Confidence in performance should be a focus for state market transformation plans The IRA can transform the market for heat pumps by winning the kitchen table conversation

The Inflation Reduction Act (IRA) Home Energy Rebates—which include nearly $9 billion—have huge potential. Yes, the funding is way too small to retrofit every home in America with the efficient and clean technologies needed to meet decarbonization goals and improve grid reliability. But it’s enough money to transform the market for home energy retrofits like weatherization and heat pumps.  

Every state applying for rebate money will include a “market transformation plan” as part of its application to the U.S. Department of Energy (DOE). In short, the goal of this plan is to ensure that states consider and implement strategies to spur the market long after the IRA funding is gone. 

While states can submit their plans up to one year after receiving rebate funding, it’s critical that states think about market transformation now. After all, the goal of these rebates is to create strong markets for home weatherization and electrification so that we can actually retrofit every home in America.

But what does market transformation actually look like?

Energy efficiency programs can have many goals – market transformation is one

Energy efficiency programs often have a number of objectives. Resource acquisition programs, for instance, aim to drive energy reductions to meet specific policy or energy goals. Equity-focused programs aim to ensure that disadvantaged households and communities are not left behind.

Market transformation programs are different. 

The definition of market transformation provided by the American Council for an Energy-Efficient Economy is a “process whereby the energy efficiency of all new appliances, buildings, vehicles or other technologies substantially increases over a period of years.” 

In other words, the goal is scaling the market for home energy retrofits. This market can be jump-started with rebate programs, such as the IRA rebates. But the ultimate outcome should be the development of strong markets for these measures that don’t solely rely on public dollars. 

As a result, states should be thinking about creating markets, and not just programs, as they set up their IRA rebates. 

Market transformation can have different theories of change

There’s no one correct way to drive market transformation. Energy efficiency technologies can reach maturity in the market based on one factor or a combination of factors. Increased market awareness, lower costs, higher quality, and regulation all can be utilized to drive the private market.

Take LED light bulbs as an example. While they are commonplace today, that was not always the case. Just a decade ago, LED bulbs comprised about 7% of the global lighting market, according to the International Energy Authority. Today they make up more than 50% of the global lighting market.

In that time period, utilities and governments invested billions of dollars in rebates and other incentives to drive awareness and adoption of LED bulbs. And as market uptake of LEDs increased, the cost of LEDs decreased, creating a positive feedback loop. Increased adoption then made it possible for governments, including in the U.S., to dramatically increase the efficiency standards for lighting, which meant that everyone who bought new lights would save energy. It also allowed further public investment in LEDs to be phased out as they had already penetrated the market. Why spend more public dollars on a product that the private sector had already embraced?

The same can be true for energy efficiency and electrification measures more broadly. The challenge for market transformation, however, is to define what is preventing the market for energy efficiency from growing naturally at any given point in time and then investing appropriately. 

For the IRA and heat pumps, market transformation means changing the kitchen table conversation 

Transforming the market to increase the adoption of heat pumps and other technologies depends on changing the default proposal presented to households. If a contractor tells a household that a heat pump is their best bet, that homeowner is likely to buy a heat pump. One homeowner buys a heat pump, and then another one, and pretty soon the same positive feedback loop that influenced the market for LED light bulbs takes shape.

So what will it take for contractors to default to proposing heat pumps and other related technologies, including complementary measures such as weatherization? 

A huge element is bringing down the cost. Right now, heat pumps are not cheap. A heat pump water heater can cost anywhere between $1500-$3000 (or more). Heat pump-based heating and cooling systems are even more expensive. It’s for this reason that the IRA Home Energy Rebates are focused on providing rebates for these retrofits. Heat pumps have to be comparable in price with alternatives to increase adoption. As long as funding is available, the IRA rebates, along with other state and utility incentives, will help close the gap. 

But throwing money at heat pumps in the form of government rebates is not likely to increase market adoption by itself. The money, eventually, will run out. And if the kitchen-table conversation around the benefits of heat pumps never begins, then the market for such technologies won’t change, and grow, once the IRA rebate cash is used up.

The good news? The conversation about energy efficient technologies is changing. Nonprofits like Rewiring America are playing a key role in flipping the script, as is the IRA itself, which is expected to raise the profile of heat pumps. 

However, it can still be challenging for households to find contractors recommending a heat pump instead of conventional fossil-fueled HVAC systems. Contractors generally won’t propose technologies that customers find unfamiliar or confusing. And households in many areas around the country still remain unclear about heat pumps and their advantages respective to the heating and cooling technologies their homes have used for decades. 

One key aspect, however, is confidence in performance: no contractor wants to recommend a solution that doesn’t work. Confidence requires more than money. It requires education and training. And it also requires market actors that will put their money where their mouth is when it comes to energy savings. 

The measured pathway of the Home Efficiency Rebates Program enables aggregators to provide guaranteed energy savings. Aggregators, private companies or nonprofit organizations, take on the energy savings performance risk of energy efficiency upgrades like heat pumps and insulation. That’s the type of performance confidence that both contractors and homeowners want, and need, to see.

The success of IRA heat pump rebates should be measured by the number of contractors (and trucks) that proudly sell heat pumps

It is important that the IRA rebates are used by all types of contractors, and not just by the contractors that typically take advantage of government and utility rebate programs. 

Many contractors, frankly, are skeptical of government programs. They, however, are the exact types of contractors that have the potential to transform the market for energy efficiency. In the coming months, the DOE and state energy offices should pay special attention to what these contractors need to help homeowners choose clean energy technologies over the same old stuff. 

After all, we can and should measure the success of the IRA rebates based on the number of contractors that proudly sell heat pumps, weatherization, and other energy-efficiency technologies. 

February 28, 2024