Explainer: Electrification & heat pumps — the concepts, the economics, and the decision checklist

Heat pumps now represent the fastest-growing segment of building decarbonization technology globally, with the International Energy Agency reporting that global heat pump sales exceeded 20 million units in 2024—a 250% increase from 2019 levels. This exponential growth reflects a fundamental shift in how policymakers, utilities, and building owners approach the challenge of eliminating fossil fuel combustion from space heating and cooling. Understanding the retrofit workflows, grid integration challenges, and incentive structures that drive adoption is essential for anyone navigating the transition from combustion-based heating to electrified thermal systems.

Why It Matters

Buildings account for approximately 30% of global final energy consumption and roughly 26% of global energy-related CO₂ emissions when including indirect emissions from electricity and heat production. Within buildings, space heating and domestic hot water represent the largest end-use energy demand, consuming over 50% of building energy in temperate and cold climates. The decarbonization of building heating therefore represents one of the most consequential—and most challenging—components of global climate mitigation strategies.

The significance of heat pump adoption extends beyond emissions reduction. In 2024, the European Union installed 3.2 million heat pumps, bringing the total stock to over 24 million units. The United States saw heat pump shipments exceed gas furnace shipments for the first time in 2023, a trend that continued through 2024 with heat pumps representing 53% of all residential heating equipment sold. China, meanwhile, deployed over 40 million heat pump units in 2024 alone, primarily for combined heating and cooling applications.

These deployment figures carry profound implications for energy security. Heat pumps reduce dependence on imported fossil fuels—a strategic priority that gained urgency following the 2022 energy price shocks. The IEA estimates that if the current heat pump deployment trajectory continues, global natural gas demand for building heating could decline by 21 billion cubic meters annually by 2030, equivalent to the entire residential gas consumption of Germany.

From an economic perspective, heat pump adoption creates jobs across manufacturing, installation, and maintenance. The European Heat Pump Association estimates that the sector supports over 250,000 jobs in Europe alone, with projections suggesting this could triple by 2030 under accelerated deployment scenarios.

Key Concepts

Electrification refers to the systematic replacement of fossil fuel-based energy systems with technologies powered by electricity. In the building sector, electrification primarily involves substituting gas boilers, oil furnaces, and propane heating systems with electric heat pumps, resistance heating, or district heating connections. The climate benefit of electrification depends critically on the carbon intensity of the electricity grid—a heat pump powered by coal-fired electricity may produce more emissions than a high-efficiency gas furnace, while the same heat pump on a renewable-dominated grid delivers near-zero operational emissions.

Heat Pumps are devices that transfer thermal energy from a lower-temperature source to a higher-temperature sink using a refrigeration cycle. Unlike combustion heating, which converts fuel to heat at a maximum theoretical efficiency of 100%, heat pumps move existing heat rather than generating it, enabling coefficients of performance (COP) typically ranging from 2.5 to 5.0. This means a heat pump can deliver 2.5 to 5.0 kilowatt-hours of heating for every kilowatt-hour of electricity consumed. Air-source heat pumps (ASHPs) extract heat from outdoor air, ground-source heat pumps (GSHPs) use subsurface thermal reservoirs, and water-source variants utilize lakes, rivers, or aquifers.

CAPEX (Capital Expenditure) represents the upfront investment required to purchase and install a heating system. Heat pump CAPEX varies widely by technology and application: residential ASHP installations typically range from $4,000 to $12,000, while GSHP systems with ground loop installation may cost $15,000 to $35,000. Commercial and industrial heat pump systems scale accordingly, with large-scale installations reaching millions of dollars. Understanding CAPEX in relation to operating cost savings and available incentives is essential for project economics.

HVDC (High-Voltage Direct Current) transmission enables efficient long-distance electricity transport, reducing losses compared to alternating current (AC) systems. While not directly related to heat pump technology, HVDC infrastructure is critical for grid-scale electrification because it allows renewable energy generated in remote locations (offshore wind, desert solar) to reach urban heating loads. Major HVDC projects linking Scandinavian hydropower to continental Europe or connecting offshore wind to coastal cities directly enable the clean electricity supply that makes heat pump deployment climate-beneficial.

PPA (Power Purchase Agreement) is a contract between an electricity generator and a buyer that specifies the terms of electricity supply, typically over 10-25 years. Corporate PPAs allow building owners and industrial facilities to secure renewable electricity at fixed prices, hedging against electricity market volatility while ensuring low-carbon power supply for electrified heating systems. Virtual PPAs enable organizations to claim renewable electricity attributes without physical delivery, supporting corporate sustainability goals.

DER (Distributed Energy Resources) encompass small-scale electricity generation and storage assets located at or near consumption points. For heat pump deployment, DERs include rooftop solar photovoltaic systems, battery storage, and smart thermostats that enable demand response. Integrating heat pumps with DERs can reduce grid stress, lower electricity costs through self-consumption, and provide flexibility services to grid operators.

What's Working and What Isn't

What's Working

Incentive stacking in the United States has dramatically improved heat pump economics. The Inflation Reduction Act (IRA) provides tax credits of up to $2,000 for qualified heat pump installations, while the High-Efficiency Electric Home Rebate Act offers point-of-sale rebates up to $8,000 for low-and-moderate-income households. Many states layer additional incentives: New York's EmPower+ program covers full installation costs for income-qualified residents, while Massachusetts offers rebates of $10,000 or more for heat pump conversions through Mass Save. This incentive stacking reduces payback periods from 10-15 years to 3-5 years in many cases.

Nordic market transformation demonstrates what scaled adoption looks like. Norway now heats over 60% of buildings with heat pumps, while Sweden's heat pump penetration exceeds 40%. This transformation occurred over two decades through consistent policy: carbon taxes on heating fuels, electricity price structures that favor heat pumps, and building codes requiring high efficiency. Critically, Nordic countries invested in installer training and supply chain development, ensuring deployment capacity matched policy ambition.

Cold-climate heat pump technology advancement has eliminated the historical barrier of performance degradation at low temperatures. Modern variable-speed heat pumps from manufacturers like Mitsubishi, Daikin, and Carrier now maintain rated capacity down to -15°C and continue operating at reduced capacity to -25°C or below. The Northeast Energy Efficiency Partnerships (NEEP) maintains a cold-climate heat pump specification requiring COP >1.75 at -15°C, with over 100 qualifying products now available. This technological progress has opened northern markets previously considered unsuitable for air-source heat pumps.

Utility heat pump programs are accelerating adoption through on-bill financing and leasing models. Utilities like Eversource, National Grid, and Pacific Gas & Electric offer programs where customers pay no upfront costs, instead repaying installation through monthly utility bill charges. These programs address the CAPEX barrier that prevents many homeowners from adopting heat pumps, particularly in rental housing where split incentives between landlords and tenants impede investment.

What Isn't Working

Grid infrastructure limitations present a binding constraint in many regions. Residential electrical panels typically provide 100-200 amp service, but heat pump installations—especially when combined with electric vehicle charging and electric cooking—can require upgrades to 400-amp service. Panel upgrades alone cost $2,000-$5,000, while distribution transformer upgrades (when multiple homes on a circuit electrify simultaneously) can cost utilities $15,000-$50,000 per transformer. In the UK, Distribution Network Operators report that 40% of low-voltage networks will require reinforcement by 2035 under current electrification trajectories.

Installer workforce shortages constrain deployment velocity. The European Heat Pump Association estimates the EU needs 500,000 trained heat pump installers by 2030, up from approximately 150,000 today. Similar shortages exist in North America, where many HVAC contractors lack heat pump expertise due to historical market dominance of gas furnaces. Training programs are scaling rapidly—the Building Performance Institute certified 40% more heat pump installers in 2024 than 2023—but workforce development remains a bottleneck.

Refrigerant regulatory uncertainty creates investment hesitation. Most heat pumps use hydrofluorocarbon (HFC) refrigerants with high global warming potential. The Kigali Amendment to the Montreal Protocol mandates HFC phase-down, while the EU F-gas Regulation requires transition to low-GWP alternatives by 2030. Manufacturers are shifting to propane (R-290) and other hydrocarbon refrigerants, but the transition imposes redesign costs and safety considerations. Some building owners delay heat pump purchases awaiting clarity on which refrigerant platforms will dominate.

Electricity rate structures disadvantage heat pumps in many jurisdictions. Where electricity prices significantly exceed gas prices on an energy-equivalent basis, heat pump operating costs may exceed gas heating despite superior efficiency. Germany exemplifies this challenge: electricity prices averaging €0.35/kWh versus natural gas at €0.10/kWh create difficult heat pump economics despite high carbon taxes. Rate redesign—including time-of-use pricing that rewards flexible heating loads—is essential but politically complex.

Key Players

Established Leaders

Daikin Industries (Japan): The world's largest HVAC manufacturer, Daikin commands approximately 20% global heat pump market share. The company produces residential, commercial, and industrial heat pumps across all technology types, with particular strength in variable refrigerant flow (VRF) systems for large buildings.

Mitsubishi Electric (Japan): A pioneer in ductless mini-split heat pumps, Mitsubishi Electric developed cold-climate technology that enabled heat pump deployment in previously challenging markets. The company's Hyper-Heating products maintain capacity at temperatures below -25°C.

Carrier Global Corporation (United States): Part of the legacy heating and cooling industry, Carrier has invested heavily in heat pump technology development. The company's commercial heat pump portfolio serves large buildings, while residential products compete across North American and European markets.

Viessmann Climate Solutions (Germany): Acquired by Carrier in 2023, Viessmann is a leading European heat pump manufacturer with deep expertise in hydronic systems. The company's integration of solar thermal, heat pumps, and energy storage positions it for whole-building energy solutions.

Bosch Thermotechnology (Germany): A major supplier of heating systems globally, Bosch has pivoted aggressively toward heat pumps, announcing plans to phase out gas boiler manufacturing in Europe. The company's air-to-water heat pump range targets the residential retrofit market.

Emerging Startups

Gradient (United States): Developing a window-mounted heat pump that installs without professional HVAC work, Gradient targets the rental housing market where traditional heat pump installation faces landlord-tenant coordination barriers. The company raised $32 million in 2024 to scale manufacturing.

Quilt (United States): A ductless heat pump company focusing on design aesthetics and smart home integration, Quilt aims to make heat pumps desirable consumer products rather than utilitarian appliances. The startup raised $33 million in Series A funding in 2024.

Tepeo (United Kingdom): Developing high-temperature heat storage systems (zero-emission boilers) that store cheap off-peak electricity as heat, Tepeo's technology enables homes to electrify without upgrading electrical infrastructure. The company raised £10 million in 2024.

Harvest Thermal (United States): Combining water heating and space heating in an integrated heat pump system with intelligent thermal storage, Harvest Thermal optimizes electricity consumption around grid signals and time-of-use rates.

Aira (Sweden): A vertically integrated heat pump installation company, Aira handles manufacturing, sales, installation, and maintenance under one roof. Backed by $300 million in funding, the company aims to industrialize residential retrofit delivery.

Key Investors & Funders

Breakthrough Energy Ventures: Bill Gates's climate technology investment fund has made multiple heat pump-related investments, including backing companies developing next-generation refrigerants and advanced heat pump controls.

DCVC (Data Collective): This venture capital firm has invested in building decarbonization technologies, including Gradient and other startups addressing HVAC electrification.

The U.S. Department of Energy: Through the Buildings Technologies Office and the Inflation Reduction Act implementation, DOE provides billions in grants, loans, and tax incentives for heat pump manufacturing, deployment, and workforce development.

European Investment Bank: The EIB has committed over €10 billion to energy efficiency financing, including dedicated heat pump deployment facilities supporting residential and commercial installations across EU member states.

Clean Energy Finance Corporation (Australia): CEFC has deployed over AUD $2 billion in building efficiency investments, including heat pump financing programs for residential and commercial customers.

Examples

Netherlands: Natural Gas Phase-Out — The Dutch government mandated that all new buildings from 2018 must connect without natural gas, while existing buildings must transition off gas by 2050. By 2024, over 400,000 Dutch homes had installed heat pumps, with hybrid heat pump adoption accelerating as a transitional technology. The Netherlands gas grid operator Gasunie is actively planning network decommissioning, demonstrating how coordinated policy across gas phase-out and heat pump incentives accelerates transformation. Heat pump installations in the Netherlands increased 42% year-over-year in 2024.
Maine, USA: Income-Tiered Incentive Success — Efficiency Maine's heat pump programs have made the state a national leader, with one heat pump installed for every four households. The program offers $2,000-$4,000 rebates for moderate-income households and up to $8,000 for low-income residents. Between 2019 and 2024, Maine added over 200,000 heat pumps to its building stock. Notably, the program emphasizes contractor training—requiring installer certification to participate—ensuring installation quality supports long-term performance.
China: Industrial Heat Pump Scaling — Chinese manufacturers have achieved remarkable cost reductions, with residential heat pump prices falling below $1,500 for basic units. Beyond residential applications, China is deploying industrial heat pumps for district heating, with projects in Beijing and Tianjin using large-scale water-source heat pumps to deliver heat to millions of residents. The Haidian District project in Beijing uses sewage-source heat pumps to extract thermal energy from wastewater, providing heating for 1.2 million square meters of building space with carbon emissions 75% lower than coal-fired alternatives.

Action Checklist

FAQ

Q: Do heat pumps work in extremely cold climates? A: Yes, modern cold-climate heat pumps operate effectively at temperatures well below -20°C. Variable-speed compressor technology and enhanced heat exchanger designs have transformed cold-climate performance. The key is selecting equipment rated for cold-climate operation—look for NEEP Cold Climate Heat Pump Specification compliance or equivalent. At extreme temperatures, COP declines but remains above 1.0, meaning heat pumps still outperform electric resistance heating. Many cold-climate installations include backup resistance heating that activates only during temperature extremes, ensuring reliable comfort without fossil fuel dependence.

Q: What is the typical payback period for a heat pump investment? A: Payback periods vary significantly based on fuel prices, electricity rates, incentive availability, and climate zone. In regions with high natural gas prices and strong incentives, paybacks can be as short as 3-5 years. In areas with cheap gas and limited incentives, paybacks may extend to 10-15 years. However, evaluating heat pumps purely on payback oversimplifies the decision: heat pumps also provide air conditioning (typically more efficiently than separate AC systems), improve indoor air quality by eliminating combustion, reduce carbon emissions, and increase property values. Life-cycle cost analysis incorporating all these factors typically favors heat pumps even where simple payback appears long.

Q: How do heat pumps affect electricity grid demand? A: Heat pump deployment increases electricity demand, particularly during winter peak periods when heating loads are highest. This presents both challenges and opportunities. Challenges include potential distribution transformer overloading and generation adequacy concerns during cold snaps. Opportunities include the flexibility inherent in thermal mass—buildings can be pre-heated during off-peak hours, then coast through peak periods with reduced heat pump operation. Smart thermostats and utility demand response programs can orchestrate this flexibility, turning heat pump fleets into grid assets rather than liabilities. Studies by Rocky Mountain Institute and others suggest that electrification with managed charging and heating can reduce total system costs compared to maintaining parallel gas and electric infrastructure.

Q: Should I choose an air-source or ground-source heat pump? A: Air-source heat pumps (ASHPs) cost less upfront and suit most residential applications. Ground-source heat pumps (GSHPs) offer higher efficiency (COP typically 3.5-5.0 versus 2.5-4.0 for ASHPs) and more consistent performance because ground temperatures vary less than air temperatures seasonally. GSHPs make sense when: (1) the site has adequate land for horizontal ground loops or suitable geology for vertical boreholes; (2) the building has high heating loads justifying the premium; (3) the owner values maximum efficiency and long equipment life (GSHP components last 25-50 years versus 15-20 for ASHPs). For most residential retrofits, ASHPs provide the best value. Large commercial, institutional, and multifamily buildings increasingly choose GSHPs for long-term operational savings.

Q: What happens to my existing ductwork if I switch to a heat pump? A: If your home has existing forced-air ductwork in good condition, a ducted air-source heat pump can use that infrastructure directly. This simplifies installation and reduces costs. However, ductwork designed for gas furnaces may be undersized for heat pumps, which deliver air at lower temperatures and higher volumes. Contractors should evaluate duct sizing and sealing; duct modifications or sealing can improve heat pump performance significantly. Alternatively, ductless mini-split heat pumps bypass ductwork entirely, with individual indoor units in each zone. Ductless systems offer room-by-room temperature control and eliminate duct losses (which can waste 20-30% of heating energy in poorly sealed systems), but require more indoor units and associated aesthetic considerations.

Sources

International Energy Agency. (2024). Heat Pumps: Tracking Clean Energy Progress. Paris: IEA Publications. Available at: https://www.iea.org/energy-system/buildings/heat-pumps
European Heat Pump Association. (2025). European Heat Pump Market and Statistics Report 2024. Brussels: EHPA.
U.S. Energy Information Administration. (2024). Residential Energy Consumption Survey: Space Heating. Washington, DC: EIA.
Northeast Energy Efficiency Partnerships. (2024). Cold Climate Air Source Heat Pump Specification. Lexington, MA: NEEP.
Rocky Mountain Institute. (2024). The Economics of Electrifying Buildings. Boulder, CO: RMI.
Air-Conditioning, Heating, and Refrigeration Institute. (2025). Historical Shipment Data: Central Air Conditioners and Heat Pumps. Arlington, VA: AHRI.
BloombergNEF. (2024). Building Decarbonization Outlook. New York: Bloomberg Finance LP.