De-Carbonizing our Household’s Energy

Like many others, I’ve been increasingly sensitive to the amount of fossil fuel our household consumes and decided to try and eliminate our dependence on carbon-derived energy.

Our heat and hot water is fueled by heating oil and in this note, I’ll focus on my quest to shift from oil-based heating to electric heat pumps. In another note, I chronicled our journey to solar-powered photovoltaic cells to supply our electricity and you can read that here.

Overview

For those who don’t want to read through it all, the “TL;DR” is that for my situation a switch from oil heat to heat pumps for heating, cooling, and hot water is not financially feasible over any reasonable time horizon. But, for many others, it can be a good move.

To make this switch, circumstances matter.

• For new construction or a major renovation, heat pump technology should make better economic sense than traditional oil- or gas-based heating systems. Go for it.
• For an existing home needing to replace an oil- or gas-based HVAC system or a central air conditioner, it’s likely to be economically reasonable to switch to heat pumps. Go for it.
• For an existing home with a working HVAC system, it is almost certainly not economically viable as the payback period is, essentially, never. (This is my situation.)
• For rental properties, the incentives to de-carbonize are more challenging as the property owner would incur the capital costs and switching risks while the renter would receive the benefits of lower utility bills. In theory, it’s doable but good luck with that.
• Having solar panels can significantly sway the economics in favor of heat pumps as the cost of your additional electricity may be $0.
• These economics are greatly influenced by the various tax credits and rebate incentives provided by the federal government, your state, and your utility.

To significantly reduce our dependence on oil- and gas-fueled heating, the federal government would need to make this a higher priority by using a combination of more carrots (tax credits and subsidies) and sticks (a carbon tax).

Heat Pump Technology Explainer

Air-based heat pumps can both heat and cool your house. In the winter, they extract heat from the cold outside air and transfer this heat to warm your indoor air; in the summer, they reverse direction and extract heat and humidity from inside your house and transfer it outside.

Ground-based (i.e., geothermal) heat pumps work similarly but use the year-round ~50 degree underground temperature to do the heat transfer — great for both winter heating and summer cooling. They’re more energy efficient than air-based pumps but are more expensive as they require drilling hundreds of feet deep in your yard and running pipes to capture that energy.

Details

My goal was simple: replace our oil-based energy — and our boiler, hot water heater, and oil tank — with heat pumps.

Our heat, hot water, and air conditioning would be powered by electric heat pumps and we’d eliminate ~640 gallons of heating oil we burn per year. The savings would cover the capital cost of the conversion as well as the additional electric bill.

That was the idea but it didn’t it add up. Why not?

• Heat pumps consume a lot of electricity and the best estimate was that it could double my electric bill. Nearly half of the heating oil savings would be absorbed by the additional cost of electricity.
• Our house has 100 amp electric service and we’d need to upgrade to 200 amps to cover all the needs of the heat pumps. This would add a substantial cost to the project.
• The heat pump equipment would probably not last as long as my current oil burner, which should provide another 25 years of use.
• There are other non-monetary benefits. The removal of an oil tank and its small risk of a catastrophic leak, the removal of gas and associated improvement of inside air quality, and the removal of a small risk of carbon monoxide poisoning from the burning of these fuels are important considerations but they don’t easily quantify into dollars.

The Incentives

A quick explainer on the incentives:

• The feds offer a 30% tax credit with certain caps for energy efficiency projects including heat pumps, heat pump hot water heaters, and necessary electrical upgrades. A tax credit is a dollar-for-dollar reduction in your federal taxes; this is significant and is the primary impetus to make these projects viable.
• Massachusetts (where I live) offers few state tax credits for energy efficiency projects but the electric utilities offer significant rebates for heat pump installations. These rebates only apply if you convert the entire house’s heat, rather than supplementing an existing carbon-based heating system. Air-based heat pumps receive a $10,000 rebate and ground-based receive $15,000. The utilities also provide a smaller rebate for a heat pump hot water heater, as well as a 75% subsidy for insulation upgrades.
• Some other incentives are difficult to quantify and thus hard to fully value when doing this analysis. The tax credits are easy to understand, as is the direct subsidy from MassSave, a non-profit funded by the utilities. However, there are also ongoing payments that the homeowner receives for 10 years and it’s unclear how much these may be worth. I estimated it to be a few thousand dollars over 10 years.

The Numbers

I received proposals from two HVAC contractors. One provided two air-based options and one ground-based and the other provided a single air-based option. The prices varied, depending on the manufacturer and the HVAC installer. To keep things simple, I’m merging the three air-based heat pump proposals into a single one that can serve as a reasonable proxy of what to expect for an air-based installation and as a comparison to the ground-based option.

My approach was simple:  how many years would it take to recoup my investment (net of incentives) from the savings of no longer paying for heating oil?

Here are the costs for ground- and air-based heat pumps in my home:

• The pre-incentive total cost for ground-based was $68,000; for air-based, the total cost was $47,000. This included the 200-amp upgrade.
• Now it got interesting as the ground-based qualified for $37,000 of tax credits and incentives and air-based “only” qualified for $16,000.
• The net cost to me was ~$31,000 for either the ground- or air-based. Most experts agree that ground-based is a better technology, especially in cold-winter climates like Massachusetts, and more energy efficient.
• To remove my boiler and oil tank would cost another $5,000, bringing the total cost to me for the two options to be $36,000.

I would save ~$3,200 per year from heating oil I would no longer purchase (640 gallons at the currently inflated price of $5 per gallon). However, I would also incur more electricity usage for my heat pumps and I guessed this to be $2,000 per year. I would also receive some state incentives that I estimated to be another $200 per year.

Simply put, my net savings would be ~$1,400 per year and my net investment would be ~$31,000. Ignoring the time value of money as well as inflation, this project would have a 22 year payback. That didn’t make economic sense, especially if you consider the heat pump gear may have a useful life of ~15 years.

Final Summary

First, if you made it this far, well done.

As I suggested at the top, retrofitting heat pumps into a home with a working HVAC system may be good for the world, but it’s unlikely to be good to your pocketbook. The upfront investment is simply too high compared to the annual savings you’ll obtain.

For new construction, a major renovation, or a heating system replacement, heat pump technology may be a better option for you and the world. And, if you combine heat pumps with rooftop solar panels, the payoff will be even more financially advantageous. More on solar panels in a different note.

If you’re thinking of de-carbonizing your home or converting your electric usage to solar and have questions about how to analyze the project’s financial viability, get in touch.