People are always attracted to geothermal heat pumps, at least partially, on payback. Who doesn’t like to save money? Payback is a more complicated issue than most would assume.
When asked ‘How much will I save?’, I reply, ‘How much do you spend?’.
A geothermal system can be 30% or 50% or 70% more cost efficient than conventional systems. However, 50% isn’t something that goes in the bank. 50% of what? There are folks out there that spend ghastly sums on space conditioning, and others that are getting by really well.
Remember, half of a lot is a lot. Half of almost nothing is almost nothing. This brings me to our strategy to treat the house as a system, which will be discussed elsewhere. Conservation is far and away the first step. However, it is difficult or impossible to conserve yourself to comfort, and after all reasonable conservation measures are in place, we can now talk about the benefits of geothermal. Even after this, I still prefer to speak of savings not as an absolute dollar amount, but in terms of $/btu delivered to the home. The formula is simple:
Fuel Type Cost of fuel / (100,000 btu/unit) / efficiency = $/100,000 btu
Oil $3.75 1.4/gal .82 $3.26
Propane $2.75 0.95/gal .95 $3.04
Electric Resistance $0.165 0.03413/kwh 1.00 $4.83
Geo Heat Pump $0.165 0.03413/kwh 4.00 $1.21
As you can see, geothermal heat pumps deliver heat into the space at under half the cost of the nearest competitor. To be honest, you could design a super insulated passive solar home that has so little heating requirements that cutting the heat bill in half would hardly matter. I say this only to reinforce the idea that your savings will depend on your consumption, and I love reducing consumption first. However, we have left the days where conservation meant ‘freezing in the dark’. A comfortable indoor environment, especially in an existing home, requires a right sized central system, and the best choice at that point is geothermal.
Of course, the absolute dollar operating cost savings is only half of the payback story. If the savings is the denominator, and the incremental cost is the numerator, then payback can be described as ‘extra cost/annual savings = years to payback’.
Geothermal is generally expensive to install, although we have done jobs where we were actually the low bidder. I say this to illustrate that the vagaries of the market can be somewhat unusual, and often depend on the individuals involved. Usually, we are looking at the question of ‘how much more, and how much do I save?’.
Incremental cost is often driven by homeowner specific factors. Why are you in the market? Building a new home, then you have to spend something on a heating/cooling system, and the incremental cost is the difference between a conventional system and the geo. If your existing unit on its way out, replacing it will cost something. Some people want to add central air. There is a cost to that as well. The added cost of a geothermal depends on your situation and what you need to spend to meet your objectives.
Nobody likes to spend money on HVAC equipment, but when circumstances dictate the need, a geo system should be considered.
We have done jobs on a strict payback basis, usually electrically heated homes, and the payback reaches out to 7-9 years. But remember, the geo has to payback the whole cost, because there are no offsetting installation savings. Even still, a 7-9 year payback translates to 11% to 14% on your money, tax free! We can discuss the financial aspects further down the line, but the next driver of payback is in the following section on government and utility support.
Government and utility support
The federal government and local utilities actively support geothermal installations. There are several reasons for this, and they are not the same for both entities. The feds like geo because it helps from an economic, environmental and national security standpoint. The economic benefit is a no brainer. Efficiently heating and cooling buildings saves money. Regardless of your political view, I think we can all agree that spending less money on something that simply goes up the chimney is a good thing. How this largess is disbursed is well outside of my purview. It seems clear that enhancing retirement or educational accounts, paying down debt or mortgages, adding to savings and investments, or simply spending a couple extra bucks on fun, are all more economically attractive than keeping the chimney warm. From an environmental standpoint, the feds like geo because it’s perfectly clean at the point of use. Since the fuel source is electricity, any environmental remediation required can be accomplished at a relatively small number of sites (power plants). This leads into the discussion of fuel mix, be it coal, oil, natural gas, nuclear, hydro or renewable. Regardless of your environmental policy stripes, I think we would all agree that we don’t want to live in what Beijing has become anymore than we would have wanted to live in Pittsburg in the days of Carnegie and Frick. Clean air and clean water matter. Geo gives us the opportunity to centralize the points of pollution more effectively than millions of fossil fuel units (oil and gas) scattered across the countryside that may or may not be running cleanly. Geo also affords us the ability to heat and cool our homes on our own using on site renewable sources, primarily solar but maybe wind. It’s not feasible to possess your own personal oil well. The national security angle is clearly illustrated by two gulf wars. If oil didn’t matter, I doubt we would have shed so much blood and treasure over a big sandbox. Heating and cooling is just one piece of the energy puzzle, but geothermal has the ability to move us away from imported energy sources towards a cleaner, more efficient and more stable energy future.
Utility interests are a little different. For a power company, the perfect customer would turn on a 100 watt light bulb, and leave it on forever. The company would have a totally stable load on its system and be able to bill out that load for every hour of every day of every month. Real life is not this way. The power companies have to construct systems that meet peak load requirements, and this is expensive. At anything but peak load, there is under-utilized capacity which is not generating money for the company. As an example, a nice house with central air and oil heat might add 5kw to the peak summer load and run about 600 hours. The power company gets to bill out 3000kwh. Take the same house and install a geo system that also draws 5kw, but runs for heat as well. Typically the geo will run for 3000 hours a year, allowing the power company to bill out 15000 kwh. No addition wires or poles or transformers or trucks or staff is required for the extra income.
Federal Tax Support:
Residential –Federal tax credit of 30%, uncapped
Commercial –Federal tax credit of 10%, uncapped
Maximum Accelerated Cost Recovery System (MACRS) – benefit up to 38% uncapped
Many of the incentives/benefits cover the entire cost of a new geothermal HVAC system, or retrofit/improvements to an HVAC system. These improvements can include the following costs:
- Geothermal source (ground loop)
- Geothermal heat pump equipment
- Ductwork and specialties
- Controls and indoor air quality (IAQ) items
- Electrical service connections
- Excavation & recovery costs
- Engineering and drawings, permits and fees
Federal incentives for geothermal HVAC systems that are currently in effect through the year 2016 include different criteria for commercial and residential.
If you are a residential customer, all you need is to be a taxpayer and fill out a form IRS 5695. You will get 30% of the entire cost of the geothermal HVAC system back in direct tax credits, which can be rolled over from year-to-year until they get the full incentive. For simple math, a $30,000 HVAC system will receive a $9000 tax credit, on your very next tax filing, through 2016.
If you are a commercial entity that owns his commercial property, that entity receives a 10% federal tax credit. The deal sweetens when MACRS is applied. The geothermal HVAC system is depreciated in an accelerated manner from 27 years down to an abbreviated five years. 50% bonus depreciation is also applied the first year; a huge plus. This 50% bonus has been extended and modified several times since 2008, most recently in January 2013 by the American Taxpayer Relief Act of 2012. By taking advantage of the commercial/corporate geothermal HVAC tax credits and incentives, an expenditure of $1 million for a geothermal HVAC system will net tax incentives amounting to $480,000 over five years under current program guidelines. A 48% tax incentive for corporate clients is clearly favorable to the 30% tax credit for residential clients.
Utility Support :
We are centered in Connecticut, so this part is limited to Nutmeg denizens. Utility support programs have taken on various forms annually since we first got involved in the ‘Energy Crafted Home’ program, back in 1993. Currently, NU and UI support geothermal retrofits with a rebate of $500/ton, capped at three tons. Program requirements for retrofits include participation in the HES program, which in my opinion is the best thing ever. Everyone should do at least the energy audit. Remember, conservation is the best, and these guys will help you tighten up the house and at an extremely moderate cost. New construction requires entry into the Federal Tier 3 Energy Star program, which is rather involved, but for those with the will, it can yield significant rebates, and more importantly, a very efficient home. Connecticut is also home to a few municipal electrical service providers, and they coordinate their rebate efforts through CMEEC. Currently, their program affords a $150/ton rebate for geothermal with no ceiling.
You can see that we are in a favorable market with the many incentives for the implementation of geothermal HVAC technologies. It does take a little legwork on the part of the contractor and consumer.
About Cash Flow
A geothermal system can dramatically reduce energy expenses, but often at a higher installed cost compared to conventional systems. Some lucky folks just pay cash, which is the cheapest way to finance the geothermal installation. Not everyone is in that situation, but it simplifies things. If the geothermal system has a seven year payback, your invested money is yielding 14% (in after tax dollars). This could be thought of as a tax free municipal bond that pays 14%. Not a bad investment. We have a customer who paid for the installation with money he had in his retirement account. When I asked how he thought of it, he considered it an investment in a different asset class. Instead of making 5% in his retirement account, that same money is now making 14% in his basement.
Every month, the bills come in. Two of the largest are usually the mortgage and the energy bill. The incremental cost of a geothermal system is usually financed in some way, either by rolling it into a higher mortgage, or a home equity loan. A comparison of the sum of the monthly loan and energy payments of a house with a conventional system and the same house with a geothermal system will result in a lower monthly cost with the geothermal system. The results vary with the home, energy prices, interest rates and terms. The geothermal system will almost always produce a positive monthly cash flow from the date of installation.
Admirals Bank has an innovative loan program geared toward financing energy efficiency upgrades. Rates and terms vary, and for current specifics, please contact:
Another financing option in Connecticut is run by the Connecticut Housing Investment Fund (CHIF). Program details can be found at: