve Con Edison’s petition to transfer $100 million from other energy-efficiency programs to help cover the Clean Heat program’s deficit? Should the PSC approve Con Edison’s request to charge its customers an additional $32.5 million monthly to restart the program? Just how important are generous consumer-facing rebate levels to the growth of the heat-pump market? 

Such questions are difficult to answer, and New York isn’t the only market searching for solutions in response to a sugar crash. In California, the Technology for Clean Heating program burned through its $28 million single-family housing budget in the six months after it started accepting applications. Denver, Colorado’s electrification program, which offered rebates of up to $9,000 to install a new heat pump, closed up shop just three months later, after providing rebates to owners of less than 1% of the city’s single-family houses.

No matter where these kinds of programs are put in place, the outcome is the same: Generous consumer-facing rebates create sugar-high markets that lead to sugar crashes when funds run out. And now, with the Inflation Reduction Act set to steer at least $4.5 billion in funding to support a suite of generous consumer-facing rebates for all types of clean electric appliances, the risk of market sugar crashes has gone national. 

A better way

It doesn’t have to be like this. At my company, Sealed, which is on a mission to stop energy waste and electrify all homes, we believe the solution is straightforward. We have a proposal that can capitalize on growing consumer awareness about heat pumps and building electrification to achieve long-term transformation of the heat-pump marketplace. 

Our three-part plan pairs what has been proven to work — consumer-facing rebates — with flexible market-based incentives for companies that do work with heat pumps and with predictable, long-term budgets to sustainably accelerate market growth while avoiding sugar highs and sugar crashes. 

First, consumer-facing rebate programs, like New York’s Clean Heat Program and Denver’s program, should transition to lower, more stable rebate values that minimize FUD-related sugar highs. In many leading heat-pump markets, consumers have become accustomed to the rush of receiving a rebate for installing a heat pump. We should continue to encourage that feeling by maintaining rebate availability, but set clearer, more sustainable expectations of just how much money customers will see in a refund check. This might slow the near-term adoption of heat pumps, but it would help ensure long-term adoption and market sustainability. 

Second, smaller and more stable consumer-facing rebates should be paired with incentives for the companies that make, sell, distribute and install heat pumps. Numerous studies have found that such market-based midstream” and upstream” incentive programs drive heat-pump adoption better than stand-alone consumer-facing rebates. These programs vary in design but often provide incentives directly to distributors, retailers or manufacturers, commonly referred to as trade allies or market actors, to shift their behavior. 

Unfortunately, these programs are often barred from being paired with consumer-facing rebates and are bogged down by restrictive rules that limit participation to only one type of trade ally at a time. Why? Because they are designed by government regulators looking to minimize program risk, often at the expense of market innovation. I know — I used to be one of those regulators. Instead of this approach, we believe market-based incentives should be pairable with consumer rebates and accessible to all types of market actors.

Third, rebates and incentives must be predictably reduced in value over time and be backed by long-term budgets tied to clear market transformation goals. If so, they will send clear signals to the marketplace and provide long-term certainty for companies to plan around. And customers will know exactly how much money they’ll get back by switching to an electric heat pump within a certain time frame. 

Multiple rooftop-solar market-transformation programs, including New York’s NY-Sun program and the California Solar Initiative, took this approach of gradually reducing rebate amounts over time in a transparent way. These programs were by no means perfect, but they helped grow their states’ solar markets in a predictable fashion by providing long-term incentive certainty. The result: California and New York are two of the biggest rooftop solar markets in the U.S.

To bring about a cleaner future for all of us, we need to do all we can to help homeowners install electric heat pumps. In 2021, national heat-pump sales increased by almost 15%, and they’re poised to increase even more in 2022. Every day more and more heat pump installations occur in states with cold climates, such as Colorado, Illinois and New York, helping overcome the misconception that heat pumps don’t work in freezing temperatures. But unless incentive programs of the future learn from the programs of the past, America’s heat-pump market will continue to experience dramatic sugar highs and sugar crashes, ultimately slowing this critical transition.

Nate Kinsey is the senior policy manager at Sealed, a cleantech company on a mission to stop home energy waste and electrify all homes.