(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 ūüôā

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.

2. Installed Costs: Gross and Net Geothermal vs Comparable System

Again, for the sake of simplicity, I’ll only be using closed loop, vertical systems for this example. Horizontal loops will be more common depending in your location, and standing column wells are hugely popular in certain regions.

Element to consider when looking at DIRECT installation costs of a single project:

  • ¬†Loop Field: The main cost drivers will be how many bore feet you need for an installation, the cost per foot, and how much casing you need.
  • Heat Pump: Cost of the unit itself based on tonnage, how many units you have, and the installation and labor cost in your area.
  • Distribution System: Largely dependent on type of system (air, water) and if its new construction or retrofit. If retrofit, you may or may not need to upgrade the system.

According to Martin Orio at Water Energy Distributors, in the northeast, average installed costs for water to air systems are around $9,500 per ton and water to water systems around $11,000 per ton.

Here’s the breakdown of what Martin is seeing in New England:

  • ¬†Vertical Loop: $3,800 – $4,500 per ton
  • Inside the building Heat Pump and Distribution: ~$5k / ton

Remember, all of these are averages AND the averages have a HUGE swing in geothermal based on the specific building, type of equipment, permitting, well drilling in your specific area, etc, etc….etc.

The key thing to consider when looking to understand installed geothermal costs is that it’s not just the cost of geothermal, but the cost of geothermal MINUS the cost of a comparable system. The same is true for calculating the savings from a geothermal BTU, it’s not the cost of the geothermal BTU by itself, but the cost of the geothermal BTU in relation to a comparable, BTU.


Here are a few scenarios to illustrate how we calculate geothermal installed costs:

1. Retrofit and existing equipment that needs to be changed soon.

2. New construction, obviously the home needs an hvac system.

3. Retrofit, but the existing equipment does not need to be changed soon.

The best case for geothermal is always made in scenarios 1 and 2, and scenario 3 is always more difficult, I’ll explain why below.

Our sample home is based on Worcester, MA. It’s 2,000 square feet with a max heat loss of 20 btu per square feet, giving a max heat loss of around 40,000 BTUs.

Oil and NG system Installed Costs

I asked Ed Malloy at New England Renewable Energy Systems what he is seeing for installing cost for traditional HVAC systems in New England. This is what he told me for residential.

  • 2000 sqft with central air is ~$4500-5500 (furnace, controls, 98% AFUE) +
  • $3,000-3,400 (standard duct one floor) or
  • $3,600-4,000 standard duct two floors),
  • Add another $4000-4,500 (for 18 SEER AC),
  • $1500 for tstat and humidification.
  • New Construction Total¬†= ~$14,500-16,000,¬†So 3-4 ton is about $4500-5000/ton
  • For retrofits, if the existing duct system is adequate you will likely only need a need furnace. Let’s assume retrofits will only be changing the furnace itself and thus will be $5,500.
  • Ed said for rules of thumb, the cost of oil and natural gas equipment is the same installation costs but it vary widely based on labor cost and crew skill, as well as equipment pricing at any particular time.

Geothermal Installed Cost for New Construction and Retrofit. 

  • ¬†We’ll take Martin Orio’s quote price at $9.5k/ton for geothermal for new construction.
  • For a retrofit, let’s assume the existing distribution system is adequate, we “just” need to install the loop field and unit, let’s say this will reduce our installed costs for retrofits by $1k/ton and make it $8.5k/ton.

New Construction

Since the homeowner needs to buy a system anyway, we calculate the cost of geothermal based on the additional cost of the geothermal system, not the gross costs. REMEMBER THIS: if the client is already upgrading their HVAC system, do not quote the system based on pure geothermal cost, but the additional cost.

Geothermal 4 tons x $9.5k = $34k

Oil or NG Furnace w/AC= $14.5k

Geothermal Premium Cost = $19.5k and this is what we will use for installed costs in our model.


With a retrofit if the existing equipment needs to replaced, we’ll only cost each system out based on the equipment.

Geothermal 4 tons X 8.5k per ton = $34k. Savings $1k per ton because we won’t need to install a distribution system.

Oil/NG Furnace + AC minus the distribution and tstat = $11k

Geothermal Premium is $23k and this is what we will base our installed costs on.

Retrofit with new equipment

Let’s say a homeowner calls you and their equipment is only 3 years old, but they’re interested in geothermal. In this case, you would use the full cost of geothermal as the installed cost because they DON’T NEED to upgrade their equipment.

Geothermal is 4 tons X 8.5k per ton = $34k. It will be slightly cheaper then new construction because they already have a distribution system.

3. Value of a geothermal BTU. 

Similar to installation costs, in order to calculate the savings a property owner will receive from installing geothermal, we need to understand the  cost of a delivered geothermal BTU vs the cost of delivering a comparable BTU.

There are 2 parts to the equation.

1. The spot cost of delivering each BTU, which is roughly calculated by understanding –> How many BTUs are produced X the efficiency of the system X the fuel cost of the system.

2. In a perfect world, we also need to understand equipment lifetime and operations and maintenance cost. If certain technologies need to be replaced more often then others, or require more expensive maintenance, that should be factored into the cost of delivering a BTU. For the simplicity of this post, we will not discuss this.

There is no sense reinventing the wheel, so to see a good example of how to calculate the cost of a geothermal BTU vs a comparable, see Ryan Carda’s article “Selling Geothermal As a Hedge Against Rising Energy Prices”

Here’s a snapshot of what he concluded.


4. A Few Examples to Walk Through

¬†Now that we understand the government incentives, some basic installed costs and operating cost, let’s run through a few examples.

My goal was to be able to do some basic sensitivity analysis and do a commercial example. However, I wasn’t able to get the information I needed to feel confident about the numbers for a commercial project. I’ll discuss more about the challenges of obtaining information and what exact data I need to crunch some numbers.

For residential, here is our sample house profile.

  • 2000 square feet: 20 btu / square foot max heat loss = 40,000 max heat loss. Max heat gain we’ll assume is 23,000 BTUs
  • Location¬†is around Worcester, MA
  • All systems will be air based
  • For the retrofit scenario, we’ll assume the duct system already exists and only the units will change.
  • For new construction, we’ll change the fuel type and if the homeowner decides to have AC or not.
  • NG Prices are 1.10 per therm, inflation @ 3% a year. I’m assuming NG gas costs will NOT stay low for a long period of time.
  • Electricity is .16% kWh inflating at 3%.
  • Fuel Oil is at starting at $3.50 gallon but inflating at 6%.
  • AC SEER is 12

New Construction Samples

With AC and Oil

Oil Installation: $14,500

Geothermal Installation: $38,000.

Geothermal costs a premium of $12,100 with incentives with an expected savings of $1,715 against oil, with an inflation rate of 2% per year. The provides an IRR of 16.97%. Really good! FYI, an IRR of ~10% will double in 7 years, some of you might call this a ‘payback period’.

Figure 1: Geothermal VS Natural Gas and Oil with AC:

(Image using LoopLink Geothermal Design Software) 

 With AC and Natural Gas

The geothermal vs natural gas installed costs will stay the same in our example, however the expected savings will decrease to $145 and the IRR will be negative.

New¬†Construction¬†without AC and Oil:¬†Now, let’s see what happens if the building is new but no AC will be installed. The geothermal costs will stay the same, the oil HVAC system will drop in cost by about $4,500 to $10,500, and the geothermal savings will slightly drop.

The Geothermal premium is now 16,100, and the savings drops to $1,859. This creates an IRR of 11.65%.

Geothermal VS Gas and Oil without AC Operating Costs

(Image using LoopLink Geothermal Design Software)

New Construction without AC and Natural Gas:

If we analyze the same scenario, but with natural gas, the returns are even worse because the expected savings from just natural has is expected savings of only $66. This will result in a negative IRR as well.


Retrofit and existing equipment needs be replaced

In the retrofit examples, the installation costs for both will be slightly lower because only the equipment will be changed while the operating savings will stay the same as compared with the above example for new construction. This has a huge assumption in it, and that’s the shell of the building in a new¬†construction¬†is the same as a retrofit. It shouldn’t be true, but sadly it’s likely is with most homes in the northeast still being framed with 2 X 6 walls, etc, etc.

For geothermal, we’ll assume $8.5/ton because we’re saving money on not having to install duct. The geothermal system gross cost $36,000.

For both oil and Gas we’ll assume the price is simply to replace the heating unit $5,000 and the AC unit, $4,500. The switch will cost $9,500

The geothermal premium is $14,300.

The savings vs oil is expected to be $1,859 and inflating at 2% per year providing an IRR of 13.45%

The savings vs natural gas expected to be $289, which provides a negative IRR.

Retrofit and existing equipment is new

Let’s say a homeowner calls you and their current HVAC equipment is only 2 years old, but they are still interested in geothermal. In this case, because they DON’T NEED to replace their equipment, the cost of geothermal will be the full cost.

Thus, a 4 ton geothermal system at $9,500 ton will cost $38,000 gross. If they have a Oil with AC, their expected savings is $1,937 a year, yielding an IRR of 5.73%.

If natural gas, the expected savings will be $145 per year, and a negative IRR.

Light Commercial natural gas new construction and retrofit. 

It’s simple to say that commercial is a different beast and I only wanted to skim over it, with a super simple example to display some of the other incentives available for geothermal in commercial settings.

While my intention was to include a simple commercial example, the reality is that the problem quickly became extremely complex, and using rules of thumbs made creating any sort of useful conclusions impossible.

The amount of variables, calculations and different permutations to even establish 1) a semi-accurate commercial heat loss/gain analysis and 2) the installation and operating cost of a traditional HVAC system and 3) the installation and operating cost of a geothermal system were too numerous for one simple article.

In the future, I’ll dig down into commercial more, but I didn’t feel we could do it justice in this post.

Lessons Learned from this basic analysis residential analysis

  • The customer profile has a huge impact on the economics of a geothermal system. New construction with oil and AC is THE BEST RESIDENTIAL CUSTOMER. If you only want to focus on one customer, make it this type. If not new construction, then a retrofit with oil and AC.
  • Don’t focus on anyone who uses natural gas UNLESS, they tell you they¬†believe¬†the cost of NG will go up a lot.
  • We didn’t include¬†maintenance¬†and lifetime costs which will likely have a huge impact. Oil and NG, and standard AC systems have shorter life and require more¬†maintenance than geothermal. This will bolster the case for geothermal because it will increase the cost of a BTU from a comparable system.¬†Including¬†operating and¬†maintenance¬†will be even more critical for commercial systems, where tens of thousands of dollars are being dealt with.

What needs more consideration that I did not go into

  • There is a huge variation in installed cost with geothermal, and standard HVAC systems, as well as operating costs. Also, we can’t be 100% confident about any energy inflation rates that we assume. What this means is that most of the assumptions we’re making out of averages are likely to be very inaccurate for a specific building. Two residential retrofits of the same size could have drastically different retrofits costs and heat loss, because while square footage is important, it’s not necessarily the most important factor in heat loss calculations.
  • I didn’t consider O+M costs or lifecycle costs, which will have a huge impact on delivering BTUs. If a oil systems need to be replaced every 10 years, and geothermal every 25 years, that must be considered in a complete analysis.

What data we need to perform a financial analysis

If it was a perfect world, below is the list of information I would need to create a great financial model. However, like always, the trick will be how confident I am in each of these numbers.

  • Geothermal Installed Cost
  • Geothermal¬†operations¬†and maintence and lifecycle costs.
  • The cost of a comparable HVAC system installation
  • Comparable HVAC O+M and lifecycle costs
  • Cost to deliver¬†a geothermal BTU and expected inflation
  • Cost to deliver a comparable BTU
  • Clients Discount Rate

This is enough information to build a pretty accurate financial model of a system. The challenge is that the above information is not easy to get for a geothermal project and IF you use rules of thumbs for a quick sales proposal, it’s very likely that the numbers will change widely when you actually get into a building.

If anyone is interested in collaborating on the above, please let me know.