How The Inflation Reduction Act May Impact Heat Pump Standards

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The Inflation Reduction Act provides significant incentives — up to $2000 — for Americans who install a heat pump. But just as its “Buy American” provisions for electric cars now exclude many EVs that are on the market — particularly those manufactured by Hyundai and Kia — the standards for heat pumps to qualify may be so high that many that are currently available do not qualify.

Canary Media reports that some in the industry worry the performance standards established in the IRA — which are intended to encourage manufacturers to build more efficient heat pumps — could limit the number of products available to customers who want to draw on federal incentives to help pay for the switch from fossil gas to electric heating. That could give the technology, and the tax credits meant to promote it, a bad reputation, said Nate Adams, an electrification advocate and CEO of HVAC 2.0, a company that makes software used by HVAC installers.

“If there are too many bad experiences, it can really slow things down. Word of mouth marketing is really critical” for an industry that’s still largely organized around local and regional networks of contractors and installers, he said. ​“Bad reviews get read hundreds of times.”

The Inflation Reduction Act requires heat pumps to ​“meet or exceed the highest efficiency tier” set by the Consortium for Energy Efficiency in order to be eligible for the tax credit. On its website, the organization says, “Efficiency can be a hard sell. After all, efficiency can’t always be seen, the first cost can be high, and it’s hard to know when you have it. On top of that, the promise of lower energy and operating costs is only one feature of a product. To meet these challenges, CEE creates common reference points that make efficiency visible and verifiable, attract multiple stakeholders, and increase the impact of efficiency messages. A CEE definition of efficiency bridges divides among stakeholders and consumers, creating market focus.” Those of us who advocate for electric transportation know firsthand how hard it is to educate people about the value of efficiency.

Right now, CEE’s highest efficiency tiers for air source heat pumps — the heat pumps that heat and cool air in buildings — are significantly more stringent than those set by Energy Star, the other major US standard for appliance efficiency, which operates under the Department of Energy and the Environmental Protection Agency.

In fact, Adams said, less than 10% of heat pumps available in North America meet CEE’s highest standard in the category commonly used for residential central heating. Most of the rest are slightly less efficient — but still quite capable — and even one of those is far more efficient than electric resistance heating and far cleaner than fossil fueled heating systems.

What’s more, those high efficiency systems tend to cost at least $3,000 more than the more widely available heat pumps that aren’t quite as efficient, he said. It’s hard to sell a customer on a heat pump tax credit if the price premium for eligible equipment is bigger than the tax credit itself, he pointed out.

The CEE Will Meet This Week

But all that could change after a meeting of CEE’s board of directors to be held this week. That’s when the group is expected to decide on new heating and cooling specifications to come into effect in 2023, the same year that the tax credits will first be available.

CEE declined to comment on what options it is considering for its new standards. But a September 30 document obtained by Canary Media indicates the organization is considering altering its current efficiency tier structure to have a simpler structure that would allow most heat pumps that now earn Energy Star ratings to be eligible for the tax credits

“This change with CEE, if it does go through, makes me really, really happy,” Adams said. ​“With reasonable efficiency requirements, it opens up a lot of pieces of equipment we can use.” That includes some equipment that combines good performance in low temperature climates that cost between $4,000 and $5,000. “That’s where that $2,000 tax credit really matters,” Adams said.

Nate Kinsey, senior policy manager for New York based home efficiency startup Sealed, said his company supports the proposed alignment with Energy Star. Not only are there far more Energy Star rated heat pumps available — about 39% of those currently available in the North American market, according to 2021 data — but customers are also more familiar with the Energy Star label than they are with the detailed efficiency metrics used by CEE. “Aligning the heat pump tax credit eligibility with Energy Star is a rare win-win-win opportunity,” he said.

The Other Side Of The Heat Pump Story

But some environmental advocates and energy efficiency experts are worried that CEE’s proposed changes dilute the clear intent of the Inflation Reduction Act, which is to promote greater efficiency in the US heat pump market.

“We believe that the intent was to ensure that consumers can get a very high-efficiency, quality product that can meet their heating needs,” said Mark Kresowik, senior policy director for the American Council for an Energy Efficient Economy. ​“Our assessment is that CEE should continue to push the market above and beyond, especially given the generosity of these tax credits.”

A CEE spokesperson told Canary Media that the organization has ​“received comments from the HVAC industry addressing these items. “Our membership is working diligently to establish performance requirements that are likely to meet the goals of our members, who have long standing incentive programs for customers and share concerns about product availability, cost effectiveness, and incremental benefits associated with higher performance levels.”

Sealed’s Kinsey said he understands that lowering efficiency requirements for heat pumps could set a precedent for lowering requirements for fossil fuel appliances as well. Yet he emphasized that it’s important to expand accessibility and affordability of heat pumps to speed broader market adoption of a technology that not only eliminates fossil fuel use in buildings but also uses energy far more efficiently than the systems it replaces.

Adams noted that the Inflation Reduction Act’s tax credits for EVs are limited by income, with more expensive cars and more wealthy customers barred from receiving them. Setting a heat pump tax credit that’s only available for the most expensive products is moving in the opposite direction. ​“It’s like arguing that you can only get the EV tax credit if you can afford the Tesla Plaid,” he said.

Kresowik, on the other hand, noted that efficiency improvements for consumer products ranging from washing machines to light bulbs have been driven largely by government standards. Instead of shifting those standards to make more existing products eligible for tax credits and other forms of government incentives, ​“manufacturers should meet that increased demand for all the benefits that efficient products provide,” he said.

Heat Pump Policy Consequences

There are parallels here to discussions about what is better — a hybrid car, a plug-in hybrid car, or a battery-electric car. Should they all be eligible for government incentives? Should more efficient electric cars get more incentives? There are no easy answers.

Heat pump manufacturers can restructure their equipment designs and manufacturing processes to adapt to changing regulations, Dana Fischer, director of regulatory strategy at Mitsubishi Electric, said during a webinar hosted by Rewiring America last week. But ​“it’s a lot of work to make those massive changes in the marketplace occur and it doesn’t happen in a vacuum,” he said. ​“It takes sustained growth.”

It also takes time for manufacturers to change their product lines. Waiting for those changes can result in big costs. If tighter efficiency standards end up slowing down the broader adoption of heat pumps by increasing prices and thereby reducing the impact of the new tax credits, that could severely hinder the growth of a technology seen as central to combating climate change. The International Energy Agency reports that global heat pump installations must triple by 2030 to keep the world on course to achieve net zero carbon emissions by 2050. But heat pump installations in the US grew by only about 15% last year.

Making the tax credit program as effective as possible will be important to driving a US heat pump market transformation, Fischer said. Of all the building electrification incentive structures in the Inflation Reduction Act, ​“I think the tax credit is really the big mover.”

Unlike the two other primary home electrification and efficiency incentive programs created by the IRA which are capped at around $9 billion, the heat pump tax credit is available without limits over the next 10 years. ​“It’s likely that there will be tens of billions, if not $100 billion, of tax credits issued over the course of the 10 year period, depending on how quickly electrification takes off,” Fischer said.

That speed is critical, Canary Media argues. “The more people take advantage of the heat pump tax credit over the coming decade, the better for cutting emissions.” We would love to get feedback from our readers on how these policy conflicts should be resolved. Please use the comment section to tell us your thoughts.