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Finance 101 For Geothermal Pros
(Image using LoopLink Geothermal Design Software)
The only thing that the geothermal industry needs to worry about is sales. We need more sales. For the most part, we have talented enough engineers and tradespeople to install any project that we could imagine, we just need to sell it first.
In order to sell more, we need to be able to understand the economic benefits of the technology. However, after my attempt to write this article, I can honestly say that it is difficult (compared with solar PV and solar thermal) to accurately calculate the direct financial benefit of ground source heat pumps. I’m not saying it can’t be done, it just takes a lot of work.
This article is a stab at understanding the economics of ground source heat pumps. I wasn’t able to answer all of the questions I wanted to, so I will surely be doing a follow up post on some more specific topics. Also, the basic financial methodologies in this article can provide a solid foundation for anyone interested in advancing the industry. In the end, cash flows and IRRs are cash flows and IRRs.
There are many ways to sell geothermal: it’s more comfortable, especially in cooling mode because it removes a lot of latent heat. There is the foreign oil argument. And then of course, it’s an amazing investment that provides great returns and reduces HUGE fluctuations in energy costs that will happen with other fuel sources. Which argument is the best? Well, that depends on the customer you’re speaking with 🙂
Two of the arguments are subjectively valuable (the comfort and foreign oil arguments) and the other is based on direct economics of the technology. This is not to say that ‘soft’ benefits are worthless. For some customers, they are worth more then direct financial benefit, for others they are not and its all about the $$. However, we can’t put numbers on the subjectives, especially in residential sales. In commercial sales, understanding the raw economics will be critical to the success of any geothermal company.
Understanding the financial implications of a geothermal system is a must for a successful company. You need to understand how to calculate the benefits of the technology, communicate the benefits to clients and understand what the key factors are that will determine a profitable project from a less-profitable project.
This post will help you understand the financial implications of investing in a geothermal system from the clients perspective. It will by no means be an advanced piece but will give good guidance to 1) new professionals to the geothermal industry or 2) companies that are looking to beef up sales.
If you’re new to finance and renewable energy, start by reading the Finance 101 for Renewable Energy Pros piece. All of these analysis assume you can understand the cash investments and savings in a project, performing discounted cash flow analysis, and determine the IRR of the project. The structure of the this post will follow the Finance 101 for Solar PV Pros article.
First, What makes geothermal a little special, and more difficult to perform then other technologies?
The majority of modeling and projections are based on a lot of assumptions. Getting exact measurements in heat loss, heat gain, and the exact cost of a comparable fossil fuel BTU and the cost of a geothermal BTU are all based on models. The models have been getting better, but most are based on a series of assumptions that cannot be measured with 100% confidence. In this way, solar thermal and geothermal are related, and different from solar PV, where exact electric usage can be measured.
In order to calculate the savings from a geothermal system, you need to calculate the cost to deliver a geothermal BTU vs the cost of another BTU. Again, this is based on a lot of assumptions. They are the best assumptions that we have, but I just wanted to be clear that they are not 100% accurate either so it’s always best to be super conservative.
Lastly, installed costs and savings will vary greatly depends on the applications. While geothermal at $9,500 a ton might be a good average, there will be some applications where its $5,000 per ton, and others where it is $15,000 per ton. This is similar in operating savings, geothermal vs oil saves a much larger amount then geothermal vs natural gas. The huge amount of variation makes the economics of the technology hard to average because it’s so specific to each site.
Understanding the benefits of geothermal is really a pain the aXX. The amount of possible scenarios that you can face in each building, heating system, and thus installed and operating costs are truly staggering and are MUCH more numerous then one would deal with in solar PV or SHW. This adds up to a technology that requires lots of time to calculate the benefits.
Understanding the Variables That Impact Geothermal Economics
Before we run through some examples, let’s understand the variables that we need to understand about each installation that will drive the economics of the project.
1. Government Rebates
Residential: 30% ITC for Residential Project. Very straightforward. The owners of the geothermal project will receive 30% of the value of the project in the form of a tax credit that will directly reduce the amount they pay in federal taxes.
Commercial: 10% ITC for Commercial which can be applied in addition to the EPA Act.
Commercial: EPA Act of 2005, Section 179D Tax Deductions: Qualifying energy reducing investments can obtain immediate tax deductions of up to $1.80 per sq. foot. Many specific criteria need to be met from a building perspective, tax perspective, and engineering perspective. Take this free course to learn more. For this article, we’ll use 1.80 per square foot and a corporate tax rate of 20%. It’s possible that a specific system might only receive a $.60 or $1.20 per square foot deduction. The deduction can be used for anything that is directly related to the operation of the geothermal system; loop field, heat pumps, distributions system, pipe, ductwork, etc. For example. The calculation of this is very simple: Building square footage * 1.80 = tax deduction. Tax deduction * corporate tax rate = cash value of the tax credit. If the building was 100,000 square feet * 1.80 deduction per square foot = 180,000 tax deduction * 20% tax rate = $36,000. If you want to learn more about geothermal tax credits, take our free course about geothermal tax credits.
Commercial: MACRS. Same calculation as solar PV, except the basis for commercial geothermal systems is 10%, not 30%. If you want to have a detailed explanation of how to calculate MACRS, see the solar pv financing article.
State, municipal, utility rebates. Utility is common, but the range of rebates very unclear. MassSAVE for commercial electric retrofits is one. As you can see from this utility rebate, the amount of HVAC is “varies widely”. Call your utility is you have any questions. For this sake of this article, we’ll assume that there is no geothermal incentives from state, municipal or utility sources though it’s very likely that there would be.
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Geothermal Performance Case Study: Closed Loop vs. DX vs. Kelix Thermocouple
(This post has received a lot of feedback as expected, I’ve posted some update information at the bottom of the post from Sam Johnson’s team and from Kelix themselves)
Last month, I published an interview about the Kelix ground coupling system and there was interesting response. Here’s why I did it: I always want to speak with anyone who is actively working on making geothermal more kick ass. By kick ass, I mean profitable and increasing adoption of the technology.
The main item that struck me after I published the post is the few nasty emails I received. Instead of fellow geothermal pros supporting one another and figuring out the best places for new technologies, I noticed it seemed the industry was trying to show where a new technology WOULD NOT work, instead of where it would work. This is childish and we shouldn’t tolerate it.
After the piece, Sam Johnston approached me and offered to share some AMAZING DATA on a comparison study they did between a closed loop geothermal system, a DX system and the Kelix technology.
A few more notes before Sam begins.
First, The main issue I’ve noticed, and the Kelix article highlighted, is that the geothermal industry seems (someone correct me if I’m wrong) to not have a standardized testing process and way of communicating different products to the market. What this causes is a “she said/he said, manufacture vs manufacturer debate”. This tends to increase the risk associated with using the technology both for property owners and EPC contractors who want to get into the business. Anything we can do to create a more standardized way of communicating and testing new products will DRASTICALLY improve the industry.
Second, please don’t email me any comments about the article. Put all of your comments and recommendations publicly in the comment sections. The reason I’m stating this is simple, I’m assuming I’m going to get some angry emails from EPC contractors, engineers, architects, and manufactures about something that isn’t exactly correct in this analysis and that it’s not 100% perfect. What we need to take away from this case study is the intent behind the individuals who performed it. What are they trying to accomplish and WHY? If we believe that they were trying to make the industry better then we should figure out what makes sense and is useful about their analysis and where it could be improved.
The reason I asked Ryan Carda to provide his feedback is that I know his goal is never to bad mouth other people but to move the industry forward. His comments about the data are amazing and will be useful to anyone who is going to do further testing and analysis on ground source technologies.
If you have any questions, comments, etc about these case studies please don’t hide, leave them publicity in the comments and they will be addressed. If you have any serious problems with the information, give me a call 617 702 2676, but if you’re goal is simple to cut people down, I’m likely not going to listen to you.
Enter Sam Johnston from JTI Energy
During my experience with Environmental Compliance Services, Inc. (ECS) I had the privilege to be part of a team that was to demonstrate geothermal alternative energy in a very special way. This effort was to become central to a branded division named Terraclime. What follows is my article distilled from many individuals who participated in this comparative systems effort. The main purpose of this article is to promote alternative energy, especially geothermal by telling this story and revealing lessons learned.
As a member in a partnership, ECS acquired the Mill, some 150,000 square feet in 2007. The Mill was seriously contaminated and considered a “brown-field” property. ECS’ core business is remediation; remediating equals changing “dirty-dirt and dirty-water”. The Mill became a great “brown-field to green-field” story.
The Mill had its beginning in the early 1830’s when modern industrialists of that time were attracted to the nearly 30’ water fall drop of the adjacent Mill River. This hydro power would help develop their silk plantation and needed silk processing.
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Lessons Learned from Selling Community Scale Geothermal in New England
I’ve heard a lot of pitches to about community geothermal, using a single loop field for many different households. The main benefit is simple, a reduction in drilling costs due to economies of scale. The roadblack, as always, is actually turning the idea into a real project. Selling.
A few months ago, I finally heard of a company who has done it.
So, I had to speak with this company and learn more about they learned selling a community scale geothermal project.
I spoke with Ed Malloy, President of New England Renewable Energy Systems.
If you’re looking on strategies to sell geothermal and figure out what your strategy is, whatever your area of the country, this will be a useful discussion for you to watch
HIGHLIGHTS
Ed said that a project at this scale is driven by folks that have a vision and pioneers in the development community
We talked about what they are seeing as the perfect clients in the geothermal market. On the commercial side, there are institutions that have a long term outlook. He’s found the best clients are public institutions, and private institutions that have large energy spends, but are in a low margin business.
Ed said that the client side has switched from “what is geothermal?” to “I know what geothermal is and technology, show me the cost.” However, investigating the costs costs money itself.
We talked about if and how geothermal would fit into an ESCOs business model for commercial clients
HERES WHAT WE SPOKE ABOUT – See below for some job photos.
1) Ed’s lessons learned from selling geothermal in New England
2) With the community geothermal project, I’ve heard the idea many times, but I’ve never heard anyone who has done it. Could you share the story of the project? What makes it special? How did it come to fruition?
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Certified GeoExchange Desiger Certification – The CGD – What is it? Who needs it? How to get it?
Certified GeoExchange Designer Certification is the most prestigious credential that exists within the geothermal heat pump industry because few people have it. It’s hard to get because you can’t sit for the exam without some combination of education and experience (these requirements are explained in detail below). It’s also really hard to understand the process […]
HS TV Ep 8: 1/2 the Drilling Depth, 1/3 the Footprint, SCW vs. Closed Loop Geothermal Systems
Standing column well geothermal projects have significant advantages over closed geothermal projects in certain circumstances. Standing column wells typically need half the amount of drilling then traditional closed systems, because they can transfer heat so much faster. Also, they be installed in places with extremely limited space, in cities for example. Lastly, they can be used in rural areas in conjunction with potable water wells.
The problem is that because even closed loop geothermal systems are foreign to many HVAC and drilling contractors, standing column well systems seem like they’re on another planet. We’d like to change this.
We’ve been writing heavily about standing well systems, how they’re designed, their difference between closed system systems. See below for some review articles if you’re brand new.
The 4 Differences Between Geothermal Standing Column Well and Closed Loop Systems
What You Need to know About Quoting and Selling Standing Column Well Systems
13 Steps to Basic Standing Column Well Geothermal Design
I also wanted to speak with Dr. Albert Koenig, a standing column well expert, to get his opinion on the technology, if he feels it get be relegated from a niche technology and what he is doing to demystifying the design and installation process so more contractors will feel comfortable designing and installing the technology.
Here are the highlights.
SCW systems typically need 1/2 the drilling length of comparable closed loop systems, because the thermal conductivity is extremely high in SCW systems.
SCW typically take 1/3 the foot print of closed systems, if you’re space constrain this will be extremely attractive.
SCW systems can typically 12 to 15 tons of heating and cooling capacity for each well, compared with 2 tons be average for closed system systems.
Most well drillers know 80% of what they need to drill and installed SCW wells.
You can retrofit existing water wells for a SCW project, but you may need to increase the depth of the well.
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