Determining Payback

One of the most compelling justifications for going geo is the opportunity to earn back the money you invested in a geothermal system. This is accomplished in two ways:

  • Federal_Tax_Credit.png30% federal tax credit plus 10% state and local tax credits adding to 40%
  • Electricity savings

Another way to look at payback is to compare the added costs of a geothermal heat pump over and above the cost for an oil, gas or electric heating-cooling system. Again, that comes down to the energy savings achieved with a heat pump as opposed to a furnace/boiler for heating and the electric costs to run air conditioning.

Generally speaking, the estimated average payback time for a geothermal system is about 3 to 10 years. Let’s examine two payback scenarios as presented in Donal Lloyd’s The Smart Guide to Geothermal:

Scenario #1 – Payback on Added Costs, No Subsidy

The cost of a geothermal system totals $28,000. That’s $8,000 more than you would have spent on the $20,000 cost of a natural gas boiler and full house A/C. Savings on not having to buy gas amounts to $2,500 every year. To run your heat pump costs $200 in electricity per year.

$2,500 - $200 = $2,300 savings per year

$8,000 ÷ $2,300 = 3.5 years payback

Scenario #2 – Payback on Added Costs, With Subsidy

The 30% federal tax credit is meant to get more consumers to opt for renewable forms of energy like geothermal. Accounting for the 30% federal tax credit alone makes for a big difference in payback time and savings.

$28,000 geothermal system cost x .30 = $8,400 tax credit

$28,000 - $8,400 = $19,600 actual cost

Considering Scenario #1 with the cost of a natural gas boiler and full A/C at $20,000, the payback for the geothermal system is immediate!

Now let’s take the annual energy savings from Scenario #1 of $2,500 for not  buying gas and just $200 a year for electricity for the geo heat pump ($2,300). In five years that’s $11,500 in fuel savings; in just 8 1/2 years fuel savings amount to $19,900. 8.5 years payback.  

Note: Lloyd’s calculations for natural gas costs stem from 2010-2011. Of course, we all know from experience that energy costs can be volatile. More recently the price of natural gas might be higher, depending on a variety of factors including weather, supply and market conditions.

A more recent (2014) payback calculation is presented in an article in Green Builder magazine for modestly sized house:

“The home is in Chicago, and we’re comparing a gas furnace to a ground sourced heat pump with a Coefficient of Performance (COP) of 4.0 and an Energy Efficiency Ratio (EER) of 22, and it provided the following data.

The “results” page states that the home will save $1,331 in Year One, and a cumulative $17,544 by Year 10. It also states that it increased the value of the home by $26,620.  Savings by Year 20 could be in the order of $50,000.