Do Heat Pumps Save You Money? In California, It Depends on Your Electric Utility

Last year, when Shreyas Sudhakar started a heat pump installation company in the San Francisco Bay Area, he realized he wouldn’t be able to find new customers by promising to bring down their utility bills. 

Electric heat pumps are around three times more efficient than gas appliances, and Sudhakar’s clients typically use less energy overall after making the switch. But they also use more electricity. And if they live in a part of California serviced by Pacific Gas & Electric (PG&E) or one of the state’s two other investor-owned utilities (IOUs), the savings they may have come to associate with the technology will likely prove elusive.

“I have to do a lot of tempering expectations, to be honest,” said Sudhakar, who also publishes the newsletter Heat Pumped. “It’s hard for me to put my hand on my heart and say ‘Yes, this will save you money.’ For most people, it ends up being around the same.”

That’s a tough pill to swallow given that the upfront cost of buying and installing a heat pump averages around $19,000 in California. In many other parts of the country, the upfront cost is seen as a worthwhile investment given the promise of a lower operating cost over time. But these days Sudhakar often fields requests from people who want to run both “a heat pump and a gas furnace as a backstop so they can hedge their bets.”

For now his business is limited to wealthy people and “climate people”—those with unusual dedication to reducing their emissions of greenhouse gases. Sudhakar is glad to serve those folks, but they’re far from the bulk of California households. And therein lies the rub. 

California’s electricity rates are the highest in the continental U.S., due in part to the fact that the investor-owned utilities have added the cost of wildfire mitigation to their rates and those costs have been on the rise. PG&E, the large IOU serving the bulk of the northern and central parts of the state, raised its electricity rates six times in 2024. A 2023 study found that one in five families in the state were behind on their utility bills. Recent rate increases have made that problem worse, forcing some utility customers to choose between power and other necessities like food and medicine. 

On top of those cost burdens, the astronomically high rates also threaten to stand in the way of the state’s climate goals at a moment when cutting a significant quantity of greenhouse gas emissions is critical to preventing worst-case climate scenarios.

Building decarbonization lies at the heart of California’s climate action plans, and yet its commitment to installing six million heat pumps by 2035 is beginning to look aspirational at best. Meeting that goal would require 600,000 households and apartment buildings to install the appliances every year for the next 10 years. According to data collected by Tech Clean California, a program that offers incentives to offset the cost of heat pumps, only 39,000 single-family households have installed heat pumps in the last three years. In other words, the state has some catching up to do. And a January report from California’s legislative analyst’s office acknowledged that high electricity rates have the potential to “impede the state’s efforts to meet its ambitious climate goals.” 

“I’ve talked to people who’ve said, ‘I was thinking of putting in a heat pump so I did the math on how much it would cost, and it’s just unbelievably expensive to run.’ I suspect that there are a lot of other people out there doing the same math,” said Severin Borenstien, professor at the Energy Institute at Haas at the University of California, Berkeley. The state’s heat pump goals will “go out the window if we don’t get our act together,” he added. 

Mohit Chhabra, senior policy analyst at the Natural Resources Defense Council, agrees that time is of the essence. “Every year, a fraction of people decide to replace their appliances. And if they choose gas, you’ve lost that section of the market for 20 years.” 

The stakes for ratepayers will also ratchet up soon as their consumer choices begin to narrow. The Bay Area Air District has already put a rule in place that requires all broken gas hot water heaters and furnaces to be replaced with heat pumps, and it will begin to go into effect in 2027. The South Coast Air Quality Management District is considering a similar rule, as is the state’s air resources board. 

“For market transformation to take place, it needs to make sense for everybody,” says Chhabra.

Why Is Electricity From IOUs So Expensive?

National research confirmed that lower electricity prices have been strongly associated with higher installation of heat pumps. And for Californians living in one of a few dozen cities and counties with small municipal and community-owned utilities, where electricity rates are significantly lower, these electric appliances are an easy sell. 

“If you’re served by LA Department of Water and Power, the Sacramento Municipal Utility District or one of these utilities and you can afford the upfront cost, it makes a lot of sense to get a heat pump because you’re in a much better position. Your rates are great,” said Mike Henchen, a principal focused on carbon-free buildings at RMI, the nonprofit formerly known as the Rocky Mountain Institute.

Travis Gibrael, a project manager for the Reclaim Our Power Utility Justice Campaign—launched by the state’s most outspoken environmental justice organizations around the time that PG&E declared bankruptcy in 2019—echoed that sentiment. “The Sacramento Municipal Utility District’s rates are 58 percent lower than PG&E. The Plumas-Sierra Rural Electrical Co-op has rates that are 56 percent lower,” he said, “It’s the IOUs that are the problem.” 

Investor-owned utilities account for roughly three‑quarters of electricity distributed in the state. PG&E serves 16 million customers, Southern California Gas serves 21 million customers in the heavily populated region around Los Angeles and San Diego Gas & Electric (SDG&E) serves another 3 million in the southernmost part of the state.

Unlike municipal utilities, investor-owned utilitiess are private companies whose primary responsibility is to maximize profits for their shareholders. Now, that model is facing a new level of scrutiny.

On top of cost of the production and distribution of power, IOU customers also pay for an ever-increasing number of wildfire-related costs, including the cost of damages to wildfire victims, prevention measures such as burying power lines and trimming trees around electricity infrastructure, AI-enabled cameras to speed the detection of problems, repairing aging infrastructure and contributions to the California Wildfire Fund, which provides insurance against future fires. Those costs across the state added up to approximately $27 billion between 2019 and 2023. And because those costs have been passed on to ratepayers, they now account for between 7 percent and 13 percent of the average IOU utility bill. (Residents with the lowest incomes receive discounted rates through the state’s CARE/FERA program and pay a smaller portion of these costs.) 

Several experts point out that the “cost of service” model investor-owned utilities use to set their rates allows them to earn big returns on expensive capital projects while passing on the cost of those investments to their customers. That might be one reason PG&E has buried 800 miles of power lines since 2021 and plans to bury thousands more at the rate of $3 million to $4 million per mile, despite evidence that alternative approaches, such as “fast trip” technology, which shuts down power lines in high-risk scenarios, would be far more cost-effective. 

Reclaim Your Power’s Gibrael pointed to improved insulation and third-party auditing of PG&E’s aging, potentially dangerous equipment as additional alternatives. “The IOUs are trusted to audit their own equipment, and we would like to see third-party auditors flag where the equipment is far beyond its usable life,” he said. 

Sylvie Ashford at The Utility Reform Network (TURN) said that utilities owned by investors have a history of attempting to make money off behind-the-meter or customer-side investments and padding projects with more capital investments than necessary to increase their profits. She pointed to a recent neighborhood-scale electrification project at Cal State Monterey, where PG&E proposed paying for the retrofits with its capital budget but met resistance and ultimately backed out.

“They have an incentive to do everything with capital-intensive technology,” said Borenstein. “I think that’s a real problem.” 

PG&E did not respond to multiple requests for comment from Inside Climate News.

The Rate Solution That Fell Flat

In 2021, Borenstein and his colleagues at the Haas School of Energy designed an approach to spreading out the rising cost of electricity in an equitable way. They proposed an “income-graduated fixed charge”—a flat rate based on what customers could afford—with seven different rates and a steep reduction in the cost of each additional kilowatt used to incentivize the switch from gas to electricity. 

“To do that, you’d have to actually know people’s income while maintaining their privacy,” Borenstein said. That would have required the state’s franchise tax board to somehow cooperate with the utilities. Ultimately, when it was time for lawmakers to propose legislation, they “did not allow any of that.” 

The California Public Utilities Commission, which regulates investor-owned utilities, did approve a similar program last May. It resulted in a $6-per-month fixed charge for CARE recipients, a $12 fixed charge for FERA users and a single $24 fixed charge for all other IOU customers—from people with moderate incomes to billionaires. But the per-kilowatt rate was not set at a significantly lower price, so it is unlikely that it will result in significant savings for heat pump buyers.

RMI’s Mike Henchen sees the fact that the fixed charge was put in place as a promising sign that lawmakers and regulators are paying attention and taking the energy affordability crisis seriously. 

“There’s definitely room for improvement on the rate design, and I think there’s an appetite to continue to try to make reforms happen,” he said. Henchen also points to the fact that gas prices have been unpredictable, due in part to the war in Ukraine—which has led to steep increase in liquid natural gas from the U.S. being shipped to Europe—and they could rise in a way that makes using more electricity appealing once again. But that shift would bring about even more hardship for consumers. 

A Viable Alternative?

For all these reasons, and because high electricity rates are hindering electrification projects that could slow the greenhouse gas emissions driving climate change, Gibrael and his colleague Emi Yoko-Young, who co-directs the Reclaim Our Power campaign, want to see an overall move away from the profit-based model of today’s investor-owned utilities. On a call in early February, they pointed to the moment, nearly five years ago, when it looked possible that PG&E would become a publicly owned nonprofit called Golden State Energy. They are hopeful that some of the momentum to break up the massive IOU might be coming back around, they said. Earlier that day, state Senator Aisha Wahab had proposed a bill that would fund a two-year feasibility study to examine multiple utility models for Golden State Energy and determine which would be best for ratepayers. The night before, the Berkeley City Council passed a resolution to support the study, following the precedent set by the cities of San Francisco and Richmond. 

“The incentives of an investor-owned utility are directly opposed to the needs of the people and the land,” said Yoko-Young. She and Gibrael acknowledge that the odds are stacked against the campaign, especially since investigations by a Northern California ABC station revealed most of the state legislators have taken money from the IOUs, and Governor Gavin Newsom is notorious for receiving donations from PG&E. 

“[The proposed feasibility study] is a statement of vision that people can rally around. And I think in a large way it’s about telling the story of how things could be, so people in California can feel as though there’s a viable alternative,” said Gibrael. “We just need the political will.” Reclaim Our Power is part of a larger coalition planning a march in Sacramento to “abolish PG&E” on April 24.

The numbers are certainly eye-opening. In 2023 PG&E reported $2.48 billion in profits and paid $1.8 billion in dividends to their shareholders. SDG&E reported $891 million in profits.

A recent policy brief from the Economic Liberties Foundation, a nonprofit that opposes monopolies, focused on what it calls the “excessive rates of return” for IOU shareholders and claims that the utilities have been able to “outfox their regulators.” The brief’s author, Mark Ellis, says the California Public Utility Commission, which is in charge of setting rates, doesn’t question the fact that shareholders are typically expected to earn more from investments in utilities than from working with Wall Street asset managers. 

“Even environmental organizations have an ingrained idea that these utilities need higher returns on equity (ROEs) to make investments, but that is just not true,” said Ellis.

Instead, he recommends regulators set the rate of return for utilities owned by shareholders at the minimum a company needs to earn to satisfy its investors. If that were to occur, Ellis said, “all that capital expenditure would be 20 percent cheaper.”

Such a shift might also bring down the overall cost for ratepayers, but Borenstein isn’t convinced it would make enough of a difference to spur more heat pump adoption on its own. 

Instead, he believes the state should move many of the costs incurred by the IOUs onto the state budget and treat them more clearly like taxes.

Heat pump installer Sudhakar noted that regulators in Massachusetts recently raised the price of gas to cover the cost of rebates and incentives for heat pumps and upgrades that improve energy efficiency. If the state succeeds in incentivizing a large-scale shift from gas to electricity, it might become a model for California and other states to consider.

But Ashford, at TURN, is cautious about anything that raises prices for working people. “We want exciting new solutions to get people to electrify their homes, but if we put those costs into rates, it’s counterproductive,” she said. “We need to bring rates down so they’re sending the right signal, and also have incentives [for heat pumps] happening in tandem. We can’t have those levers working against each other.”

Correction: A previous version of this story misspelled Sylvie Ashford’s first name.