Heat pumps are becoming increasingly popular for residential buildings with rising energy prices and the need to reduce the use of fossil fuel heating systems.
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Thinking about a heat pump for your home? New and expanded government incentives coupled with soaring utility costs make it more attractive.
Especially when used in conjunction with clean power sources such as rooftop or community solar panels, a heat pump — a single electrical device that can replace a homeowner’s traditional air conditioning and furnace system — can heat and cool a home with less environmental damage.
In view of the high inflation, these investments are also becoming more attractive for consumers. A whopping 87% of US homeowners surveyed said they experienced higher prices in at least one category of home services or utilities over the summer, according to SaveOnEnergy.com. There’s another potential bonus: stimulus offered by the recently passed 2022 Anti-Inflation Act.
“These incentives will not only save you money on your utility bills now and in the long term, but put our economy on the right track to reduce the use of fossil fuels that contribute to climate change,” said Miranda Leppla, director of the Environmental Law Clinic at Case Western Reserve University School of Law. “It’s a win-win situation.”
The use of heat pumps is becoming more common as governments legislate for their introduction. Washington State recently mandated the construction of new homes with heat pumps. In July, California Gov. Gavin Newsom announced a goal of 3 million climate-ready and climate-friendly homes by 2030 and 7 million by 2035, complemented by 6 million heat pumps by 2030.
Here are four important things to know about upgrading your home to a heat pump system.
Heat pump cost, savings and efficiency considerations
Suitable for all climates, heat pumps are three to five times more energy efficient than traditional heating systems, according to Rewiring America, a nonprofit organization focused on electrifying homes, businesses and communities.
Instead of generating heat, these devices transfer heat from the cool outside to the warm inside and vice versa during warm weather. Heat pumps rely on electricity instead of natural gas or propane, both of which have higher carbon emissions than renewable electricity like wind or solar, said Jay S. Golden, director of the Dynamic Sustainability Lab at Syracuse University.
With installation, heat pumps can range from about $8,000 to $35,000 depending on factors like the size of the home and the type of heat pump, according to Rewiring America, but it estimates the savings could be hundreds of dollars a year for the average household. Additionally, it’s a long-term game, since heat pumps, which most people will install, have an average lifespan of 10 to 15 years, according to Rewiring America.
Electricity costs also tend to be more stable, protecting consumers from fluctuations in gas prices, said Joshua Skov, a corporate and government consultant on sustainability strategies who also serves as an industry mentor and educator at the University of Oregon.
“Although there is an upfront cost, having a heat pump would save millions of homeowners money over the life of the unit,” he said. “You’ll save even more if the federal government covers some of the upfront costs.”
Incentives of the Inflation Reduction Act
The Anti-Inflation Act – a large-scale climate protection measure by the federal government – contains numerous incentives to reduce the costs of energy-efficient building renovations. Those incentives far exceed what’s available to homeowners today, said Jono Anzalone, an associate professor at the University of Southern Maine and executive director of the Climate Initiative, which empowers students to address climate change.
For low-income households, the Inflation Reduction Act covers 100% of the cost of a heat pump, up to $8,000. For middle-income households, it covers 50% of your heat pump costs up to the same dollar limit. Homeowners can use a calculator — like the one available from Rewiring America — to determine their eligibility.
If you’re considering multiple green home improvements, keep in mind that the total legal threshold for “qualifying electrification projects” is up to $14,000 per household.
Federal tax credits for homeowners
Those who break the income threshold for a rebate will be able to take out the non-commercial energy real estate loan, commonly referred to as the 25C, starting Jan. 1, said Peter Downing, a director at Marcum LLP, who heads the accounting firm Tax Credits and Incentive Group.
Homeowners can get a 30% tax credit for energy efficiency projects like heat pumps. In a given year, they can get a loan of up to $2,000 to install certain equipment, such as a heat pump. That credit expires after 2032, according to the Congressional Research Service.
There may be another tax credit for homeowners who buy a geothermal heat pump, which on average is a more expensive but more durable option. According to Rewiring America, homeowners can get an unlimited 30% tax credit on a geothermal heating system, which estimates an average geothermal installation at about $24,000 and lasts twenty to fifty years. That means the average tax credit for this type of pump will be about $7,200, Rewiring America said.
The ventilation system of a geothermal heat pump in front of a residential building.
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Rulemaking for the Anti-Inflation Act is still in progress. But it’s possible for eligible consumers to receive both a rebate and credit, Downing said. But the math probably isn’t that simple, based on previous IRS guidance on energy rebates backed by the federal government. Suppose a consumer is entitled to a 50% rebate for a heat pump that costs $6,000. For tax credit purposes, the remaining $3,000 could be eligible for a 30% tax credit, resulting in a potential $900 credit, he said.
State and municipal financial support
States, municipalities, and local utilities may provide rebates for certain efficient appliances, including heat pumps. “Check with everyone because there are so many different levels of programs that you really have to hunt around,” said Jon Huntley, a senior economist at Penn Wharton Budget Model, who co-authored an analysis of the Inflation Reduction Act’s potential impact on the economy.
Also, be sure to check back regularly to see what new state, local and utility-based incentives may be available, as programs are updated frequently, Golden said. Reputable local contractors should also be aware of locally available discounts, he said.
Many installers have aggressive financing packages to make installing heat pumps more viable, Anzalone said.