Can Americans Afford to Fully Electrify Their Homes?

Residential homes account for one-fifth of America’s energy consumption, with the largest part of that consumption going toward home heating. In the U.S., more homes are heated with natural gas than any other fuel, a fact that has drawn the attention of policymakers as momentum builds to reduce fossil fuel consumption. 

Recently, a number of cities have sought to curtail residential gas use by introducing policies to promote home electrification and, more controversially, through bans that prohibit gas hookups in new homes. While it’s still too early to tell how politically viable, and ultimately effective these efforts will be, what is clear is that the urgency to electrify everything will only intensify as more municipalities, states, and the federal government set ambitious decarbonization goals for the years to come.

Lucas Davis, an economist at the University of California at Berkeley’s Haas School of Business, offers a look at the drive to electrify home heating. His recent research examines what motivates households to choose to electrify, how much Americans may be willing to pay in the process, and how this understanding could be used to focus policies that drive rapid and equitable electrification of American homes.  

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. Residential homes account for one-fifth of America’s energy consumption, with the largest part of that consumption going towards home heating. In the U.S., more homes are heated with natural gas than any other fuel, and this is a fact that has drawn the attention of policy-makers as momentum builds to reduce fossil fuel consumption.

Recently a number of cities have sought to curtail gas use by introducing policies to promote home electrification and, more controversially, through bans that prohibit gas hookups in new homes. While it’s still too early to tell how effective and politically viable these efforts will be, what is clear is that the urgency to electrify everything will only intensify as more municipalities, states, and the federal government set ambitious decarbonization goals for the years to come.

On today’s podcast, we’ll take a look at the drive to electrify home heating. We’ll examine what motivates households to choose to electrify and how this understanding might be used to focus policies that drive rapid and equitable electrification of American homes. My guest is Lucas Davis, an economist at the University of California at Berkeley’s Haas School of Business and a Visiting Scholar here at the Kleinman Center. His work focuses on energy and environmental markets. Lucas, welcome to the podcast.

Lucas Davis: Thanks for having me.

Stone: We’re in this era now where there is a focus on the importance of electrifying everything. Much of the public conversation seems to have been around the electrification of transportation, but there has also been maybe a less high-profile focus on eliminating fossil fuel use in the home. How important is reducing home fossil fuel use within the larger context of our efforts to cut greenhouse gas emissions?

Davis: It’s huge. So as you said, this is a major source of carbon dioxide emissions, so U.S. households burn 2.7 trillion cubic feet of natural gas each year for home heating. That’s the carbon dioxide equivalent of having 40 million cars on the road. So this is a huge sector for carbon dioxide emissions.

Stone: So why is electrification of home heating specifically so important?

Davis: What I want to start with is why first. So why are we talking about electrification of transportation? Why are we talking about electrification of buildings? For me really the starting point for this is cheap, renewable electricity. Over the last decade, grid-scale wind and solar have both fallen in cost precipitously. Since 2009, the levelized cost of wind is down 71%. The levelized cost of grid-scale solar is down 90%. That is what is precipitating these discussions because those cheap renewables create an opportunity not only to decarbonize the electricity sector, but then it leads us to look around and say, “Well, wait a second. What else could we do with electricity? What other major sources of CO2 emissions could we potentially address with electricity?”

Stone: Electric home heating isn’t as unusual as it once was. I grew up in Ohio. We had natural gas heat, and a couple of times a year I’d go down to my grandmother’s house in Nashville, Tennessee, and I remember as a kid noticing these heating units in the wall, where you could flip a switch and then get a blast of heat in the face. It was kind of fun, but it was also very unusual. So this is kind of changing, is that right?

Davis: Yes, I didn’t realize, frankly, the degree to which it has changed over the last several decades until I started looking at this, but U.S. households really didn’t heat with electricity 70 years ago. Let me give you just a little bit of history on this. If you go back to 1950, only 1% of U.S. homes were heated with electricity. That increased to 8% by 1970, 26% by 1990, 35% by 2010, and just about 40% of households today heat their homes primarily with electricity. That’s frankly a much larger increase in electrification than I was aware of, and there actually has not been a lot of work done by economists or other researchers documenting or trying to understand that really pretty striking pattern. It is very much a regional story.

As part of this research, one of the things you do is you make maps. And it very much is a regional story, where the Southeastern United States has really embraced electricity. The climate in the Southeast is really conducive to electric heating because in most parts of the Southeast, you don’t need huge amounts of heat each year. Texas is 60% electricity. Homes in Florida, 90% of them are heated with electricity. I just think understanding this historical trend and understanding this variation across states and how we heat our homes is really important as we move forward to think about constructing policies to increase electrification.

Stone: Obviously there has been a switch, as you said, from 1% to about 40% of this country heating with electricity, but the idea here now is that we have to get the other 60%. So you’ve investigated again what motivates people to switch to electric heating of their own accord. You looked at a number of variables. What did you find?

Davis: The first thing I did, even before I collected any data, was I sat down with a yellow pad, and I wrote down a list of hypotheses, scientific method. So first you write down some hypotheses, and then you take it, you know — I’m an economist. I work with data, so I don’t do an experiment in the lab, but I do take it to the data. So I wrote down five hypotheses, and I’ll be honest. I’m an economist, so two of them that loomed very large in my mind as I was sitting there with the yellow pad were prices and income. For economists, those are two of the major drivers of how we make choices. So those were definitely going to be on my list. I also wanted to think about geography and climate, which we can talk about.

Then I took those hypotheses to the data and actually compiled data describing these 70 years of household heating choices and began to tease through the data to try to understand which of these different hypotheses holds. What I found is that by far the most important factor that determines these choices is prices, energy prices. And if I had to pick one, it’s electricity prices. In retrospect, we’ve got to think this is a major driver of choices, but I was struck just to the degree to which this drives behavior in the data. States with cheap electricity, you see a lot of electric heat. States with expensive electricity, you don’t see it. Energy prices as a whole, I find, can explain about two-thirds of this increase in electrification since 1950.

So in my experience, you don’t normally go to the data and find that a single factor is so important, but in this case I’m finding energy prices are low and explain about two-thirds of the increase in electrification.

Stone: Tying in with that, you also mentioned geography. So if you’re in a part of the country where it’s relatively warmer, and you don’t expect to actually have to use as much electricity to heat your home, then I guess the price differential of the energy that you’re using would make less difference, as well, right?

Davis: Absolutely. If you just need a little bit of heat, say you live in Florida, and you’re only going to run a heater two months of the year, an electric heating system works great. Sure, it’s expensive per BTU of heat, but it’s cheap for the capital costs. The initial investment is low, and so that makes a lot of sense. But interestingly, one of the other hypotheses I wrote down on my yellow pad was climate change. So I said, “Well, another thing that has gone on over the last 70 years is that the entire United States is warmer.” Everyone, no matter where you live in the US, you need less heating than you did in 1950. I find that that does explain some of the increase in electrification over this period, but only about 4%. So whereas prices are like two-thirds, climate change can only explain about 4%. So that really is not the big factor explaining this pattern over the last 70 years.

Stone: Now it’s interesting. You live in Berkeley, which was the first city to ban natural gas hookups in new home construction. That began in January of 2020. It’s interesting because it seems that Berkeley’s solution puts climate concerns foremost, ahead of economic considerations and motivations. And this is in a state that has one of the highest electricity costs in the country. How has the ban gone over?

Davis: You’re exactly right, that Berkeley is ground zero for this. This was the first city in the United States to ban natural gas on new buildings. It started in Berkeley, but it spread like wildfire. Now there are 43 cities in California that have adopted similar bans on natural gas in new buildings. Moreover, policy-makers in cities all over the US are talking about it. Actually it’s one of the policy levers that local policy-makers have. We’ve gone from really nobody talking about this. On January 1st, 2020, when Berkeley did this, this blew people’s minds. This was not something people were talking about prior to this. Now cities all over the U.S. are talking about it.

Stone: It caught a lot of people off guard, right? I guess it caught the gas industry off guard, and then we’ve seen some bans on the bans, for example in Arizona and Oklahoma, they’ve actually passed state rules that say, “Look, municipalities, you can’t do this.”

Davis: Yes, absolutely. That’s the other end of the spectrum. As you say, there are these states that are saying, “Wait a second.” It’s exactly as you have described. “Cities, you don’t have this right to ban natural gas.” So there really are two perspectives out there right now. There are the proponents of electrification who say, “We have to do this if we’re going to meet the climate goals we’re trying to meet.” And then you have critics who are saying, “Wait a second. A natural gas ban is going to be very expensive. This is going to cost consumers a lot of money, and moreover, it’s probably going to be regressive — so it’s going to hurt lower-income households more.

This is getting discussed a lot in policy circles, but there’s not much economic research on this. So I really wanted to try to bridge those two views and go to the data and try to say, “Well, how costly is a ban on natural gas for households? How much does this cost the typical household?”

Stone: What did you find? How much does electrification cost the typical homeowner?

Davis: The answer is that it really depends where in the United States you’re talking about. What I find is that in states like Florida, where overwhelmingly households are already choosing electricity, the economic cost of banning natural gas is low. It’s less than $100 per household on average per year. In contrast, as you move northward to colder and colder states, the cost of the ban increases. It’s about $300 on average for a household in Texas. It’s about $900 on average for a household in California, $1,100 in Pennsylvania, and over $1,500 in the coldest states like Upper New England.

Stone: So let’s break this down a little bit here. When we’re looking at these costs, we have two categories of homes that I think are probably important to highlight and what you highlight in your research, that is new homes that are going to be built and retrofitting of existing homes that may already be heated with oil heat or with natural gas heat. Can you talk about the different challenges in costs that are inherent in looking again at a new build versus retrofitting an existing house? And by the way, when we look to the middle of the century, when we hope to be carbon-neutral, most of the houses that will exist at that point are already here today.

Davis: Great point. And the numbers I described a minute ago, those are numbers for new builds, so that’s really a lower bound on the costs for all households. Retrofits are expensive. It’s going to be more expensive than that in all cases, for all states. Why is it more expensive? The capital costs of retrofits are more expensive than new builds. It just costs a lot more to go back in there and retrofit a system with an electric system, but also the operating costs are higher. A lot of these older homes, not only are they heated with fossil fuels, but they also tend to be energy inefficient. They tend to not have great wall and roof insulation. Maybe they don’t have upgraded windows, et cetera, et cetera. When you have a home that’s not very energy efficient, moving electricity is more expensive because you need to use a lot of kilowatt hours of electricity. It becomes really cost-prohibitive in a Northern state, say, to switch to electricity. That’s why retrofits are a big challenge. I would describe my results as saying there’s a lot of low-hanging fruit in relatively warmer parts of the country. There are a lot of households that we probably could convince to switch to electricity with a pretty modest subsidy, for example. But there are also large parts of the country, mostly the Northern U.S., where it’s a pretty big lift, where it would take a pretty significant subsidy to get them to switch to electricity.

Stone: I also want to point out here, I think when we’re talking about switching to electric heating, we’re actually talking about people putting what are called “air source heat pumps” in their homes. I don’t think we’re talking about the electric resistance heating, which my grandmother had in her house, which I understand is pretty inefficient and probably would make the costs higher. My understanding is that these heat pumps, though — they may have limited ability to actually heat a home when you’re in a place that’s really, really cold.

Davis: Moving forward, most electric heating is going to be heat pumps, and exactly as you say, it’s because they’re more efficient. What traditional resistance heating does is it converts electricity into heat, just like your toaster does, for example. Heat pump is a completely different technology, and I don’t really love the words “heat pump,” but what a heat pump really is, is running an air conditioner backwards. You’re not converting electricity into heat. You’re using electricity to move heat between the inside shell of the house and outside the house.

So how does an air conditioner work? You’re moving heat from inside the house to outside the house, while a heat pump allows you to run that in reverse and bring heat from outside to inside the house. And it actually takes less kilowatt hours of electricity to move heat than it does to produce heat. Heat pumps, under warm conditions, can be three times more efficient than resistance heating. The challenge is that as it gets colder — imagine when you’re trying to bring heat in on a very cold day — heat pumps become less efficient. They actually become much closer to resistance heating, and in many cases in colder climates, what we have to do is build a backup heating system. So we have a heat pump for when it’s relatively warm, but then you maybe need some other kind of a system, be it electric resistance heating or maybe a natural gas furnace, to deal with very cold days. In practice, what those limitations have meant is that heat pumps are widespread in the Southeastern United States but pretty seldom used outside the Southeast.

Stone: You’ve pointed out in your research that right now obviously it’s more expensive for someone to completely replace their heating system. You’ve got gas under an emergency situation in the winter. Your gas furnace dies, and you’ve got to replace it. What are you going to do? The easiest choice is to put another gas furnace in. But that really works counter to what we need to accomplish here, which is to switch over to electric heating. How do we create an environment through policy measures, economic measures — whatever they may be — to make switching to electric heat a default, no matter what your situation is, whether you have time to sit around and think about it and run the economics in your own home, or you have to do it on the fly to make sure your house is still warm in the winter on its coldest days.

Davis: There is such inertia in these choices. It’s not only with natural gas. A friend of mine has recently replaced his heating oil system with a new heating oil system. Why? Because it went out in the middle of winter, and he needed to get some heat into his home immediately. There wasn’t time to retrofit. He didn’t have a chance to go around and do research to move to natural gas, let alone to electricity.

What I would like to see is actually a different entry point. I’m excited about policies that would target not that heating replacement decision, but the central air conditioning replacement decision. So imagine this: It’s the summertime. Your central air conditioner goes out. Call up an HVAC repairman. They come, but at that point, they say, “Wait a second. Here I’ve got this central air system. We can go with that, or for a pretty modest incremental additional cost, we can go ahead and install a heat pump. What this will allow you to do is to phase out whatever you’re currently using for heating, and use the heat pump for heating.” I like that. Not only do I think there’s a little less urgency often in those summertime decisions, although I understand homes can get very hot, but that’s actually a better chance, a better opportunity when you’re already going to be spending money to install a central A/C. The incremental cost at that point — that’s a pretty good opportunity to try to turn over that house and electrify it.

Stone: In your reports on electrification, you come to a conclusion, and this is going back to our discussion a little bit earlier of the economics of switching. But you end with a very interesting quote, and I just want to read it briefly. It says, “Nationally, it may be a lot easier than generally believed to encourage electrification, as income seems to play little role in the decision.” I want to bring up a couple of points on that. One is that so far, where we’ve seen these bans on natural gas hookups, those have been relatively well-to-do communities — Berkeley, California; Brookline, Massachusetts. Also, as you point out in your research, low-income households tend to more often live in multi-unit buildings that themselves are more likely to be electrified. So the question is, can we be sure that income has such a small impact on what is very often, at least to this point, an economic decision for a household?

Davis: Yes, a couple of reactions. The first is that, as you described correctly, in the research I find that income does not have a big impact on these choices. That is, that high-income households make this tradeoff between electricity and natural gas much the same way that low-income households make that tradeoff. That wasn’t obvious to me. In fact, when I was hypothesizing what was going to happen, I thought there was going to be potentially room for a real income effect here where, say, perhaps high-income households might prefer electricity because it’s cleaner and there are less on-site emissions. I really don’t see that. It looks like income doesn’t matter much for these choices. But I’m so glad you brought up multi-unit homes.

I think multi-unit homes are a big opportunity here. What I find in my analysis is that multi-unit homes, and in particular, rental properties are much more likely to be already heated with electricity. Now, why is that happening? I think it actually goes back to what economists have described as the “landlord/tenant problem.” This is described as a problem in the energy efficiency context, and in what sense is it a problem? Landlords tend to not spend a lot of money up front on capital investments that lead to savings over time, particularly when their tenants pay the energy bill. So this landlord/tenant “problem” has led to an underinvestment in multi-unit buildings, in terms of energy efficiency investments. This exact same incentive leads to more electric heating in landlord-owned properties. And that’s an opportunity. Not only are these multi-unit homes already greener, more likely to be electrified, but it also means that this is a sector that I think that with a bit of a policy push, could quite easily move even more in the direction of electrification.

Too often when we design programs, we think about owner-occupied properties. I think this is kind of a forgotten sector. There’s not enough attention, whether we’re talking about utility design programs or national policy-making. We know that a third of Americans live in rental homes. This is a large opportunity for electrification, and I’d like to see much more policy focused on this sector.

Stone: Is the grid itself ready to handle the potential load that would come from electrification of home heating systems across the country? And I think there are probably two sub-questions to this. One is, is the grid low-carbon enough to actually provide a climate benefit? And number two, is it robust enough to economically provide low-cost electricity, again, as you would get more of the country relying on electricity for pretty much everything in the home?

Davis: The U.S. grid is getting greener fast. So this is true not only in states like California that are kind of out ahead of this. Here in California, we’re speeding towards 50% renewables, but when you look at just emissions from the electric grid, it’s down dramatically, even since 2010. So the US grid is much cleaner than it was even a short time ago. Sure, there’s still a lot of regional variation. Electricity is dirtier in the Midwest today than it is in California, for example. But everywhere, it’s getting greener.

The other thing on that is that even if there’s not a huge carbon benefit in 2021 from electrification, proponents of electrification are going to say, “Yes, but we’re setting in place capital infrastructure today that’s going to affect how people heat their homes in 2030, 2040, and beyond. So thinking about where we’re going with the electric sector may be even more important than where it is today. Is the grid robust enough? That’s a completely separate and important line of study. There have certainly been spectacular recent failures. The tragic events in Texas in February underscore the importance of designing electric grids and management of grids and setting up incentives in a way to make sure that we can keep the lights on.

This is going to continue to be a challenge that’s going to take all-hands-on-deck approaches that combine demand response and storage and more supply reliability, et cetera. But I’m optimistic that actually we can incorporate much larger shares of renewables into the grid and can continue to keep rates reasonable and to keep the lights on.

Stone: I want to refer to some other research that you’ve done recently. You’ve looked at the risk that poor households could foot the bill for legacy gas infrastructure, should large parts of the population electrify their households. Can you talk about this risk and how it might be addressed?

Davis: I think as a pertinent example, think about new homes. Think about we’re going somewhere, and we’re building a brand new housing development. I think a really interesting question is, should we extend the natural gas system to that new housing development? I think it’s a really interesting question because if we think that we need to electrify in the next decade or two, it may not make sense in terms of that large capital investment to roll out the natural gas infrastructure. So I think that question about what we do in terms of new natural gas infrastructure is really interesting.

Related, we’re seeing a growing patchwork of households and businesses defect from the natural gas system. So here in Berkeley, for example, there are homes that are going all-electric — the “electrify everything” movement. One of my neighbors is replacing his natural gas furnace with an electric heat pump, and he’s going to electric hot water. He is going to continue to pay a PG&E bill, but only on the electricity side. Why that’s a challenge is that in natural gas rates, there are huge legacy costs. The natural gas system — billions and billions of dollars have been incurred to run natural gas lines all over the United States, and those costs are still being borne by rate payers. So when my neighbor leaves that system, those fixed costs don’t go away. You’ve still got the exact same natural gas line running down my street, and the question is, who is going to pay?

And the answer is all the customers that are left. At this point, this is just beginning to happen. We’re just seeing little patches of people leaving the natural gas system, but in a forward-looking exercise with University of Michigan economist Catie Hausman, we thought about what could this look like over the next decade or two, as you see large-scale numbers of people leaving the natural gas system? It raises real equity concerns because as we’ve seen in a previous cycle of this, with rooftop solar in the electricity grid, it’s likely that it’s going to tend to be higher-income households that are able to electrify. I’m concerned that that could leave lower-income households left holding the bag for these legacy costs.

Stone: So Lucas, before we finish up here, is there anything, any highlights from your research that you would like to talk about that I haven’t asked you about yet?

Davis: I think one of the important takeaways from the research is that energy prices matter. This is a familiar theme for energy economists, actually. We’ve been talking about energy prices for a really long time, but I think this home heating example is just a really rich, illustrative example of how, when we’re setting rates, how do we set electricity prices? How do we set natural gas prices? Do we price externalities? A lot of times, that conversation is very abstract, and it’s hard to think, “Well, how does this really matter?”

This example of home heating shows how this matters. If rates are set in such a way that they don’t reflect social marginal costs, that leads to wrong choices. You have too many people using electric heat, or not enough people using electric heat. So I guess I just think economists are a broken record on this, but it underscores the importance of making sure that energy is priced efficiently.

Stone: Lucas, thanks very much for talking.

Davis: Thank you so much. This was a treat.

Stone: Today’s guest has been Lucas Davis, an economist at the University of California at Berkeley. Lucas did recently publish a working paper which I neglected to give a name to in this podcast. That working paper is titled “What Matters for Electrification? Evidence from 70 Years of U.S. Home Heating Choices.”

Visit the Kleinman Center’s website for more episodes of Energy Policy Now, as well as the latest energy policy research and blog posts from the center. To keep up with the latest from the center, subscribe to our monthly newsletter on our website. Thanks for listening to Energy Policy Now, and have a great day.