Will a heat pump save you money? It depends

There’s no doubt that heat pumps are planet-friendly, but whether they make pure financial sense is a more complex — and personal — question. Here’s what to consider.
By Alison F. Takemura

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Heat pump on concrete blocks outside a home in the sun.
(iStock/Canary Media)

Canary Media’s Electrified Life column shares real-world tales, tips and insights to demystify what individuals can do to shift their homes and lives to clean electric power. 

Heat pumps are undisputed winners for the climate. But what about for your wallet?

Well, it depends. That’s essentially the answer from researchers at the National Renewable Energy Laboratory (NREL) and the Lawrence Berkeley National Laboratory (LBNL), who drilled into this question by simulating the entire U.S. housing stock for a peer-reviewed study published in February.

Heat-pump economics depend on a grab bag of individual-specific factors: your home, your local climate, heat pump efficiency, government and utility incentives, what fuel you’re switching from — as well as fuel prices in your region — and interest rates, if you’re financing. In other words, only you can answer this question definitively for yourself.

But what we can do is help you grasp exactly how these aspects affect heat pump costs, arming you with the information you need to determine if the jump to a heat pump will end up saving you money — or not.

Let’s dig deeper into the factors that shape heat-pump economics.

Incentives can drive down upfront costs of heat pumps

Heat pumps, like cars, have different fuel economies — and the most efficient heat pumps generally cost more. For example, for a home with ducts, a low-efficiency air-source heat pump that uses electric resistance for back-up heating has an average upfront cost of $9,000; a medium-efficiency heat pump, an average cost of $20,000; and a high-efficiency cold-climate” heat pump, an average cost of $24,000, according to the NREL and LBNL study.

Contrast that to the much lower costs for conventional systems. The team estimated that a like-for-like furnace or boiler replacement (i.e. swapping a broken gas system for a new gas one) costs on average just $5,000. For households that might be replacing their furnace or boiler and central AC at the same time — a heat pump can do the job of both appliances — that combo would cost on average $11,000, which is still much less than the average sticker price of upgrading to a medium-efficiency heat pump.

But there’s good news: Even with these differences, heat pumps make economic sense for an estimated 65 million out of 110 million households in the U.S., the study found — and that’s before subsidies.

The better news? The U.S. is awash in heat-pump incentives. The 2022 Inflation Reduction Act includes a $2,000 federal tax credit for heat pumps as well as forthcoming point-of-sale rebates that could reduce heat-pump installation costs by as much as another $11,500 for lower income households, according to the authors.

When the research team applied the potential $13,500 in total federal incentives, in nine out of 10 of cases, high-efficiency heat pumps cost the same or less than like-for-like replacements over the heat pump’s estimated 16-year lifetime.

State, local and utility programs across the country also offer heat-pump incentives that can be combined with the federal ones. Massachusetts issues rebates as massive as $16,000 for income-qualified households.

Another lever that can tilt the economics toward heat pumps is how utilities design electricity rates. For instance, some utility customers in Maine can already get lower electric rates for using heat pumps, said Mark Kresowik, senior policy director of the nonprofit American Council for an Energy-Efficient Economy.

Though the study assumes that everyone pays for a heat pump in cash, financing options can also have a major effect on whether a heat pump pays for itself over its lifetime. Some states, such as New York, offer low-interest loans for heat pumps to make them more affordable for those who can’t shell out for the equipment up front.

Market experience over time could help bring heat pump costs down. Installers new to the tech may charge higher prices to cover the hassle and risk of working with unfamiliar equipment,” the report’s authors note.

What’s your starting point?

Whether heat pumps are a net financial boon or bust ultimately depends on energy bill savings, which are themselves affected by two major factors. One is whether a home already has AC or not. For the 12 percent of U.S. homes without window or central AC, switching to a heat pump and using it for heating and cooling will increase energy use and decrease bill savings.

The other dominant factor affecting savings is the fuel you’re switching from. If you’re converting from fuel oil, propane or electric resistance, those tend to be pretty expensive heating fuels, so you could save quite a bit by switching to a heat pump,” said Eric Wilson, senior research engineer at NREL and lead author of the February study.

The research showed that homes heated in these ways and equipped with AC achieve median savings of $300 to $650 per year, depending on heat-pump efficiency. But fossil gas heating can be cheaper in some cases than heat-pump heating. The team found that median annual energy bills ranged from going up by $70 to down by $380. Still, Wilson said, we find that for more than half of homes that use natural gas for heating, there was a financial benefit from switching to a heat pump.”

A wrinkle in estimating bill savings is that energy prices can be volatile — and may shift substantially in the future. Utility spending on the gas distribution system has rapidly grown to $33 billion as of last year, and gas rates would likely increase in response to bring in the same revenue for system maintenance, Wilson said.

But a sure way consumers can save on their bills is if they can rid themselves of their gas connection entirely. Utilities have fixed charges to deliver gas to customers, with the national median in 2015 being $11.25 per month, though amounts vary widely among service areas: In 2022, New York City residents saw a fixed fee of over $60 a month.

That fixed charge can actually be pretty important,” Wilson said. It can be the tipping point from positive savings to negative savings.” That was the case for his own energy bills, he added; he only started saving money by electrifying once he disconnected from gas.

But bill savings can only close the upfront cost gap if you pay a low enough price for the heat-pump project to begin with.

Efficiency and weatherization affect heat pump costs

Weatherizing a home first — by sealing air leaks and adding insulation — can not only deliver comfort and resilience benefits but also drive down the operating costs of a heat pump. It can even lower the upfront costs of a heat-pump system by up to $3,700, because a better-insulated home requires less heating power. Of course, there’s a cost to weatherization, too; such upgrades raised initial outlays in the study by $9,000 on average.

Choosing a higher efficiency heat pump can also drive down operating costs, though it increases the upfront cost. While high-efficiency heat pumps pay off in colder climates, lower efficiency heat pumps are often more cost-effective in warmer regions, according to the study.

When households invest in the optimal combination of heat-pump efficiency and weatherization upgrades for their homes, they can save hundreds to thousands of dollars per year, the team found. Those switching from fuel oil or propane are likely to reap the highest savings.

Bringing it all back home 

The study authors, by necessity, paint a broad picture of heat pump costs and bill savings.

But how will the economics pan out for you and your home? To figure out whether the long-term bill savings can offset the added upfront cost, you’ll need to consider your own unique situation, including your home, existing equipment and energy usage. To help, you may want to consult with an energy auditor, your contractor, your utility — or even an accountant. Online tools such as nonprofit Rewiring America’s electrification planner can also give you an estimate of upfront cost and bill savings.

The takeaway is that heat pumps often, but not always, save people money overall. And as forthcoming federal rebates kick in, many more people will be able to save money than before.

Let’s not forget, however, that heat pumps provide other, less tangible benefits: They slash carbon emissions and improve indoor air quality, because unlike fossil-fueled appliances, they don’t emit hazardous pollutants such as nitrogen dioxide, particulates or carbon monoxide. Their heating is often touted as more even and comfortable, and they provide essential cooling during deadly heat waves that are becoming more prevalent in a warming world. Personal finances may be front-of-mind for most of us, but these other factors are hard to put a price on.

Alison F. Takemura is staff writer at Canary Media. She reports on home electrification, building decarbonization strategies and the clean energy workforce.