Will tough standards for heat pump tax credits hurt adoption?

Industry insiders spar over whether the climate bill’s $2,000 tax credit for heat pumps should require higher-efficiency models or loosen standards to expand the market.

A heat pump is installed near the garage of a beige brick home
(Chad Roberston Media/Shutterstock.com)
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Heat pumps are a key technology for making buildings more energy efficient and getting homes off dirty fossil fuels. That’s why the Inflation Reduction Act is offering tens of billions of dollars in tax credits and rebates to entice U.S. consumers to install them.

But what if the biggest tax credit in that policy mix — up to $2,000 for heat pumps that use electricity to heat and cool buildings — comes with such a high bar for efficiency that most heat pumps now available in the country can’t meet it? 

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This brewing conflict underscores how complicated climate-friendly policy can get when good intentions run headlong into less-than-ideal market realities. 

Some industry insiders worry that the performance standards now in place to drive manufacturers to build even more efficient heat pumps could severely limit the number of products available to customers who want to draw on federal incentives to help pay for the switch from fossil gas to electric heating. 

That could give the technology, and the tax credits meant to promote it, a bad reputation, said Nate Adams, an electrification advocate and CEO of HVAC 2.0, a company that makes software used by HVAC installers.

If there are too many bad experiences, it can really slow things down,” he said. Word-of-mouth marketing is really critical” for an industry that’s still largely organized around local and regional networks of contractors and installers, he said. Bad reviews get read hundreds of times.”

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That’s why Adams is eagerly awaiting news from this week’s board meeting of the Consortium for Energy Efficiency, or CEE. The Inflation Reduction Act requires heat pumps to meet or exceed the highest efficiency tier” set by this little-known group of North American energy-efficiency program administrators to be eligible for the tax credit. 

Right now, CEE’s highest efficiency tiers for air-source heat pumps — the heat pumps that heat and cool air in buildings — are significantly more stringent than those set by Energy Star, the other major U.S. standard for appliance efficiency, which operates under the Department of Energy and the Environmental Protection Agency. 

In fact, Adams said, less than 10 percent of heat pumps available in North America meet CEE’s highest standard in the category of configuration commonly used for residential central heating. Most of the rest are slightly less efficient, but still quite capable, heat pumps — and even one of these slightly less efficient heat pumps is far more efficient than electric resistance heating and far cleaner than fossil-fueled heating systems. 

What’s more, those high-efficiency systems that are available tend to cost at least $3,000 more than the more widely available heat pumps that aren’t quite as efficient, he said. It’s hard to sell a customer on a heat-pump tax credit if the price premium for eligible equipment is bigger than the tax credit itself, he pointed out. 

A change in the works? 

But all that could change after a meeting of CEE’s board of directors to be held this week. That’s when the group is expected to decide on new heating and cooling specifications to come into effect in 2023, the same year that the tax credits will first be available. 

CEE declined to comment on what options it is considering for its new standards. But a Sept. 30 CEE document obtained by Canary Media indicates that the organization is considering altering its current efficiency tier structure to have a simpler structure that would allow most heat pumps that now earn Energy Star ratings to be eligible for the tax credits. 

This change with CEE, if it does go through, makes me really, really happy,” Adams said. With reasonable efficiency requirements, it opens up a lot of pieces of equipment we can use.” That includes some equipment that combines good performance in low-temperature climates — an important factor for heat pumps — with prices in the $4,000 to $5,000 range, which is where that $2,000 tax credit really matters,” he said. 

Nate Kinsey, senior policy manager for New York–based home efficiency startup Sealed, said his company supports the proposed alignment with Energy Star. Not only are there far more Energy Star–rated heat pumps available — about 39 percent of those currently available in the North American market, according to 2021 data — but customers are also far more familiar with the Energy Star label than they are with the more detailed efficiency metrics used by CEE

Aligning the heat-pump tax-credit eligibility with Energy Star is a rare win-win-win opportunity,” he said. 

Will easing heat-pump rules harm overall efficiency efforts? 

But not all industry insiders share this view. Some environmental advocates and energy-efficiency watchdogs are worried that CEE’s proposed changes could run counter to what they say is the clear intent of the Inflation Reduction Act: to drive greater efficiency in the U.S. heat-pump market. 

We believe that the intent was to ensure that consumers can get a very high-efficiency, quality product that can meet their heating needs,” said Mark Kresowik, senior policy director for the American Council for an Energy-Efficient Economy. Our assessment is that CEE should continue to push the market above and beyond, especially given the generosity of these tax credits.” 

ACEEE is also concerned that the proposal to loosen efficiency ratings for heat pumps is part of a concerted industry effort to weaken CEE standards” for a wider range of heating and cooling systems, Kresowik said. CEE also decides on efficiency standards for water heaters and fossil gas furnaces, and its current efficiency standards for gas-fueled water-heater standards are weaker than current Energy Star standards and need to be tightened, he said. 

A CEE spokesperson told Canary Media that the organization has received comments from the HVAC industry addressing these items. Our membership is working diligently to establish performance requirements that are likely to meet the goals of our members, who have long-standing incentive programs for customers and share concerns about product availability, cost-effectiveness, and incremental benefits associated with higher performance levels.” 

Sealed’s Kinsey said he understands worries that lowering efficiency requirements for heat pumps could set a precedent for lowering requirements for fossil-fuel appliances as well. Yet he emphasized that it’s important to expand accessibility and affordability of heat pumps to speed broader market adoption of a technology that not only eliminates fossil-fuel use in buildings but also uses energy far more efficiently than the systems it replaces. 

Adams noted that the Inflation Reduction Act’s tax credits for EVs are limited by income, with more expensive cars and more wealthy customers barred from receiving them. Setting a heat-pump tax credit that’s only available for the most expensive products is moving in the opposite direction: It’s like arguing that you can only get the EV tax credit if you can afford the Tesla Plaid,” the carmaker’s most expensive model, he said. 

Kresowik, on the other hand, noted that efficiency improvements for consumer products ranging from washing machines to light bulbs have been driven largely by government standards. Instead of shifting those standards to make more existing products eligible for tax credits and other forms of government incentives, manufacturers should meet that increased demand for all the benefits that efficient products provide,” he said. 

Heat-pump manufacturers can restructure their equipment designs and manufacturing processes to adapt to changing regulations, Dana Fischer, director of regulatory strategy at Mitsubishi Electric, a major heat-pump maker, said during a webinar hosted by pro-electrification nonprofit Electrify Now last week. But it’s a lot of work to make those massive changes in the marketplace occur, and it doesn’t happen in a vacuum,” he said. It takes sustained growth.” 

It also takes time for manufacturers to change their product lines — and waiting for those changes could have a big cost. If tighter efficiency standards end up slowing down the broader adoption of heat pumps by increasing prices and thereby reducing the impact of the new tax credits, that could severely hinder the growth of a technology seen as central to combating climate change. The International Energy Agency reports that global heat-pump installations must triple by 2030 to keep the world on course to achieve net-zero carbon emissions by 2050. But heat-pump installations in the U.S. grew by only about 15 percent last year. 

Making the tax-credit program as effective as possible will be important to drive a U.S. heat-pump market transformation, Fischer said. Of all the building-electrification incentive structures in the Inflation Reduction Act, I think the tax credit is really the big mover,” he said. 

Unlike the two other primary home-electrification and efficiency incentive programs created by the law, which have nearly $9 billion to spend before they’re depleted, the heat-pump tax credit is available without limits over the next 10 years, he said. It’s likely that there will be tens of billions, if not $100 billion, of tax credits issued over the course of the 10-year period, depending on how quickly electrification takes off,” he said. 

That speed is critical. The more people take advantage of the heat-pump tax credit over the coming decade, the better for cutting emissions. 

Jeff St. John is director of news and special projects at Canary Media.