Cold Climate Heat Pumps

The-Heat-Pump-Dilemma-Image

Marketers can profit from installations and service, provided the utilities don’t take over

By John MacKenna

EDITOR’S NOTE: This is the first installment of a two-part series on cold climate heat pumps. In Part 1, we examine the market implications of these versatile appliances. In Part 2, we will examine the technology that enables heat pumps to perform in cold climates with improved efficiency.

Disruption has become the norm for energy marketers. Between volatile pricing, extreme weather, and aggressive incursions by natural gas utilities, the heating oil industry has absorbed one shock after another and shown a tremendous knack for adapting to change.

The industry is being put to the test again by the rise of electric heat pumps. Aided by important technological advancements, heat pumps have emerged as an attractive home comfort option that is relevant even in the cold climates of northern New England.

Powered by electricity, heat pumps present an imminent and direct threat to heating oil sales—making them a likely target for industry self-defense measures. It comes as no surprise that at least one industry association is challenging a state-sponsored plan to subsidize heat pump installations.

What is surprising, however, is the way some heating oil companies are embracing heat pumps as a business opportunity. At Noonan Energy, in Springfield, Mass., ductless cooling has been part of the product line for about 15 years, and sales have really taken off since the arrival of improved cold climate performance for heating, according to President Ted Noonan.

“When they were just for cooling, ductless systems had a place but they didn’t go everywhere. They were not the most aesthetically pleasing thing, and you could only cool a limited space,” he explained. The recent arrival of versatile units that could provide cooling in hot weather and then deliver heat even on cold days breathed new life into the product line.

“We have been selling Mitsubishi for a while, and they came to us and said this is the wave of the future, and we need to get onboard,” Noonan explained. The Massachusetts Department of Energy Resources started offering generous rebates, and Noonan spotted an opportunity. “It really hit home when I heard about this one customer of ours who decided to replace his 60-year-old boiler. We had been after him for 10 or 15 years to upgrade, and then one of my salespeople tells me he is going to install ductless. That got my attention.”

Between the state incentives and the positive buzz about four-season heating and cooling, customer interest is high. “They are into it because it is the latest and greatest thing, and they hear all the raves,” Noonan said. “But in the dead of winter, it still costs a lot to run on electric. The way we try to do it is to deliver space heating in the shoulder season for rooms that you can’t hit with central heating.”

He embraces the business opportunity because it provides installation work and ongoing service work. “If we don’t do it for them, someone else will,” he added. “You can’t convince people not to install them.”

Heat pumps with cold climate capabilities are particularly attractive to customers who don’t have central air conditioning, because they can replace their window units with a ductless system that also provides heat in winter. During one recent home show, Noonan gathered 30 leads for heat pump installations. He finds that word-of-mouth also spurs sales, because homeowners are eager to talk to friends about heat new ductless systems.

Displacement of heating oil sales is not an important consideration at Noonan because the company is most interested in serving as a full-service home comfort company to its customers. Noonan had already moved into home energy audits and plumbing before selling the latest heat pumps. “It’s not about selling oil; it’s about doing business. This is just another diversification strategy, and its fits right in our wheelhouse,” he noted.

Rather than push heating oil, Noonan espouses a strategy of satisfying customers. “We want to be in people’s homes. We find that if we are not Jack the Tradesman in their home, it is easy for them to get rid of oil and put in natural gas. We want to be part of that conversation and make sure customers trust our people. I tell sales people that when we get a lead on a heat pump from an existing customer, it’s a gift,” he said. The customer will probably hire Noonan for the job and might not even seek quotes from competitors. “If we’re in the home, we can drive the decision making process,” he said.

Noonan said heat pump sales have doubled in each of the last three years, and the company installed an estimated 150 heat pumps in 2014. The company has actually picked up some heating oil accounts by selling heat pumps to new customers and having them switch to Noonan for their oil.

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Strong Rebates

Another Massachusetts company that has embraced heat pump installations is Falmouth Energy, of Falmouth, Mass. Owner Chris LeBoeuf said the company has been selling ductless air conditioning for about eight years and saw tremendous growth in the last couple of years as four-season heat pumps gained traction. Demand has been largely driven by state incentives that include rebates of up to $1,000 from the state Cool Smart program and the Massachusetts Clean Energy Center. “The fact that customers can heat with them has been a tremendous boon,” he said. Instead of installing electric baseboard heat in a hard-to-reach space like a bonus room above a garage, Falmouth can install a four-season heat pump that provides much better efficiency.

LeBoeuf got into the home comfort business in 2001 and does not have a long history of selling oil that might color his thinking about alternative comfort systems such as heat pumps. “I initially saw gas as a big problem and thought we’d never service gas, but now we routinely install and service gas heat,” he said. Heat pumps generally do not replace oil heat systems but rather supplement them in the shoulder seasons, LeBoeuf noted.

Falmouth Energy also installs solar thermal and solar PV.  “I look at what the customers need and what else we can provide them,” he said. “Our agenda is to service customers. If they need oil, that’s great. We use heating oil in our own home. It is something we strongly believe as opposed to the alternatives, but the question to us is: What else do the customers need? Our tagline is ‘A Century of Energy Solutions.’ We started in the late 1800s with wood and coal, and now we sell other energy products, and ductless is really a solution for customers.

“When you provide solutions that people are happy with and solutions that are clean and quiet, those are the things you want to be doing for your customer, rather than cleaning out a 45-year-old boiler.”

An emphasis on HVAC sales also create challenges, however, because companies need to market continuously to educate customers about new solutions, which is very different from delivering heating oil to the same customers year after year, according to LeBoeuf.

At The Fuel Company in East Falmouth, Mass., Marketing Manager MaryEllen Donald said the company opened a complete new avenue of business when it began selling heat pumps. The company was already delivering oil and providing heating, cooling, plumbing and water filtration, and the idea of a four-season HVAC appliance has resonated with customers. “The big breakthrough of late is that we are moving away from the term ‘air conditioning’ and looking at is as a heating and cooling pump. That is where the Massachusetts Clean Energy Center and the Cool Smart program really has helped break it open with very deep incentives.”

The idea of applying heating and cooling in zones to the home is very appealing to customers, she added.

The Fuel Company has had some success installing heat pumps for current heating oil customers and keeping them as heating oil accounts with reduced gallons, she noted. “We don’t see ourselves as a heating oil company,” Donald said. “We see ourselves as energy providers and comfort providers. It has been a long adjustment to the reduction in gallons, and it is nice to have some nice alternatives. Heat pump installation is a wonderful alternative. We are providing a solution to their heating and cooling needs, and people are very open to it.”

One important consideration in New England is keeping a heat pump’s outdoor condenser units free from snow and ice. Donald said. The Fuel Company strongly recommends the use of brackets to mount condensers on the side of the home so they are above the snow line.

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The Association Perspective

While some marketers in Massachusetts have embraced heat pumps, the Massachusetts Energy Marketers Association (MEMA) must stand back and take a long view that considers the interests of all its members. President Michael Ferrante said there is a love affair with heat pumps that cuts both ways: The business opportunities for marketers are great, but there is a risk that policymakers and utilities will leverage heat pumps to reduce heating oil sales. He sees policy developing in neighboring states that could give utilities the inside track on installing heat pumps.

“Clearly our retailers are diversifying and selling these products,” he said. “We, as executives, have to look a the product lines and see how they fit long-term.” He is concerned that heat pumps are acquiring an allure similar to natural gas that has policymakers and consumers seeing them as a panacea—and an ideal replacement for oil heating. He said there is an urgent need for a study to determine just how efficient and clean it is to heat homes with heat pumps powered by electricity. “People believe heat pumps are more environmentally friendly, and they call them ‘clean heat’ in some circles. We have combatted that. What is clean about how we produce electricity with natural gas?” he asked.

Research is needed to evaluate the true costs of heating by heat pump as well as the environmental effects of shifting more of the region’s heating load to the electric grid, Ferrante said. “Is it really the best alternative?” he added.

Despite those reservations, MEMA endorsed two recent state-sponsored seminars on heat pumps and urged dealers to attend and learn more. “Why not at least present the opportunities to learn and give them the information they need to understand what this is about and how it might fit in their businesses?” he said.

In Vermont, meanwhile, heat pumps have some appeal to members of the Vermont Fuel Dealers Association (VFDA), according to Executive Director Matt Cota. Dealers in some parts of the state are concerned about losing customers to natural gas, and heat pumps can reduce customers’ urgency to switch fuels. If a new heat pump reduces a customer’s heating oil requirements, they may be more willing to stay with oil and less interested in paying for a fuel conversion, he said.

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Monopoly Power

In Maine, the sale of heat pumps is a mixed blessing. Marketers are creating some new opportunities in equipment sales by offering heat pumps, but one utility is trying to corner the business for itself, at the expense of independent contractors such as the members of the Maine Energy Marketers Association.

Association President Jamie Py recently told Oil & Energy that the group is intervening in an application by the utility Emera Maine to expand a heat pump installation program. Emera is trying to make an “end run” around the contractors and get permission from the state Public Utilities Commission (PUC) to install heat pumps directly and provide on-bill financing. “That is what has the ire of contractors,” Py explained. “They were making money installing the things.”

In recent testimony to the PUC, Emera President and CEO Gerard R. Chasse claimed that Mainers spend $1.29 billion a year on fossil fuel for heating and said air-source heat pumps can reduce that expense because they are “three times more efficient than any fuel-combustion furnace or boiler.” He testified that 10,000 Maine citizens have taken advantage of incentive programs from Emera Maine and the Efficiency Maine program to install heat pumps. “While that is good news, it is only a small portion of those who might participate to their benefit, considering that nearly 390,000 Maine households are still heating with fossil fuel,” he stated. The utility proposes to offer every one of its customers an opportunity to install a heat pump with no upfront costs. The utility would own the heat pumps itself and provide all maintenance services and recover the costs through an equipment charge that would be part of the customer’s electric rate.

The Maine Energy Marketers Association has filed testimony of its own challenging Emera Maine’s plan. The Association sees a number of problems with the utility’s proposal.

  • The program would establish Emera Maine as a heating and cooling sales and servicing business that competes directly with MEMEA member companies.
  • The program impacts the competitive interests of MEMA member businesses, because Emera would compete with MEMA members using unfair advantages stemming from its status as a utility and its existing relationship with customers.
  • The program allows Emera an unfair advantage in the sales and servicing of heating equipment by providing what amounts to free financing to customers.
  • Emera would exercise an unfair advantage in equipment sales as a monopoly creating a special rate for heat pumps—a pricing advantage that MEMA members cannot match because they face direct competition.
  • The proposed program does not necessarily insulate customers from the financial risks associated with heat pump installation and service. Emera will own the equipment while customers pay costs on it monthly, and the customer could end up having no equipment after making many payments towards its cost and could continue to pay equipment charges after the equipment is removed.

“In a pure free market, customers are going to choose whatever product works best for them, and that is all we ask,” Py told Oil & Energy. “What we get concerned about is when the government steps in and chooses winners or losers, or a utility comes in with their ability to be a monopoly. That market power inordinately affects what we can do to sell other products like propane or heating oil that would be a better product for the customer.”

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