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Heat purchase agreements could lower barriers to heat pump adoption

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  • Kircher, Kevin J.
  • Zhang, K. Max

Abstract

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.

Suggested Citation

  • Kircher, Kevin J. & Zhang, K. Max, 2021. "Heat purchase agreements could lower barriers to heat pump adoption," Applied Energy, Elsevier, vol. 286(C).
    • Handle: RePEc:eee:appene:v:286:y:2021:i:c:s0306261921000490
    DOI: 10.1016/j.apenergy.2021.116489
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    3. Wang, Y. & Wang, J. & He, W., 2022. "Development of efficient, flexible and affordable heat pumps for supporting heat and power decarbonisation in the UK and beyond: Review and perspectives," Renewable and Sustainable Energy Reviews, Elsevier, vol. 154(C).
    4. Li, Jiamei & Ai, Qian & Yin, Shuangrui & Hao, Ran, 2022. "An aggregator-oriented hierarchical market mechanism for multi-type ancillary service provision based on the two-loop Stackelberg game," Applied Energy, Elsevier, vol. 323(C).
    5. Qiuyi Wu, 2023. "Theoretical Evaluation of Photovoltaic Thermal Water Source Heat Pump, Application Potential and Policy Implications: Evidence from Yangtze River Economic Belt, China," Sustainability, MDPI, vol. 15(18), pages 1-22, September.
    6. Yamashiro, Ririka & Mori, Akihisa, 2023. "Combined third-party ownership and aggregation business model for the adoption of rooftop solar PV–battery systems: Implications from the case of Miyakojima Island, Japan," Energy Policy, Elsevier, vol. 173(C).
    7. Xingchi Shen & Yueming Lucy Qiu & Pengfei Liu & Anand Patwardhan, 2022. "The Effect of Rebate and Loan Incentives on Residential Heat Pump Adoption: Evidence from North Carolina," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(3), pages 741-789, July.
    8. Lygnerud, Kristina & Yang, Ying, 2024. "Capturing flexibility gains by price models for district heating," Energy, Elsevier, vol. 294(C).
    9. Alisa Freyre & Stefano Cozza & Matthias Rüetschi & Meinrad Bürer & Marlyne Sahakian & Martin K. Patel, 2021. "How to Improve Effectiveness of Renewable Space Heating Programs by Better Understanding Homeowner—Installer Interactions," Energies, MDPI, vol. 14(15), pages 1-24, July.

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