Supporting Energy Efficiency and Accelerating Heat Pump Retrofits for American Homes

Policy Perspectives on Infrastructure MIT School of Architecture and Planning Policy recommendations convened by the MIT Norman B. Leventhal Center for Advanced Urbanism July 2021

Supporting Energy Efficiency and Accelerating Heat Pump Retrofits for American Homes

A program to reduce U.S. greenhouse gas emissions 11 percent, while creating 265,000 cleantech jobs by reducing energy usage in single-family homes.

By Zachary Berzolla, Christoph Reinhart, John Reilly, Henry Jacoby, and Cassia Schuler

Summary

Residential buildings account for approximately 22 percent of U.S. greenhouse gas (GHG) emissions.

The 84 million detached single-family homes in America can be retrofitted with existing but underadopted building technologies to decrease energy use and eliminate on-site greenhouse gas emissions by 2050, reducing the residential building contribution to national emissions by 85 percent (see Figure 1).

To achieve this goal, the Federal Government should support a nationwide program to increase the rate at which homes are retrofitted with clean, efficient electric heat pump heating and cooling and building efficiency packages, from 1 percent of homes annually today to 4 percent annually by 2031. A sustained 4 percent retrofit rate would eliminate 11.5 billion tons of CO2 emissions by 2050, reduce national CO2 emissions 11 percent from today’s levels, and directly support 265,000 long-term cleantech jobs distributed across the nation.

The proposed program has three components.

1) A ten-year, $117 billion federal investment expanding the Non-Business Energy Property Tax Credit (26 USC § 25C) that would encourage owners to upgrade their homes to meet the EPA ENERGY STAR Certified Home standard1 while electrifying their heating systems with highefficiency heat pumps. The expanded tax credit, coupled with state incentive programs, would greatly reduce the net cost of the retrofits so the homeowner’s initial investment is recouped after only five years of energy savings.

2) A ten-year, $54 billion federal investment expanding the Department of Energy’s (DoE) Weatherization Assistance Program (WAP) that would cover the remainder of the cost of the same upgrade packages for low-income homes. This additional funding would enable lowincome homeowners to contribute to and benefit from the residential decarbonization effort. The program would roughly double the current WAP spend per household and, when the 40 percent refundable tax credit is included, should cover all costs for low-income households.

3) A national program leveraging DoE resources that would provide region-specific building retrofit guidance and contractor training. The combination of DoE-supported standardized building retrofit packages and upskilled installation contractors would streamline the retrofit process and greatly reduce uncertainty, driving higher adoption rates.

The ENERGY STAR Certified Home program is aimed at new construction, but the program could easily be expanded to include retrofits.

Additionally, in light of our ambitious climate goals it would need to include requirements for high-efficiency electrified heating systems such as air and ground source heat pumps.

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Scope of Problem

Buildings account for approximately 40 percent of U.S. carbon dioxide emissions. Cutting emissions from every part of the building stock, including residential buildings, is critical to meeting emissions reduction pledges.2 A massive effort is needed to reduce emissions through technology retrofits, since more than two-thirds of today’s buildings will still be in use in 2050.3

Improvements in energy efficiency are the least expensive way to reduce buildings-related emissions, and can simultaneously provide a healthier, more comfortable living environment and lower energy bills. But retrofitting homes to reduce energy use can still be costly and must be performed by knowledgeable workers.

In addition to increased efficiency, reaching U.S. emissions reduction goals will require a shift away from fossil fuel-based home heating systems. Electric heat pumps are a proven but underutilized heating and cooling technology suitable for all U.S. climate zones. Coupled with the anticipated decarbonization of the electric grid, they can effectively eliminate emissions from home heating systems.

Widespread installation of home technology retrofit packages including building and appliance efficiency upgrades as well as electrification of heating systems would put the residential building sector on the necessary decarbonization path. But access to capital and to a skilled workforce can be barriers to successful implementation of retrofits.

Our proposal addresses both of these barriers. Expanded energy tax credits and weatherization programs would help homeowners finance retrofits. Standardized retrofit packages and training programs would ensures that homeowners get the right technology, properly installed.

Recommendations

Recommentation 1: Renew and expand the Non-Business Energy Property Tax Credit to be refundable and support five-year payback periods for energy efficiency and heat pump upgrades meeting the ENERGY STAR Certified Home standard. Energy savings can pay for the home improvements needed to bring a home up to the EPA ENERGY STAR Certified Home standard. But the payback period in most parts of the U.S. is currently around twenty years. Upgrades for the average home can cost around $16,000, while the existing Non-Business Energy Property Tax Credit (26 USC § 25C)— set to expire in Dec. 2021—provides a maximum of $500.

Congress should renew the credit through 2031 with more generous terms and should make it refundable to benefit low- and moderate-income (LMI) homeowners. Increasing the maximum credit to 40 percent of installed costs would significantly reduce the payback period but will not be enough to reach the desired five-year payback. State and utility-funded energy efficiency incentive programs can help further reduce the net retrofit cost to the homeowner, providing a combined incentive that we estimate would bring the payback period to under five years. Previous studies have argued that threshold for economically feasible building upgrades is a payback period of less than five years.4 By providing incentives to keep the payback period under this threshold, the goal will be to quadruple the national retrofit rate by the end of the program. Some states will have to increase their incentive funding to support the targeted payback period.

In most parts of the United States, heat pumps are the most economical choice for improving heating efficiency and would provide homeowners with immediate energy and cost savings.5 By replacing furnaces or boilers and air conditioners with heat pumps that provide both heating and cooling, on-site

2.

International Energy Agency (2019) “Energy Efficiency: Buildings ”.

Architecture 2030. Why the Building Sector?

Wilson, Eric J., Craig B. Christensen, Scott G. Horowitz, Joseph J. Robertson, and Jeffrey B. Maguire. “Energy Efficiency Potential in the U.S. Single-Family Housing Stock,” National Renewable Energy Laboratory, 2017.

5.

McKenna, Claire, Amar Shah, and Mark Silberg, (2020) “It’s Time to Incentivize Residential Heat Pumps”.

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emissions of greenhouse gases from the combustion of natural gas or fuel oil can be eliminated. In some regions, cold climate air source heat pumps or ground source heat pumps may be needed to cover the coldest days.

To avoid excessive winter peak electricity demand that could tax the power grid, it is important that heat pump installations are accompanied by other energy-efficiency upgrades. Typical measures include replacing all lightbulbs with LEDs, installing high-efficiency ENERGY STAR appliances, and improving the building envelope with air sealing and insulation upgrades.

Together, this set of energy-efficiency measures and heating-cooling system retrofits can make most single-family residences meet the ENERGY STAR Certified Home standard. These simple and tested strategies can be fine-tuned to address the climate conditions and building stock in different regions of the country. Targeted packages can be developed, qualified for the tax credit, and rolled out at the state or county level, with support from Department of Energy building technology studies (Recommendation 3).

Recommendation 2: Expand funding for the Weatherization Assistance Program (WAP) to support extensive energy-efficient retrofits and heat pumps for eligible households. The WAP targets households with incomes less than 200 percent of the federal poverty level.6 There are an estimated 25.5 million WAP-eligible single-family homes across the country.7 The program currently funds only LEDs, air sealing, and some small insulation projects for these homes. The DoE should receive increased funding to expand the purview of this program to cover all the retrofits required to meet the ENERGY STAR Certified Home standard, allowing the U.S. households least likely to have the financial means to self-fund these improvements to participate in the effort to reduce emissions from single-family homes. Efficient buildings are also healthier and have lower operating costs—co-benefits that address issues disproportionately affecting low-income households. The DoE should be tasked with rolling out and administering an expanded WAP program in coordination with local weatherization programs.

Recommendation 3: Leverage Department of Energy resources to streamline the retrofit process by creating standard upgrade packages and training installation contractors. The lack of standardized retrofit packages and processes increases costs, adds to uncertainty, and depresses adoption rates. DoE should support the creation of model upgrade packages for various climates and home types, in coordination with ongoing work at its National Labs. DoE should also support the development of workforce training programs to teach contractors and installers how to explain the benefits of an ENERGY STAR Certified Home to homeowners and how to properly carry out the needed retrofits and improvements. At least 265,000 Americans could be employed in well-paying jobs installing standardized upgrade packages around the country. Installers can also leverage DoE resources to accurately estimate upgrade costs for each home, allowing them to provide assurances to homeowners as to the cost and performance of the upgrades.

Weatherization Leveraged Partnerships Project, “Estimated Number of Households Income-Eligible for the Department of Energy Weatherization Assistance Program as of 2015,” University of Minnesota, 2015.

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Ibid.

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Conclusions

We propose a ten-year investment in American homes by the Federal Government through an expanded energy efficiency tax credit and weatherization assistance program as well as an investment in contractor training and resources. Through this program, single-family homes around the country would be eligible for a 40 percent refundable tax credit to carry out retrofits to meet the ENERGY STAR Certified Home standard and electrify their heating with a heat pump. With readily available technologies such as heat pumps, insulation, and LEDs, these retrofits should lead to a 40 percent or more reduction in energy use for the average home, all the while making them healthier and cheaper to operate. By combining the tax credit with state and utility incentives, homeowners could reduce their payback period for the retrofits to under five years an attractive proposition that should drive adoption.

For low-income households, doubling the weatherization assistance program spend per household and expanding the requirements to cover all proposed upgrades would greatly reduce energy burden with little to no upfront cost. To ensure these retrofits are carried out properly, the DoE would support widespread contractor training and task its National Labs to develop comprehensive packages that address the needs of most American homes. This guidance would simplify the retrofit process and make it easy for homeowners to understand the costs and savings of the retrofits upfront.

The combination of these three programs would address many of the key barriers to building retrofits today and drive nationwide retrofit adoption to 4 percent by the end of the ten-year program (Figure 2). At the end of the ten years, the program will support 265,000 installation jobs (Figure 3) and the scale of the demand will continue to support them in the foreseeable future without continued federal investment (Figure 4). Sustaining the 4 percent retrofit rate would put the U.S. on track to retrofit all single-family homes by 2050, leading to an 85 percent emissions reduction from single-family homes (Figure 1) and a nationwide emissions reduction of 11 percent from today’s levels.

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FAQs

Why single-family homes?

Single family homes are the most numerous building type in the United States and account for approximately 22 percent of U.S. greenhouse gas emissions. Addressing their needs is crucial to achieving U.S. emissions reduction goals, and doing so will bring jobs to every town in the nation.

Why does this need to be a ten-year program, and how does it meet the needs of the entire United States in that time?

Providing certainty through fixed timelines will help drive adoption. Additionally, we estimate it will take ten years of incentives to build up the demand, knowledge base, and workforce to sustain a 4 percent annual retrofit rate while dropping installed cost. In these first ten years, 18 million homes will be upgraded. The combination of workforce development, lower costs, and industry knowledge created in the ten-year program will sustain that retrofit rate at 4 percent even after the program ends, ensuring all U.S. single-family homes are upgraded by 2050.

Why is so much money needed?

Building energy efficiency upgrades are labor-intensive tasks requiring a well-trained and well-paid workforce. Most of the upgrade costs go toward installation. Heat pumps are still becoming mainstream and lowering the costs requires a critical mass of installations that has not yet been reached. The size of this program should make heat pumps the most economical and desirable choice for American homeowners.

How does this support low- to medium-income (LMI) households?

Direct support will be provided through the expanded Weatherization Assistance Program (WAP) and by making the tax credit refundable. This will directly enable more LMI households to carry out these upgrades at little to no cost. Additionally, the costs for upgrades will drop as more buildings are retrofitted, making retrofits more affordable for all. Furthermore, by creating a nationwide baseline expectation that every home is an efficient home, renters can also benefit.

Why is the WAP funding so large?

The current WAP only reaches 35,000 homes a year. To provide retrofits and heat electrification to all 25.5 million eligible homes by 2050, the program will need to be greatly expanded so that 1 million WAP-eligible homes are retrofitted each year by 2031. WAP applies to the lowest-income households, which are least likely to have the capital to spend on energy upgrades yet spend a disproportionate amount of their income on energy costs. Between the refundable tax credit and the expanded WAP funding, the entire retrofit cost for WAP-eligible homes would be covered.

What kinds of jobs will be created by this funding?

Energy-efficiency upgrades fall under the jobs-intensive construction sector, requiring local contractors to install the requisite building upgrades. As a result, the vast majority of the federal funding will go toward creating well-paying jobs in the trades. Most of the energy-efficiency retrofits will require a trained construction tradesperson well versed in insulation upgrades to homes. HVAC contractors will be needed to install the heat pumps. Any HVAC contractor versed in current refrigeration (air conditioning) technology will be able to install most heat pumps. Energy modelers may also play a role in some of the upgrades, but these are not accounted for in the analysis.

How did you calculate job creation numbers?

The job creation numbers are based on the adoption rate ramping up from 1 percent in year one to 4 percent in year ten of the program. By year ten, there will be 3.3 million retrofits being carried out each year. With each retrofit averaging 123 job-hours (based on RSMeans8 estimates for installation only) and 1,560 onsite job hours required to sustain a full-time worker each year, 2.3 billion job-hours will be needed in the first ten years, which will support 265,000 full-time workers. Retrofitting the remaining U.S. single-family homes will continue to support these jobs and require another 7.9 billion job-hours

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by 2050. The actual installation time and scope will vary regionally, and job creation will be distributed across the country.

What is the cost per home for the proposed upgrades?

The cost to upgrade a “typical” 2,400 ft2 home in the United States will be around $16,000. It will vary by location due to differing insulation requirements and the baseline state of the home. After receiving the 40 percent federal tax credit and matching local incentives, the average homeowner may only need to pay approximately $3,000 out of pocket.

What do the insulation upgrades involve?

In homes with some existing insulation, envelope upgrades may include installing external rigid insulation and an air, water, and vapor barrier when replacing siding and adding attic insulation. Older homes may also require insulation blown into the exterior wall cavities. The exact upgrades needed are specific to the local climate and the existing building insulation. Total insulation needs are documented in the ENERGY STAR Certified Home requirements and could be further elucidated by the DoE. Do all the upgrades need to happen at the same time?

Not necessarily. Weatherization and insulation can be carried out when siding needs replacing, or other major work is being done on the house. Heat pumps need to be installed only when the existing HVAC equipment needs to be replaced. However, carrying out all the upgrades together can result in overall savings because equipment can be right-sized and the logistics will be bundled together.

Why not just focus on heat pumps?

Moderate energy-efficiency upgrades are the lowest-cost option per kWh saved. A well-insulated and air-sealed home is also more comfortable for occupants, creating a higher standard of living.

Additionally, if all U.S. homes installed heat pumps without first reducing heating demand through energy efficiency, the amount of energy required on the coldest day would surpass the current midsummer demand for electricity, stressing the power grid.

Can heat pumps really meet the heating needs for all of the United States?

Properly sized cold climate air source heat pumps can provide 100 percent of their rated heating capacity at 5°F and 76 percent at -13°F.9 With electric resistance backup in the coldest of climates, an air source heat pump can operate efficiently year-round. Ground source heat pumps are even more efficient and can scale indefinitely, but have higher upfront costs. They would also be supported under the tax credit.

Are heat pumps really better than a natural gas furnace?

The electric grid in the United States has been rapidly decarbonizing and as a result, for all but two states (only 1 percent of U.S. households), a modern heat pump will have lower emissions than a natural gas system.10 The emissions reductions will only improve as decarbonization of the grid continues.

Can heat pumps really be used in all 85 million U.S. single-family homes?

Yes! In buildings with existing central forced-air systems, ducted whole-home heat pumps can be installed and can usually reuse existing ductwork. In buildings without existing central air systems (e.g., buildings with steam radiators), multi-zone ductless heat pumps are an easy and cost-effective solution.

One outdoor unit can supply hot or cold air to up to five indoor units installed in the major rooms. This system also provides greater comfort and control than most existing systems because each indoor unit can be controlled separately. Each indoor unit will only require small-diameter refrigerant lines (often less than 1”), making it easy to install and hide. Buildings with low-temperature radiant heating can use water-to-water or air-to-water heat pumps connected directly into their existing system. In each scenario, whether the heat comes from a ground source or an air source heat pump will depend on the home.

8.

Gordian, Green Building Costs with RSMeans data. Rockland, MA, 2020. RSMeans is a widely used construction cost estimation

database.

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9..

McKenna, Claire, Amar Shah, and Mark Silberg, (2020) “It’s Time to Incentivize Residential Heat Pumps”.

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Ibid.

What about new construction?

To meet U.S. emissions reduction goals, all new homes will need to meet at least the ENERGY STAR Certified Home standard with a heat pump, and preferably the stricter Zero Energy Ready Home standard,11 by the end of the decade. However, the sheer number of existing homes outweighs the impact of new homes, and additional benefits are needed to support the retrofit market. For instance, when energy efficiency is incorporated into the initial design, incentives already exist in some locales to help defray the costs of building an efficient new home. Finally, a lot of improvement in new construction efficiency can be achieved through using the most up-to-date building codes (e.g., ASHRAE 90.1 – 2019). The 2019 version of ASHRAE 90.1 results in an average energy savings of 37 percent over the 2004 version still used in many parts of the United States.

Can U.S. industry support the growth in heat pump demand?

Over the last five years, 75 to 80 percent of all HVAC equipment installed in the United States came from domestic manufacturers.12 The industry currently employs 126,000 U.S.-based workers. Several of the largest players have invested in local manufacturing, including Daikin’s recently completed $417-million factory in Texas.13 Expanding production at new or established U.S. factories to meet the increased demand should be possible, especially since the bulky size of the equipment lends itself to local manufacturing.

Additional Links Reinhart, C., Berzolla, Z., Jacoby, H. D., Reilly, J. M., and Schuler, C. (2021) Thoughts on a Federal Government Stimulus Package for Buildings. SSRN. [This paper has an appendix detailing all the assumptions used for this study. The paper focuses on rebates, but the same outcome could be accomplished with the tax credits detailed here].

A current DoE program that provides prescriptive standards for new homes to be efficient enough that they can meet a zero energy goal with the installation of rooftop solar panels. The standard incorporates much of the ENERGY STAR Certified Home standard. Energy.gov, “Zero Energy Ready Homes”.

12.

Diment, Dmitry. “Heating & Air Conditioning Equipment Manufacturing in the U.S.” IBISWorld Industry Report 33341. 2021.

13.

Ibid.

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About the Authors

Zachary Berzolla Building Technology PhD Student, MIT Department of Architecture, zbz@mit.edu Zach Berzolla is a PhD student in the Building Technology Program at MIT. His research in the Sustainable Design Lab focuses on helping communities and companies meet their greenhouse gas emissions reduction targets through energy efficiency, heat electrification, and renewable energy. His work enabling policymakers in any community to identify the most effective buildings-related upgrades to meet their emissions reduction goals through a website, UBEM.io, was recognized as one of Fast Company’s 2021 World Changing Ideas Energy finalists. Berzolla is a recipient of the National Science Foundation Graduate Research Fellowship and a 2021 Presidential Management Fellow finalist.

Berzolla holds a masters in building technology from MIT and dual bachelors degrees in physics and energy systems engineering from Middlebury and Dartmouth, respectively. While at Middlebury, he led efforts that resulted in a trustee-adopted campus plan to reduce campus energy consumption significantly and source all remaining energy from renewables. He also led a team of fifteen that won the 2018 U.S. DoE Solar Decathlon School Design Challenge.

Christoph Reinhart Professor of Building Technology, MIT Department of Architecture, creinhart@mit.edu Christoph Reinhart is a building scientist and architectural educator working in the field of sustainable building design and environmental modeling. At MIT he is leading the Sustainable Design Lab (SDL), an interdisciplinary group with a grounding in architecture that develops design workflows, planning tools, and metrics to evaluate the environmental performance of buildings and neighborhoods. He is also the head of Solemma, a technology company and Harvard University spinoff, as well as Strategic Development Advisor for Mapdwell, a solar mapping company and MIT spinoff. Products originating from the SDL and Solemma are used in practice and education in over ninety countries.

Before joining MIT in 2012, Reinhart led the sustainable design concentration area at Harvard’s Graduate School of Design where the student forum voted him the 2009 Teacher of the Year for the Department of Architecture. From 1997 to 2008, Reinhart worked as a staff scientist at the National Research Council of Canada and the Fraunhofer Institute for Solar Energy Systems in Germany. He has authored over 140 peer-reviewed scientific articles including two textbooks on daylighting and seven book chapters. His work has been supported by a variety of organizations from the U.S. National Science Foundation and the Governments of Canada, Kuwait, and Portugal to Autodesk, Exelon, Kalwall, Philips, United Technology Corporation, and Sage Electrochromics.

Reinhart’s work has been recognized with various awards including a Fraunhofer Bessel Prize by the Alexander von Humboldt Foundation (2018), the IBPSA-USA Distinguished Achievement Award (2016), a Star of Building in Science award by Buildings4Change magazine (2013), and seven best paper awards.

Mapdwell has been recognized with Fast Company’s Design by Innovation 2015 award for Data Visualization as well as a Sustainia 100 award. Reinhart is a physicist by training and holds a doctorate in architecture from the Technical University of Karlsruhe.

John Reilly, Co-Director Emeritus, MIT Joint Program on the Science and Policy of Global Change Henry Jacoby, Professor Emeritus, MIT Center for Energy and Environmental Policy Research Cassia Schuler, Undergraduate Student, Wellesley College

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About policy perspectives on infrastructure

Policy perspectives present responses from faculty in MIT’s School of Architecture and Planning to the American Jobs Plan.

The effort was convened by the MIT Norman B. Leventhal Center for Advanced Urbanism.

MIT School of Architecture and Planning sap.mit.edu At the MIT School of Architecture and Planning (SA+P), we believe that humanity’s toughest problems occupy the same ground as their solutions: the space between people and their environment. This is our territory. From the day MIT opened its doors and introduced Course 4 as the nation’s first academic program in architecture, our faculty, students, and alumni have explored the human landscape to discover—and deliver—better futures.

MIT Norman B. Leventhal Center for Advanced Urbanism lcau.mit.edu Urban environments constitute one of the most complex societal challenges of today’s world. The LCAU seeks to drive collaborative, interdisciplinary research focused on the design and planning of large-scale, complex, future metropolitan environments, to advance urban scholarship and practice that makes cities more equitable, sustainable, and resilient by design.

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