The Village Green

A blog about how Canadians can achieve energy independence by powering down and then powering up the right way.

In a recent Greenlivingonline poll asking readers about the renewable energy system they most dream about having in their home one day, 42% of respondents said, “geothermal heating”.   

Geothermal heating and cooling is quickly becoming the gold-standard of mechanical systems for Canadian homes.  Indeed the day will come when every property has been converted to ground source heat pump technology given its inherent efficiencies and technical advantages.    

Regularly we’re told by potential clients that they’d love to convert their home to a geothermal system but it’s prohibitively expensive (even though such a system costs less than most people spend on their cars, a depreciating liability if there ever was one).  So, today I thought I’d riff about how a typical Canadian family can realize their geothermal “dream”.  

When replacing your current systems becomes an “event”

As mechanical systems age – in this case, by mechanical systems I mean things like furnaces and air conditioning systems –their efficiency drops.  So while you may have  paid for these systems years ago in terms of their purchase price, their day-to-day operating costs continue to increase, in some cases, dramatically so (as our friend, Toronto realtor Chris Chopik likes to say, the cost of energy is the second price tag to your home).  

Eventually, aging systems need to be replaced.  They either become increasingly unreliable, they fail outright, or they become prohibitively expensive to operate. When we replace them, we’re presented with a decision – an “event” - and it’s at this time we can potentially realize our geothermal “dream”.  

Comparing costs 

Installing a high quality furnace and air conditioning system will cost you roughly $10,000.  We always want to buy high quality systems regardless of what we buy because you tend to get what you pay for.  

By comparison, a typical Canadian inner-city home will be looking at a planning cost of roughly $35,000 to install a geothermal system.  For reasons I’ll leave for another day, the cost of installing geothermal is much less in rural properties.  

We now have a delta - a difference - of $25,000 between our two options – the conventional furnace and air conditioning option and the geothermal option (and remember, geothermal provides both heating and cooling so you only need one “appliance” to do the job of two).

However, there’s more to consider.  

In Ontario, there’s $8,750 in combined federal and provincial grants available to every homeowner who installs a geothermal heat pump under the ecoENERGY Retrofit for Homes program.  Plus, there’s a RST rebate available for geothermal purchases which provides another rebate of roughly $1,000.  

Now we see the geothermal cost premium compared to our more conventional furnace and air conditioning options is down to around $15,000 to $16,000 which is roughly the cost of a used Honda Civic.  A Honda Civic is a fabulous car but most Canadian families wouldn’t consider it a luxury car.  Rather, they’d see it as a good, reliable, practical runabout.  Similarly, geothermal technology is no longer something only to be found in million dollar executive homes but in our homes.   

Geothermal on a buck a day or perhaps even less 

It’s an old sales trick to take the price of an expensive object and break it down to a cost-per-day over a long period of time leading to the claim, “just pennies a day”.  

In addition to being suspicious of sales gimmicks, I’m also not a fan of financing.  The typical Canadian family simply has way too much debt.  Yet, financing can make sense in some specific instances, particularly when the life of the asset is equal to or much greater than the term over which the loan is amortized.  This is one of those cases.

How much does $16,000 cost to finance over a conventional 5/25 (five year fixed rate, 25 year amortization term)?  At today’s rates (roughly 5.49%), it costs $97 per month.  Further, promotional rates are available including a 4.19% promotional rate from RBC (full disclosure, RBC is not a sponsor of mine, I merely found this on their web site), which would result in a monthly financing cost of $86.

We’re now down to a cost of about $2 - $3 dollars a day.  This is where the efficiency of geothermal really starts to kick in because we haven’t yet considered operating costs, the second price tag of your home.  

To keep the analysis simple, we’ve worked with clients whose monthly energy cost savings by installing geothermal were actually greater than the incremental cost of installing the system using calculations similar to those outlined above.  In other words, their geothermal system, far from costing them money, was actually generating cash for them: the savings were greater than the cost of installing the system.  

The above analysis does come with some assumptions.  It assumes “an event”, that being the required replacement of old systems and it assumes that the geothermal system can be financed on a mortgage.  

These conditions won’t apply for many people.  But they will apply for many others. By looking at our situation in the right light and doing the right analysis, a “dream” that seems unattainable becomes quite attainable for middle class families looking to protect their family budget and build long-term value in their homes.  

Gabriel Draven 

Village Technologies 

December 2009