California regulators have allocated $45 million to incentives for heat pump water heaters through 2025, in another step on the path toward the state's 2045 carbon neutrality goal.
In a unanimous vote last month, the California Public Utilities Commission carved out 5 percent of the $830 million in new funding approved for the state's Self-Generation Incentive Program, amounting to $44.7 million in total. That includes a $4 million set-aside for low-income customers.
The commissioners cited multiple complementary benefits as justification for the decision: greenhouse gas emissions reductions, the ability to soak up surplus renewable electricity and grid demand flexibility.
Rachel Golden, deputy director of the Sierra Club’s clean buildings program, said the funding represents “the largest single investment in advanced clean-energy heating technology in California.”
While heating often gets less attention than other areas of energy consumption, onsite use of fossil fuels in buildings accounts for about 15 percent of California's greenhouse gas emissions, according to a Natural Resources Defense Council analysis. Around 90 percent (PDF) of the furnaces and water heaters in California are fueled by natural gas or propane.
California's new heat pump water heater incentive will "play an important role in electrification efforts by replacing higher GHG emission natural-gas water heaters with water heaters using electricity that is increasingly renewable," the CPUC commissioners said in a statement announcing the funding.
"A very large number of water heaters are replaced every year, so it is important to start transforming that market as soon as possible."
Who gets the money?
Even the CPUC commissioners conceded the $45 million in new funding is just a down payment on the amount that will be required to mainstream heat pump water heaters in California.
“We are going to need hundreds of millions, if not billions, to deal with this issue,” CPUC Commissioner Clifford Rechtschaffen said at the January 16 meeting.
By comparison, on the same day as the CPUC action, Governor Andrew Cuomo announced that the New York State Public Service Commission had approved $454 million in funding for heat pumps through 2025.
California's funding is "an important step forward, but it’s only a piece of what’s needed," said Pierre Delforge, building decarbonization senior scientist at the Natural Resources Defense Council.
The CPUC said it may revisit whether to dedicate additional funding for heat pump water heaters after an upcoming workshop on the new SGIP funding. That workshop, scheduled for March 31, is intended to hash out details on program design, eligibility requirements, incentive amounts and whether incentives will be disbursed upstream to equipment vendors and manufacturers, or downstream directly to consumers.
Commissioners will also consider whether eligibility for incentives under SGIP should be contingent on heat pump water heaters using controls to enable grid-responsiveness capability.
“The incentive structure for [heat pump water heaters] under SGIP still needs to be worked out because current storage incentives are designed for batteries and don’t work well if applied to HPWHs,” said Matt Vespa, a staff attorney with the nonprofit environmental law organization Earthjustice.
Three co-equal goals guide (PDF) the SGIP program: environmental benefits, grid support and market transformation. The CPUC believes heat pump water heaters meet all three criteria.
“This is a very efficient emerging technology that can greatly assist in reducing greenhouse gases. It can also help in managing peak load. Water can be heated at the right times and then used later,” said Commissioner Rechtschaffen.
“Ensuring load-shifting” is one of the goals identified for the March 31 workshop. But how would it work?
Jeff St. John reported recently for Greentech Media on a pilot involving heat pump maker Rheem, distributed energy platform provider EnergyHub and Connecticut utility United Illuminating in which Wi-Fi-enabled, "smart" electric heat pump water heaters were deployed as demand response assets during winter peaking events.
In California, heat pump water heaters could be enlisted to tap abundant and cheap midday solar and overnight wind power to heat water during off-peak hours. Water kept warm in insulated tanks would then be ready for use during early morning, late afternoon and early evening hours, when electricity demand surges.
NRDC’s Delforge said the SGIP HPWH incentive program is expected to be online by the end of 2020.
A view from the field
GTM reached out to one of the most experienced heat pump installers in Northern California, Larry Waters, with A-1 Guaranteed Heating & Air, Inc., in Vallejo, for an on-the-ground view of the market.
“I can tell you for sure that incentive programs will jump-start the market in a big way,” Waters said in an interview.
Until recently, longstanding CPUC policy had prevented the state’s investor-owned utilities (IOUs) from offering fuel-switching incentives. So, if a homeowner wanted to, say, swap a gas-fired water heater for a high-efficiency electric heat pump water heater, no rebate was available — even though electric heat pump water heaters are up to five times more energy-efficient than conventional gas models.
Last August, the CPUC voted to revise the primary policy barrier that had blocked the fuel-switching incentives. Now, consumers are likely to see rebates from California’s IOUs for electric appliances such as heat pump water heaters beginning in the second half of 2020.
According to Waters, the lack of incentives for heat pump water heaters had perplexed his customers.
“The lack of an incentive on fuel-switching to a HPWH falsely indicates to most consumers that maybe it’s not the most efficient way to go. They say, ‘If it was the most efficient way to go, why wouldn’t they be incentivizing it?’ I have faced that objection dozens of times,” Waters said.
Regarding the new SGIP incentives, he added, “If the rebate is given upstream, it needs to be clear to the consumer that that rebate has brought down the price of their unit, so they see the value.”
Waters also cautioned policymakers to consider the barriers to emergency heat pump water heater installs. After all, the decision to replace a water heater is usually forced on homeowners on short notice when a unit fails.
“There would be barriers to having plumbers install [HPWHs]. Most plumbers do not want to run an electrical circuit, which really eliminates the entire emergency replacement market. Most of the time, when people are replacing a water heater in an emergency, they have not researched, saved or planned for such an expense,” he said.