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The Unusual Cost Structure of Geothermal Heat Pumps

Since writing my post Planning for a Heat Pump Furnace in Michigan, I’m getting closer to taking the plunge. I’ve learned some interesting things along the way, most of all about geothermal, which was not on my radar at first. This post looks at the near- and long-term costs of geothermal heat pumps and the incentives they create.

Does cost matter? It shouldn’t, but it does. At a societal level, the urgency of electrification is well-established. Humanity must replace fossil-fuel-burning equipment with electric alternatives and the grid that powers them must be converted to running on renewables. The future is grim if these things don’t happen.

In the face of ecological collapse, it shouldn’t much factor into the equation whether electrification costs somewhat more or less than continuing to spew carbon. At least, not at a societal level.

But for individuals faced with replacing an old gas furnace, of course cost is a deciding factor. As I got price estimates and read, I made a spreadsheet for some basic cost comparisons of geothermal vs. high-efficiency gas heat (with electric A/C). The result surprised me.

In the short term, geothermal is way more expensive. I have a small lot, so would need to have more-expensive vertical loop wells instead of horizontal. Installing those wells is a five-figure cost. Then a manifold of pipes gets built above those vertical loops and routed into my basement. Also expensive. Then I need the actual heat pump unit that extracts heat and blows it into my house, akin to the gas furnace being replaced. (In the summer, it runs the other direction, dumping heat into the ground and cooling the home). All of these costs hit at once.

Then it gets interesting. The in-ground loops last upwards of 50 or 100 years with no additional costs. All that gets serviced and replaced over time is the heat pump unit, which is in the same cost ballpark as the combination of a high-quality furnace & air conditioner. It should last longer than those conventional counterparts, in part because it’s doing a low-stress job with a constant heat source as opposed to combusting gas.

Where I would save money is on operating. Geothermal couples a high-efficiency technology, the heat pump, with a constant source of heat or cold, year-round. This improves on an air-source heat pump, which doesn’t require the in-ground infrastructure but is inefficient when trying to cool using very hot air or draw heat from frigid winter air.

Modeling the savings is tricky. Cost inputs depend on your heating and cooling needs, fuel and electricity costs, and other factors. For instance, my electric utility (DTE) offers a separate meter for geothermal units that pays a lower rate. But to generalize, the US Department of Energy suggests that geothermal reduces winter heating costs by 50%. Another page quotes the EPA as saying overall savings are 30-60% annually. Even assuming only 30% savings, my calculations were that over the lifespan of the project, geothermal pays for itself and then much more.

My quick estimate showed that by the time the first heat pump unit is replaced at Year 25 after installation, the total lifetime cost is even with gas (100% of the cost). That is, in Years 2-25, the lower operating costs of geothermal recouped the big initial outlay. And now the loop is paid for and continues to work! So in Years 26-50, geothermal would cost only about 57% vs. gas.

At that point I may not be alive, much less living in the same home. But someone will be living there and reaping the benefits of the geothermal loop as they save 43% each year on their heating and cooling costs, likely beyond Year 50.

All of which makes the cost structure and incentives unfortunate. Geothermal is the most efficient way to heat and cool a home in Michigan. It’s also the cheapest, in the long run, even considering the massive up-front expenses. But it’s that first homeowner who has to take the financial hit. And most homeowners rightly balk at the upfront costs.

The tax credits (30%) on a new geothermal system are great. But they mostly benefit wealthier homeowners. Missing from the picture is a simple and widely-marketed financial instrument that would provide long-term financing for the installation costs and bundle with the home. The Department of Energy alludes to such a mortgage:

When included in a mortgage your investment in a GHP [geothermal heat pump] may produce a positive cash flow from the beginning. It may also be possible to include the purchase of a GHP system in an “energy-efficient mortgage” that would cover this and other energy-saving improvements to the home. Banks and mortgage companies can provide more information on these loans.

I hope to learn more about such financing arrangements. But even if great ones exist, the fact that they’re not widely known and used indicates a missed opportunity. Geothermal heat pumps save homeowners money, conserve energy, and reduce carbon emissions. Society benefits from their widespread adoption. We just need an easy, common way to spread out the upfront cost.

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