Propane at a crossroads: Forecasting the industry through 2035

Key markets analysis

▶ Residential markets (5 billion gallons sold / 53 percent of the industry in 2024)

The residential sector is the anchor of the propane industry, representing 53 percent of the gallons sold, roughly 5 billion annually. Space heating dominates this segment, accounting for about 70 percent of residential propane use. This long-standing role is now under pressure as the market shifts toward electric heat pumps, positioning propane increasingly as a secondary or backup heat source rather than the primary one.

Four structural changes are accelerating the transition away from propane as a primary heating fuel:

⦁ Advances in heat pump technology have expanded the viable climate range for electric heating, especially with cold climate models that maintain output at low temperatures. The higher efficiency units are also cheaper to operate, reducing the operating cost advantages traditionally available to fossil fuel space heating options.

⦁ Stricter appliance efficiency standards are raising the performance bar for gas furnaces and water heaters, narrowing the cost gap between high efficiency electric and gas systems. Requirements for condensing furnaces also increase the complexity of furnace replacements and can make mini-split heat pump systems more attractive in the replacement market as well as in new construction.

⦁ Decarbonization and electrification policies, combined with utility, federal and state incentives, are actively steering homeowners away from combustion appliances.

⦁ Shifting preferences among builders and trades increasingly favor electric systems for simplicity, up-front cost, code compliance and alignment with policy trends.

These forces affect both the replacement market, where aging propane furnaces will be swapped for heat pumps, and new construction, where all-electric options offer ease and lower cost.

Heat pump technology is also advancing rapidly in water heating, a category that represents 15 percent of residential propane gallons. Heat pump water heaters are gaining market share due to efficiency standards, rebates and builder familiarity. As adoption grows, propane’s share of the water heating market faces the same structural pressures as space heating.

Despite these headwinds, two emerging energy policy concerns favor propane:

⦁ Grid resilience is becoming a central issue for utilities, policymakers and homeowners. Winter peak demand leading to outage risks makes all-electric homes more vulnerable. Propane offers a reliable, on-site energy source that can flatten the power demand during peak cold periods, replacing the electric resistance heat strip, which is a power hog and expensive to operate, as the heat pump’s backup.

⦁ Rising electricity costs are intensifying affordability concerns. As power rates climb while propane supply costs remain flat or decline, propane will become more affordable.

These pressures provide an opportunity to slow the shift toward the “all-electric home” model. Instead, dual-fuel systems pairing a heat pump with one of propane as the backup heating option will emerge as a practical solution that reduces grid strain, lowers homeowner energy outage risk, reduces the homeowner’s overall energy costs and maintains propane’s presence in the home, albeit at lower annual volumes. To be effective, however, these systems must be based on smart home, grid-connected technologies and operated in conjunction with electric utility load-control programs.

Transitioning propane from a primary to a secondary heat source has significant consequences for gallons sold. In a typical 4,000 degree-day market, a propane-heated home could lose between 300 to 600 gallons per year when switching to a heat pump-led dual-fuel system.

Our industry gallon forecast suggests a wide range of possible outcomes. However, even in our most optimistic scenarios, we expect to see declining gallon sales in the residential sector.

⦁ Optimistic scenario: If the industry successfully defends its customer base from going fully electric by accelerating dual-fuel adoption, residential gallon loss may be limited to around 300 million gallons by 2035.

⦁ Baseline to pessimistic scenario: Without strong countermeasures, heat pump adoption and higher appliance efficiency standards could drive losses of 300 million gallons by 2030 and up to 750 million gallons by 2035.

These projections underscore the urgency of strategic action that protects and grows the residential market.

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