AMA – Why Is Geothermal Not More Popular?
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. Today is another AMA, that is Ask Me Anything, episode. I love to answer your questions. And if you have a question you think is going to be of broad interest, send it in. I’ll answer it live on the air. Send your questions to Victor at victorjm.com. Today’s question comes from Michael who writes, “I’m a long time listener of the podcast and it’s great. With geothermal being so efficient, why is it rarely used on new single-family homes or retrofitted with existing homes? Thanks.”
Well, Michael, this is a great question. Let’s talk about why geothermal is so efficient and why it’s not used more often. I personally have geothermal installed in my own home, and my sister just had geothermal retrofitted at her home in the East Coast, in Montreal. Let me share some of the technical elements of geothermal, the different types of systems, and the tradeoffs compared with traditional natural gas-based heating.
It basically comes down to the cost and land. There are several types of geothermal systems. In volcanic areas, there are lava domes that are near the surface which brings a lot of the core heat very close to the surface. Places like Iceland, rely heavily on this source of heat to provide domestic heating, but we’ve got very few places like that through most of North America.
The basic idea of geothermal is a heat pump. A heat pump can generate heat when operating in one direction and provide air conditioning in the opposite direction. It’s the same process but in reverse. With a geothermal system we’re extracting heat from the earth when we’re heating, instead of extracting heat from the air that might be very cold. The reason it’s more efficient is because the heat transfer is more efficient when you’re starting with a heat source that’s much closer to room temperature. In the winter, the ground is warm compared with the outside air and in the summer, the ground is cool compared with the outside air. In both cases the heat transfer is much more efficient.
On really cold days, a traditional electric heat system will use about five times more energy compared with a geothermal heat pump. Some people promote the use of electric systems for heating instead of natural gas from a greenhouse gas emission standpoint. You have to understand how the electricity was generated to begin with. If you’re burning natural gas to generate the electricity, you would have been better off burning the natural gas as a heat source where you need it instead of wasting two thirds of that energy at the power plant.
So, the question is whether these systems are worth the extra investment. In order to get a sufficient surface area in the ground, you need to bury a lot of pipe. Some systems or open-loop systems just take groundwater from one well, use it as a heat transfer medium, and then re-inject that water back into the ground some distance away in a second well. You’re not doing anything to the water apart from heating or cooling it, so theoretically, you should be safe to re-inject the water without causing any harm to the environment. Still, in some jurisdictions, they don’t allow you to inject anything into the ground regardless. That’s where I came from, so that might rule out this type of system.
Some geothermal systems will also preheat the water heater that goes into your domestic hot water, that also can represent a saving. The question then arises if these systems are worth the extra investment. Now these groundwater systems are also putting raw water through the heat exchanger in the heat pump. That water might have high mineral content which will eventually corrode or clog the heat exchanger, resulting in an early life failure. Of all geothermal systems, these are probably the lowest cost to install. You need to drill two wells, so you have to add the cost of the two wells to the cost of the geothermal system. We’re probably talking around an extra $4,600 to $16,000 for drilling two wells. These raw water systems are called open-loop systems.
The second type of system is the closed-loop system. These typically have about 3500 feet of pipe buried in the ground. We’re talking two thirds of a mile of pipe. It’s a lot of pipe. The furnace will circulate a mixture of water and glycol through those 3500 linear feet of pipe. The use of the surface area of the pipe is there to transfer the heat from the pipe to the ground and vice versa, depending on whether you’re heating or cooling. Now, if you’re going to bury the pipe in the ground, you need to dig a hole that’s at least 6 feet deep that measures a minimum of 40 x 150. That amounts to moving about 1300 yards of dirt which will end up costing you about $12,000 to $15,000 in machine time with an excavator to dig out the hole and backfill it.
The geothermal systems are also more expensive. You’re going to spend about $15,000 on a water furnace compared with maybe $5,000 on a gas furnace and maybe another $3,000 on a separate 3-ton air conditioner. So, it’s almost double the cost just for the equipment. Then you need to add the two thirds of a mile of pipe and all the fittings. In short, you’re going to spend $20,000 to $30,000 extra compared with a conventional system.
The problem is not everyone has that extra 6,000 square feet of land sitting around on their property that you can use to bury the geothermal system. Some people’s properties are just not that large. That is a real obstacle. Now, some systems that are space-constrained would have you drill two wells and then build a closed-loop system by stuffing those 3500 linear feet of pipe vertically down into the well. That’s the system that was installed at my sister’s house where she retrofitted a geothermal system at her place. That approach can also work. But, you’re going to need to drill two very deep wells. And, you’re looking at a similar cost to drill the wells, maybe a bit more compared with digging a 6,000 square foot pit.
So, the question becomes how many years until you get a payback on that investment. If you’re in an area with a low-cost source of natural gas, and the infrastructure is already in place, the natural gas is probably the way to go. A gas furnace – 95% efficient – and you’re going to be using much more efficient use of the energy than you would be burning natural gas in a turbine to generate electricity at 30% efficiency and then hoping to get back some of that lost energy by using a ground-source heat pump.
If you’re in an area where electricity is expensive, and the only other fuel you can buy is propane, then your heating costs in a cold climate might run you around 5,000 a year for just propane. If your electricity is moderately priced at, say, 15 cents a kilowatt-hour, then your heating cost with geothermal might be around 1,000 a year. In that instance, you can save almost 4,000 a year in energy cost, and your break-even on the incremental investment will be around 7 years. In my estimation, the savings are definitely worth it. When you factor in the savings in air conditioning costs on top of that, the break-even is faster still. It’s still going to cost you about half of what a traditional air conditioning system would to operate. When you put it all together, your economic break-even might be as good as five years.
And that’s precisely why we installed geothermal in our home. But it’s not for everyone because of the higher upfront cost, and because of the added complexity. Drilling two wells isn’t that simple, and not everyone has an extra 6,000 square feet of land that they can dedicate to a geothermal system. In the case of the retrofit at my sister’s house, it would not have made any economic sense if it were not for the fact that she qualified for a massive government grant. The contractor for our house actually inflated the price accordingly, and the price tag was an eye-watering number. Her situation made sense financially, but only because of the energy grant.
I hope I was able to answer your question Michael. And for listeners at home, I want to thank you and wish you a great day. Go make some great things happen. We’ll talk again tomorrow.
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