With Subsidies, Pollution-Preventing Heat Pump Upgrades Can Be Affordable for Low-Income Bay Area Households

Gas appliances in homes and buildings are responsible for more lung-damaging nitrogen oxide (NOx) pollution than the Bay Area’s passenger cars, and they contribute to the region’s failure to meet legally binding federal air quality standards that protect health. To tackle this underappreciated driver of pollution, the Bay Area Air Quality Management District (Air District) is gearing up to vote on a first-in-the-nation standard that would phase out the sale of new fossil fuel heating appliances, laying the groundwork for a widespread transition to pollution-free electric heat pumps in homes.


Heat pumps are highly efficient electric appliances that pull double duty, providing heating and cooling by absorbing heat from a source, such as the air, and transferring that heat into or out of a home. Heat pumps are two to four times more efficient than gas furnaces.


The Air District’s proposed standard would apply to Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, and Santa Clara counties, plus southern portions of Solano and Sonoma counties. If it is approved on March 15, new furnaces and water heaters sold in these counties will need to be pollution-free within a decade, beginning in 2027 for single-family residential water heaters, 2029 for residential furnaces, and 2031 for multifamily and commercial water heaters.


For communities of color and low-income communities living on the frontlines of the Bay Area’s air quality crisis, the health benefits of a transition to electric heat pumps will be immense. The Air District estimates that by reducing lung-damaging air pollutants, its appliance standard will prevent 15,000 asthma symptom incidents and avoid up to 85 premature deaths every year.


Policymakers must ensure that the cost of this transition away from fossil fuel heat does not fall on people already struggling with the Bay Area’s staggeringly high housing costs. Fortunately, the federal government and the State of California have already approved billions in subsidies to support households in accessing heat pumps. The subsidies will become available later this year.


SPUR analyzed the net cost of heat pump conversion for low-income, single-family households and for owners of multifamily buildings that serve low-income households. We found that, with the help of current and soon-to-be-available subsidies, both could actually save money with this conversion when they are faced with replacing gas appliances that are at the end of their useful life. This cost savings benefit is in addition to operational cost savings — which is about $120 per year for single-family homes in PG&E territory — and to health and climate benefits.


The true cost of heat pump conversion reflects subsidies and the baseline cost of replacing old appliances.

To understand the true cost of converting to heat pumps, it’s key to remember that property owners are already responsible for the cost of acquiring a new appliance when their old one breaks. The net cost of converting to a heat pump is the cost of that pump minus both the baseline cost of replacing a gas appliance like-for-like and the incentives available for heat pumps.


Net Cost of Heat Pump Conversion:

Cost of Heat Pump minus Replacement Cost of Gas Appliance minus Subsidy


The Air District provided a thorough economic analysis of the proposed rules in its December 2022 staff report. However, the Air District’s analysis didn’t consider the generous clean appliance incentives already approved by the state and federal government. The federal government’s new High-Efficiency Electric Home Rebate program (HEEHR) subsidizes low-income households up to $8,000 for a new heat pump for home heating and cooling, $1,750 for heat pump water heaters, and $4,000 for a new electric panel. Bay Area households that stack incentives from HEEHR with those from California’s TECH program and the Bay Area’s BayREN program could receive more than $20,000 in subsidies. We provide a more complete explanation of our calculations in our Methods of Net Cost Analysis.


In short, our calculations show that, even with the expense of electrical panel upgrades, the cost savings of heat pump conversions are real and sizable when subsidies are factored in.


With subsidies, low-income households will often save by upgrading to electric heat pumps.

Using the Air District’s evaluation of costs as a starting point, SPUR ran the numbers to estimate the net cost of converting from gas appliances to heat pumps after applying incentives for low-income households and multifamily building owners. To qualify for the greatest benefits in the HEEHR program, a household must earn less than 80% of the median income in its area. For the owner of a multifamily building to qualify, at least half the building’s units must be occupied by low-income households.


Our analysis found that by taking advantage of already-approved state and federal subsidies, low-income homeowners and multifamily building owners pay less upfront to upgrade to clean electric heat pumps than they would to replace their gas appliances like-for-like. In addition, households that upgrade to heat pumps will gain access to efficient cooling — a benefit addressing a major gap in climate resiliency as heat waves become more common with climate change.


Here’s the average cost breakdown for low-income single-family and multifamily properties that replace polluting gas systems with clean electric heat pumps, while taking advantage of HEEHR, TECH, and BayREN incentives:


  • Low-income, single-family households that convert from gas furnaces and tank hot-water heaters to heat pumps will save $8,000 in upfront costs.
    • Replacing a furnace with a heat pump for home heating and cooling will save $6,000. Compared with purchasing both a new gas furnace and an air conditioner, buying a heat pump that both heats and cools saves $17,000.
    • Upgrading to a heat pump water heater will save $2,000.
    • An electrical panel upgrade will cost $300 after rebates.


  • Owners of low-income multifamily buildings that convert each unit from gas furnaces and tank hot water heaters to heat pumps will save $7,000 per unit in upfront costs.
    • Switching from a furnace to a heat pump will save $5,000 per unit. Compared with buying a new gas furnace and air conditioner, buying a heat pump that both heats and cools saves $17,000 per unit.
    • Upgrading to heat pump water heaters will save $2,000 per unit.
    • An electrical subpanel upgrade will cost $0 per unit after rebates.


The heat pump incentive programs we included in our analysis are three of the biggest, but many more programs are available. They include at least 10 incentive programs offered by Bay Area cities and local energy providers and additional offerings from the California Public Utilities Commission and California Energy Commission. For example, Sonoma Clean Energy offers households $6,000 to install heat pumps for space heating and hot water; households can add that incentive to HEEHR, TECH and BayREN incentives. In addition to HEEHR, the federal Inflation Reduction Act has rolled out three other incentive programs as well as substantial tax credits. The tax credits and most of the incentives are available to households at any income level.


Although BayREN offers incentives to install gas appliances that are more efficient than the gas appliances they will replace, these incentives are modest, amounting to just $700 for furnaces and water heaters. They are far less generous than heat pump incentives, and they are likely to be phased out in the next 10 years.


Our findings paint an encouraging picture of the progress the State of California and the federal government have made in closing the affordability gap on clean appliances, especially for low-income households. As the market for heat pumps grows, installation costs are likely to fall, which could bolster savings.


The proposed appliance standard will avoid locking in decades of air pollution from appliances.

Appliances often last 20 or more years. Replacing fossil fuel appliances that have reached their end of life with a clean alternative such as a heat pump will avoid locking in decades of air pollution. Even with adoption of Air District’s standard, the transition away from fossil fuel appliances will take decades because only 5% of appliances break in a single year. Nonetheless, by establishing a sunset date for the installation of new gas appliances, the standard will represent a major step toward eliminating a key source of air pollution.


Committing to an appliance standard today will give manufacturers and policymakers the signal they need to scale up the supply chain and financial support for clean appliances. The proposed standard adds up to cost savings for low-income households as well as to health and climate benefits for all.


To review our methods and calculations, please see the Methods for Net Cost Analysis.

Read our methodology