Heat pumps could cut electricity rates 13% in winter, RMI finds

By Rebecca Stone

Residential electricity rates could fall by 13% on average if heat pumps use spare winter grid capacity, according to a new study from clean energy think tank RMI, equivalent to roughly $200 off an annual residential bill.

RMI said maximizing heat-pump deployment without triggering expensive grid buildouts could produce that average reduction from the rates residential customers would otherwise face because of inflation. The study found that roughly half of U.S. states have ample spare winter capacity, while most of the country's grid reaches its maximum on hot summer afternoons when air conditioners run together. The research directly addresses the claim that widespread heat-pump adoption would overload the grid.

The analysis covered 24 states and Washington, D.C., which RMI identified as the jurisdictions with the most spare grid capacity. Heat pumps would not raise summer peak electricity use, the researchers said, because the units would largely displace less efficient air conditioners rather than add to that cooling demand.

The study connects residential electric-heating demand with the fixed cost of grid infrastructure. RMI describes heat pumps as efficient sources of heating and cooling, with climate, air-quality and typically household-bill benefits. Electricity rates combine the cost of power with fixed investment in poles, wires, power plants, transformers and other equipment, plus regulated utility profits.

Ryan Shea, a study co-author and RMI's manager on its carbon-free buildings team, compared the grid to a toll bridge carrying too few cars. Because utilities size infrastructure for occasional demand peaks, fewer customers carry the cost of capacity that remains available most of the time. Adding winter heat-pump load can spread those fixed costs across more kilowatt-hours.

Where is the spare grid capacity?

Michigan provides one example in the RMI analysis. The state could install 3.6 million home heat pumps and lower overall residential rates by as much as 27%, according to the study. The modeled 13% average and 27% Michigan result are directional estimates, not forecasts, because RMI lacked utility-specific data needed to refine its results.

Does a lower rate mean a lower bill?

A lower price per kilowatt-hour does not guarantee a lower total household bill. Parth Vaishnav, assistant professor of sustainable systems at the University of Michigan, called the work “sensible and well done” but warned that electricity costs substantially more than fossil gas in the coldest U.S. climates.

A 2024 Michigan study co-authored by Vaishnav found that switching from fossil gas to a heat pump could raise bills for some households by more than $1,000 a year under then-current fuel costs. RMI did not estimate bill changes for households that switch to heat pumps.

Several variables determine the result:

• The heating system and fuel the household replaces
• The home's insulation
• The heat pump's efficiency
• The relative price of heating fuel and electricity

“The larger the reduction in electricity rates, the higher likelihood that someone's energy bill will decrease with a heat pump,” Shea said. That relationship does not make a heat pump the cheaper option in every home.

Can hybrid systems expand grid headroom?

States could fit more heat pumps within existing grid headroom if some households retain a fossil-fueled furnace or boiler for the coldest hours. In Illinois, RMI found that the grid could accommodate only 30% of households using a heat pump as their sole heating appliance.

Some heat pumps can operate below minus 20 degrees Fahrenheit. Certain installations, however, include less-efficient electric-resistance strips that activate when the heat pump cannot maintain temperature, consuming more grid capacity.

RMI's proposed capacity-and-rate mix would be:

• 79% of households with a hybrid heat-pump and fossil-fuel heater system
• 21% with an all-electric heat-pump system alone

Even when supplemented by gas furnaces, installing more heat pumps produces deeper emissions cuts than installing fewer, according to RMI. Shea said hybrids can fit current grid conditions while preserving a route toward all-electric heating. Vaishnav agreed that furnaces and heat pumps can work in tandem, with the hybrid option improving emissions, household bills and grid-headroom use.

What regulatory changes could unlock the savings?

Vaishnav proposed two regulatory approaches:

• Require central air-conditioner replacements to use heat pumps while leaving installed fossil-fired systems in place
• Require manufacturers to stop producing one-way air conditioners in favor of two-way heat pumps

State incentives could also promote heat-pump adoption as a tool for lowering electricity costs. For national decarbonization, homes eventually must relinquish fossil fuels entirely. Shea said RMI hopes the economic case for all-electric heat pumps becomes more affordable over time.

Regulators could rebalance winter electricity rates so heat-pump households receive lower prices; those households often overpay fixed grid costs. That winter-rate approach saved Massachusetts heat-pump customers at least $37 million last winter, RMI said. Customers without heat pumps also benefit because the rates encourage switching and more heat-pump use can spread fixed costs across the winter load.

The next milestone is state regulatory review of winter heat-pump rates, appliance-replacement rules and utility-specific rate impacts. Until RMI's directional estimates are tested against utility data, the 13% and 27% figures remain planning estimates rather than rate forecasts.