Published October 5, 2026
By NZero
Every building owner facing a performance standard eventually asks the same question: which upgrade should we do first? The answer depends on the building, the rules it must meet, and the price of the energy it uses. Fresh 2026 data on heat pumps and heat pump water heaters shows why that question is getting easier to answer for some buildings and harder for others.
This post walks through the market signals, the factors that drive retrofit return on investment (ROI), the policy landscape, and how a data-driven tool like NZero can turn all of it into a ranked list of upgrades.
Heat pumps are now close to half of U.S. cooling equipment shipments. According to AHRI shipment data reported by ACHR News, heat pump shipments rose 17.6% year over year in July 2026, the second-best July since tracking began in 2010. Heat pumps made up 45.1% of combined air conditioner and heat pump shipments that month, and they have grown year over year for six straight months.
The longer view is even clearer. July heat pump shipments are up 172.7% since 2010, compared with about 40% for air-conditioner-only units. Over the past decade, central AC declined while the total cooling market grew 16.8%, which means heat pumps supplied all of the net growth.
Water heating is moving the same way. Electric water heater shipments grew 23.1% between July 2016 and July 2026, while gas units fell 1.8%. In July 2026, electric units outsold gas by roughly 52,000. Facilities Dive credits mandates and long-term electrification trends for sustaining this demand despite federal headwinds.
Gas equipment remains a large part of the picture, though. July 2026 was the fourth-highest July for gas furnace shipments in the 17 years of AHRI data. For retrofit planning, that means hybrid and staged approaches deserve a fair evaluation alongside full electrification.
For a building subject to a performance standard, retrofit ROI has five parts:
The weight of each part changes from building to building. A hotel in Seattle, an office in New York, and a school in Texas can face very different math for the same piece of equipment. That is why a single, universal ranking of retrofits rarely holds up.
Federal incentives are gone. Heat pump water heaters (HPWHs) lost their federal tax credits at the end of 2025, according to the Advanced Water Heating Initiative’s 2025 State of the HPWH Market report. The 25C credit had covered 30% of installation costs, up to $2,000. The report notes an immediate drop in new construction installs after the credit ended. Any payback model built before 2026 needs to be rerun without it.
Local incentives fill part of the gap. AWHI tracks 150 HPWH incentive programs across the U.S. as of February 2026. Some regions with low historical adoption, such as the Southeast, saw sales accelerate thanks to well-designed rebates. Incentive value is local, so it has to be modeled by address.
Installation costs can make or break a project. Electrical work is often the hidden cost. In California’s TECH program, 21% of rebated HPWHs were 120-volt plug-in units, and they cut installation cost by 22%. In a Chicago affordable multifamily retrofit, using a gas tankless heater as backup for central HPWHs avoided about $100,000 in electrical upgrades that electric resistance backup would have required.
Operating savings depend on the baseline. Top HPWHs now exceed 4.0 UEF, about four times as efficient as a standard electric resistance tank. Replacing electric resistance therefore saves far more than replacing an efficient gas unit in a region with cheap gas.
Load shifting adds value under the right tariff. Commercial systems from manufacturers like Laars and Mitsubishi now include CTA-2045 controls that let operators load up and shed demand on schedule. Under time-of-use rates or demand charges, that flexibility becomes real dollars.
Timing matters. A federal efficiency standard taking effect in 2029 will effectively require electric tank water heaters over 35 gallons to be HPWHs. As that date approaches, the cost premium over a like-for-like replacement shrinks. For many buildings, the strongest ROI comes from replacing equipment at end of life rather than early.
Compliance value is the hardest part of ROI to model because the rules keep changing. The AWHI report describes 2025 as a year of both breakthroughs and setbacks.
Some rules are tightening:
Others are loosening or stalled:
For building owners, the takeaway is to model compliance on a timeline. An upgrade that looks optional today can become required, and the reverse can happen too.
NZero recommends retrofits based on the standard a building has to meet. To rank those recommendations by return, the model needs the right inputs and a clear way to score them.
The measures to compare
The inputs that matter most
How to score each measure
The output should be a ranked list paired with a sequence. A building might add HPWH controls this year, replace a failing boiler with a hybrid system in 2027, and complete full electrification when the chiller reaches end of life.
A few blind spots are worth naming before anyone commits capital:
The direction is clear even with these gaps. Heat pumps and HPWHs keep gaining share, products are improving fast, and a federal water heater standard arrives in 2029. The buildings that capture the best returns will be the ones that match each upgrade to their own rules, rates, and replacement schedule. That matching is exactly the work a standards-based recommendation engine is built to do.
