Myth Number Two: Geothermal is Too Expensive.
This myth is often circulated, and is clearly untrue. For starters, I’d maintain that every homeowner is buying a geothermal unit. Most just don’t have one. They have equipment that while less expensive to install, is constantly eroding their savings account. There are two costs associated with the choice of an HVAC system. The first is obvious. How much to install it? The second is less clear and it involves the operating and maintenance costs through the years. Everyone’s situation is different, but I maintain geothermal is the best choice for nearly every homeowner’s situation. For new construction, alterations or additions, system replacements, or straight retrofits, the only logical and compelling choice is a geothermal system. The only difference between the different situations is how well the numbers work for geothermal. When compared to conventional options, geothermal ranges from a good choice to a complete no-brainer. Is geothermal more expensive from an up-front cost basis? Usually, but looking a little further down the road is always a good idea. The first two things we need to determine are the extra costs of a geothermal system, and the annual savings, to generate a simple payback period.
On the savings front, geothermal’s advantage is relatively easy to determine. I don’t want to bury you with numbers, but I always like it when claims are at least backed by a listing of assumptions, If we assume oil @ $3.75 and 85% efficiency, propane @$3.00 and 95% efficiency and electricity @$0.18 with the geothermal unit at 400% efficiency, we center in on a roughly 60% reduction in the cost to provide heat to a home with geothermal. For older equipment, we can assume a 65% efficiency and the percent reduction in operating cost achieved by the geothermal is 68%. The question is how does this reduction play out over time, or more specifically, does it justify the additional expense?
The additional cost is a tough nut to crack. I’m a contractor and so are all of my competitors, both geothermal and conventional. We quote jobs and over the years I’ve seen margins move around depending on conditions. I looked into using RSMeans data for a comparison, but I just don’t feel it is representative of the contracting world. Sometimes quotes are a little heavy, and sometimes contractors are motivated to go get the work. For homeowners, this means they can be subject to a wide variance in pricing.
An apple to apple comparison is also important. Depending on the state of the original home, some of the costs of our quote provide capability or value that was not in the original house, most notably central air. Some of the geothermal cost needs to be credited and the additional investment cost of the geothermal adjusted downwards to reflect this improvement. I’d like to walk through a few jobs we did and show our cost, compare them to a reasonable estimate of the alternatives, and project the savings and payback for the choice our customer made.
Example #1: New Construction
The calculated heat loss is 33,758 btuh for 2985 square feet of space. This is a super efficient shell. Using a simplistic heating degree day model, and the above given assumptions, the expected fuel consumption for fuel oil would be $2,467.50. A 60% reduction in this cost yields an annual savings of $1,480. Our contract was for $29,899.00 for the geothermal and duct work. The loop installation added $9,600 for a total job cost of $39,499.00.
For this house, we would need to compare the geothermal system to a high quality conventional system, most likely what is called hydro-air. This system would be composed of a boiler ($7 K), two air handlers ($2 K each), two outdoor condensers ($2.5 K each), one indirect fired water heater ($2.5 K), an oil tank ($1 K) and a chimney ($1 K). Our cost for ducting is $11,830 and can assumed to be common to both the geothermal and conventional. If we total up the conventional component parts and add in the common duct costs, the conventional system costs $32,330.00. The geothermal is $7,169 higher. Given a straight line payback assuming the savings indicated above, we’re looking at 4.8 years.
There is more to the story. The big incentive is the 30% tax credit, uncapped, for geothermal installations. In this case, it’s worth $11,849.70. Homeowners can also get a $1,500.00 credit from the state conservation fund. Yes, the geothermal has a higher initial price tag, but at the end of the day, the whole concept of payback is exploded in this example because there are no extra costs to pay back. Out of pocket, geothermal costs $26,149.30 and conventional costs $32,330.00. The nearly $1,500/ year you save goes right into your pocket. When I said ‘no brainer’ above, this is the example I meant. For new construction, the incremental cost of geothermal is negligible but the benefits extend for decades.
Example #2: Existing house with no air conditioning, no ductwork and an older system.
This home is a log cabin that was previously heated with an oil system. It had no duct work or air conditioning. The calculated heat loss for this home was 46,554 btuh for 2050 square feet. Please note this home requires 22.7 btuh/sq ft. The above listed super insulated home only requires 11.3 btuh/sqft. My point is that it is not the size of the home that determines equipment size. It’s the amount of heat required.
Since this home had an older system, about 65% seasonal efficiency, the expected savings of the geothermal is 68%. Using heating degree day calculations, this home would consume $3787.00 per year for heating. The new install saves $2,582.00/year.
We installed a five ton geothermal system into this house at a contract price of $33,986 which includes $3,000.00 for trenching costs. Part of the cost ($7,500), was to install duct work. Let’s see how the numbers really work.
Operating cost savings are $2,582.00 first year. Installed cost is $33,986.00. The 30% credit reduces the cost to $23,790. We then get $1,500.00 in a rebate from the conservation fund lowering the investment to $22,290. We need to value the addition of central air to the home. The cost of the duct component ($7,500.00) plus $4,500.00 for a condenser and air handler should be about right, reducing the investment to $10,290.00. Payback period is just under four years.
Example #3: Existing house with no air conditioning, with duct work and an older system.
This home is a 30 year old raised ranch with an addition of f of the back. It had the original furnace and ductwork, but no central air. The heat loss for the 2628 square foot home is 46,546 btuh, essentially identical with the previous home. Original consumption and projected savings are therefore the same.
Our contract price was $33,450 and the horizontal loop required $3,000 in excavation for a geothermal price tag of $36,450.00. After tax credit and rebates, the cost is $24,015. This home was done at a time when additional rebates were available but since that $5,000 is no longer available, I ignored it. The duct work was existing but the furnace was on its way out and would have required $5,500.00 for replacement. There was no central air so a condenser is needed, but the furnace serves as the air handler (+2,500.00). These items reduce the geothermal extra cost to $16,015.00. Operating cost savings of $2,582.00 annually nets a payback period of 6.2 years.
Example #4: Existing house with air conditioning and an newer system.
This is a 3284 square foot home with newer original equipment and full conventional central air. The heat loss calculates to 53,701 btuh and the original system operated for $3,925 per year. The annual savings are $2,354.
Our installed cost was @29,200 plus $10,620 for the vertical ground loop for a total of $39,820. They still got the tax credit and rebate to lower the installed cost to $26,374. Since the original equipment was relatively efficient for fossil fuel and in good shape, the owners really didn’t need to do anything. This is the worst case situation for geothermal in regard to straight payback. This house should recoup the investment in 11.2 years. Payback period is often a jaundiced way of evaluating conservation measures. If I where to offer you a tax free municipal bond that paid 8.93% interest, you might be very attracted to it. That is the same financial performance as the geothermal system.
The examples above are meant to illustrate the importance of each customer’s situation and the effect it has on evaluating the finances of a geothermal installation. We only credited the geothermal system for operating cost savings on heat. There are also operating cost savings on cooling and domestic hot water. Several other benefits that are very real include reduced maintenance costs, increased reliability, reduced insurance costs (decreased fire hazard) and increased resale value. The above analysis also does not escalate the cost of energy, often given at +4% per year, which would increase the saving year over year.
To illustrate that effect, let’s look at our examples and compare the ten year cost of ownership for the original system and the geothermal and escalate the fuel cost by 4%. Cost of ownership combines installed cost with annual operating expenses. In all cases, the geothermal saves money. The savings are listed below.
Example # 1: $23,950
Example # 2: $20,710
Example # 3: $14,985
Example # 4: $ 1,528
The least attractive payback still produces a savings in ten years, but as you can see, the savings are dramatic in the other three cases. I knew example # 4, was going to be rough and the decision has to hinge on other factors. Some people want the oil tank out of their lives. Others are planning on a photo voltaic system. The thing I find interesting in this comparison is example #1 through #3. I knew #1 was a no-brainer, but #2 and #3 are right behind it. It seems if anything is wanting in your current system, a conversion to geothermal is nearly as compelling as new construction. If you have a system that needs replacing or would like to add central air, the numbers are right there.
There are less tangible but equally real benefits such as the more stable and secure nature of the price of electricity compared to fossil fuel and the ability to combine the geothermal with a photo voltaic array to result in a tremendous level of energy independence and security.
Other areas of this site discuss other benefits of geothermal, so there is no need to go into them here. I wanted to stick to the dollars and the examples above prove geothermal is at least a good investment and more often a fantastic one.