Heat purchase agreements could lower barriers to heat pump adoption

Efficient electric heat pumps have the potential to significantly reduce greenhouse gas emissions from heating and cooling buildings. However, heat pumps' initial costs can be prohibitively high and their lifetime costs are only situationally competitive with incumbent technologies. Here we show that a business model based on heat purchase agreements could lower these barriers to heat pump adoption. In this business model, a user hosts a heat pump owned by an aggregator. The aggregator installs the heat pump at low or no initial cost to the user. The user buys the heat pump's heat or cooling output from the aggregator. The aggregator buys the heat pump's input electricity in the wholesale energy market and sells the flexibility of their aggregate electrical load in ancillary service markets. This paper presents the first economic analysis of heat purchase agreements as a third-party ownership model for electric heat pumps. We derive conditions under which a heat purchase agreement is mutually beneficial to the user and the aggregator. We also provide a method to fairly price heat and cooling. A case study of a typical United States home shows that a heat purchase agreement could more than double the value of a heat pump investment relative to the incumbent business model. The potential impact of this work is to reduce emissions both directly, by accelerating replacement of fossil-fueled or inefficient heating or cooling equipment, and indirectly, by helping power system operators reliably integrate wind and solar generation.