Unveiling Hurdles: Understanding Heat Pump Adoption Challenges
Real estate is responsible for forty percent of global greenhouse gas emissions, stemming from the construction and operation of buildings. On-site emissions from buildings in use largely result from burning natural gas and oil for heating and cooking, with natural gas alone representing 81% of direct fossil-fuel CO2 emissions (EPA, 2022). Consequently, replacing fossil fuel-based heating with electric alternatives has been identified as a key milestone in reducing emissions from buildings and achieving the net-zero emission goals of nations.
High-efficiency electric heat pumps, which offer the most energy-efficient solution for space heating, are considered the most promising solution to reduce emissions from the building sector (IEA, 2022b). However, the adoption of heat pumps is still rather slow in meeting such targets. According to the IEA (2022a), the number of heat pumps globally must dramatically increase from 180 million (in 2020) to 600 million installed units by 2030 to support the net-zero targets pledged by major economies, tripling the existing space heated by this technology. A new study by Juan Palacios (Maastricht Center for Real Estate and MIT), Johnattan Ontiveros (MIT), Siqi Zheng (MIT), and Chris Knittel (MIT) aims to shed light on the barriers to adoption of heat pumps.
Cost Decomposition: The adoption of heat pumps is hindered by the higher upfront costs of installation compared to gas and oil heating alternatives. What drives the costs of installations? In a detailed dataset that includes the breakdown of costs for 163 installations in Massachusetts (US), the researchers can illustrate the composition of the final price charged to households. The following figure shows that the composition of costs is mainly driven by the cost of the heat pump unit itself and the costs of hiring the contractor required to install the equipment, which stands out as the second major driver of costs for households in the installation of heat pumps.
Role of Contractors: While numerous studies focus on changes in equipment costs driven by technological advances that make the production of heat pumps more efficient and cheaper, less is known about how contractors can become more efficient and cost-effective for households to hire. The lack of qualified and experienced installers, who are in great demand for skilled labor to meet the demands of this emerging technology, is considered to be a key bottleneck in the mass adoption of heat pumps (IEA, 2022a). Additionally, the presence of unqualified installations may introduce the risk of inefficiencies in the equipment and extra operational costs.
To uncover the role of contractors, this study utilizes a unique dataset containing detailed installation records of 14,000 heat pump installations, undertaken by 600 different installers between 2015 and 2019 in the state of Massachusetts (US). The data includes all hedonic characteristics of properties, the exact equipment installed in the property, and the total costs of installation. The study documents significant systematic differences across contractors in equipment installed and costs, after controlling for a rich variety of home attributes. Top ranked installers (top 25 percent) the added cost is a 14.28% decrease compared to the mean across all contractors. The installers in the bottom of the distribution are responsible for up to 20.32% extra costs for households, relative to the mean.
What drives these differences? In the core analysis, we document a significant learning effect in heat-pump installations, characterized by a reduction in the degree of oversizing installations and costs charged to households as contractors accumulate more experience. An increase of 1% in the number of installations by a contractor is associated with a 0.03% reduction in the installed capacity of heat pumps.
This research piece highlights the important, yet often neglected, role of contractors in the energy transition and the significant impact they have on ensuring that households can afford to upgrade their home energy efficiency and equipment efficiency.
References:
EPA (2022): “Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2020,” Tech. rep., U.S. Environmental Protection Agency.
IEA (2022a): The Future of Heat Pumps, International Energy Agency OECD.
IEA (2022b): “Heating - Subsector Report,” .
