Electric Rates Can Help or Hinder Heat Pump Progress

This policy brief by RMI argues that current electricity rate designs in the United States often overcharge heat pump users, creating a financial barrier to home electrification. The document explains that because many utility costs are driven by summer peak demand, customers who add electricity demand in the winter (via heat pumps) may pay more than the actual cost of service. RMI proposes several rate reform strategies—including seasonal heating rates, time-varying rates, and separate customer classes—to align electricity pricing with actual system costs and support decarbonization goals.

• Current electricity rate designs often result in heat pump customers being overcharged relative to the actual cost utilities incur to provide them with electricity. This misalignment can lead to higher household bills for those converting from gas to electric heating, which may deter families from electrifying.
• The overcharging of heat pump users occurs because electricity demand for heating predominantly happens in winter, whereas many U.S. grid demand peaks and associated system costs occur in the summer. Consequently, heat pump users may pay a share of system costs that exceeds their actual contribution to peak demand.
• An analysis of NIPSCO in Northern Indiana demonstrated that while current rates would increase the bills of a typical customer switching from natural gas to heat pumps, aligning rates with the actual cost of service would instead result in the customer saving hundreds of dollars per year.
• RMI identifies several potential rate reform strategies to make electrification more affordable: seasonal heating rates (reducing winter volumetric rates), increasing fixed charges while reducing variable rates, implementing time-varying rates, creating a separate customer class for heat pump households, or providing fixed customer rebates.
• Specific implementations of seasonal rates have been seen in Maine, where Central Maine Power and Versant Power lowered winter volumetric energy rates by increasing fixed charges to make heat pumps more affordable.
• To mitigate the regressive nature of increased fixed charges—which disproportionately affect low-income customers who use less energy—California has attempted to reduce marginal electricity prices while providing discounts for households meeting income-based bill reduction thresholds.
• Long-term rate design must account for the possibility that widespread electrification in cold climates could shift the electricity system from summer-peaking to winter-peaking, which would increase the cost of service during winter months.

APA

RMI (2024). Electric Rates Can Help or Hinder Heat Pump Progress. https://rmi.org/resources/electric-rates-can-help-or-hinder-heat-pump-progress/

Chicago

RMI. Electric Rates Can Help or Hinder Heat Pump Progress. 2024. https://rmi.org/resources/electric-rates-can-help-or-hinder-heat-pump-progress/.

Wikipedia

{{cite report |author=RMI |title=Electric Rates Can Help or Hinder Heat Pump Progress |date=5 December 2024 |url=https://rmi.org/resources/electric-rates-can-help-or-hinder-heat-pump-progress/ |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{rmi2024electric, author = {{RMI}}, title = {{Electric Rates Can Help or Hinder Heat Pump Progress}}, institution = {RMI}, year = {2024}, month = dec, url = {https://rmi.org/resources/electric-rates-can-help-or-hinder-heat-pump-progress/}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }