The economics for heat pumps, efficient mini-splits in particular, are good. The consumer saves a dollar for every gallon of heating oil displaced by their heat pump after paying for the electricity. Our electric utility sells an additional 11 kWh of electricity powering the heat pump resulting in nearly a dollar profit from every gallon of heating oil displaced. The environment benefits from a 45 percent reduction in carbon emissions using a heat pump over oil heat.
So, what does it take to make this happen? How do you sell someone a $3,000 to $4,000 heat pump? Education helps, but money matters. A mini-split investment can save you around $500 a year and is expected to last 14 years with a 17 percent rate of return, tax free. Compare that to your money market investments if you’re fortunate to have some, and it looks pretty good. But getting consumers to spend that kind of money takes some serious marketing approaches. Especially for a product new to consumers.
Let’s look at two marketing strategies: The computer printer and car dealer.
The printer manufacturer may heavily discount the price of a printer with the goal of making it up on selling the ink over the life of the printer. Similarly, our utility could invest in installing heat pumps at little or no cost to their customers and make back their investment in electric sales over the life of the heat pump. The utility consumer saves around $500 a year with little or no upfront costs. The utility earns a 10 percent return on their investment over the life of the heat pump. Both utility and consumer benefit from the heat pump.
Then there is the car dealership. First, they wave a healthy “rebate” or “cash back” offer to entice the buyer into the showroom and follow up with a low-interest loan pitch, while keeping the sales price profitable. The low-interest loan offers most prospective car buyers the financial ability to purchase their product. Auto dealers recoup some of those marketing costs in parts and service over the life of the car as well.
Our electric utility could offer a $,2000 rebate on the purchase and installation of a $4,000 heat pump along with a very low interest loan. Now the utility has only invested in half of the cost of the heat pump, yet still makes the same profit with electric sales on each gallon of oil displaced.
It only gets better. To finance heat pumps the City of Seward is eligible to apply for a zero-interest loan program through the US Department of Agriculture called the “Rural Energy Savings Program.” The city can add a couple percent interest to the loan to cover administrative costs so there is no financial burden on the city utility. The city profits from the additional sale of electricity help keep rates low for everyone.
The consumer loan is paid back to the city using an on-bill-payment agreement that is added to the monthly utility bill. In the Lower 48, default rates average less than one percent for on-bill payment, keeping utility risk to a minimum. The consumer pays little upfront and sees a net savings every month. The more they displace oil with the heat pump the more they will save, so the consumer has a strong incentive to use the heat pump.
Here’s an example. The city would issue heat pump loans to utility customers in “good standing” with no credit reports or bank applications. In addition, the utility provides a substantial rebate, say $2,000, to reduce the upfront cash required or the loan payment, adding a strong incentive for participation.
The rebates could also be covered by the Rural Energy Savings Program loan and repaid with revenue generated by the added electric sales over the loan period. The loan can be tied to the electric “meter” and not the customer so in the case of a homeowner selling the home, the loan and the heat pump savings would be transferred to the new homeowner. Rental properties can work the same. Much like a utility extension to a new subdivision is paid over time and increasing property values along the way. The heat pump loan could be in the seven-year range, allowing years of additional savings to the consumer beyond the loan payments. Don’t need a loan? Take the $2,000 rebate and receive the total savings day one.
Can it work? There have been rural utility loan programs around since we began electrifying rural America. Utility on-bill-payment programs for energy efficiency have been used since the 1980s. Resources and models for setting up on-bill-payments are readily available. The stars are aligned to benefit the Seward consumer, the utility, and the environment. It’s worth taking a look.
Phil Kaluza is a mostly-retired building science specialist and can be reached at email@example.com or (907) 360-6337.