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Why Heat Pumps Don’t Pencil Out in Most Commercial Buildings…Yet

American environmentalist Bill McKibben thinks heat pumps can save the world. No, he’s not saying we should all join hands and sing kumbaya in buildings heated and cooled by the much-talked-about mechanical system. Instead, McKibben argued in a widely read essay earlier this year that the Biden administration should invoke the Defense Production Act to get American manufacturers to mass-produce heat pumps.

Those heat pumps could then be shipped to Europe and installed in an effort to wean the continent off fossil fuels, help fight climate change, and put a dent in Vladimir Putin’s war chest according to McKibben. He concludes the essay with a rallying cry, writing, “We could peacefully punch Putin in the kidneys, doing him severe damage without raising the odds of nuclear war; and we could even start to head off the instability and war that will invariably accompany the climate crisis. Heat pumps for peace and freedom!”

McKibben got his wish in early June when President Biden invoked the Defense Production Act to accelerate the production of not just heat pumps but also solar power hardware, insulation, transformers, and electric grid components like fuel cells, electrolyzers, and even platinum group metals used in many of these technologies. As McKibben had predicted, the Biden administration’s stated reasoning was to hasten a clean energy economy and lessen America’s and its allies’ reliance on adversary countries like Russia for fossil fuel and energy resources.

What does all this have to do with commercial real estate? More than you may think. Climate change and energy politics are interesting but may not always directly impact building owners. But in this case, the so-called revolutionary power of heat pumps may have real estate owners wondering if they should look into them for their own buildings. The decarbonization of America’s building stock is an unavoidable topic in real estate these days, as seemingly every major real estate firm today is touting ESG goals and net-zero emissions targets. Space heating represents the largest energy end use in commercial buildings, accounting for 25 percent of total energy use in 2012, according to the most recent figures from the U.S. Energy Information Energy Administration. Electrifying heating needs through heat pumps could push a facility closer to net-zero, as 32 percent of energy sources in U.S. buildings are natural gas.

But even the most prominent clean energy advocates admit the economics of electrifying heat in existing commercial buildings is complicated. “All-electric heating and cooling for larger commercial buildings is pretty nascent,” Mike Waite, Senior Manager of the Buildings Program for the American Council for an Energy-Efficient Economy (ACEEE), told me. “There’s not much data on how many heat pumps are installed in commercial buildings. They’re more common in residential and smaller commercial buildings.”

Cold weather compatible

Heat pumps offer an energy-efficient alternative to furnaces because they don’t burn fossil fuels. Like a refrigerator, heat pumps use electricity to transfer heat from a cool space to a warm space and vice-a-versa, so they work in both heating and cooling seasons. There are different types of heat pump systems, such as air-source, water-source, and geothermal, which transfer heat from the air inside a building to the ground outside. Large commercial buildings that use heat pumps typically use hydronic systems because it’s easier to push water than air. 

For the most part, where heat pumps are installed depends on where you live. Commercial buildings with the quickest payback periods are in the southern U.S. and Pacific region, where space-heating needs are modest. For larger commercial buildings, Waite of ACEEE said most all-electric buildings are in California, where the climate is favorable, and there’s also a strong policy push for electrification. “The technology is there, and if you’re in a warmer climate, it sort of becomes a no-brainer to install a heat pump,” Waite said.

Some assume heat pumps can’t work well in cold climates, but newer technology has changed that. Air-source heat pumps take heat from outside air, run it through a refrigeration cycle to increase the temperature, and deliver it into the building. Because heat pumps rely on heat from outside, it makes sense most people think they can’t work in cold climates.

The key feature that allows heat pumps to work better in climate zones with harsh winters is variable speed inverter-driven compressor technology, which has gone mainstream within the past decade. These compressors adjust the unit’s operating speed to match the building’s heating demand, increasing the system’s efficiency in cold weather. The Northwest Energy Efficiency Alliance reports that leading heat pump products are now capable of operating well below minus-10 degrees Fahrenheit.

As a result, heat pumps have become more popular even in places like Alaska and Minnesota, which have some of the coldest winters in the nation. Still, heat pumps are affected by low temperatures. It’s harder to extract heat the colder it gets outside, so systems become less efficient. Researchers at the National Renewable Energy Laboratory (NREL) are currently studying heat pump efficiency inside a 20-degree below test chamber in their Fairbanks, Alaska, laboratory. “At frigid temperatures, the efficiency is getting relatively low, and at that point, it doesn’t typically make sense to use a heat pump anymore,” admitted Tom Marsik, chief scientist at the NREL’s Cold Climate Housing Research Center. “And it is often better to use other technologies.”

The NREL’s research and other studies have implications for commercial and residential heating and energy, as researchers aim to understand the operating limits of heat pumps and how they can be expanded outside of warmer climate zones. Despite the limitations, there’s currently more appetite for heat pumps in colder areas of the U.S., including states like New York, Maine, Colorado, and Massachusetts. 

Because heat pump efficiency drops the colder it gets, one solution is to have a backup heating system on days when the temperature drops below freezing. It could be a gas-fired boiler or an electrical backup resistance heater. This method could also work for commercial buildings with challenging electric conversion economics so that heating electrification doesn’t have to be an all-or-nothing proposition. Buildings that meet a considerable portion of the heating load with electricity and then use a small amount of fuel backup still get significant carbon and energy savings.

ACEEE published a masterful, 90-page report on electrifying space heating in existing commercial buildings in 2020, the first to focus on heating electrification in the commercial real estate sector. They studied a sample of more than 5,000 U.S. commercial buildings and found that electrification could reduce total site energy use by about 37 percent and reduce carbon emissions by 44 percent. About 27 percent of existing U.S. commercial buildings heated with fossil-fuel systems today can be electrified with a payback period of fewer than 10 years without any rebates or carbon pricing. Financial incentives, carbon pricing, and additional energy efficiency improvements could substantially improve payback periods for commercial buildings switching to electrified heating systems.

That’s the good news. The bad news is that while substantial energy savings and emissions reductions are available, the report admits we’re not quite there yet. “The economics of conversions are challenging for many buildings absent improved building and system efficiencies, reduced system costs, financial incentives, and/or a price on carbon emissions,” the report says. ACEEE continues, “Given these realities, electrification of commercial space heating is likely to proceed slowly without policy support.”

Contractor reluctance

Using heat pumps in commercial buildings has other complications. The ACEEE report says an ample opportunity is converting centralized boiler/chiller systems to electric heat. Some of these conversions have been done (usually during major renovations), but the economics of this type of conversion is highly site-specific, and finding adequate outdoor space to locate the new electric heating units is challenging for high-rise buildings.

ACEEE’s report was based on widely available and commonly used electric heating systems like rooftop heat pumps. The researchers said there would be some promising opportunities on the horizon that could spur more conversions, such as using variable frequency drives (VRF) combined with high-efficiency outdoor air systems to replace rooftop units. 

Compared to ductless heat pumps used in residential homes, VRF heat pumps are a type of ductless heat pump typically larger in size and in heating and cooling capacity. The advantage of a variable frequency drive system is it can modify refrigerant pressures and temperatures based on outdoor and indoor conditions, making them highly efficient. The downside is that VRF heat pumps don’t provide ventilation, and their heating and cooling capacity is limited. Variable frequency drive systems are typically used more in smaller to mid-sized buildings.

Building owners may also one day be able to use modular, packaged, and multi-pipe chiller/heat pumps systems to replace large, gas-fired boilers. But these advances are still not widely available now. And in some cases, even with policy support and incentives, electrifying space heating may be too hard to pull off, such as in buildings with complex HVAC systems.

The reality is electric heating systems in commercial buildings like large offices are so nascent that even some energy efficiency experts have yet to determine their market penetration. The data for residential buildings is much more available, which is at least promising. About 180 million heat pumps were used for heating worldwide in 2020, and the global stock has increased by 10 percent per year over the past 5 years, according to the International Energy Agency. Heat pumps have become much more common in newly built homes, but they still meet just 7 percent of global building heating demand. 

Waite of ACEEE said it’s harder to get data on heat pump tech in commercial buildings than residential ones. “On the commercial side, it’s still largely anecdotal, but there is more appetite for heat pumps,” Waite said. David Cohan, Senior Advisor at the Institute for Market Transformation, told me “there’s no question” there have been “hundreds of heat pump installations” in commercial buildings. But Cohan added that for heat pumps to go mainstream, “there have to be tens of thousands of installations, and contractors will get more used to them.” Most contractors working with commercial building owners are not only used to more conventional HVAC systems, but many also want no business with installing more complicated heat pump systems.

If a commercial building owner is serious about building electrification, they’ll likely have to insist contractors install a heat pump. “Many contractors will say let’s keep doing what we’ve been doing,” said Ben Hiller, Technical Manager at the Northeast Energy Efficiency Partnerships, a nonprofit funded partly by the U.S. Department of Energy. “Don’t go straight to a contractor who will just automatically install a fossil-fuel-based system.”

It’s in contractors’ best interest to do quick and easy jobs, and installing packaged rooftop HVAC units is easy for most of them. The margins are better when they do these projects; they sometimes wrap it up in a single day. “When the other options might be more complicated, humans always want the easiest solution,” Hiller told me. “But at the end of the day, heat pumps are more efficient and will save money over oil-based systems.” 

Hiller admitted that the economics become more complicated when comparing electric heat to natural gas-based systems because gas is typically cheaper than electricity in many parts of the U.S. But Hiller also explained that heat pumps could be 300 percent more efficient than fossil-fuel-based heating systems. Under ideal conditions, a heat pump can transfer and produce 300 percent more energy than it consumes. By comparison, even the most efficient gas furnaces are only 95 percent efficient. This is because heat pumps transfer heat by absorbing it, depending on the type of system, from the air outside or underground, unlike fossil-fuel systems that rely on consuming energy to generate heat.

A different shade of green

For all the arguments in favor of heat pumps in commercial buildings, the reality is the economics may be too complicated right now. Some building owners may feel the altruistic duty to lower their asset’s carbon emissions, and some may even operate in jurisdictions where the law will soon require it. But if electrifying the heating system is still more expensive and complicated than doing it the old way, not much will likely change for the time being.

ACEEE’s comprehensive report admitted that even with all currently available policy incentives and rebates, a simple payback period for a heat pump system in most commercial buildings would still be around 10 years or less. That’s in line with most estimates for significant heating and cooling retrofit payback periods. But one has to wonder how many building owners would purposively make that investment unless they had to because of an energy code or law like New York’s Local Law 97

The report from ACEEE noted the specific numbers from some recent large commercial heat pump retrofits, some of which had attractive payback periods. Outside the U.S., a Vancouver office building installed a new system that recovers heat from its data center to heat the building. The system slashed natural gas use by 96 percent and carbon emissions by 35 percent at the cost of $222,000 (Canadian). The payback period was 6.3 years without utility incentives and 4.4 years with the incentives. 

Still, when faced with newer heat pump technology, not all real estate owners are willing to give it a shot (just yet, anyway). Like some of the contractors they work with, why not just do it the quick, old, and easy way? Heat pumps are making more strides in residential buildings and warmer climate zones across the U.S., but on the commercial side, we’re still in the early innings of the game, so to speak. Commercial building space heating electrification will likely proceed slowly without increased federal policy support and more rebates and incentives.

The benefits of heat pumps to reduce energy consumption and help fight climate change are as clear as day, but the economics for commercial real estate are hazier. Heating system electrification pencils out better in new construction, and retrofits to existing buildings are more complicated and capital-intensive. Exceptional, brand-new buildings like JPMorgan Chase’s all-electric skyscraper and headquarters in New York City get tons of attention, but let’s remember how rare projects like that are and how much capital a firm like that has at its disposal. 

Eventually, heat pumps may penetrate the commercial real estate market when the price comes down as it did with other clean energy like solar power. Environmentalists like Bill McKibben think heat pumps can save the world, but before doing that, they must first make better financial sense for commercial building owners.

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