Heat Pumps, More Than You Wanted to Know
Over the last few months, Baker and I have been digging in deep on Heat Pumps. I'm putting my explorations here on pause but wanted to write up everything we've learned over the last few months.
Heat pumps are unique in that they are a tool for fighting climate change, where we have the technology today. It's the same tech that we've been using in refrigerators and AC units for decades. Switching to heat pumps would reduce hundreds of MT of CO2 emissions per year. And yet, they are only present in 15% of US single-family homes.
Unlike more speculative areas of climate tech, adopting heat pumps en-masse is more a question of deployment. There are barriers with financing, the purchase journey, the large up-front install cost, and the lack of differentiated outcomes. I'll get to all of these down below.
Overall, it feels like a space which is ripe for disruption, which is why you see a lot of startup founders starting to investigate this space. Every step in the process today is broken, which means that there is a lot to improve.
Author's note: I'm not a grizzled heat pump or HVAC expert, so it's certainly possible I got some stuff wrong. What follows is the result of about six months of research. If you have a correction, please reach out.
Types of heat pumps
If you're totally new to the space: heat pumps are a high-efficiency, climate-friendly option to heat and cool your home. They run on pure electricity, and are 3-4x more efficient than existing electric options. They are one of our best tools in the fight against climate change, and should be deployed in every home in America.
Heat pumps consist of the same set of components...
An outdoor unit which either collects heat from the outdoors to be brought inside, or releases heat collected from indoors. It will typically have a fan to move air across a set of coils (metal) which conduct heat from the refrigerant. there are two primary styles of these: "barrel-style" which look more like a traditional AC unit and "box-style" which are the boxes you see on Heat Pumps, Hooray!.
An indoor unit (or indoor heads) which either pulls heat in from inside the home or disperses it out. think of it as functionally the same thing as the outdoor unit, but it sits inside your house and looks different based on how heat is distributed throughout the home (see below)
Refrigerant lines which exchange heat between the indoors and outdoors. these are metal tubes that carry a substance known as refrigerant which has an extremely low boiling point.
A compressor which is used to modulate pressure of the refrigerant
A reversing-valve which changes the directional flow of refrigerant to either heat or cool your home. when you adjust the thermostat 'mode', it is effectively changing the direction of the reversing-valve.
Sometimes: heat strips / resistive heating: in very cold climates below -5 degrees F, heat pump capacity will go down to the point where it may have trouble meeting the heating load. To combat this, certain heat pumps ship with resistive elements (imagine a toaster oven that generates heat by running through a wire).
Additionally, there are a few other 'flavors' of heat pumps depending on your home setup, but all of these consist of the same core parts.
Heat pump flavors: how heat is distributed
If you want to install a heat pump in your home, you have several options for how that process works.
Option 1: Central-ducted - most US homes have duct-work to move heat (and air!) throughout the house. In these systems, there's a central set of tubes which run air throughout the house, kind of like blood vessels will carry blood throughout the body. Centrally ducted heat pumps are the most popular, since about 60% of US homes already have ducts. If you have ducts, using that ductwork is typically the cheapest and most effective way to distribute heat.
Option 2: Mini-split aka ductless - for homes without duct-work, or cases where you want to condition a specific room (e.g. think of a garage), you can use a mini-split unit. This works in the same way as the central units, but instead of hiding the indoor unit in a basement or closet, they are instead mounted visibly on the walls. Refrigerant lines will run directly from an outdoor unit to an indoor one. Because these can't heat the whole home, they are typically smaller. In some cases, you can route refrigerant to multiple 'heads' inside the home.
Option 3: Mono-block or 'packaged' - there's one other type of heat pump which is generally less popular because it's not as flexible or performant for many housing configurations, the 'mono-block' unit. These combine indoor and outdoor units into a single form factor that sits outside the house, and then moves air inside. It benefits from simplicity of install (no refrigerant lines), but won't be nearly as efficient as a split system and has a bigger outdoor footprint.
Option 4: Air-to-water - for households who have radiant heating, heat pumps (or heat pump water heaters) can exchange heat with water. This is less popular in the US, but a popular way to heat in Europe.
Heat pump flavors: heating sources
In addition to how heat is distributed inside, there are also differences in how heat pumps.
Air-source heat pumps are the most common heat pump variety, that you see everywhere. These exchange heat with the outside air, just like an AC Unit.
Dual-fuel - a dual fuel heat pump setup is basically the same as centrally ducted, but it just means that you don't replace your existing furnace, and have the heat pump installed alongside it. This is a popular route for homeowners looking to gradually transition. With dual-fuel, the heat pump and the gas furnace can never run simultaneously, so it won't save much money on heating. But it can be useful for gradually moving to electric heating.
Air-to-ground (aka ground-source) - in extreme climates (think the northeast), heat pump heating and cooling both become lower efficiency. pulling heat out of the very cold air is hard to do, as is pushing heat into hot humid days. it turns out that if you drill down ~30-40 feet, the soil temperature will remain more or less constant throughout the year. this gives a heat pump much better efficiency.
The market
Today's market participants are split into a few different layers: consumers, contractors and technicians, wholesalers, and manufacturers.
Let's start with consumers. Furnace equipment typically has a lifetime of 20 years, while AC equipment has a lifetime of more like 15 years. When your furnace or AC dies (or perhaps you want to get an AC for the first time), you have a magical window of opportunity to upgrade to a heat pump.
Today, most consumers will either call the number on the side of the unit left by the original installer (an ingenious and basically zero-cost lead-flow technique), or will search on Yelp, Angie's List, or Google to find a contractor. Typically these lead-flow businesses will get ~$60-80 per lead.
Typically the breakdown is...
- 2-4k equipment cost (pure hardware)
- 4-15k labor cost (removing old equipment, running refrigerant lines, install)
- 10-20k (maybe) duct upgrades, panel upgrades
That labor cost has a wide variance. It's mostly a function of supply and demand. In areas where many people have AC, it's relatively easy to retrofit a heat pump and it happens all the time
Most of the time, heat pump upgrades will be done under duress. About 80% of furnace replacements happen during a "break-fix" scenario, where the existing equipment has stopped working and new equipment needs to be installed. It's much more difficult to ask for a bigger replacement (both in terms of time and cost) when the heating is out and your family is cold! Homeowners will call a contractor (also referred to as an HVAC technician) who comes in to investigate the issue.
Contracting firms are typically both small and fragmented. There are 300,000 HVAC technicians in the US, but 145,000 companies! That means many of them are either sole proprietors, or just a few individuals with a truck.
It's a good business to be in, generally speaking. Individual shops may be making anywhere from
Most contractors that we've talked with indicate that there's a severe labor shortage. Contractors have to be experts at system design, understanding heating and cooling loads, some electrical work, pressure variations, and construction. It’s a skilled trade that takes a long time to master.
New contractors typically learn via the apprenticeship model, but in the last few years, fewer individuals have entered these trades. In some cases, contractors aren't even taking new jobs for months. Demand for contractors spikes twice per year; the first hot day in summer, and the first cold day of the winter.
Over the last few years, there's been an increase in private equity roll-up vehicles buying up these firms. Many of them are trying to centralize and bring technology to key functions (scheduling, financing, invoicing) and allow the technicians to spend more time on their specialized work.
Contractors have not historically adopted a lot of software, though there are companies trying to serve them (ServiceTitan).
Finally there are the manufacturers. These are the only large players in the market, they are a handful of publicly traded companies, like Carrier, Trane, Lennox, Mitsubishi and Daikin. Each of them bring in $1b+ in hardware, and typically maintain a 20% margin.
Many technicians have agreements directly with wholesalers or the manufacturer. As a result, it's tough to buy a heat pump unit even if you really wanted to. Similar to the way car dealerships worked 20 years ago, you have to go through the dealer (aka the contractor or wholesaler) who is a licensed retailer for the manufacturer.
These manufacturers are slightly disincentivized from pushing heat pump adoption for two reasons: 1) many of them also sell furnaces and A/C units, and have whole divisions responsible for those P&L statements 2) they want to maintain a margin on equipment. Rather than provide equipment that is higher-cost but easier to install, they will try and ship the lowest possible cost, and then pass the labor costs on to the end consumer.
There are 77 million single-family homes in the US, and roughly 3 million furnace or AC units installed per year.
Installing a heat pump
Okay, so what's a heat pump install look like? There's a few different pieces..
On-site visit: the purpose of this is two-fold. One part of it is to actually assess the quote and ensure that there aren't any issues. The second is to help sell the homeowner on the desired solution. As part of this on-site visit, the contractor will want to do some initial system sizing to determine what sort of system you need.
In repair cases, the first visit ends up being the most important. When a technician says that the existing equipment is and needs to be replaced, they set the framing for the entire journey.
The output of the system design should include a load sizing report for the home. It should indicate how many BTUs you need to heat your home in the winter, and how many tons of cooling you need in the summer.
As it turns out, load sizing is a surprisingly tricky problem to get right. Design will depend on your room configuration, insulation, and even position of the home relative to the sun. The “gold standard” way to do this is by running a Manual J calculation on the home, and doing a blower door test which assesses the actual leakiness of the home.
Many contractors will skip this step if replacing the existing equipment with a newer version of the same equipment. This is another reason that contractors will prefer to stick with replacing existing systems vs swapping out for a heat pump.
There's a few things that will blow up a quote...
- new ductwork - if you live in a climate where it doesn't get too hot, you might have small ductwork. The ducts don't need to be very big because gas furnaces heat at a high temperature (140F). Heat pumps heat at a much lower temperature (100-110F), which means they need to move more volume of air to work. Getting to this increased volume requires increasing the duct size, which tends to add 10-20k to the up-front cost. In practice, if existing ductwork is insufficient, the installer will instead recommend a ductless system, which also tends to be more expensive (remember, if you have ducts, they are the cheapest way to deliver heat).
- panel upgrade / and new 240v outlets - older homes were wired in a time before we had all these electric appliances (solar panels, evs, etc). A heat pump might require upgrading your panel to accommodate increased amperage. Doing a panel upgrade isn't terribly expensive, but it might add 2-3k to rewire the home. It also increases the end-to-end time for the job, as the utility may have to upgrade service to the home.
- new insulation - insulating a home is expensive, but probably the thing you should do before making any other upgrades. in most cases, insulation will be the #1 thing you can do to make your home more efficient.
Install: a heat pump should be able to be installed in about a day. The technicians will have to remove any old units, and run any new refrigerant lines (aka drilling holes in the walls of your home). If you have an existing AC, the technicians can likely re-use the refrigerant lines already in your walls. The technicians will install the outdoor unit by placing it on a concrete slab and hooking it up to the electrical outlets, as well as the different indoor units. Often, technicians will recommend installing new thermostats as part of this process. Finally, they'll need to "charge" the refrigerants, filling the lines with R-410A (or another refrigerant).
Follow-up / maintenance: most installers offer a 1-year warranty on any work that they do. Callbacks with heat pumps are most frequently due to leaking refrigerant (which also is bad from a climate-perspective, more on that below).
Utilities
There's one other player in this market who we didn't talk about yet: utilities and government funding.
The government has set aside budgets to help consumers drive the adoption of green technology. Typically these budgets are set at the federal level, and then flow down to the 'state energy office'. Each state energy office then works with local utilities (ConEd, PG&E) or NGOs (BayRen) to provide programs for consumers to adopt high-efficiency devices.
While the large budget numbers are set at the federal level, actually dispersing that money is very much a local issue.
I've personally found the way utilities work to be a hard thing to reason about, but in general, here's how people have described their incentives to me...
- utilities charge each consumer a 'fixed service fee' which is something like $20/mo. this costs them basically nothing to service (think of it like the gym membership)
- utilities generally want to decrease peak demand on their systems, while simultaneously keeping customers connected and paying the service fee. the higher the demand, the more expensive it is for a utility to deliver that energy, so utilities will minimize spike and lower-margin "peak load"
- utilities are 'procurement engines', they are very good at funding new capital improvements, if they can show a return on those projects. they tend to build little in-house
- electric utilities will incentivize switching to all-electric. gas utilities will incentivize high-efficiency devices. in some cases, utilities which do both will figure out the cost to serve individual homes, and try and switch load to whatever method is cheapest to serve.
Despite all this, the software and data utilities provide is an area that is ripe for startups to dig into. It's also a slog, the most well-known company here is Opower, but there aren't many others willing to brave the high-touch sales cycle.
Incentives and rebates
A key result of that government funding is that utilities often offer $2k-3k per heat pump install to bring higher-efficiency devices into the home. With the Inflation Reduction Act this number has expanded dramatically for low and middle income families.
There's a lot of problems that exist with these incentives...
Discovery - before they can apply for incentives, homeowners have to know about them! The unfortunate thing is that these incentives are spread across many different sites. In many cases, incentives are "good until the money runs out", which means a consumer might be expecting more money back.
Eligibility - woof, incentive eligibility is a complex thing. Often it depends on a multitude of factors: the exact unit which was installed, the sizing vs existing equipment, the household income, and more. It is difficult for homeowners and contractors alike to wade through to know how much money they are eligible for.
Application - applying for rebates requires an annoying amount of paperwork. In cases of things like EV chargers, consumers can fill out the applications themselves. For a heat pump, it will probably require 2-3 hours of contractor time... which is why many contractors just don't bother!
Financing - the biggest incentives have historically come in the form of tax credits that you can claim off your tax bill at the end of the year. This means that the consumer has to 'float' the cost of the install up-front, until they can claim the rebate months later. More progressive utilities will partner with banks to provide interest-free loans, but there's still a big gap here.
Heat pump economics (am I getting ripped off?)
You might be wondering how money flows as part of this process...
- the wholesalers will typically charge 3-5k per heat pump unit. Higher efficiency units will be more expensive (6-8k). The manufacturer will try and maintain a 30% margin, with higher-efficiency units having a greater margin.
- the installers will pass that cost onto the consumer, and then typically double the cost of the unit for labor. For a 5k system, there will be minimum 5k in labor costs. In certain geos with a more competitive labor market (SF, Seattle), we've even seen labor account for 70-90% of the bill.
- the average consumer with a high-efficiency gas furnace will save something like ~
2,000 per year. - contractors will usually include some buffer room
The net-result is that in a heat-pump popular market with many AC units and mild climate (think Austin, TX), the cost will be something like
A word on Refrigerants
While I'm generally bullish on heat pumps and convinced that we must adopt them to prevent climate change, today's heat pumps aren't all sunshine and rainbows. There's one big problem with rolling them out: refrigerants.
Remember, refrigerants are substances which transfer heat from outside in (or vice versa). Refrigerants have a very low boiling point (think -40 degrees F). The low boiling point makes it easy to change the pressure to adjust whether a refrigerant is liquid or gas, which is good for heating transfer, but can create problems elsewhere.
Notably, many refrigerants have a high global-warming-potential (GWP). This number is measured relative to CO2 (which has a GWP of 1), and expresses how much worse a molecule of refrigerant is when it comes to global warming.
There have been thousands of refrigerants categorized over time. They are typically numbered by R-{Ccount - 1}{Hcount + 1}{Fcount} when viewed as pure chains, but when they are combined the numbering scheme changes to be more sequential.
Today's most popular refrigerant is R-410A. It is a mixture of CHF2CF3 and CH2F2 has a GWP of 1,400. (It should be noted that even with some refrigerant leakage, we still see that heat pumps come out ahead when it comes to GWP)
Over time, we've been steadily outlawing high global-warming-potential refrigerants (remember CFCs and HFCs?). And in 2024, the industry is gearing up to phase out R-410A.
The one problem is that there aren't a lot of other good alternatives that exist. Refrigerants fall into two classes...
- flammable: these are refrigerants like Propane (R-290) or Isobutane. We can't roll them out without updating a bunch of building codes. As an aside, it's sort of crazy to me that we decide to limit propane in building codes, when we pipe natural gas into homes all the time to literally light it on fire.
- high-pressure: among the leading non-flammable refrigerants is CO2. It's not flammable (good!) has a GWP of 1 (also good!) but requires a lot more pressure to turn from vapor to liquid (bad!). This means more expensive compressors.
Finding new refrigerants is an active area of research, and will probably require a sea change. Most of the big manufacturers seem to be heavily investigating this area of research.
Buckets of problems
Consumer awareness - most consumers don't know (or care much) about how they get their heat. Despite being available for many years, heat pumps have only recently entered the popular discourse. Unlike solar or EVs, heat pumps are pretty much invisible, and it's not yet a status symbol in any dimension.
Urgency of problem - most HVAC systems are replaced when the old system has broken. Consumers typically don't have a ton of appetite to do a lengthy heat pump install when they can't keep their home warm! On the flip side, when an HVAC system is working smoothly, consumers have little desire to switch it out and add risk to the process.
Contractor incentives - contractors typically want to avoid any sort of callback. The easiest way to do this is to replace the existing equipment. It minimizes risk, and additional labor hours. You don't have to worry about running into issues which might lead to a drastically higher quote (duct sizing or panel upgrades).
Regional markets - one reason HVAC is tricky for startups to tackle is that it's a highly fragmented, very regional market. The pitch for consumers is actually different depending on geo. In SF or Seattle, heat pumps might be viewed as 'adding an AC for the first time'. In the southeast, it's a way of reducing your electricity bill by 2-3x. In the northeast, heat pumps are best positioned to replace expensive sources of fuel like fuel oil.
Areas of opportunity
Financing. Solar has a rich set of options for financing the big up-front cost. These largely do not exist with heat pumps today (though local utilities may sometimes run 0% APR loan programs). Applying for rebates and incentives is an arduous process, and often still requires that you spend money up-front.
System design. Designing a system for a home is tricky, and often involves a visit to the home. This is both annoying for consumers, and costs the contractor as it requires an extra 2-3h of transit time to prepare a quote that they may not even be paid for! The holy grail here would be working in the same way that solar does: going directly from address -> design. We've built a lot of this modeling into Heat Pumps, Hooray!, but there's still internals of the system which require more work to surface (ductwork, panel, refrigerant lines). There are some companies focused exclusively on system design (CoolCalc, Arch, Conduit).
New heat pumps and refrigerants. There's a number of startups trying to build new heat pumps: Gradient, Stow, Dandelion Energy, and others. A system like Gradient's window unit doesn't require any sort of contractor install and works for multi-family apartment buildings. Dandelion takes a differentiated approach by focusing on ground-source heat pumps, which are more difficult to purchase.
Purchase journey. Right now, it's fairly difficult to get a heat pump even if you are highly motivated and not budget constrained. There's a number of companies trying to help the purchase journey: Woltair in Poland, Lun in the EU. Each of them are working to make buying a heat pump more similar to buying a dishwasher or washer/dryer online.
Additionally there are some other pathways that folks are trying to explore that I'm a little less bullish on, but I thought are worth mentioning here.
Luxury products? A number of folks are investigating whether heat pumps might become a luxury product. I'm personally skeptical here. Heating and cooling are a lot less tangible than an EV or having solar on your roof. That said, if you could find a way to turn a heat pump into a futuristic technological device or a high-status symbol, I think you'd have a lot of luck. Quilt is one such company, applying high industrial design to an antiquated market. For products like an induction stove where you use it daily, I think this approach can work much better (a la Impulse).
Whole-home electrification. It's far more common to upgrade a single component at a time. But there are a few companies trying to do whole-home electrification by providing better hardware and software: Lunar Energy, Elephant Energy.
Thanks
First and foremost, I wanted to thank Baker for being an incredible thought partner throughout all of this and building something really cool and useful.
Additionally, there have been a handful of folks we've had conversations with who fundamentally changed my understanding of the Heat Pump market: Shayle (if you have not checked out his podcast, you owe it to yourself to do so), Andy, and Gregory from EIP, Sam and Josh from Innovation Endeavors, Seth and Alex from 50y, and Vibhor and David from Coatue, Erika Reinhardt
Thank you demo crew: Kevin Niparko and Lauren Reeder for keeping us going with feedback and encouragement throughout.
