Natural gas prices on the Railbelt will rise, but unless the grid transforms, gas heat will still be cheapest.
A combination of increased renewables and substantial load growth could make heat pumps cheaper.
It’s easy to get sucked into focusing on electricity. But in Alaska, we use far more energy for heat. And on the Railbelt, most of that heat comes from Cook Inlet gas. That’s because if a pipe brings Cook Inlet gas to your house, that’s almost certainly the cheapest way to heat it.
With the impending Cook Inlet gas crisis pushing those prices up, will that still be true?
I particularly wanted to know how those numbers worked out for air source heat pumps. Heat pumps (and direct electric heat) are the only easily available heating methods that don’t involve burning anything directly. Which means they don’t produce local pollution, and have the potential (depending on the electricity source) not to produce CO2 either.
I’ve been happily heating my place with a heat pump for a bit over a year now, which means I get lots of questions about how well it works (great), how much it costs (about $600/yr for my small place), and who installs them (harder question).
My co-blogger Alan has developed an excellent heat pump calculator that lets you look at the economics for your specific house, including lots of characteristics of the building itself, different heat pump models, installation costs, and more. If you’re thinking about getting one, check it out!
For straight operating costs, the general rule-of-thumb answer is that Enstar gas is cheapest where it’s available, but heat pumps are basically always cheaper than propane, and often cheaper than heating oil, especially if your heating oil is expensive.
I decided to analyze how that general answer might change with rising gas prices, renewable energy, and load growth. This is based on cost numbers for Wasilla as a representative Southcentral community -- the answer looks similar for most of the urban Railbelt except Fairbanks (where natural gas is less available for heat and electricity). Detailed assumptions and methods are at the end of the post.
Gas heat gets expensive if gas prices rise. But most of our electricity is produced from natural gas, so the heat pump also gets more expensive. It takes gas prices to triple before they get close, and at that point, oil heat is cheaper.
If more of the electricity is produced from renewables, the heat pump costs become less dependent on gas. The heat pump stays cheaper than oil heat under most scenarios, but more expensive than gas heat until gas prices reach around double those of today.
Most of the heat pump operating costs are based on the fixed costs of operating the electric grid. These don’t change with gas costs or electric use, so if more electricity is sold, those go down. If electric use goes up dramatically (nearly double current use based on the 2050 “moderate load growth” scenario from this ACEP paper on beneficial electrification in the Railbelt), those fixed costs drop, and heat pumps become competitive with natural gas in the $12-$15/Mcf range that’s likely in the near term.
Could that happen? The increased load in the beneficial electrification paper is mostly due to a projected increase in electric vehicles, rather than heat pumps. I don’t know whether that’s likely, but it could happen if electric vehicles save people money at current electricity and gasoline prices. It seems much less probable for people to increase load by doing something that’s currently more expensive than the alternative. That goes both for heat pumps and for the increase in industrial load that keeps getting promoted in the energy task force reports. (We can’t just “Be Iceland” and attract industry when industrial power is so much cheaper in so many other places -- unless we cancel out those gains with massive subsidies).
People in real houses also have to factor in the capital costs and installation costs of a heat pump, the cost of backup heat if it’s needed, and any non-cost factors that matter to them.
When I got the heat pump at my place, I didn’t do any of these economic calculations. I didn’t even use Alan’s calculator. We were switching from wood heat, which had no direct monetary cost to us. Wood takes lots of labor, and most importantly to me, creates lots of pollution. Indoor air pollution, outdoor air pollution, and a great deal of climate impact. Burning wood sometimes gets treated as “carbon neutral,” but on the timescale of the dire consequences we’re trying to avert, it really isn’t. Wood has a worse carbon footprint than all these heat sources. My heat pump has the potential to be a cleaner and cleaner heat source if we clean up the grid. I’m a fairly low-income person, but to me, that’s definitely worth $600/year.
Notes and assumptions
Costs are listed per mmBTU of energy delivered to the house, and don’t include installation costs for any heater. Assumed efficiencies are 80% for natural gas, oil, and propane furnaces, and a COP of 2.5 for the air source heat pump. Assumed prices are all based on Wasilla numbers, as a representative Southcentral location that avoids some of the complication of other areas (Anchorage has two different electric rates with different gas costs, Fairbanks doesn’t have Cook Inlet gas and would have less efficient heat pumps, Homer has an extra Enstar surcharge.)
Current energy prices
Heating oil = $3.64/gallon (from heat pump calculator).
Propane = $4.20/gallon (from heat pump calculator).
Natural gas = $1.15 per ccf (based on current base rate + gas cost adjustment (GCA) + monthly customer service charge normalized to average residential use).
Electricity = $0.2054/KWh (MEA Q4 2024 base rate + cost of power adjustment (COPA). Not including customer charge, since customers without gas heat are assumed to be without gas altogether, but customers without electric heat still have electricity)
Future gas prices:
The base rate and customer charge are assumed flat. The GCA was assumed to directly equal $/ccf in assumed future prices. This may be an underestimate, since the current GCA ($0.87/ccf) beats the current Cook Inlet prevailing value ($0.79/ccf).
Future electricity prices:
Electricity base rates were assumed to be flat. The current COPA was split into a gas-dependent and gas-independent component (assumed to be flat). New renewable energy was priced at $0.08/KWh. Gas power efficiency was assumed at the 2022 central area plant efficiency of 8.09MCF/MWh. The gas-dependent component = 2022 fuel costs/ /total 2022 MWh (total generated+purchased - sold for resale). This component was varied based on hypothetical gas prices and renewable additions as shown below.
Base case: Gas price per KWh = $/MCF x MCF for native load in 2022 /total 2022 KWh
Increased renewables cases:
Gas price per KWh = $/MCF x (MCF reduced by defined percentage)/total 2022 KWh
New renewable price per KWh = $0.08 x (KWh no longer met by gas)/total 2022 KWh
Renewable scenarios:
The 45% reduction is based on the lower bound of gas use for electricity presented in the 2023 joint utility report on Cook Inlet gas availability. The 75% reduction is based on 750TWh remaining natural gas generation from the 80% RPS standard in the initial NREL RPS report (range 600-900TWh depending on scenario). The 25% reduction is one I threw in to have a more moderate number.
Increased load scenario: This is based on the “moderate load growth” 2050 scenario from table 5 of this ACEP paper. Increased load was assumed to proportionately reduce the electricity base rate, as if the entire base rate is composed of fixed costs that do not increase with load growth.