Why Canada Should Phase Out Fuel Oil for Space and Water Heating

Canada should eliminate fuel oil space and water heating to protect consumers and the environment

Fuel oil, also known as furnace or heating oil, is Canada’s least efficient, most expensive, and most polluting way of heating buildings and water. According to the latest data, more than a million homes in Canada were heated with oil and more than a quarter million homes had an oil-fired water heater.

When they fail, if those heating systems are replaced with another that uses oil, customers will be locked into high and volatile costs. To protect customers, we should ensure all new systems use a more energy-efficient alternative, such as heat pumps, and help everyone convert from oil as quickly as possible.

The high price of heating with oil

The chart below provides a comparison of space heating bills associated with heating with fuel oil compared to a fully electric system with a cold-climate air-source heat pump (CC-ASHP) in various Canadian cities that are likely to still use fuel oil. The difference in costs is over $4,000 in most of these cities.¹

Oil prices have almost doubled in Canada since mid-2020. These figures are an updated calculation of a 2022 report by Natural Resources Canada, replacing August 2020 energy prices with February 2024 prices for an archetypical post-1980 2-storey house.

These annual costs are not only high, they can also come all at once. Oil is delivered in shipments to refill oil tanks, which can cost customers thousands of dollars. In contrast, electricity or gas customers more typically pay monthly or bi-monthly for the energy they have already used.

One reason fuel oil is expensive is because it is less efficient. Regulations require new oil furnaces to be at least 83 per cent efficient in converting energy from fuel to heat in your home. Furnaces installed before mid-2019 were required to be at least 78 per cent efficient. In contrast, heat pumps are typically 200–540 per cent efficient during regular operation because they use a little electricity to move heat from the outdoors to indoors instead of producing heat through combustion, and the electric resistance heating system that supplements a heat pump on very cold days is 100 per cent efficient in converting electricity to heat. Heat pumps provide the additional bonus of energy-efficient air conditioning.

Fuel oil also comes with added insurance premiums and leak risks. Oil leaks have the potential to contaminate soil, requiring clean-up and remediation costs that can be tens of thousands of dollars, with a risk of not being covered by insurance if the leak was preventable. This can lower property values and cause further problems if a leak contaminates neighbouring properties. Oil furnace chimneys also require regular cleaning to prevent fire.

Fuel costs are not only typically higher, they are also volatile. In only 22 months, the Canadian average price for fuel oil increased 135 per cent from January 5, 2021, to November 8, 2022. In comparison, electricity rates are regulated and the large infrastructure system costs can be spread out over time. Price increases are more predictable and can be lower than the rate of inflation.

Planning for long-term affordability 

Despite these drawbacks, people could still replace an oil-fired system with a new one. Most space and water heating system installations are emergency replacements. When it is the middle of the winter, a like-for-like replacement is the quickest. The immediate need for heat factors higher than getting locked into inflated costs over time. This is a reason for using regulations to make more efficient and lower-cost heating systems the default choice.

The average cost of a heat pump in Canada is $18,400 and an average oil furnace with a tank replacement and air conditioner cost $6,500 and $5,000, respectively. This means the higher up-front costs of switching from an oil furnace to a heat pump are paid back in less than three years in all five cities analyzed above.

Policies should help Canadians pay the up-front costs. The federal government has unfortunately ended the Greener Homes grant, yet offers an interest-free loan of up to $40,000 to finance a heat pump. For low-to-moderate income Canadians, the federal Oil to Heat Pump Affordability Program provides $10,000 in up-front support. If you live in a province that is co-delivering this program with the federal government, more support is available (up to $30,000 in Nova Scotia). News reports also indicate the federal government will be expanding energy efficiency for low-to-moderate-income Canadians to include upgrades, such as insulation, for homeowners and tenants.

A strategy to phase out fuel oil heating should help people make a plan before their oil furnace dies. This can include building envelope upgrades (insulation and air sealing) to right-size new heating systems, electrical panel upgrades or optimizations, and design of heating distribution systems. To do this, the government should provide grants, loans, tax credits, etc., not only for the material and equipment costs but for people to access expert help with the design and implementation of retrofit projects.

Canadian regulations to eliminate oil heating would follow the lead of Québec, which first implemented regulations preventing the installation of new oil furnaces, boilers, and water heaters. It started with new residential buildings in 2021 and extended to existing buildings in 2023.

Protecting both customers and the environment

With their high costs, it is not responsible for policymakers to let customers get locked into new heating oil systems. Regulating oil heating out of existence is a consumer protection measure. It also protects the environment by reducing expensive oil spills and climate change-causing emissions by using more energy-efficient equipment and cleaner fuel sources.

¹Quebec, Ontario, and the Atlantic provinces have the most homes that heat with fuel oil. We omitted Quebec because they have already banned fuel oil and included Kamloops because B.C. has the highest percentage of homes heated with oil west of Ontario. Current fuel oil price data was unavailable for Ottawa and Prince George.