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Economics of Geothermal

The environmental benefits of geothermal are indisputable.  A residential geothermal installation typically supplies 4 to 5 kilowatts of heat for every kilowatt of electricity used.  Without getting into the engineering details of energy measurement, geothermal can be as efficient as requiring only 20% fossil fuel (electricity) to supply 80% renewable energy.  This varies widely depending upon application, but the basic concept is that in optimal installations, a geothermal system can cut your heating and cooling bills by up to 80%.  In extreme cold or warm climates, these numbers will be lower, but based on my research, geothermal is likely to easily yield savings of at least 50% in fossil fuel costs related to heat and cooling.

geothermal co2

In addition, the federal government currently provides a 30% tax rebate (dollar for dollar credit, not just a deduction) against the full cost of a geothermal installation.  Various states top off these federal subsidies with generous programs.  For instance, Connecticut exempts geothermal heat pumps from sales tax, as well property tax increases related to the increased value of the system.  Connecticut also provide for low interest rate loans of up to $25,000 (single family home) and $60,000 (multi family dwellings) for geothermal installations (10 year repayment terms).  Connecticut state utilities add on an additional $1500 of rebates for installing a system.  Other states such as California, New Jersey and New York have generous programs that add to the federal credits. Check your state’s programs here.

All in all, government incentives can reduce the cost of a geothermal installation by up to 50%!

So heating and cooling bills that can be reduced by 50-80%, government incentives that cover as much as 50% of the cost… geothermal is a no-brainer right?  Well, not quite.

Geothermal isn’t just messy.  It’s expensive.  I had a tough time finding contractors that specialized in residential geothermal — and an even tougher time getting them to come to my house and provide a detailed proposal.  It’s a complicated system to design and install, and every set up is custom.

I’ve received three estimates for my home:  $50,000, $36,000 and $60,000 (pre-rebates).  Why is this so expensive?  The components of a geothermal project include multiple contractors:  well drillers, excavators, electricians, plumbers and heating/cooling specialists.  With all of those contractors and sub-contractors, the mark-ups on service add up.  Excavations and well-drilling are an expensive component and the well-drilling market is not very competitive.  A single well typically costs at least $10,000 to drill in the Northeast, and can be more depending upon the type of soil and rock encountered.  In Connecticut, well drillers must be licensed by the state, and there is a strong well driller lobby, which has limited new entrants and competition.  On my $60,000 estimate, well drilling comprised $18,000 of the quotation.  Finally, contractors are all aware of the rebates and replacement factors which impact the economics of a geothermal installation, and it’s possible… that the prices reflect their assumption of what the final, post-rebate price will be.  In other words, it’s unclear whether geo installations are actually more expensive today than 3 years ago because contractors know that the government is subsidizing up to 50% of the cost.  The lowest of the 3 estimates that I received was prior to the availability of all of the current government rebate programs.

Like any complex project involving multiple contractors, I also received feedback on widely varying designs.  One contractor suggested that we drill two or three wells to ensure that enough energy would be generated by the system.  Another contractor recommended a heat exchange unit that would have added to the cost of the project.  One contractor, after being asked too many questions, sent me an email that he was not interested in doing the project at all.

The bottom line:  multiple contractors on a complex project with little competition is a prescription for inefficiency and high costs.  Buyer beware!

A big factor in determining the economic efficiency of a residential project is the age of the homeowner’s existing heating and cooling system.  The reason is that the geothermal pump will replace the air conditioning and in many parts of the country may replace the heat and hot water furnaces as well.  So if your air conditioner is ready for replacement, you can psychologically view part of the geothermal installation as a replacement of your a/c — potentially up to $10,000.  For homes with newer systems, it’s far less economical to discard new heating cooling systems for a new geothermal system.

So who is geothermal right for?

  • Homes located anywhere in the U.S.
  • With even small amounts of land
  • With owners who don’t mind a temporary mess in their yard
  • With older and less efficient a/c and heating equipment that is near replacement age
  • In states with solid incentive programs on top of the federal government’s 30% rebate program

Next up… payback periods for geothermal and then on to solar.


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