Michigan utilities are overcharging customers with electric heat, some experts say

ANN ARBOR, MI - They put solar panels on the roof. They installed new windows and blew insulation into their walls. Then, they threw out their gas furnace.

John Lofy and his wife, Laura Rubin, have ticked off a list of green updates to their 110-year-old home in a leafy Ann Arbor neighborhood. But going fully electric for their heating and cooling with a new heat pump, while a win for the environment, is one step that isn’t paying for itself.

“We figured that we would take a hit in costs, and we have, for sure,” Lofy said. “This has basically doubled our electricity use.”

It may be a common story, but some argue it doesn’t have to be.

As Michigan homeowners ditch gas furnaces in favor of heat pumps — much more efficient and environmentally-friendly alternatives that run on electricity — utilities could offer lower rates, better supporting a major pathway to slash carbon emissions from buildings, experts say.

Rather than burning a fossil fuel like gas or oil to warm a home, heat pumps use electricity to transfer heat, acting like an air conditioner in reverse.

The source of the heat can be underground, as with geothermal systems, but it’s commonly the outside air. Models like the one Lofy and Rubin installed extract heat even from the winter air, and work in reverse in the summer to cool their home.

Heat pumps have outsold gas furnaces nationally for two years running, and the Biden Administration’s signature climate law offers up to $2,000 incentives for installations, aiming to slash emissions from home heating and cooling as the power grid adds more renewable energy, like wind and solar, to meet demand.

But as it stands, the switch from gas could pump up annual energy costs by $1,154 on average in cold climates like Michigan, on top of upfront installation costs, a University of Michigan study of 51 homes found.

That’s in part because in DTE Energy’s Southeast Michigan service territory, electricity is about five times more expensive per unit of energy than gas, said study co-author Parth Vaishnav, an assistant professor of sustainable systems at UM.

Home weatherization, like added insulation and air sealing around doors and windows can drive utility bills for heat pumps down and make costs comparable to furnaces, but those retrofits are expensive and likely out of reach of many low-income households, Vaishnav’s study found.

Even with efficiency upgrades, Lofy reported that his regular home energy bills rose $100 or more in the winter with the new heat pump, compared to the old gas furnace, and pump didn’t quite make up the difference with savings in the summer.

But how power companies set their rates also plays an important role, some experts say.

“The argument we’re making is that it’s also because the way our electric rates are designed. They’re paying too much for the electricity,” said Douglas Jester, managing partner with the policy consulting firm 5 Lakes Energy, who has urged DTE on behalf of environmental groups to consider making changes.

As it stands, DTE’s power rates are formulated by allocating its costs to different customer classes based on usage during the time of year when the grid is under the highest strain, on hot summer days, Jester said.

But while heat pump users contribute a comparable amount to other households to that summer peak, they’re also using significantly more power in the winter to heat their homes when the grid is less stressed — and paying the same rate.

“That results in the household with electric heat paying more for distribution over the course of the year than the household that does not use electric heat, even though their cost of service as measured by the utility is the same,” Jester said.

He argues electric heating customers are effectively subsidizing the gas furnace majority, still nearly 75% of households in Michigan, per U.S. Census Bureau estimates.

One solution could be a special electric heating rate bringing lower winter costs, something already offered by utilities in Illinois and Massachusetts.

“That would help pretty enormously,” said Missy Stults, sustainability and innovations director for the city of Ann Arbor, which is offering residents rebates for home energy improvements like heat pump installations as part of its climate efforts.

Read more: Ann Arbor wants residents to get rid of gas furnaces to fight climate change

Jester, representing groups like the Michigan Environmental Council and Michigan Chapter of the Sierra Club, has recommended state regulators require DTE to study that possibility as part of ongoing legal proceedings where the utility is seeking to hike its electric rates.

In a written statement, DTE spokesperson Ryan Lowry didn’t address whether or not the utility supported a new electric heating rate.

Setting rates is a “highly technical and complex undertaking” that plays out before state regulators, who must examine evidence and proposals submitted by nearly 30 organizations participating in the process to set rates that are “fair and balanced for all customers,” providing comment on the proposals in the process, Lowry said.

DTE offers $250 to $1,000 rebates for customers who install heat pumps, a dedicated geothermal rate and a separate “CoolCurrents” rate for customers with air-source heat pumps or central air conditioning, which it says offers savings during the heating months.

But, Jester said, the rate requires a separate meter and wiring at homeowners’ expense, and some may choose not to participate because it allows DTE to interrupt service temporarily during peak periods.

Consumers Energy, Michigan’s second largest power provider behind DTE, does not currently offer a special rate for heat pumps, spokesperson Brian Wheeler said in a statement.

The company has a responsibility to provide “affordable service” to both electric and natural gas customers, he said. “We always will serve customers’ heating needs, whatever they choose, while noting that natural gas is a very affordable heating fuel in Michigan compared to electric heat.”

Consumers stands for “fair and equitable rates,” and its electric rates are legally required to be based on the cost of providing service and approved by state regulators, Wheeler added.

It’s not just environmental benefits that come with heat pumps, experts say.

In the winter, cool temperatures mean electric equipment like transformers are not as stressed.

“There’s actually a benefit to inviting more power onto a system that’s been sized for the summer because in the wintertime, you just have that much more capacity that it can run,” said David Gard, a senior consultant with 5 Lakes Energy, who works alongside Jester.

Fossil fuels like gas are also vulnerable to price spikes, while renewable energy comes with predictable costs, he said.

Heat pumps can also result in more comfortable and consistent heating. And electrifying appliances like water heaters and stoves can also eliminate indoor air pollution caused by gas-powered devices, associated with conditions like asthma, Gard added.

That’s been Rita Mitchell’s experience.

She installed a heat pump in place of an ailing 50-year-old gas furnace in her Ann Arbor home, with the environment in mind.

She no longer contends with the temperature peaks and valleys that came with the furnace, nor does her family have to raise their voices to talk over its noise, she said.

Plus, she’s disconnected her gas line, and her home is ready to be powered exclusively by renewable energy as the grid transitions that direction, Mitchell said.

Mitchell reported the change hasn’t made a big difference in her energy costs, but she also made energy efficiency improvements to her house.

She supports a separate rate for heat pump customers, to correct the rate discrepancy advocates like Jester described.

“I would hope they would,” she said. “Because if what they’re charging for isn’t really happening, that’s just not correct from a business perspective.”