An Examination of the US Residential Heating Market

Abstract

This paper outlines the US residential space heating market and highlights thirteen disruptive companies whose products decarbonize some link in the space heating supply chain. The goal of the paper is to provide Energy Impact Partners (EIP) with a strong understanding of market trends, regional switching costs, customer behaviors, and policy incentives. Additionally, we present an investment landscape of disruptive companies from which EIP may choose to pursue specific investment objectives. The US residential space heating market may be thought of as a mix of space heating fuel sources, such as natural gas and electricity, and a mix of space heating technologies, such as Furnaces and Heat Pumps. Four major trends stick out. First, Furnaces dominate the technology landscape as the most popular heating technology. Second, natural gas and electricity are the two main fuel types used for space heating, with 51% of households using natural gas and 37% of households using electricity. Third, the mixes of fuel and equipment have changed since 2001 largely due to higher population growth in southern regions where electricity and Heat Pumps provide space heating for most homes. Fourth, according to utility executives interviewed the mix of fuel and technology will not change drastically over the next ten years. Payback periods calculated are often long, greater than 10 years, making the switch to less carbon intensive fuel sources or less energy intensive technologies less appealing to the average homeowner. Furthermore, customer behavior hinders the switch to decarbonizing technologies because most individuals do not view space heating equipment as aspirational purchases and will only replace equipment upon failure – which often happens during the winter – forcing them to seek out the quickest fix rather than shop around for an alternative option, even if that option can save money through lower operating costs. Several federal and state incentives exist to motivate homeowners to decarbonize their space heating system. More details are provided in Chapter 7. Ultimately, the paper concludes with four insights for EIP with regards to investing in space heating startups. These insights revolve around the projected energy and technology mix, where innovation occurs in the space heating supply chain, customer behavior in purchasing decisions, and the importance of government policy for a startup’s success.