Are Heat Pumps a Commodity?

A commodity is something meaningfully undifferentiated and priced by market forces. Items from Supplier A and Supplier B are interchangeable, without meaningful differences in form, fit, or function.

When you think about commodities, you probably picture bags of rice or barrels of oil.

Commodities can be filtered by attributes or quality levels. For example, the USDA defines different grades of ketchup, which must meet specific texture, taste, and consistency criteria.

If you ran a restaurant and wanted to source packets of ketchup, it’d be reasonable to ask a few different suppliers for quotes on USDA Grade A ketchup, sort from price low to high, and order the cheapest one.

Differentiating the undifferentiated

Because a commodity is priced by market forces, it’s a race to the bottom by default. If someone sells a commodity, it’s in their best interest to convince you they aren’t, because that’s the only way for them to gain pricing power.

Commodity producers generally have a few options:

• Sell at market rate. Farmers selling soybeans in bulk to their co-op.

• Make the product differently, moving it into a different class. “We produce these non-GMO organic soybeans with no chemicals or pesticides, using heirloom seeds. That’s why they cost more.”

• Differentiate through branding or influence. Imagine if MrBeast had a line of soybeans...

• Process it into something unique. “These are soybean chips made from my grandma’s 200-year-old recipe. Time Magazine says they're the most unique chip they've ever tasted.”

• Convince customers their product is different when it actually isn’t. “Green Pod Farms’ soybeans are garbage. Ours are plumper, fresher, and last weeks without refrigeration.”

Gas furnaces are a commodity

Let’s tie this back to HVAC.

Residential furnaces in the US come in 4 basic widths - ‘A’ cabinets are 14.5” wide, ‘B’ cabinets are 17.5”, ‘C’ are 21”, and ‘D’ are 24.5”. They’re all roughly the same depth and of similar height.

Virtually every furnace is powered by a standard 15A, 115V electrical circuit.

There are a couple efficiency tiers - "standard efficiency" models convert 80% of their input fuel into heating, while "high efficiency" turn 90+% of the input into heat.

And there’s range of capacities - how much heat the furnace can put into the house.

You can visualize these options in a simple table:

In most cases, an HVAC contractor would measure the existing furnace, find a matching one from their supplier, and "swap boxes". Just like a restaurant owner would choose a Grade A ketchup.

Sure, there are different manufacturers that offer varying warranty terms, paint colors, or availability of spare parts. But for all intents and purposes, these furnaces are interchangeable commodity products with an identical function.

Many mechanical components are commodities!

Furnaces aren’t unique in being a commodity. As a mechanical engineer, I’d often order parts from McMaster-Carr for my projects. They stock nuts and bolts, pumps, and pretty much everything in between.

If I was rigging up a test stand and I needed a pump, I’d pick out one that met the specifications I needed and had the right interface. I didn’t care if it was made by Grundfos or Baldor or Goulds. McMaster abstracts that information away.

I might receive a Goulds pump for my order today, but a Baldor pump when I placed another order in 3 months. No worries! I designed my system with a few key requirements for the pump, and as long as the pump met those requirements, it would work.

Equipment doesn't always feel like a commodity

Interestingly, when you talk to many contractors, you wouldn’t get the sense that HVAC equipment was a commodity. You’ll hear a lot of technicians say things like "I'm a Carrier guy", or "I'm a Trane guy".

Sales conversations in homes often revolve around brand, and attributes of different models.

And this makes a lot of sense, because HVAC systems are big purchases, and we’re used to brand being an important factor when making other big purchases! Contractors can lean on the professionally produced literature from the brands that they sell to highlight how their proposal is better.

But much of this is Coke vs Pepsi tribalism. Furnace designs are fairly consistent with each other, with some minor layout differences. Most brands use the same handful of suppliers for core parts like blower motors and gas valves.

Seriously, furnaces are a commodity

I’m pretty sure that most HVAC manufacturers know that the equipment they sell is a commodity. When you look at how furnaces are named, you can see a consistent structure across brands.

When a contractor goes to their supplier, they typically rattle off a few key attributes and the rep lets them know what’s in stock. Depending on availability or cost, a contractor might switch from their “usual” brand.

It probably explains why manufacturers have incentives like luxury vacations and invitations to sporting events for contractors that install a lot of their equipment. They need to find things beyond their product to differentiate themselves with.

You know who else offers luxury vacations for their customers? Soybean seed producers.

Heat pumps aren’t really a commodity yet

For something to be a commodity, it needs to be easily interchangeable with other options on the market. And right now, that’s not the case for ducted heat pumps in the US. While furnaces generally share the same voltage, similar outer dimensions, and other key parameters, heat pump designs can vary wildly.

Not only are they different from the gas furnaces that they’re replacing, but they’re inconsistent with other heat pumps (often, even heat pumps from the same manufacturer have significantly different interfaces)!

This adds a substantial amount of overhead and engineering to every single retrofit project. HVAC contractors are used to box swapping - and for heat pump equipment to truly become a commodity, it needs to be designed to enable that.

Over the past year or so, I’ve started to see a glimpse of this future. Equipment manufacturers are starting to develop heat pump hardware specifically targeting gas furnace retrofit.

They’re paying attention to the little details - where the ductwork hooks up, the equipment voltage, interoperability with parts from different brands. This heat pump air handler from ADP exemplifies what a retrofit-focused design could look like (and it’s a piece of equipment we often use at my own company, Vayu, for our heat pump installations).

Heat Pumps can be commodities

That’s not to say that heat pumps can’t be commodities. In fact, single zone mini-split heat pumps exemplify this. They all have roughly the same form factor, wiring, dimensions. In some countries, you can buy them at an electronics store.

I’m hopeful that heat pump designs will converge into consistent standards that are shared across brands. We’re already starting to see this, with some of the designs I highlighted earlier.

But I have good reason to worry that this won’t happen. And the thing that worries me the most is proprietary controls.

Tailwinds to commoditization

For the longest time, HVAC controls have been built around 24VAC wiring. The logic is pretty simple - the thermostat will tell the equipment when to turn on and off. The thermostat is nothing more than a fancy switch.

But manufacturers realized that they could squeeze extra efficiency out of HVAC equipment if the thermostat tells it more than just to turn on or off.

If the heat pump knows that the inside of the house is 72 degrees, and has been increasing at 1 degree per minute, it can adjust the speed of the compressor to minimize energy and maintain a steady temperature.

The problem is that these thermostats have been built with proprietary communications protocols. A Carrier thermostat won’t work with Mitsubishi equipment, a Mitsubishi thermostat won’t work with a Gree system. And a Carrier indoor heat pump unit won’t work with a Mitsubishi outdoor heat pump unit.

This crushes the dream of commoditized heat pump equipment. Remember that ADP air handler I was raving about earlier? ADP actually doesn’t make any heat pump outdoor units. They only make the indoor units - that’s what they specialize in.

That same ADP unit could be used with outdoor units from multiple different brands, and controlled by a variety of different thermostats. This has historically been true with ACs and furnaces. You could use a Trane furnace with a Carrier AC and not cause any big issues.

While it comes from a noble goal of increasing performance, I suspect the push to proprietary standards has been intentional. It’s a way to move equipment away from being a commodity, giving the manufacturers more pricing power.

HVAC Contractors definitely aren’t a commodity

All this talk about HVAC equipment being a commodity might have you thinking that HVAC contractors are a commodity, too.

And it’s understandable to think that, given the general advice that you should shop around for quotes and get proposals from a few different contractors before you choose one.

Many homeowners take that to mean that they should get 10 quotes and choose the cheapest one. Which would be a good strategy, if every single HVAC installation was the same. Unfortunately, that’s just not the case.

A Department of Energy study found that 70-90% of AC and Heat Pump systems have at least one performance-compromising fault, many introduced at the time of installation.

Even HVAC experts can have challenges with their contractors! Bill Spohn, an industry veteran that runs a company which sells HVAC tools, had an improperly installed heat pump in his own home.

Many installers skip important steps like making high quality flare connections or pulling a proper vacuum to prevent the formation of acids that will break down the components over time. Even more cut corners with their sizing, using rules of thumb and dramatically oversizing systems.

Until the average quality of installations increases, choosing the right installer might be one of the most important decisions you’ll make when you’re getting a heat pump for your home.

Commoditization is important for market transformation

Why does it matter if heat pumps are a commodity?

We can look at other technology transitions for a clue. Lithium-ion battery cells are the core commodity for electric cars, home batteries, and utility scale energy storage. We look at their price with a simple metric, $/kWh. Similarly, the cost of solar panels can be tracked by $/Watt.

We don’t have to distinguish whether a solar system has SunPower, LG, or GAF modules - they’re all graded by the same cost metric.

For heat pumps to follow similar adoption curves, the equipment needs to become a commodity. And I believe we can get there, with the right nudges.