TODAY’S STUDY: Getting Emissions Out Of Buildings

The Economics of Electrifying Buildings

Sherri Billimoria, Leia Guccione, Mike Henchin, Leah Louis-Prescott, August 2018 (Rocky Mountain Institute)

Executive Summary

Seventy million American homes and businesses burn natural gas, oil, or propane on site to heat their space and water,1 generating 560 million tons of carbon dioxide each year—a tenth of total US emissions.2 Now, with an increasingly low-carbon electric grid comes the opportunity to meet nearly all our buildings’ energy needs with electricity,i eliminating direct fossil fuel use in buildings and making the gas distribution system—along with its costs and safety challenges— obsolete. Further, electric space and water heating can be intelligently managed to shift energy consumption in time, aiding the cost-effective integration of large amounts of renewable energy onto the grid. And reaching “deep decarbonization” goals of 75% or greater reduction in greenhouse gas emissions will require eliminating most or all of the CO2 produced by furnaces and water heaters across the country, alongside other measures across the economy.

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Achieving this vision will require massive market transformation, including discontinuing the expansion of the gas distribution system, widespread adoption of new appliances in homes and businesses across the country, and new markets for intelligent devices to provide flexible demand to the grid. Eleven million households burn oil or propane for heat—the most carbon intensive and costly fuels—and another 56 million burn natural gas.3 The most efficient electric devices—heat pumps for space and water heating— have small market share today; many homes need additional electrical work to accommodate them; and consumer awareness of this heating technology option is low.

In this paper, we analyze the economics and carbon impacts of the electrification of residential space and water heating both with and without demand flexibility— the ability to shift energy consumption in time to support grid needs. We compare electric space and water heating to fossil fuels for both new construction and home retrofits under various electric rate structures in four locations: Oakland, California; Houston, Texas; Providence, Rhode Island; and Chicago, Illinois. We focus on the residential sector, which makes up the majority of carbon emissions from buildings’ fossil fuel use,4 but a similar market transformation will be needed in commercial buildings to meet deep decarbonization targets. Cooking, clothes drying, and other end uses are assumed to be electric in all cases.

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In many scenarios, notably for most new home construction, we find electrification reduces costs over the lifetime of the appliances when compared with fossil fuels. However, for the many existing homes currently heated with natural gas, electrification will increase costs at today’s prices, compared to replacing gas furnaces and water heaters with new gas devices. We find electrification is cost-effective for customers switching away from propane or heating oil, for those gas customers who would otherwise need to replace both a furnace and air conditioner simultaneously, for customers who bundle rooftop solar with electrification, and for most new home construction, especially when considering the avoided cost of gas mains, services, and meters not needed in all-electric neighborhoods. Customers with existing gas service face higher upfront costs to retrofit to electric space and water heating compared with new gas devices, and either pay more for energy with electric devices—in the case of colder climates in Chicago and Providence—or save too little in energy costs to make up the additional capital cost—in the case of Houston and Oakland. Figure 1 illustrates this result, described in more detail in the body of the report.”

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Many factors could improve the cost-effectiveness of electrification compared to gas in the future. The purchase price of heat pump devices is expected to decline as the market grows and manufacturers realize economies of scale. The value of electric demand flexibility is likely to increase as variable renewables grow on the system, increasing the price spreads in electricity markets—customers’ ability to capture this value with intelligent devices can reduce the lifetime costs of electrification but depends on new rate designs and utility programs. Carbon pricing or other climate policy may impose additional costs on natural gas supply. Or gas commodity prices may change in unpredictable ways in the future.

Electrification already reduces carbon with today’s electric grid in all but the most coal-heavy systems. This is true in comparison to not only heating oil and propane, but also to natural gas. Figure 3 illustrates this result, showing emissions reductions in Oakland, Houston, and Providence. Because the electric grid serving Chicago has coal power as its marginal generator most of the year, the short-term impact of electrification increases carbon emissions.iii With continued retirement of coal plants, however, the long-term impact is expected to swing in favor of electrification in Chicago and nationally.

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Summary Of Recommendations

Electrification of space and water heating presents a viable pathway to deep decarbonization, already reduces carbon in all but the most coal-dominated regions, can support renewable energy integration with the proper control strategies, and is lower cost than fossil fuel alternatives in several key scenarios including new construction and retrofit from propane or heating oil. Even regions that are coal-dominated today are seeing rapid retirement of coal plants, making electrification more attractive. There were almost 7 GW of coal retirements and no new coal plants in 2017,5 and more than 11 GW of coal plants are scheduled to retire in 2018.6 However, many households currently heated with natural gas will not find it cost-effective to switch from furnaces to electric heat pumps at today’s prices. To capture the near-term benefits of fuel switching where most beneficial, and to prepare for a long-term approach that includes widespread cost-effective electrification, we offer five recommendations for regulators, policymakers, and utilities:

1. Prioritize rapid electrification of buildings currently using propane and heating oil in space and water heating. Although these represent less than 10% of US households, they account for more than 20% of space and water heating emissions. Electrification is very cost-effective for propane customers, and has a comparable cost to heating oil depending on local pricing. Electrifying these homes in the near term can build scale and market maturity to support even more widespread electrification in the future.

2. Stop supporting the expansion of the natural gas distribution system, including for new homes. This infrastructure will be obsolete in a highly electrified future, and gas ratepayers face significant stranded asset risk in funding its expansion today. Furthermore, electrification is a lower-cost and lower-carbon solution than extending natural gas, either to new or existing homes.

3. Bundle demand flexibility programs, new rate designs, and energy efficiency with electrification initiatives to effectively manage peak load impacts of new electricity demand, especially in colder climates that will see increased peaks in winter electricity demand with electrified heating.

4. Expand demand flexibility options for existing electric space and water heating loads. Only 1% of the 50 million existing electric water heaters in the US participate in demand response. As widespread electrification adds loads, particularly in winter, effective demand management will mitigate system costs and aid renewables integration.

5. Update energy efficiency resource standards and related goals, either on the basis of total energy reduction across both electricity (in kWh) and gas (in therms), or on the basis of emissions reductions across both electric and gas programs. Otherwise, successful electrification could penalize utilities for not reducing electricity demand, even when it provides cost and carbon benefits.

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