Sustainability Spotlight: Heat Pump Water Heaters & Electrification

Sustainability Spotlight: Heat Pump Water Heaters & Electrification

By Frank Schwamborn

Another day, and another meeting where sustainability was on the value engineering chopping block. This time, the conversation was about cutting the central hot water heat pump and sticking with a common gas water heater. Recently, building electrification has been a hot topic.  Back in May, the City of Los Angeles passed a new ordinance for all new buildings to be all-electric and emission-free, while several other cities and organizations throughout California have committed to a mixed fuel paradigm. SoCalGas has a list of cities that would resist adopting electrification requirements before a state-wide requirement came down. Electrification is on the minds of a lot of different people. And they all want to know how much it is going to cost them. 

However, never mind the politics. Let’s talk about crunching numbers to make a simple business case for the heat pump water heater. I organized a spreadsheet to back up my argument. Let us start with assumptions and input variables. 

Variables

There is a lot to break down here:

1. We need to know roughly how much hot water we need a year which is described by Equivalent Full Load Hours (EFLHs) and expected water demand in GPM.
2. I got energy rates which I sourced from the EIA for Southern California. I also have rates from my local utility company SoCalGas & Southern California Edison, and they were not too far off the EIA.
3. UEF is just a fancy word for efficiency, but I grabbed that from typical EnergyStar appliances. Note: Heat Pump UEF is weather dependent; freezing weather will lower the equipment efficiency.
4. Next, I used standard escalations and discounting rates. Ultimately, all of the parameters fall in a normal range. But I’m excited to work with my partners to apply this tool to more projects and make it specific to them.
5. Of course, I had to calculate the carbon emissions and the economic cost of that carbon. This is where the emission rate, site-to-source ratio, and cost of carbon come into play.

Energy Results

Now, with some straightforward analysis, we get the following results from a yearly perspective.

The heat pump water heater has the lowest energy consumption, energy cost, and CO2 emissions. Energy consumption isn’t a surprising result. The physics are clear: combustion heat transfer will never beat a heat engine cycle. However, 77% savings is going to fluctuate depending on your weather. The heat engine cycle and its efficiency are dependent on outdoor temperatures. The colder your winters, the lower you should expect in efficiency. (Although, given the current trajectory of climate change, you can expect warmer winters on average.)

When it comes to energy economics, the cost difference is sensitive to energy prices. Owners have a lot less control over future gas prices. However, electricity can be a lot more forgiving if your building has the right infrastructure. A building with PV & Batteries (a new requirement in the 2022 California Energy Code) can be used to hedge against spiking electricity prices. Ultimately, the heat pump efficiency wins out and gives users a lower operating cost. The heat engine cycle is critical to this. For example, in contrast, it might be jarring how expensive it can be to operate a tankless electric water heater. However, even with nearly 100% efficiency, high electricity prices will drive up the operating cost, so don’t take long hot showers if you go this route.

What might be the most surprising result is the CO2 emissions between the water heaters. With a 77% reduction in energy, how are we getting a 9% reduction in CO2 emissions? This can be explained by one simple question: How clean is your electrical grid? California requires all its retail electric utilities to disclose their power mix. The cleaner and closer your power is generated, the fewer CO2 emissions your electricity produces. This is a keystone to electrification. It’s the same argument people bring up when comparing a traditional gas car versus an EV.

When we consider building CO2 emissions, we need to include the wasted energy to get electricity from a distant power plant to your building. Therefore, it’s key to produce clean local electricity, and I advocate for communities to take ownership of their power to control costs. Fortunately, in California, the state is making large moves toward a cleaner grid where we will be confident electrification will result in lower CO2 emissions. On a pound-per-pound basis, the SCE grid is 1.46 times more carbon intensive if you ignore transmission and distribution losses. When SCE’s grid reaches below 409 lbs./MWh of carbon intensity, we can expect to see natural gas lose its emission edge. With current policy and regulation trends, this outcome is likely. Comparing SCE to its peers, the CA average is rapidly approaching that threshold with a 466 lbs./MWh intensity. 

Life Cycle Cost Analysis (LCCA)

Now let us examine the business case for heat pump water heating. Does it pencil out? I compared two Energy Star water heaters and a tankless electric water heater. The heat pump was 48% & 165% more expensive compared to the high-efficiency tankless gas water heater and tankless electric water heater, respectively. That initial cost could persuade someone to think the electric tankless is the best option, which is why a 15-year LCCA is important to examine. This LCCA assumed a 7% discount and a 4% energy escalation rate.

If we examine the cumulative cost over 15 years to operate the water heater, we begin to see some trends. Even though the tankless electric water heater is the cheapest option, it has huge operating costs over its lifetime. When we compare the heat pump to the tankless gas heater, we see a more competitive LCCA, with the heat pump coming out ahead.

Cumulative Cost – Water Heating

Even without looking at the net present value, when comparing an electric tankless to a heat pump, it’s clear that the heat pump is a superior product worth the cost premium. However, the net present value of the heat pump savings compared to a gas heater is tighter. After a 7% discount, the NPV of the savings comes out to be $10,528.88 over 15 years with an IRR of 169%. While the savings aren’t as dramatic as compared to electric tankless, with a break-even point before year 2, the heat pump water heater is a solid choice. 

Key Energy Takeaways

• Heat pump efficiency cuts through, even with a high cost of electricity. Heat pumps use less energy, enough to come in below the annual energy cost of natural gas water heaters. However, this is climate dependent. If you live in a cold region like the upper Midwest, heat pump efficiency drops in the winter and will switch to electric resistance heating at freezing temps. Check with the manufacturer.
• Natural gas is cheap. This isn’t surprising, since natural gas prices have ruined coal plants and wedged out nuclear plants. However, gas price volatility will be a disruptive behavior for owners trying to figure out net present values. I would be concerned about fuel supply chains hurting gas equipment LCCAs. 
• Electric Resistance might give you a zero-emission building, but without internalizing how improved morbidity and mortality affect its usage, the technology will have mixed impacts. We can expect the grid to reduce its emissions in the next two decades, and we could expect stable electricity prices, but the 15-year LCCA isn’t favorable. I would recommend supplying enough power for a heat pump for a future retrofit.