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Economics of Geothermal (continued)

December 15, 2009

Have we finally reached the point where we can actually save money adopting renewable energy solutions for our homes?

The math on geothermal savings can vary widely based on a number of factors including where you live, how big your geothermal system is, and how efficient your house is (insulation, size, etc.).  Additionally, payback periods will vary widely based on the cost of the fuel that you are using.  But let’s take a real example:  my house.  In a recent post, I described how I received geothermal proposals for my property ranging from about $36,000 to $60,000 installed, not including tax incentives.  The efficiency of these systems, at least as represented by the contractors marketing them, ranged from 40%-60% energy savings (winter and summer).  So let’s take some round numbers:  50% savings and $50,000 to install, and see what the payback period looks like.

My home is heated by oil furnace in the winter, and electic central air in the summer.  My heating oil bills vary, but I typically pay about $4500 for a season of oil.  This includes oil used to heat my hot water.  This varies widely based on the price of oil.  For instance, this winter, I would expect to pay closer to $5200.  My electric bills associated with air conditioning also vary based on the price of electricity, but generally speaking, I estimate that I spend approximately $1500 per year on the incremental electricity associated with air conditioning.  So in total, I spend $6700 on energy for heating, cooling and hot water — with an expectation that this will rise in the coming years.

If I purchased a $50,000 geothermal system, and took advantage of all of the rebates that are available to me in Connecticut, my net cost would be $33,500 (30% federal tax credit, plus $1500 Connecticut utility credit — in some states the benefits could be as much as an additional 20%).  So my net investment in a geothermal system in Connecticut would be $33,500.

My total energy spending on HVAC and hot water is $6700, and I would save approximately 50% of that cost by installing a geothermal system.  So my net savings per year from the system would be $3350 (and would arguably rise over time).  Ironically (and I promise I did not plan this outcome), my geothermal system would be paid for by the savings generated by it in exactly 10 years.  If the cost of energy rises, my payback period would be faster.

So the question is:  Is 10 years a fast enough payback period for most homeowners?

I don’t think so.  Yes, it is true that many people will adopt renewable energy solutions to protect the environment, without regard to cost.   But for the vast majority of us, we need to know that renewable energy solutions are the same or maybe only a little more expensive than fossil fuel.  And 10 years is a very long time to wait for that realization.  My guess is that for widespread adoption of geothermal to take hold of the mainstream, payback periods will need to be 5 years or less.  Geothermal is still twice as expensive as it should be — even with tax breaks.  Of course if  the price of energy rises rapidly, the payback period would shorten, and could make this an attractive solution.  But given the current recession, I do not think that will happen in the next year or two.

Is the payback worth it?

There is one important addendum to this analysis that is worth mentioning and considering if you are evaluating geothermal solutions:  if your hot water heater, furnace and/or central air conditioning are nearing the end of their useful lives (furnace in about 20-30 years; AC in about 10 years), you have an additional embedded benefit.  Part of the cost of the geothermal conversion is also being used to replace equipment that you would have needed to purchase anyway.

Again, taking my numbers:  if I needed to purchase a $10,000 replacement AC system for my home at the same time that I purchased the geothermal system, the geothermal system will allow me to avoid making that $10,000 expenditure.  The real “incremental” cost of the geothermal unit would be $23,500, not $33,500.  In essence, I would be paying about 2.2 times the cost of a replacement air conditioner for a system that would save me $3350/year, as we assumed above.  At a net cost of $23,500 for the system, one could argue that the payback period had dropped from 10 years to 7 years — a meaningful increase in value because everything after that 7th year, is pure savings to the homeowner.

For simplicity, I have not included the cost of any maintenance of geothermal systems, but you should assume that some of the savings will be eaten away by maintenance although these costs are lower than traditional HVAC systems.

The facts you need to see if geothermal is for you...

So in summary, what are the most important questions to ask, or things to assess when evaluating the economic value of a residential geothermal system:

1.  Overall cost of the system installed, including all equipment

2.  Estimated efficiency or percentage of energy saved by the system.

3.  Your current bills for electricity and/or gas or oil to determine how much you are spending for HVAC and hot water energy.

4.  The age and health of your existing heating, cooling and hot water systems, and the cost of replacement.

5.  The tax incentives available in your state (I have provided a link to these savings under a government services entry appearing earlier in the year).

The tipping factors in making geothermal work in a particular installation are:

  • Tax incentives in your state
  • Efficiency of the system (how much fossil energy it will allow you to avoid)
  • The age of your existing equipment
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