How to Decarbonize the Heating of Buildings at Lowest Cost

This article explores how a nation might decarbonize heating of building spaces at the lowest cost, in the most likely and supported way

This article explores how a nation might decarbonize the heating of building spaces, at lowest cost, and in a way that is likely to be supported by both liberal and conservative lawmakers who want to decarbonize.

It is easier for each building to operate at lowest cost, and let other buildings spend money to reduce CO₂. This is consistent with observed behavior and economic theory. Therefore, to decarbonize, it must be required by law.

Many buildings are heated by burning natural gas within a furnace. This typically heats metal fins within a duct, which heats air that circulates throughout the building. Alternatively, one can install a system that creates heat using electricity.

There are two primary ways to produce heat with electricity: One is a heat pump, and the other is a simple electrical heating element. The heat pump is 2× to 4× more efficient than the heating element. For example, one can feed 1 W into a heat pump and get 4 W of heat; or feed 1 W into a simple heating element and get 1 W of heat. One can get more out of a heat pump than they put in, as it moves heat from one place to another instead of creating it. During the heating of a building, the heat moves from the outside to the inside of the building, which causes the outdoor air to become colder. Heat pumps are already inside air conditioners. Therefore, one can perform heating with them, to a certain extent, at little additional equipment cost.

In most cases, the electricity that feeds a heat pump is made by burning natural gas at a power plant, emitting CO₂. One might prefer “green” electricity made without emitting CO₂. However, additional green electricity for a building is often not available.

A building’s energy bill often increases when it switches from a gas furnace to a heat pump, especially when outdoor temperatures are very cold. This is because a heat pump’s efficiency decreases when outdoor temperatures decrease.

An example of building decarbonization law

To resolve climate change, nations should consider enacting national laws that require the decarbonization of building heat at the lowest cost and in a way that is likely to be supported by most voters. This does not exist. However, if it did, what might it look like? Below is an example.

• New heating, ventilation, and air conditioning (HVAC) equipment is required to support space heating via electricity. And, if the building owner desires, equipment can be installed concurrently to support heating with natural gas. If both are installed, a building can heat with gas, electricity, or both at any given time.
• The cost of heat-pump equipment and electricity is often low when supporting outdoor temperatures above 5˚C (41˚F). However, these costs increase as outdoor temperatures decrease. Subsequently, lawmakers might initially require new equipment to support moderately cold temperatures and expand this requirement when concern over climate is greater. In other words, lawmakers periodically set the minimum required outdoor temperature supported by new heat pumps and select a politically acceptable level.
• Owners who operate at the lowest cost in cold climates supplement their heat pumps with a gas furnace. And owners who operate at a higher cost, perhaps to reduce CO₂, install a larger and more costly heat pump and never heat with natural gas.
• New equipment is required to communicate with a regional computer. Subsequently, buildings gain access to the spot price (i.e., instantaneous) of natural gas, the spot price of electricity, CO₂ emissions per watt of additional electricity, etc. Communication is required by all buildings that upgrade their HVAC equipment, ranging from small homes to large commercial buildings.
• If both gas and electric heat are installed, the system is required to be able to select the lower-cost option every few minutes.
• At any time, a building with electricity and gas capability can switch from the lowest-cost operation to a more costly operation and emit a different amount of CO₂. In some cases, emissions increase, and there is no reason to switch over; however, in other cases, emissions decrease. The building calculates cost and total CO₂ emissions for the gas and electric options, where total refers to building emissions plus power-plant emissions. When one can pay more to reduce total CO₂, the system calculates decarbonization cost in units of dollars spent to reduce CO₂ by one metric ton ($/tCO₂).
• In cases where decarbonization cost is low, the system must switch over and incur more gas, or more electricity cost, up to a maximum amount set by lawmakers. For example, if homes are required to spend $100 more per year to reduce CO₂, and the lowest cost operation is $700 a year, the system runs at $800 and minimizes total CO₂ emissions over the year ($700 $100).
• This additional amount is called the Decarbonization Cost Allowance (DCA), and it is set by federal lawmakers each year in units of dollars per square foot. Initially, this might be set low to gain political support. However, as climate-change harm becomes more evident, it is likely to increase.
• Lawmakers also set a maximum decarbonization cost when switching from the lowest-cost operation in $/tCO₂. Fiscal conservative lawmakers disfavor projects with a decarbonization cost greater than constructing a solar farm or wind farm, which is typically ≤$50/tCO₂. Therefore, the maximum $/tCO₂ might be set to that of other decarbonization opportunities to garner broad political support. In other words, the system operates until it incurs one of the two limits. For example, if lawmakers set DCA to $100/year and $50/tCO₂, the system will switch over only when decarbonization cost is ≤$50/tCO₂, up to $100 per house per year.
• “Green” electricity is made without emitting CO₂, and green electricity in saturation refers to discarding green electricity due to green supply exceeding demand. For example, a city needs 1.0 GW, a nearby solar farm in saturation can produce 1.3 GW, and 0.3 GW is discarded. If green electricity is not in saturation and a building switches from a gas furnace to an electric heat pump, then 100% of the additional electricity will likely come from a natural gas-fired power plant that emits CO₂. Therefore, when switching to the heat pump, we prefer to consume green electricity in saturation; however, this is rare. Subsequently, to minimize CO₂ emissions nationally, buildings with access to low-cost green electricity in saturation are favored for switching. To keep this fair, all buildings pay the same additional cost above the lowest-cost operation. However, those with access to cheap green electricity in saturation switch over more often. And those who switch more have their additional cost paid for by those who switch less. Ultimately, everyone pays the same additional cost above the lowest-cost operation per square foot, and CO₂ emissions nationally are minimized.

Getting the votes: Decarbonize

The above framework will likely receive political support, as it does not require consumers to incur high costs. Instead, it places the cost-versus-decarbonization decision in the hands of lawmakers who control it via three parameters: DCA, maximum $/tCO₂ decarbonization cost, and minimum outdoor temperature supported by new heat pumps. Obviously, lawmakers would keep these parameters at politically acceptable levels. And as evidence of climate change increases, decarbonization would likely increase via these parameters.

The National HVAC Communications and Control System

The suggested framework requires standardized communications between national computers, regional computers, and buildings. This does not exist. In other words, software and standards need to be developed, prototyped, approved by standards bodies, supported by HVAC manufacturers, and required by law. And getting this done in a reasonable period would be a great challenge. Therefore, government and/or foundations should consider generously funding the development of next-generation national HVAC communications and control at their earliest convenience.

Building heat politics

To keep building decarbonization politically feasible, nations should consider separating new laws into two parts:

A) Require new equipment to support electricity-based heating, to some extent, with gas furnace optional. And require communication with the regional computer.

B) Require consumers to incur additional DCA costs to reduce CO₂ ($/square foot/year), with a maximum decarbonization cost ($/CO₂).

Both Parts A and B are likely to be politically acceptable, since Part A by itself operates at the lowest cost and Part B operates at the politically acceptable cost. Two parts are helpful, as Part A can be sold as “operates at the lowest cost” and Part B involves periodic consideration of decarbonization versus additional cost.

One might look at legislation blocking natural gas from buildings; however, in many cases, this is not politically feasible due to increased fuel cost, equipment cost, and, in some cases, increased CO₂ emissions.

Building heat economics to decarbonize

The following table shows the cost to heat a building via different methods in units of residential, retail dollars ($) per gigajoule (GJ) of building heat. We look at Utah with cheap energy and California with more costly energy. And we look at a very cold –10˚C (14˚F) day, a cold 0˚C (32˚F) day, and a brisk 10˚C (50˚F) day. We work with residential retail prices from 2019, since pre-COVID prices were more stable.

The above table shows CO₂ emissions relative to burning natural gas in a 90% efficient gas furnace. For example, a value of 0.50 refers to emitting half as much CO₂ as that done by the gas furnace. When one switches from a gas furnace to an electric heat pump, CO₂ emissions increase 2% when very cold (–10˚C), decrease 32% when cold (0˚C), and decrease 49% when brisk (10˚C). This assumes electricity is made with a 44% efficient power plant that burns natural gas (no green electricity).

As one can see, a gas furnace tends to cost less on very cold days; and an electric heat pump tends to cost less on warmer days. Heat pump equipment that supports less than 5˚C (41˚F) outdoor temperatures tends to be costly; therefore, if a building can heat via a heat pump, it might supplement with the gas furnace on colder days.

In many cases, the low-cost option (i.e., gas or electric) also emits less CO₂, and there is no reason to switch from the lowest-cost operation. This is because CO₂ is low when heat-pump efficiency is high, and the cost is also low when efficiency is high. In other words, cost and CO₂ emissions are both driven by heat-pump efficiency, and this efficiency is inversely proportional to outside air temperature.

The above table has identified one case (i.e., California 0˚C) where one can switch from gas furnace to electricity, at increased cost, to decrease total CO₂. In this case, the decarbonization cost is $34/tCO₂ if green electricity is in saturation and $108/tCO₂ if it is not. Therefore, if lawmakers set the maximum decarbonization cost at $50/tCO₂, forced switching would not occur unless green electricity was in saturation.

Laws of economics dictate that price follows consumption. Subsequently, the price of electricity would probably increase, and the gas price would probably decrease if many buildings switched from gas to electricity. This would need to be taken into consideration when designing a national DCA system that is accepted by most regions.

The above table shows how a gas furnace compares with an electrical heat pump; however, actual numbers will vary depending on gas price, electricity price, outdoor temperature, and equipment efficiency. The spreadsheets in this article are open-source, which means anyone can download and modify them at no charge.

Decarbonization competition

If a building decarbonization strategy is looking for broad political support, it must compete with other decarbonization initiatives. For example, if one initiative decarbonizes at $250/tCO₂ and another at $10/tCO₂, lawmakers might favor the one that reduces CO₂ 25× more for the same money.

Decarbonization opportunities that compete with building heat policy are listed in the 2022 IPCC Mitigation Report and are summarized below. Click here for a high-resolution version.

This illustrates dozens of things one can do to reduce CO₂. And for each one, it shows the cost in $/tCO₂. Also, it shows the amount of CO₂ one can reduce at this cost, in units of tons of CO₂ each year.

Decarbonization opportunities that cost $0 to $20/tCO₂ are shown in light orange, and opportunities that cost $20 to $50/tCO₂ are shown in dark orange, for example. The width of each horizontal bar indicates how many tons per year the world can reduce at each decarbonization cost.

Thermal storage

Thermal storage typically entails placing a tank of water in a building, heating or cooling it with cheap and/or clean energy (e.g., low CO₂), and then using it later when energy is less cheap and/or less clean. For example, if a wind farm at 3 a.m. is discarding electricity due to saturation (e.g., no natural gas is being burned to produce electricity), then one might use that to store heat or cold and use it later when electricity is being created by burning natural gas.

Reduce cost of installing ground source

Underground soil is typically at a ~14˚C (58˚F) temperature, and if one embeds pipes into that soil and circulates water through the pipes, they can get water at that temperature. If one circulates this water through a heat pump, they can reduce electricity consumption approximately twofold when heating and cooling. This technique is referred to as a “ground-source heat pump” (GSHP), and it has two disadvantages: It consumes land, and installing underground piping is costly (e.g., $20k per house).

To reduce the cost of GSHP, nations should consider generously funding the development of machines that automate the installation of underground piping.

One might prefer to have private companies develop machines; however, investors might consider this “too big,” “too many moving parts,” or “too much risk.” Subsequently, to move this forward, governments and/or foundations might need to support initial development.

Power generation is complicated

The grid is often powered by multiple sources. For example, at any given time, a city might receive 20% of its electricity from nuclear power, 3% from solar power, 7% from wind power, and 70% from natural gas-based power stations. Solar farms produce electricity when sunny, wind farms produce electricity when windy, and other sources tend to be less intermittent.

If an HVAC system switches from gas to electricity, the building’s consumption of electricity increases and at least one power source on the grid increases its output. Typically, only one increases output due to several considerations, such as cost. Also, output from a solar farm is not likely to change, as it is set by the sun and its electricity is already being consumed. Alternatively, if the solar farm is in “saturation” (i.e., discarding green electricity due to having too much), then it could increase its output instead of discarding. And then one could transition a building from gas to electricity-based heat, with no CO₂ emissions at the source.

In many cases, switching a building from gas to electric heat causes a physical increase in the number of CO₂ molecules emitted from natural-gas–fired power plants, even if the grid receives some power from renewables. In other words, in many cases, one must fully decarbonize the grid to significantly decarbonize the heating of buildings.

Power company computers can easily calculate how many CO₂ molecules are physically emitted into the atmosphere due to a building running on electric heat instead of a gas furnace at any given moment. And this information could be displayed on a phone or web browser to help the building owners to better understand costs and CO₂ emissions.

Decarbonize: Gas furnace vs. electric heat pump

Buildings typically obtain heat from a gas furnace or an electric heat pump, and it is not possible to generalize as to which of these costs less or emits less CO₂. This is due to multiple factors that vary over time and place. For example, the efficiency of a heat pump is a function of outside air temperature. And the spot price of both natural gas and electricity vary throughout the day and between regions. Even the average price varies significantly. For example, in 2019, the average residential retail price of electricity was $0.08/kWh in Utah, and $0.17/kWh in nearby California. And the average price of natural gas was 65% higher in California.

Gas furnace equipment often costs little, as it is a physical metal chamber with few moving parts. Alternatively, a heat pump is more complicated and therefore more costly. However, a heat pump is included inside an air conditioner and therefore can also do heating, at little additional equipment cost.

Unfortunately, the size of the heat pump needed on a very cold day tends to be larger than that needed on a hot summer day. For example, the typical air conditioner on a 38˚C (100˚F) summer day lifts heat 14˚C (e.g., 24˚C to 38˚C), and the typical heating system on a –18˚C (0˚F) winter day lifts heat 42˚C (e.g., –18˚C to 24˚C). The latter is 3× further and therefore requires a much larger and more costly heat pump. To reduce the need for costly heat pumps, one can operate a gas furnace and heat pump concurrently on very cold days, or operate an electric heat pump only when warmer (e.g., T_outside ≥ 5˚C, 41˚F) and operate a gas furnace when colder.

When upgrading the existing large commercial buildings to support electric heat, one often incurs obstacles that increase costs. Two examples are as follows:

• New equipment does not physically fit into the existing space, and mounting on the roof requires expensive structural reinforcement.
• The previous system heated water to a high 80˚C temperature with a gas-fired boiler in the basement and pumped it to heat exchangers inside air ducts throughout the building. Unfortunately, heat pumps are inefficient and costly when supporting higher output temperatures. As a remedy, one might circulate lower-temperature water (e.g., 50˚C) that is heated with a heat pump on mildly cold days (e.g., T_outside ≥ 5˚C) and circulate higher-temperature water (e.g., 80˚C) that is heated with natural gas on colder days (e.g., T_outside < 5˚C).

To contend with retrofit cost challenges, new laws might require buildings to support a minimal heat level via electric heat pump, with supplementation via gas furnace as optional. The required level might increase over a period of time as concern over climate change and equipment improves. For example, the initial law might require buildings to support running exclusively on electricity when outdoor temperatures exceed 5˚C (41˚F). In many regions, this is most of the time when heating a building, and lifting heat from 5˚C to 24˚C via a heat pump is easy. Also, lawmakers might look at the additional heat-pump equipment costs required for lower outdoor temperatures, such as 0˚C (32˚F) or –5˚C (23˚F).

Building heat math

Typical modern gas furnaces are 90% efficient, which means 10% of energy is lost when hot exhaust exits the building.

Typical heat-pump efficiency is 200% when the outdoor temperature is very cold (e.g., –10˚C, 14˚F) and 400% when milder (e.g., 10˚C, 50˚F). These values are greater than 100% because a heat pump moves heat instead of creating it. If electrical power is generated by burning natural gas, then one multiplies these values by the efficiency at the power plant (e.g., 35% to 55%) to get total efficiency. For example, if power-generation efficiency is 44% (U.S. average) and heat-pump efficiency is 200%, then the total is 88% (44% × 200%). This is less than the typical 90% gas furnace, which means the electric option would emit slightly more CO₂. Alternatively, if power generation is 44% and heat pump is 350%, then total is 154% (44% × 350%), and heating with electricity decreases CO₂ by 42% (1 – (1/154%) ÷ (1/90%)).

Going electric sometimes reduces CO₂, but not always. And accurately calculating total emissions at any given time requires communication between the building and the grid.

Tax is not the lowest-cost way to decarbonize

One might consider taxing fuel or taxing carbon instead of requiring decarbonization via demand-side communication and control. However, tax entails the following disadvantages:

• Many consumers ignore price signals (“inefficient”).
• Consumers are penalized for typical behavior (“punitive”).
• One must increase the price considerably to change behavior (i.e., low price elasticity of demand).
• It does not minimize CO₂ emissions for each dollar spent beyond the lowest-cost option.

Tax is politically unpopular and is often not the lowest-cost way to decarbonize.

Conclusion

It is easier for each building to operate at the lowest cost and let other buildings spend money to reduce CO₂. This is consistent with observed behavior and economic theory. Therefore, to decarbonize, it must be required by law. And doing so at the lowest cost and in a way that is likely to be politically popular requires:

• Standardized communications between buildings, regional computers, and national computers
• Laws requiring gas-based heating equipment to eventually be replaced with equipment that supports electricity-based heating to some extent, with additional gas support optional
• Laws that require consumers to incur more costs to decarbonize at a level set periodically by national lawmakers
• More R&D to reduce costs further, such as the development of machines that automate the installation of ground source, development of window thermal cover standards, development of fan/damper standards, and development of building device communications standards
• Decarbonization of electrical power generation