Buildings are a significant contributor of carbon emissions. As the broader economy transitions to net zero, various stakeholders are pushing for building decarbonization—whether it’s real-estate investors who have made net-zero commitments, policy makers setting emissions limits, or tenants looking for greener spaces. Electrifying space and water heating systems is one way to reduce building emissions—and electric heat-pump technology, which has improved and become cost-competitive in certain markets, has emerged as an increasingly viable solution.

Heating and cooking in commercial and residential buildings account for 6 percent of global CO2 emissions, according to our recent report on the net-zero transition. (By factoring in emissions from total electric power consumed, energy use by buildings contributes approximately 27 percent of global CO2 emissions. 1 1. Thibaut Abergel et al., Tracking buildings 2021, International Energy Agency, November 2021. ) These emissions are largely due to the on-site use of fossil fuels such as oil and natural gas.

Building heat has typically been a challenge to electrify at scale because of the high cost and complexity of converting a wide variety of current heating systems (steam, hot water, forced air, to name a few), as well as the relative cost-effectiveness of fossil-fuel energy sources in most cold weather population centers. However, electric heat pumps have become an increasingly effective way for buildings to decarbonize due to operating, equipment, and installation costs becoming more competitive in certain markets, as well as developments in heat-pump technology. (A heat pump uses refrigerant and electricity to transfer heat from outdoor air or the ground to the inside of a building, even in colder temperatures). Today’s models are 2.2 to 4.5 times more efficient than gas furnaces. If implemented worldwide, using heat pumps instead of traditional boilers and furnaces could cut global CO2 emissions by 3 gigatons per year. According to McKinsey analysis, heat pumps could constitute approximately 90 percent of new heating unit sales by 2050, compared with 35 percent today.

Heat pumps are an optimal decarbonization solution for only certain building types. When assessing for viability, building owners and other stakeholders will often need to start by looking at a building’s current heat distribution system (exhibit).

Buildings with forced air or low-temperature hot water distribution, for example, tend to be good candidates for heat-pump retrofits, as they don’t require high operating temperatures. However, distribution systems that require high operating temperatures, such as steam, might make less sense for a retrofit. For some buildings and markets, heat-pump conversion could be significantly expensive compared with other low-emissions options, including hybrid boiler systems in which a fossil-fuel backup turns on when electricity prices spike (in certain cases, the gas distribution system could continue to provide reliability and resiliency in the case of power outages 1 1. This will require gas-powered heating units to be able to function without electricity, but that should not pose a significant barrier technologically. ). Regions that rely on district heating are markets in which decarbonizing central facilities could be more cost-effective than installing individual heat pumps.

Our research suggests that shifting demand, an evolving policy landscape, falling costs in certain markets, and technological improvements have all given heat pumps momentum as a decarbonization lever. However, heat pumps are not a one-size-fits-all solution (see sidebar, “Are heat pumps a fit?”). There are additional options to decarbonize a building’s energy use, including “greening” power generation with renewables (whether utility scale or on-site), electrification of cooking appliances, energy-efficiency improvements to a building’s envelope, and installation of smart building controls (such as thermostats).

In this article, we’ll focus on the potential for heat pumps to help reduce building emissions and decarbonize real-estate assets, as well as possible actions stakeholders can consider. These actions are based on homeowner surveys and more than 50 interviews that we conducted with utility leaders, contractors, manufacturers, real-estate developers, and property managers.

Momentum to electrify building heat is accelerating, as investors, tenants, and regulators in many markets press for decarbonization. In response, building owners are increasingly exploring heat pumps as an energy-efficient, cost-effective solution. The interest in heat pumps is driven by four trends.

Major real-estate investors, lenders, property managers, and tenants have made decarbonization commitments that now need to be met by reducing operating emissions of buildings. Given that space and water heating are the primary contributors of building emissions, electrification represents a meaningful step toward realizing decarbonization goals. Assuming the electricity were to come from clean sources, electrifying space and water heating in residential and commercial buildings where it is feasible could reduce those buildings’ 2016 heating emissions by 20 percent.

Policy makers, particularly in Europe and the United States, are beginning to introduce legislation supporting building decarbonization, including changes to building code requirements, bans on gas connections to new buildings, emissions limits (with financial penalties for noncompliance), and incentives. Examples of recent regulatory shifts include the following:

Heat pumps are approaching cost parity compared with fossil-fuel sources of heat in multiple markets. Rising natural gas prices in certain regions, particularly in Europe, as well as continuing improvements in energy efficiency have given heat pumps an operating-cost advantage in some cases.

Equipment and installation costs, which have historically posed the biggest economic barrier to heat-pump adoption, are beginning to decline. 8 8. “Ditching costly gas and oil is cheaper thanks to heat pump scheme,” United Kingdom press release, May 23, 2022; “Fact sheet: President Biden takes bold executive action to spur domestic clean energy manufacturing,” White House press release, June 6, 2022. Increased competition among OEMs—including Asian manufacturers of air-conditioning systems, which now produce air-to-air heat pumps at scale—is leading to lower equipment prices. In markets where adoption is more prevalent, the labor costs of installation have gone down, due to improving technical expertise. In a few Nordic countries, for example, installation of a typical air-to-air heat pump requires an average of two person-days, compared with four to eight person-days in the rest of Europe, according to our analysis.

Developments in technology, including refrigerant composition and better compressor speeds, have improved heat pumps’ effectiveness. 9 9. Thibaut Abergel, Heat pumps, International Energy Agency, November 2021. On average, the efficiency of heat pumps increases by about 2 percent annually, our research found. Rising cold temperature coefficient of performance values, a measure of energy efficiency, have made heat pumps effective in some Nordic climates. 10 10. While heat-pump technology for colder climates has become more efficient, air-to-air heat-pump systems in these areas still typically require backup heating (geothermal systems do not). Additionally, when outdoor temperatures reach the 0–5°F range during winter, heat pumps can lead to spikes in electrical load, which can challenge buildings’ electrical panels and grid infrastructure. For customers with concerns over the efficacy of cold climate heat pumps, hybrid systems (for example, electric heating solutions combined with backup fossil-fuel heating) can be deployed. According to a 2014 study, approximately one-fourth of Norwegian households were already heated by heat pumps, for example. 11 11. “Large increase in the use of heat pumps,” Statistics Norway, July 14, 2014.

While heat pumps offer a potential decarbonization solution, they don’t currently meet every building and building owner’s needs. Operational viability and installation costs vary widely across different types of buildings, due to factors such as age, size, and the current heat distribution. It’s key for building owners and other relevant stakeholders to have flexibility in considering different decarbonization paths, even if timelines are tight (to meet new emissions-reduction targets, for example).

Heat-pump adoption at scale could benefit from actions taken by multiple stakeholders, both collectively and individually. Aside from policy makers—many of whom are already taking steps—building owners, heat-pump manufacturers, electric utilities, and investors are among the potential stakeholders that could help accelerate building-heat decarbonization in the near and medium term.

Building owners may face new regulatory guidelines or shifting tenant demands when it comes to heating. In some markets, a heat-pump system could potentially be cost-competitive. Building owners could be proactive in understanding their options and planning for upgrades by considering a few potential actions:

There are potential ways heat-pump manufacturers could play a role in market activation and widespread adoption, including the following:

Electric utilities are at the intersection of multiple stakeholders that would be involved in heat-pump adoption at scale and have the potential to play a convening or coordinating role. And greener electricity is key to optimizing heat pumps’ potential as a decarbonization strategy. Traditional electric utility actions could include:

There is potential for private-equity and real-estate investors to consider building decarbonization as an investment priority. As we explored in a recent article, real-estate leaders are looking to decarbonize their assets, future-proof portfolios, and create new sources of value. McKinsey research on the net-zero transition estimates that decarbonizing the buildings sector would require increased capital spending at an average of $1.7 trillion per year between 2020 and 2050.

Investors could help to set and track decarbonization targets, and could work with relevant stakeholders (for example, operators and tenants) to explore how heat pumps might help meet those goals. Investors may also explore different financing models for electrification (energy-as-a-service leases, for example) and related energy-efficiency measures.

Additionally, innovation is still needed to advance building decarbonization in areas such as electrical infrastructure and energy management. These could be areas for start-ups to consider, for example, with backing from venture capitalists.

Electrifying building heat is a key and challenging step in achieving global and local net-zero goals, as well as in decarbonizing real-estate assets. It will likely require a significant investment of time, money, and planning. A one-size-fits-all solution doesn’t yet exist, as full electrification might not be suitable for a subset of building types or energy delivery systems. However, electric heat pumps have emerged as a viable decarbonization technology for many building types and could provide a path to energy efficiency and emissions reductions.

Gustav Bolin is an associate partner in McKinsey’s Stockholm office, Ann Hewitt is a consultant in the New York office, Blake Houghton is a partner in the Dallas office, Charlie Jersey is a consultant in the Dusseldorf office, and Evan Polymeneas is a partner in the Chicago office.

This article was edited by Andrew Simon, a senior editor in the Seattle office.

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