We've had a couple of months to investigate installing a geothermal heat pump system for our home, and now it's Decision Time.

This whole process started back in January when our old, conventional furnace went kaput on one of the coldest nights of the year.  It was past its expected life expectancy, so we started researching geothermal.  A geothermal heat pump uses the ground under the house as a gigantic heat sink, pumping heat underground in the summer (when the air conditioning runs), and pumping heat out in the winter (when it acts as a furnace).  This takes considerably less energy than conventional heating and cooling.

Financially speaking, a geothermal system costs more upfront, but less to operate.  The payback time is long enough that most people would be (understandably) reluctant to install one without some sort of financial incentive.  Fortunately, there are incentives aplenty:

• The Fiscal Stimulus Package offers a 30% rebate to new EnergyStar rated geothermal installations from the federal government.
• Xcel Energy, our power company, offers a special "dual fuel" electric rate: if we have a conventional backup and let them turn off the electric heat pump occasionally to manage demand, they cut the electric rate in half.
• Xcel also offers a rebate of $150/ton for installing a new geothermal heat pump system.

Doing the Research; Running the Numbers

Going into this process, we were helped by the fact that my parents installed a geothermal system a little over a year ago.  They've been generally happy with it, but had some issues (more on that later), and they were able to provide some hard numbers.  We figured it would cost about $25,000 to replace our furnace.

We identified several local geothermal contractors and invited them to our home to inspect the existing system and offer ideas and bids.  The contractors we did invite represented a cross-section of major heat pump brands, and all passed our initial screen of good histories on Angie's List.  We did not talk to the installer my parents hired, after hearing some of their negative comments and seeing other customers' complaints.

Our home presents a couple of unique problems for this installation.  First, we actually have two furnaces, separated by about 30 feet.  One is for the main part of the house, and the other is for an addition built before we moved in.  Ideally, we would want to replace both units with a single heat pump and tie the ductwork together, since a second heat pump adds considerable cost to the system.  There also isn't very much room around either of the existing furnaces for new equipment, making it difficult to find room for a conventional gas backup furnace (and without that special electric rate, the numbers don't make sense).

None of the contractors we spoke to thought it was feasible to put in only a single heat pump to replace the two furnaces: there just is not enough room to run the needed ductwork without cutting through bearing walls.

The space constraints also knocked out one of the manufacturers, which simply didn't have any way to give us both the heat pump and the gas backup in the space we have available.

We settled on a system from a local WaterFurnace contractor with many years of experience, and which could show us examples of how they'd handled similar problems for other customers.  The total cost will be about $40,000, and this will include two heat pumps, a natural gas backup furnace, a hot water holding tank, a desuperheater to use waste geothermal heat to preheat domestic hot water, and a whole-house on demand gas water heater.  The cost is split approximately one-third for equipment, one-third for drilling the geothermal wells, and one-third for installation and other components.

This will be a six ton system total (heat pumps, like air conditioners, are measured in "tons" of capacity), with four tons serving the main part of the house, and two tons serving the addition.  Only the main part of the house will get the backup gas furnace, but that will be sufficient to keep the addition warm (though not totally toasty).

Given that the total cost will be so much higher than we expected, we went back and did a more careful analysis of the payback.  Working in our favor is that we are also getting a new water heater in the bargain (which we would probably need in a few years anyway), so we can count the avoided cost of a new water heater towards the geothermal system.

After figuring out the various rebates and backing out the cost of two new furnaces, two air conditioners, and a new water heater, we estimate that the geothermal system will cost about $11,000 more than replacing everything with the conventional equivalents (after rebates).  It will save us about $900/year in heating costs, and $250/year in hot water (since the hot water will be essentially "free" when the geothermal system is running), and pay for itself in ten years.

I didn't figure in any air conditioning savings, since last summer we barely ran our A/C at all.  However, if we do have a hot summer, the savings will increase very quickly because the efficiency improvement for geothermal air conditioning is even more dramatic than for geothermal heat.  This could easily be hundreds of dollars more in savings.

So the numbers still make sense--the system will pay for itself before the warranty runs out.

That said, this will be a financial strain.  First, we have to pay for the whole system in one big lump, whereas if we were to replace our furnaces, hot water heater, etc., as they failed, we would be spreading the cost out over several years.  Second, we don't get the federal rebate (well over $10,000) until we get our 2009 tax refund sometime in 2010.  That means that it will be over a year between the time we spend the money and when we get that part of the money back.

Finally, the $40,000 number doesn't include relandscaping the front yard.  Drilling the wells will leave the yard a mess, and we're going to have to spend some money getting it repaired and cleaned up.  We had been planning to do a some significant landscaping within the next few years, so this will also get moved up to this spring.

Avoiding the Pitfalls

Part of making the numbers work is making sure we actually can claim all the rebates and incentives for this project.  My parents discovered this the hard way, when they went to do their 2008 taxes and learned that the model of heat pump they installed wasn't EnergyStar rated and therefore not eligible for the federal rebate.  The rebate in 2008 was limited to $3,000, so they weren't counting on it to the same extent that we are, but it was a rude surprise nevertheless and a warning for our project.

I've verified that both of the heat pumps we'll be installing qualify for the federal rebate, but we still need to contact Excel and make sure we have all our ducks in a row for both of their programs.

I also expect that there will be some as-yet-unknown gotchas.  We don't yet know where all our utility lines are, so we don't know where the wells can be drilled and where the connection to the house will have to go.  There's the chance that something will turn out to be unsuitable and put the kabosh on the whole project.

The Plan

If all goes well we'll probably have our new system installed by the end of May.  We need to get a permit for drilling the wells, and plan where everything will go.  Drilling will be in early May, with the mechanicals shortly thereafter.