Exploring Geothermal Heating and Cooling

For the last couple of weeks, I've been looking into geothermal heat pumps as an alternative to conventional HVAC units. Everything I've read says they are extremely expensive to install, but very inexpensive to operate. The bulk of the install cost coming from the well drilling required to run the closed loop system that acts as a heat exchanger with the earth. Since we have a somewhat small lot, the wells required are vertical wells that go a couple of hundred feet into the ground. These wells are expensive to drill. How expensive? That's what I set out to learn.

Based on anecdotal information off the web, I figured a system for our house would cost anywhere between $20k and $35k. Right off the bat, that sounds absurd, I know. However, right now there is a federal tax credit of 30% for the installed price and Georgia has a 35% tax credit capped at $2000. As you can see, there is quite a bit of money to be saved with these tax credits. I did a little quick math and figured that if we could get a system for under $25k it would likely be worth it, over $30k would probably not be worth it, and anything between $25k and $30k would be a tough decision.

I contacted a local geothermal HVAC company to have an estimate drawn up. I sent over the plans along with some of our specs like insulation type, roof type, window schedule, etc. Last Friday, I met the company owner at the lot to go over his load calculations, the recommended system, and of course, the price! We first went over the size of the system. Based on the load calculations, we would need a 3 ton system for the first and second floors.This would require three 200' wells to be drilled (approx. one well for every ton). We walked around the lot and discussed the location of the wells and this turned out to be easier than I expected. The tops of the wells are about three feet below grade so we can pretty much put these anywhere. They can even be put under the basement slab. It looks like we would probably have at least one under the driveway slab and two in the back yard. The load calculations assumed winter low temperatures of 22 degrees, summer highs of 95, and setting the thermostat to 70 in the winter and 73 in the summer. Most of this would be fairly accurate for us. 22 is low in the winter for Atlanta so it wouldn't happen often. Atlanta can go over 95 in the summer, but our cooling needs were actually less than 3 tons so the system could actually handle higher temperatures.

Now for the price. Not surprisingly, the price came in between $25k and $30k. Of course, nothing is easy, right? The estimate was just under $28,000. The estimated operating cost was $806 for the year. So we have an extremely high install cost with low operating cost, just as expected. But is it worth it? To determine this, I have done what's referred to as a net present value analysis. In a nutshell, this analysis looks at the difference in cost, every year, and tells you if it would be better to go ahead and invest in this project or invest in your next best alternative. The next best alternative I used is a 10 year U.S. Treasury Bond. The way net present value (NPV) works in this scenario is to compare the difference in cost of the two systems with how much that money would be worth if invested in a 10 year Treasury Bond. So for example, if the geothermal system costs $10k more than a conventional, would that money be worth more by investing it in the geothermal system or just buying the Treasury bond. If it's the same, the NPV would be zero. A negative NPV would mean the project would lose money versus the bond. A positive NPV means investing in the geothermal systems would return more on our investment than the bond.

Below is the spreadsheet I used to do this analysis. As you will see, if we live in our house for 10 years, this project has a positive NPV. This spreadsheet probably looks very confusing so let me explain each section. At the top are the cost estimates. The blue cells are our inputs and the green cells are the NPV calculations. One thing I haven't discussed yet is the basement. Since we plan on finishing the basement in three to four years, I have factored that into this as well. The geothermal contractor said the basement would need another ton at a cost of an additional $4-5k. My builder estimates the cost of a conventional unit for the basement at $5k. I assumed that the basement, which is 60% below grade, would need less conditioning so I assumed the operating cost to be one tenth of the first and second floors. I assumed this for both systems.

You'll also notice two different inflation numbers. One is for the equipment, the other for the cost of energy. I expect energy cost to increase at a faster rate than other goods and services so I used two different numbers. The regular inflation number is only used to adjust the cost of the additional basement unit since we would not be purchasing that today. The energy inflation number is used to adjust the operating costs each year.

Under the year row, there are various calculations that look rather daunting. Let me first explain each row:
1. System Cost - This is equipment and installation. Most of this expense is in year 0 (now) with the exception of year 4 where we might finish the basement.
2. Operating Cost - Energy inflation adjusted operating cost. For the conventional system, this bumps up once we install the basement unit.
3. Total expense - Total equipment and energy cost for each year.
4. Present value - The cost in today's dollars discounted by the rate of 10 year treasury rate. In reality, this should be discounted by the inflation rate, but the numbers all come out the same in the end so I used the 10 year rate.
5. 10 Year Cost - Total estimated cash outlay for a 10 year period.
6. 10 Year Present Value Cost - Total cost discounted to reflect the value (cost) in terms of today's dollars.

There are three scenarios considered:
1. Conventional vs Geothermal assuming the basement gets finished in year 4, but the geothermal system purchased is the 4 ton unit so it can be used for the basement without expansion. However, we would be conditioning an unfinished basement so this has to be accounted for in the yearly operating cost.
2. Conventional vs Geothermal assuming the basement does not get finished over the 10 year period.
3. Conventional vs geothermal assuming the basement gets finished in year 4, but the basement uses a conventional system because the 3 ton geothermal unit is purchased.

So our conclusion....we're a little bit on the fence, but leaning towards investing in the geothermal system. In all three scenarios, the NPV is positive. If you noticed the row above each NPV row, you are probably wondering what that is. That is our gain or loss if we sold the house in that year. So the worst case scenario for use would be to buy the 4 ton geothermal and sell the house after a year. That's not likely though. I think our minimum ownership time on this house is 5 years. We also have to evaluate the true likelihood that we will finish the basement. We discussed things this afternoon and I think we are having a hard time not going with geothermal since the financial data suggests that this would be the best option in the long term. Now we just need to decide if we buck up for the 4 ton in anticipation of finishing the basement.