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We had heat lamps in our master and guest baths. The guest bath had ~8' ceilings and the lamps worked fine. Our master bath had ~11' ceilings and you could barely feel the heat.

A test like that is not accurate unless the parameters are tightly controlled and all contributing factors noted. The meter reading includes all household electric use, not just the heat pump. Cooking? Bathing? Dishwashing? Laundry? Sunshine vs. overcast? Wet vs. dry weather (affects heat pump defrost frequency)? Did the 3°F recovery involve use of auxiliary heat strips? 2°F and 3°F setback is very minimal. More savings is potentially garnered with larger setbacks. I'm in TX. We had a rare snowfall during a wet norther on Dec 4. After that Dec 4 weather incident, I didn't run the central heating (heat pump) for several weeks. Instead, I used a space heater only in the bedroom at night. I noted that even with occasional nighttime temps into the upper 30°Fs, the unheated rooms in my house rarely dropped below 60°F. So ... if I had been running the heat pump at 70°F normal with a 2°F setback (68°F), it still would run to maintain 68°F during the setback periods ... but an 8°F to 10°F setback (setpoint of 62°F or 60°F), it would run very little during the setback periods, if at all. That'd make a difference on KWH usage in regards to setback vs. none.

Your installer is correct about hot water heater and the flue. This is a problem if the flue is a brick chimney. If it is a liner could be installed to solve the problem. You have to decide if the added cost of the line and the PVC pipe exhaust is worth it in order to get a 95%+ AFUE furnace. I think the Honeywell thermostat model is incorrect. Did you mean model 8320 instead of 8230? The 8230 is a special electric heat thermostat. Connecting a 2-stage furnace to a single stage thermostat is a very bad idea. When you do this the stages are controlled by a timer on the control board. The furnace always starts up in the first stage and then goes to the second stage after a set period of time. You loose all the benefits of a having a 2-stage furnace. The Honeywell 8320 can control two stages. But it would be best if you got the Infinity controller. Ask the installer to substitute it. It should be about the same price.