Without market-shaping interventions, federal and state subsidies for energy-efficient products like heat pumps often lead to higher prices, leaving the overall market worse off when rebates end. This is a key challenge that must be addressed as the Department of Energy (DOE) and states implement the Inflation Reduction Act’s Home Electrification and Appliance Rebates (HEAR) program. 

DOE should prioritize the development of evidence-based market-transformation strategies that states can implement with their HEAR funding. The DOE should use its existing allocation of administrative funds to create a central capability to (1) develop market-shaping toolkits and an evidence base on how state programs can improve value for money and achieve market transformation and (2) provide market-shaping program implementation assistance to states.

There are proven market-transformation strategies that can reduce costs and save consumers billions of dollars. DOE can look to the global public health sector for an example of what market-shaping interventions could do for heat pumps and other energy-efficient technologies. In that arena, the Clinton Health Access Initiative (CHAI) has shown how public funding can support market-based transformation, leading to sustainably lower drug and vaccine prices, new types of “all-inclusive” contracts, and improved product quality. Agreements negotiated by CHAI and the Bill and Melinda Gates Foundation have generated over $4 billion in savings for publicly financed health systems and improved healthcare for hundreds of millions of people. 

Similar impact can be achieved in the market for heat pumps if DOE and states can supply information to empower consumers to purchase the most cost-effective products, offer higher rebates for those cost-effective products, and seek supplier discounts for heat pumps eligible for rebates. 

Challenge and Opportunity 

HEAR received $4.5 billion in appropriations from the Inflation Reduction Act and provides consumers with rebates to purchase and install high-efficiency electric appliances. Heat pumps, the primary eligible appliance, present a huge opportunity for lowering overall greenhouse gas emissions from heating and cooling, which makes up over 10% of global emissions. In the continental United States, studies have shown that heat pumps can reduce carbon emissions up to 93% compared to gas furnaces across their lifetime. 

However, direct-to-consumer rebate programs have been shown to enable suppliers to increase prices unless these subsidies are used to reward innovation and reduce cost. If subsidies are dispersed and the program design is not aligned with a market-transformation strategy, the result will be a short-term boost in demand followed by a fall-off in consumer interest as prices increase and the rebates are no longer available. This is a problem because program funding for heat pump rebates will support only ~500,000 projects over the life of the program—but more than 50 million households will need to convert to heat pumps in order to decarbonize the sector.

HEAR aims to address this through Market Transformation Plans, which states are required to submit to DOE within a year after receiving the award. States will then need to obtain DOE approval before implementing them. We see several challenges with the current implementation of HEAR: 

• Need for evidence: There is a lack of evidence and policy agreement on the best approaches for market transformation. The DOE provides a potpourri of areas for action, but no evidence of cost-effectiveness. Thus, there is no rational basis for states to allocate funding across the 10 recommended areas for action. There are no measurable goals for market transformation.  

• Redundancy: It is wasteful and redundant to have every state program allocate administrative expenses to design market-transformation strategies incorporating some or all of the 10 recommended areas for action. There is nothing unique to Georgia, Iowa, or Vermont in creating a tool to better estimate energy savings. A best-in-class software tool developed by DOE or one of the states could be adapted for use in each state. Similarly, if a state develops insights into lower-cost ways to install heat pumps, these insights will be valuable in many other state programs. The best tools should be a public good made known to every state program. 

Despite these challenges, DOE has a clear opportunity to increase the impact of HEAR rebates by providing program design support to states for market-transformation goals. To ensure a competitive market and better value for money, state programs need guidance on how to overcome barriers created by information asymmetry – meaning that HVAC contractors have a much better understanding of the technical and cost/benefit aspects of heat pumps than consumers do. Consumers cannot work with contractors to select a heat pump solution that represents the best value for money if they do not understand the technical performance of products and how operating costs are affected by Seasonal Energy Efficiency Rating, coefficient of performance, and utility rates. If consumers are not well-informed, market outcomes will not be efficient. Currently, consumers do not have easy access to critical information such as the tradeoff in costs between increased Seasonal Energy Efficiency Rating and savings on monthly utility bills. 

Overcoming information asymmetry will also help lower soft costs, which is critical to lowering the cost of heat pumps. Based on studies conducted by New York State, Solar Energy Industries Association and DOE, soft costs run over 60% of project costs in some cases and have increased over the past 10 years.

There is still time to act, as thus far only a few states have received approval to begin issuing rebates and state market-transformation plans are still in the early stages of development.

Plan of Action 

Recommendation 1. Establish a central market transformation team to provide resources and technical assistance to states.

To limit cost and complexity at the state level for designing and staffing market-transformation initiatives, the DOE should set up central resources and capabilities. This could either be done by a dedicated team within the Office of State and Community Energy Programs or through a national lab. Funding would come from the 3% of program funds that DOE is allowed to use for administration and technical assistance. 

This team would:

• Collect, centralize, and publish heat pump equipment and installation cost data to increase transparency and consumer awareness of available options.
• Develop practical toolkits and an evidence base on how to achieve market transformation most cost-effectively.
• Provide market-shaping program design assistance to states to create and implement market transformation programs.

Data collection, analysis, and consistent reporting are at the heart of what this central team could provide states. The DOE data and tools requirements guide already asks states to provide information on the invoice, equipment and materials, and installation costs for each rebate transaction. It is critical that the DOE and state programs coordinate on how to collect and structure this data in order to benefit consumers across all state programs.

A central team could provide resources and technical assistance to State Energy Offices (SEOs) on how to implement market-shaping strategies in a phased approach.

Phase 1. Create greater price transparency and set benchmarks for pricing on the most common products supported by rebates.

The central market-transformation team should provide technical support to states on how to develop benchmarking data on prices available to consumers for the most common product offerings. Consumers should be able to evaluate pricing for heat pumps like they do for major purchases such as cars, travel, or higher education. State programs could facilitate these comparisons by having rebate-eligible contractors and suppliers provide illustrative bids for a set of 5–10 common heat pump installation scenarios, for example, installing a ductless mini-split in a three-bedroom home.

States should also require contractors to provide hourly rates for different types of labor, since installation costs are often ~70% of total project costs. Contractors should only be designated as recommended or preferred service providers (with access to HEAR rebates) if they are willing to share cost data.

In addition, the central market-transformation team could facilitate information-sharing and data aggregation across states to limit confusion and duplication of data. This will increase price transparency and limit the work required at the state level to find price information and integrate with product technical performance data.

Phase 2. Encourage price and service-level competition among suppliers by providing consumers with information on how to judge value for money.

A second area to improve market outcomes is by promoting competition. Price transparency supports this goal, but to achieve market transformation programs need to go further to help consumers understand what products, specific to their circumstances, offer best value for money. 

In the case of a heat pump installation, this means taking account of fuel source, energy prices, house condition, and other factors that drive the overall value-for-money equation when achieving improved energy efficiency. Again, information asymmetry is at play. Many energy-efficiency consultants and HVAC contractors offer to advise on these topics but have an inherent bias to promoting their products and services. There are no easily available public sources of reliable benchmark price/performance data for ducted and ductless heat pumps for homes ranging from 1500 to 2700 square feet, which would cover 75% of the single-family homes in the United States. 

In contrast, the commercial building sector benefits from very detailed cost information published on virtually every type of building material and specialty trade procedure. Data from sources such as RSMeans provides pricing and unit cost information for ductwork, electrical wiring, and mean hourly wage rates for HVAC technicians by region. Builders of newly constructed single-family homes use similar systems to estimate and manage the costs of every aspect of the new construction process. But a homeowner seeking to retrofit a heat pump into an existing structure has none of this information. Since virtually all rebates are likely to be retrofit installations, states and the DOE have a unique interest in making this market more competitive by developing and publishing cost/performance benchmarking data. 

State programs have considerable leverage that can be used to obtain the information needed from suppliers and installers. The central market-transformation team should use that information to create a tool that provides states and consumers with estimates of potential bill savings from installation of heat pumps in different regions and under different utility rates. This information would be very valuable to low- and middle-income (LMI) households, who are to receive most of the funding under HEAR.

Phase 3. Use the rebate program to lower costs and promote best-value products by negotiating product and service-level agreements with suppliers and contractors and awarding a higher level of rebate to installations that represent best value for money.

By subsidizing and consolidating demand, SEOs will have significant bargaining power to achieve fair prices for consumers.

First, by leveraging relationships with public and private sector stakeholders, SEOs can negotiate agreements with best-value contractors, offering guaranteed minimum volumes in return for discounted pricing and/or longer warranty periods for participating consumers. This is especially important for LMI households, who have limited home improvement budgets and experience disproportionately higher energy burdens, which is why there has been limited uptake of heat pumps by LMI households. In return, contractors gain access to a guaranteed number of additional projects that can offset the seasonal nature of the business.

Second, as states design the formulas used to distribute rebates, they should be encouraged to create systems that allocate a higher proportion of rebates to projects quoted at or below the benchmark costs and a smaller proportion or completely eliminate the rebates to projects higher than the benchmark. This will incentivize contractors to offer better value for money, as most projects will not proceed unless they receive a substantial rebate. States should also adopt a similar process as New York and Wisconsin in creating a list of approved contractors that adhere to “reasonable price” thresholds.

Recommendation 2. For future energy rebate programs, Congress and DOE can make market transformation more central to program design. 

In future clean energy legislation, Congress should direct DOE to include the principles recommended above into the design of energy rebate programs, whether implemented by DOE or states. Ideally, that would come with either greater funding for administration and technical assistance or dedicated funding for market-transformation activities in addition to the rebate program funding. 

For future rebate programs, DOE could take market transformation a step further by establishing benchmarking data for “fair and reasonable” prices from the beginning and requiring that, as part of their applications, states must have service-level agreements in place to ensure that only contractors that are at or below ceiling prices are awarded rebates. Establishing this at the federal level will ensure consistency and adoption at the state level.

Conclusion

The DOE should prioritize funding evidence-based market transformation strategies to increase the return on investment for rebate programs. Learning from U.S.-funded programs for global public health, a similar approach can be applied to the markets for energy-efficient appliances that are supported under the HEAR program. Market shaping can tip the balance towards more cost-effective and better-value products and prevent rebates from driving up prices. Successful market shaping will lead to sustained uptake of energy-efficient appliances by households across the country.

This action-ready policy memo is part of Day One 2025 — our effort to bring forward bold policy ideas, grounded in science and evidence, that can tackle the country’s biggest challenges and bring us closer to the prosperous, equitable and safe future that we all hope for whoever takes office in 2025 and beyond.

The Technology Modernization Fund (TMF) currently funds multiyear technology projects to help agencies improve their service delivery. However, many agencies abdicate responsibility for project outcomes to vendors, lacking the internal leadership and project development teams necessary to apply a product model approach focused on user needs, starting small, learning what works, and making adjustments as needed. 

To promote better outcomes, TMF could make three key changes to help agencies shift from simply purchasing static software to acquiring ongoing capabilities that can meet their long-term mission needs: (1) provide education and training to help agencies adopt the product model; (2) evaluate investments based on their use of effective product management and development practices; and (3) fund the staff necessary to deliver true modernization capacity. 

Challenge and Opportunity

Technology modernization is a continual process of addressing unmet needs, not a one-time effort with a defined start and end. Too often, when agencies attempt to modernize, they purchase “static” software, treating it like any other commodity, such as computers or cars. But software is fundamentally different. It must continuously evolve to keep up with changing policies, security demands, and customer needs. 

Presently, agencies tend to rely on available procurement, contracting, and project management staff to lead technology projects. However, it is not enough to focus on the art of getting things done (project management); it is also critically important to understand the art of deciding what to do (product management). A product manager is empowered to make real-time decisions on priorities and features, including deciding what not to do, to ensure the final product effectively meets user needs. Without this role, development teams typically march through a vast, undifferentiated, unprioritized list of requirements, which is how information technology (IT) projects result in unwieldy failures. 

By contrast, the product model fosters a continuous cycle of improvement, essential for effective technology modernization. It empowers a small initial team with the right skills to conduct discovery sprints, engage users from the outset and throughout the process, and continuously develop, improve, and deliver value. This approach is ultimately more cost effective, results in continuously updated and effective software, and better meets user needs.

However, transitioning to the product model is challenging. Agencies need more than just infrastructure and tools to support seamless deployment and continuous software updates – they also need the right people and training. A lean team of product managers, user researchers, and service designers who will shape the effort from the outset can have an enormous impact on reducing costs and improving the effectiveness of eventual vendor contracts. Program and agency leaders, who truly understand the policy and operational context, may also require training to serve effectively as “product owners.” In this role, they work closely with experienced product managers to craft and bring to life a compelling product vision. 

These internal capacity investments are not expensive relative to the cost of traditional IT projects in government, but they are currently hard to make. Placing greater emphasis on building internal product management capacity will enable the government to more effectively tackle the root causes that lead to legacy systems becoming problematic in the first place. By developing this capacity, agencies can avoid future costly and ineffective “modernization” efforts.

Plan of Action

The General Services Administration’s Technology Modernization Fund plays a crucial role in helping government agencies transition from outdated legacy systems to modern, secure, and efficient technologies, strengthening the government’s ability to serve the public. However, changes to TMF’s strategy, policy, and practice could incentivize the broader adoption of product model approaches and make its investments more impactful.

The TMF should shift from investments in high-cost, static technologies that will not evolve to meet future needs towards supporting the development of product model capabilities within agencies. This requires a combination of skilled personnel, technology, and user-centered approaches. Success should be measured not just by direct savings in technology but by broader efficiencies, such as improvements in operational effectiveness, reductions in administrative burdens, and enhanced service delivery to users.

While successful investments may result in lower costs, the primary goal should be to deliver greater value by helping agencies better fulfill their missions. Ultimately, these changes will strengthen agency resilience, enabling them to adapt, scale, and respond more effectively to new challenges and conditions.

Recommendation 1. The Technology Modernization Board, responsible for evaluating proposals, should: 

1. Assess future investments based on the applicant’s demonstrated competencies and capacities in product ownership and management, as well as their commitment to developing these capabilities. This includes assessing proposed staffing models to ensure the right teams are in place.
2. Expand assessment criteria for active and completed projects beyond cost savings, to include measurements of improved mission delivery, operational efficiencies, resilience, and adaptability. 

Recommendation 2. The TMF Program Management Office, responsible for stewarding investments from start to finish, should: 

1. Educate and train agencies applying for funds on how to adopt and sustain the product model. 
2. Work with the General Services Administration’s 18F to incorporate TMF project successes and lessons learned into a continuously updated product model playbook for government agencies that includes guidance on the key roles and responsibilities needed to successfully own and manage products in government.
3. Collaborate with the Office of Personnel Management (OPM) to ensure that agencies have efficient and expedited pathways for acquiring the necessary talent, utilizing appropriate assessments to identify and onboard skilled individuals. 

Recommendation 3. Congress should: 

1. Encourage agencies to set up their own working capital funds under the authorities outlined in the TMF legislation. 
2. Explore the barriers to product model funding in the current budgeting and appropriations processes for the federal government as a whole and develop proposals for fitting them to purpose. 
3. Direct OPM to reduce procedural barriers that hinder swift and effective hiring. 

Conclusion 

The TMF should leverage its mandate to shift agencies towards a capabilities-first mindset. Changing how the program educates, funds, and assesses agencies will build internal capacity and deliver continuous improvement. This approach will lead to better outcomes, both in the near and long terms, by empowering agencies to adapt and evolve their capabilities to meet future challenges effectively.

This action-ready policy memo is part of Day One 2025 — our effort to bring forward bold policy ideas, grounded in science and evidence, that can tackle the country’s biggest challenges and bring us closer to the prosperous, equitable and safe future that we all hope for whoever takes office in 2025 and beyond.