As both incentives and gas prices increase, Coloradans look to electrifying homes as a solution

Dan and Malia Fredrickson used the opportunity of a malfunctioning air conditioner to take a step toward electrifying their home by getting a heat pump, equipment that’s been around for a while but has gotten more attention lately thanks to federal legislation.

Rebates and tax credits for heat pumps, which use electricity to both cool and heat buildings, are among the energy-related provisions in the Inflation Reduction Act 2022. While critics contend and some economists agree that the law is unlikely to significantly decrease inflation, it has been hailed as a substantial investment in addressing climate change.

After talking to friends and experts, the Fredricksons decided to replace their old air conditioner and a furnace “that was kind of on its last legs” with a heat pump. The Boulder couple said environmental concerns were a big reason for the decision.

“If there are opportunities for us to reduce our carbon footprint we’d like to take them,” Dan Fredrickson said.

Tax credits and rebates provided by the federal legislation as well as local governments and electric utilities were also important, he added.

“The Inflation Reduction Act was completely unexpected and is a massive tailwind for our business,” said DR Richardson, a co-founder of Elephant Energy in Boulder.

Another tailwind: soaring natural gas prices that have sent customers’ bills climbing as the temperatures have dropped.

Elephant Energy, whose customers include the Fredricksons, works with homeowners and contractors to design and install systems to switch household appliances from being powered by natural gas to electricity. That can mean installing heat pumps, a heat pump water heater or an induction cooking stove.

Josh Lake, Elephant Energy’s other founder, said the company expects to double or triple its current workforce of 10 in 2023 and expand the number of contractors it works with. The company oversees installation of two to three heat pumps a week now, but expects the number to increase to between five and 10 a week once the

Starting Jan. 1, tax credits of up to $2,000 on heat pumps for heating and cooling and heat pump water heaters will be available. The federal law has tax credits for rooftop solar, battery storage and weatherization.

Rebates of up to $8,000 for heat pumps and up to $4,000 for electric panel upgrades are also part of the law.

“It’s a significant reduction on the order of magnitude of 10, 20, 30% on the tax credit side” for heat pumps, Richardson said. “And then on the rebate side, there’s an additional 30 to 50-plus-percent off installations. While once cost-competitive with a gas furnace or (air conditioner) replacement, it makes it the sort of no-brainer kind of choice.”

Combined with other incentives offered by the city of Denver, other local governments and utilities, it’s a good time to consider electrification, Lake said.

The benefits include lower operating costs, better air quality in the home and reducing heat-trapping emissions that cause climate change, Lake and Richardson said.

“I’m excited about  the opportunity to have us grow but also see the industry grow and see the impact that these all electronic technologies can have on climate change in the long range,” Lake said.

Prices fueling change?

High natural gas prices also make it a good time to consider going electric, Lake and Richardson said. Wholesale prices have soared, resulting in ballooning bills for customers.

In September, Xcel Energy-Colorado said wholesale prices were at a 15-year high. The Colorado Public Utilities Commission recently approved fuel-price adjustments for utilities, increases that are passed through to customers. In October, the PUC approved a $64.2 million natural gas revenue increase in October for Xcel. 

Data from the U.S. Energy Information Administration show the price of natural gas delivered to Colorado households in October were more than double what they were in October 2020. The agency expects households to see costs jump on average by 22% nationwide this winter because of higher fuel costs and colder temperatures.

Gas prices can be volatile, but for more than a decade they were fairly low and stable, said Mike Henchen, a principal with the carbon-free buildings program at RMI, formerly the Rocky Mountain Institute.

“It’s certainly volatile right now. People in natural gas say it’s temporary, but who knows,” Henchen said.

Heat pumps designed specifically for colder climates can save homeowners roughly $460 a year, according to the U.S. Department of Energy. They can deliver up to three times more heat energy to a home than the electrical energy consumed, the DOE said.

Adding solar to generate a home’s electricity will further drive down costs, Lake said.

An air-source heat pump doesn’t generate heat or cold air. Instead, it transfers heat from outdoors to inside a house when it’s cold and transfers heat inside to the outdoors to cool a house in hot weather.

A geothermal heat pump transfers heat between a house and the ground. Lake said the heat pump installed at the Fredricksons’ house in late November could handle temperatures to minus 13 Fahrenheit.

Carbon Switch, which produces research and guides on electrifying homes, said a heat pump capitalizes on a law of nature: hot wants to move to cold. Fluid refrigerant in coils in a unit outside the house absorbs and releases the heat. An inside air-handling unit moves the air.

Although operating costs are less for a heat pump, the upfront costs are another matter. A survey by Carbon Switch said installing a heat pump can range from $3,500 to $20,000, depending on the size of the home.

“If you have to replace your furnace and your air conditioning, it’s going to cost the average homeowner $15,000 to $20,000,” Lake said. “A heat pump is going to cost about the same.”

That’s before incentives are factored in, he added.

Heat pumps are exempt from state sales tax in Colorado. A 2022 law supports grant programs to help local and state agencies install electric heating equipment and electrify several buildings in a neighborhood.

Xcel Energy, Colorado’s largest electric utility, offers rebates of up to $2,000 for heat pumps, depending on the type.

“All the incentives can be pretty challenging to navigate. They’re challenging for us to navigate,” Lake said.

The thing to do is “get the conversation going” and do some research, he said.

It works in Norway

Homeowners might be trying to cut costs and their carbon footprints. Utilities and state and local governments are trying to keep on track to meet greenhouse-gas reduction goals laid out in state law and the Colorado Greenhouse Gas Pollution Reduction Roadmap.

The goals are to cut emissions from 2005 levels of 26%; 50% by 2030; and 90% by 2050. There’s wide agreement that meeting the goals will require reducing emissions associated with buildings, which account for approximately 40% of the global greenhouse-gas emissions.

Buildings contribute to greenhouse-gas emissions in three main ways, said Henchen of RMI: the direct use of fossil fuels in the buildings; the use of fossil fuels to generate the electricity to power the buildings; and the emissions associated with the concrete, steel and other building materials.

A state law requires local governments updating their building codes to adopt standards to make new buildings more energy efficient and less polluting. When local codes are updated, new buildings will have to able to accommodate solar energy and electrification.

And a new decision by the Colorado Public Utilities Commission implements laws requiring public utilities to reduce emissions from their natural gas distribution systems and calculate the benefits of new gas infrastructure. A concern is that utility customers will end up paying for gas plants and pipelines that won’t be needed as more electricity comes from renewable energy sources.

But a coalition of businesses, local governments, utilities and workers has advocated for natural gas as the “most cost-effective means for cooking, heating homes, and powering businesses.” Denver Pipefitters Local 208 is one of the unions in Coloradans for Energy Access. Gary Arnold, the union’s business manager, said he would recommend using gas as a backup for a heat pump in cold weather.

“It’s important that consumers understand that there are different kinds of heat pumps. The latest, greatest cold climate heat pumps can operate in pretty cold temperatures,” Arnold said.