California has long served as the regulatory bellwether for the rest of the country when it comes to building energy standards. The state's Title 24 Building Energy Efficiency Standards, updated on a three-year cycle by the California Energy Commission, set the minimum energy performance requirements for all new construction and major renovations in the state. The 2025 update, which takes full effect in 2026, marks a decisive shift toward building electrification that will reshape how portfolio owners plan capital expenditures for their California properties.
The centerpiece of the update is a set of requirements that effectively mandate heat pump technology for space heating and water heating in most new commercial construction. While the code technically allows alternative compliance paths, the performance thresholds are set at levels that make gas-fired heating equipment extremely difficult to justify under the prescriptive or performance compliance methods. For practical purposes, heat pumps are now the default heating technology for new commercial buildings in California.
What Changed in the 2025 Title 24 Update
The 2025 Title 24 update builds on the 2022 code cycle, which introduced heat pump baselines for residential construction. The new update extends this approach to the commercial sector with several key provisions that portfolio owners must understand.
Space Heating Requirements
New commercial buildings are now required to meet space heating efficiency levels that are calibrated to heat pump performance. The prescriptive compliance path requires heat pump systems with a minimum coefficient of performance of 3.0 at standard rating conditions. Gas furnaces and boilers, which typically operate at COPs between 0.8 and 0.95, cannot meet these thresholds. The performance compliance path allows designers to use any technology they choose, but the reference building against which their design is compared now assumes heat pump heating, making it extremely difficult to show compliance with combustion-based systems.
Water Heating Requirements
Commercial water heating is similarly affected. The updated code requires heat pump water heaters for most commercial applications, including multifamily buildings with central water heating systems. Exceptions exist for specific use cases such as commercial kitchens and industrial process heating, but the general direction is clear. Gas water heaters are being phased out of new construction.
Existing Building Triggers
While the most stringent requirements apply to new construction, the updated code also affects existing buildings through its alteration triggers. When an existing building undergoes a major renovation that includes replacement of heating or water heating equipment, the new equipment must meet the current code requirements. This means that when a gas boiler in an existing building reaches end of life, its replacement must comply with the heat pump performance thresholds unless the owner can demonstrate that a gas system meets the performance compliance requirements.
Capital Planning Implications for Portfolio Owners
The financial implications of the heat pump mandate extend beyond the cost of the equipment itself. Portfolio owners must account for electrical infrastructure upgrades, changes in operating costs, and the strategic implications of building electrification on long-term asset value.
Equipment Costs
Commercial heat pump systems currently carry a cost premium over equivalent gas-fired systems. For a typical 100,000-square-foot office building, a heat pump HVAC system costs approximately $15 to $25 per square foot installed, compared to $10 to $18 per square foot for a conventional gas system. This premium is expected to narrow as manufacturing scale increases and the supply chain matures, but for projects under development now, the incremental cost is real and must be budgeted.
Electrical Infrastructure
Converting from gas to electric heating significantly increases a building's electrical load, often requiring upgrades to the electrical service, switchgear, and distribution panels. For older buildings with limited electrical capacity, these upgrades can cost $5 to $15 per square foot, sometimes exceeding the cost of the heat pump equipment itself. Portfolio owners should assess the electrical capacity of every California property in their portfolio to identify buildings where infrastructure upgrades will be required.
Operating Cost Changes
The operating cost impact of switching from gas to electric heating depends heavily on local utility rates. In California, commercial electricity rates average approximately $0.22 per kWh, while natural gas costs approximately $1.50 per therm. At a heat pump COP of 3.0, the effective cost of heat pump heating is roughly $2.15 per therm equivalent, compared to $1.88 per therm for a gas furnace operating at 80 percent efficiency. However, heat pumps also provide cooling, potentially eliminating the need for separate cooling equipment and reducing overall mechanical system complexity.
Portfolio owners should model the total cost of ownership over a 15 to 20 year horizon, accounting for equipment costs, infrastructure upgrades, energy costs, maintenance savings, and the avoided cost of future gas system replacements. In many cases, the lifecycle economics of heat pumps are favorable even when the upfront costs are higher.
Electrification and the Utility Cost Landscape
Building electrification fundamentally changes the utility cost profile of a property. As buildings shift from gas to electric heating, their electricity consumption increases substantially, often by 30 to 50 percent. This shift has several implications for utility cost management that portfolio owners need to plan for.
Demand Charges
Commercial electricity rates in California include demand charges based on a building's peak electrical load. Adding heat pump heating to a building's electrical load can increase peak demand significantly, particularly during cold morning hours when heating demand coincides with lighting and plug loads. Demand charges can represent 30 to 50 percent of a commercial electricity bill, and unmanaged increases in peak demand can erode the operating cost savings that heat pumps otherwise provide.
Time-of-Use Rate Impacts
California's commercial electricity rates increasingly use time-of-use pricing, with higher rates during peak afternoon hours and lower rates during off-peak periods. Heat pump operations can be partially shifted to off-peak hours through thermal storage or pre-heating strategies, but this requires intelligent controls and careful system design. Portfolio owners should evaluate their buildings' rate structures to understand how electrification will interact with time-of-use pricing.
Tracking the Transition
As buildings transition from gas to electric heating, property teams need to track both the reduction in gas consumption and the increase in electricity consumption to verify that the transition is performing as expected. Unexpected increases in electricity costs or demand charges may indicate equipment issues, control problems, or rate structure mismatches that need to be addressed.
Incentives and Financing Options
California offers a range of incentives and financing mechanisms to offset the cost of building electrification. Portfolio owners should evaluate these programs carefully, as they can significantly reduce the net cost of compliance.
- The California Self-Generation Incentive Program provides rebates for heat pump systems that meet specific efficiency thresholds. Rebates vary by utility territory and system type but can cover 15 to 25 percent of equipment costs.
- The Inflation Reduction Act's commercial building tax deduction, Section 179D, provides deductions of up to $5.00 per square foot for buildings that meet specific energy efficiency targets. Heat pump installations that contribute to meeting these targets may qualify.
- PACE financing, available through programs like CaliforniaFIRST and HERO, allows building owners to finance energy improvements through property tax assessments. This approach can spread the cost of electrification over 20 to 25 years with no upfront capital requirement.
- Utility on-bill financing programs offered by PG&E, SCE, and SDG&E provide low-interest loans for qualifying energy efficiency and electrification projects, with repayment structured through the utility bill.
Preparing Your California Portfolio
Portfolio owners with California properties should begin planning for Title 24 compliance now, even for buildings where equipment replacements are several years away. The planning process should include a comprehensive assessment of every property's current heating and water heating systems, electrical capacity, and utility cost structure.
Conduit's utility data platform provides the foundation for this planning process by centralizing energy consumption and cost data across your California portfolio. By tracking gas and electric consumption at the meter level, Conduit enables property teams to model the impact of electrification on each building's utility costs, identify buildings where electrical infrastructure upgrades will be needed, and prioritize capital investments based on equipment age, compliance requirements, and financial impact.
The transition to heat pump technology is not optional for California portfolio owners. It is a matter of when, not if. Property teams that begin planning today will be better positioned to manage costs, capture available incentives, and protect the long-term value of their California assets.