Decarbonization Will Likely Involve Household Electrification

Electrifying everything has been hailed by many as a primary means for decarbonization. In an article from 2017, David Roberts writes that a simple two-step plan exists for achieving decarbonization:

1. Clean up electricity
2. Electrify everything

Of course, cleaning up electricity and electrifying everything are no small tasks. While the share of renewable energy generation in the energy mix has increased dramatically over the past 5 years and many utilities have set renewable energy goals, electrification has lagged. Although progress is being made, energy prices and lack of ROI continue to be significant barriers in most of the US.

Why Some Households Are Electrifying

Although electrification may not be keeping pace with the increase in renewable generation, more electrification is happening than you might think. From 1950 to 2018, the share of US households that heated their homes with electricity increased from 1% to 39%. A working paper from Lucas W. Davis at the University of California, Berkeley, seeks to explain what factors have driven this increase in electrification. Energy prices, geography, climate, housing characteristics, and household income collectively explain 90% of the increase in electrification over the past 70 years. Of those five factors, Davis finds that electricity and gas prices are by far the most important determinant in households’ electrification decisions (explaining more than 70% of the increase in electrification since 1950).

A more important result from the paper highlights differences in reservation prices (the price of electricity at which households are indifferent between electricity and natural gas) between states. As you can see in the following chart, warmer states tend to have higher reservation prices, indicating that they would prefer electric heat even when electricity prices are relatively high.

Average Electricity Reservation Prices by State

(Source: Davis, “What Matters for Electrification? Evidence from 70 Years of U.S. Home Heating Choices”)

Households in colder climates tend not to choose electric heating due to the relatively higher cost of electric heating per square foot. However, heating is not required in much of the South, and as a result, most of the market for heating equipment is in the North where electricity prices are higher. This factor is perhaps the central challenge for household electrification.

What Can Be Done about Household Electrification?

Davis' study highlights the challenge at the center of household electrification. Progress has been made in warmer parts of the US where a larger share of households have switched to electric heating, but the majority of heating demand lies in the North, where electricity prices are higher and electrification is more difficult.

Although we are further than many realize on the path to electrifying everything, many challenges lay ahead in the coldest regions. Because colder regions have a higher reservation price for household electrification, policymakers need to provide innovative solutions to encourage electrification in addition to offering significant incentives. Some states have taken regulatory action to ban natural gas in new construction—an approach that seeks to spur household electrification. More than anything, these types of regulation may serve as a sign of what’s to come for household electrification in colder climates. 

Guidehouse Insights expects the market for heating decarbonization to significantly accelerate in the coming decade as heat pumps and new hydrogen boiler technologies gain wider adoption. For that to happen, regulatory action, education, and incentives are necessary. For a more in-depth look at building decarbonization, see Guidehouse Insights’ recent report Decarbonizing Heat in Buildings.