Removing Barriers to Geothermal Heat Pump Deployment in New York

A great deal of progress has been made in decarbonizing the power sector through deployment of clean electricity generation technologies such as wind and solar.  But other technologies essential to our efforts to combat climate change, such as geothermal heat pumps, which are critical to decarbonizing buildings (which represented 32 percent of 2019 greenhouse gas emissions in New York State) are only beginning to be deployed at scale.  Additional actions in 2023 to unlock deployment of geothermal technologies are essential to meet our goals.

On the federal front, the Department of Energy (“DOE”) has set a goal of powering at least 40 million U.S. homes with renewable geothermal by 2050.  In an effort to do so, the DOE ran a $13 million funding opportunity that closed in October 2022 that would help to deploy geothermal district energy systems.  To help encourage geothermal electricity generation, in December 2022, the DOE announced $15 million in funding for two projects that will reduce the cost of developing geothermal energy by generating at least a 25% improvement in drilling rates.

In New York, last year the state legislature passed and the Governor signed a bill for a residential geothermal heat pump tax credit, and the Climate Action Council, in its final Scoping Plan, repeatedly emphasized the importance of heat pumps with respect to the broad requirements of building electrification.  The Scoping Plan is New York’s framework for achieving economy-wide greenhouse gas emissions reductions of 40 percent by 2030 and no less than 85 percent by 2050 from 1990 levels, as required by the Climate Leadership and Community Protection Act (“CLCPA”).  The Scoping Plan recommends sector-specific and economy-wide actions with respect to the state’s buildings.  Geothermal systems, using ground source heat pumps, are widely recognized as the most effective and efficient building decarbonization strategy but, to achieve widespread adoption, the state will need to navigate several key cost and regulatory barriers.

In this post, we discuss two regulatory challenges to geothermal deployment that the state is poised to address in 2023: 1) outdated environmental regulations written for oil and gas wells that are currently applied to, and unnecessarily hinder, closed-loop geothermal borehole installations; and 2) utility rate structures that fail to reflect the value of geothermal resources.  In each context, the imposition of outdated policy is unnecessarily impeding heat pump adoption and thus threatening the New York State’s ability to achieve the CLCPA’s requirements.

New York’s “500-foot Rules”

One 500-foot geothermal borehole can provide the heating capacity for many smaller single-family homes in New York State.  But larger homes and multifamily and commercial buildings require more geothermal capacity – which can be achieved by either going deeper or by installing more boreholes.  The permitting requirements that are currently applied by the Department of Environmental Conservation (“NYSDEC”) for geothermal boreholes depend on whether the borehole is lesser or greater than 500 feet deep, and were first developed in the 1970s to regulate oil and gas extraction wells.  Beyond 500 feet, each geothermal borehole is subject to the same onerous permitting and financial security requirements, on a “per-well” basis (even though closed-loop boreholes are not, in fact, wells), as oil and gas wells.  To illustrate, the financial security currently required for a project in New York that requires 1-25 boreholes less than 2,500 feet deep is $2,500 per well.  For larger, commercial systems that require more than 100 boreholes less than 2,500 feet deep, the required financial security increases to $100,000.  These requirements add significant, and unnecessary costs as compared to New York’s neighbors in, for example, Massachusetts, Connecticut, New Jersey, and Ontario.

New York State’s current regulations prohibit siting “wells” within 150 feet of any public building or area that may be used by the public and were expressly adopted in the “interest of public safety.”  While this may make sense for oil and gas production wells, closed-loop geothermal systems often must be sited closer than 150 feet to the building that the system serves to maximize the system’s efficiency, and there is little to no associated public safety risk.  Another holdover requirement is that any “well” must not be located less than 660 feet from the boundary of any “lease” – which refers to oil and gas leases and serves no practical or public safety purpose when applied to geothermal systems.  Further, geothermal installers must provide the NYSDEC with a well completion report accompanied by bagged samples of drill cuttings.  As the drilling of a geothermal borehole does not pose a risk of soil contamination, the requirement to provide bagged drill cutting samples is unnecessary and ill-fitting.

In reality, where it may be desirable to drill a single borehole deeper than 500 feet – for example, in more densely populated cities and environments where parcels are not large enough to accommodate multiple boreholes – the additional permitting and financial security requirements impose insurmountable costs, impeding market adoption.  Therefore, the New York State geothermal industry has eschewed boreholes deeper than 500 feet in favor of multiple boreholes of less than 500 feet (which add unnecessary cost), and the market has excluded projects that lack the space to drill multiple boreholes.

The New York State Climate Action Council’s Scoping Plan acknowledged that the regulatory requirements for geothermal boreholes deeper than 500 feet are a challenge to building electrification and recommended that NYSDEC develop new regulations to relieve the economic and time burden associated with the current scheme.  The state must move quickly in 2023 to reform its outdated rules for geothermal drilling if it is going to make necessary progress in its effort to decarbonize its existing building stock.

Utility Rate Structures

Geothermal heat pumps have substantial upfront costs for equipment and can also result in an inverse cost shift where they increase the owner’s electric utility bills through their increased delivery charges.  Current electric utility rates, which tend to be volumetric (i.e., customers pay a dollar amount per kilowatt of usage for both deliver and supply) were designed assuming customers were using fossil-fueled technologies for heat and hot water, and therefore do not appropriately compensate efficient, electrically driven technologies such as geothermal heat pumps for the benefits they provide to the system.  For example, New York predominantly has a daytime, summer peaking grid, while geothermal heat pumps tend to draw electricity from the grid mainly during off-peak times in the winter and at night.  Also, when cooling, geothermal heat pumps use 30% to 40% less electricity during peak summer periods, providing a valuable demand reduction to the grid.  Due to when and how they operate, geothermal heat pumps do not impose significant demands on the electric grid at peak times, so their installation is less likely to necessitate utility system upgrades to meet increased peak electricity demand.  However, since the default option for residential utility customers is a standard volumetric rate, the geothermal heat pump customers will end up paying more than their fair share of costs they put onto the system – a significant disincentive.  There has also been little recognition of the fact that increasing proliferation of heat pumps via redesigned rates can improve energy affordability – both for the heat pump owner and also for those customers who, for financial or other reasons, need to remain on fossil fuels for the time being.

While the State and utilities are taking many steps to increase heat pump deployment, including equipment incentives and increased education and outreach efforts, so far, little is being done to build more attractive rates for the technologies.  However, the Scoping Plan called out the need for rate reform, stating:

The PSC and DPS should lead consideration of dynamic underlying electric rate structures and programs (such as dynamic load management) that provide appropriate price signals to customers to incentivize deployment and usage of DERs, including heat pump systems, EV charging, battery and thermal storage, and other load flexibility measures that promote more efficient utilization of the electric delivery system and help to mitigate summer and winter system peaks.

In reality, a fundamentally new rate design is needed that more accurately reflects the benefits provided by these technologies.  Alternative rate structures are nothing new – in fact, New York utilities have offered alternative rate designs since the 1970’s in the form of time-of-use (“TOU”) rates.  Under TOU rate structures, customers are charged lower rates for energy consumed during off-peak periods, and higher rates for energy consumed during peak periods in an effort to influence the customer’s behavior.  In some utilities, such as National Grid upstate, there are “super peak” periods where customers pay even higher prices for summer afternoon usage (think rideshare app surge pricing during rush hour).  Despite the fact that TOU rates are offered by all of New York’s major utilities, these rate offerings have been adopted by relatively few customers, suggesting that TOU rates are not well understood and/or, alone, are insufficient to drive investment in heat pumps.

Given that the State recognizes the need for greater heat pump proliferation (for example, the Climate Action Council Scoping Plan stated that 1 to 2 million homes must be electrified with heat pumps by 2030), we’re anticipating that utilities will begin to explore rates that better incentivize electrification technologies such as heat pumps in the near-term.  Con Edison has already taken this step by creating an optional demand-based heat pump rate in its 2020 Rate Proceeding.  However, the adoption has been slow, with only 81 enrolled customers (4 of whom are geothermal customers).

Creating a new rate design is no small task, and there are several questions that need to be explored when designing the rates, such as whether they should be technology agnostic (i.e. should they apply only to heat pumps or to multiple electrification technologies), volumetric- or demand-based, and whether there should be a price guarantee (i.e., at the end of their first year of the electrification rate, the utility would perform a reconciliation to determine whether the customer would have paid less on their traditional rate, and if so, the customer would be refunded the difference).

These questions and challenges are not insurmountable, however, and efforts in other states can and should help guide New York.  For example, Central Maine Power recently established a pilot seasonal heat pump rate.  DTE Energy in Michigan similarly offers a geothermal heat pump rate.


New York State can take decisive and prudent action to reduce barriers to geothermal deployment, which – together with federal goals and funding – can hasten the scaling of geothermal technologies across all building sectors, and in all areas of the state. The industry (and we) will be watching closely for the necessary regulatory, permitting, and rate structure reforms to achieve the cost declines that will enable more widespread deployment.

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