Bay Journal

Loss of tax incentives could doom super-efficient heating/cooling system

Those considering ground-source heat pumps must weigh initial big investment with bigger savings over the decades

  • By Jeff Day on July 24, 2016
There are several ways that the liquid-filled pipes used in ground-source heat pump systems can be installed, depending on the local setting.  (Geothermal Exchange Organization) Ground-source heat pumps heat and cool homes and larger buildings using a buried network of liquid-filled pipes. Tapping the year-round 55-degree temperature of the subsurface Earth, a “heat changer” in the system draws heat out of the liquid in winter and sends heat from the building into the liquid in summer.  (Geothermal Exchange Organization)

Getting a household, school, office building or any other enclosed structure comfortably heated and cooled can be an energy-intensive proposition in the mid-Atlantic states, where winter temperatures can fall well below freezing and summer days can feel like a steam room.

But a little known type of heat pump — a geothermal heat pump or “geo-exchange” system — uses much less energy than conventional heating and cooling systems, especially when it is very cold. If that appeals, you will want to act fast: Substantial federal tax incentives for installing geothermal heat pumps are set to expire Dec. 31.

Homeowners and developers looking for energy-efficient heating and cooling systems have choices. The federal government’s Energy Star program has awarded stars to high-efficiency, whole-house systems in these categories: furnaces (almost all gas-fired); boilers (fueled by oil, gas or rarely electricity); electric central air conditioning systems, and heat pumps, which provide heating and cooling in one system.

Heat pumps come in two basic flavors: air-source heat pumps and ground-source or geothermal heat pumps. Both use a small amount of energy to move heat from inside to the outside for cooling, and vice versa for warming.

Air-source heat pumps lose efficiency as the weather gets colder, though, because progressively more energy is needed to extract enough heat from the air to heat a home. For this reason, the Energy Star program recommends air-source heat only for homes in moderate climates.

Geothermal heat pumps draw warmth from a network of liquid-filled pipes installed 10 or more feet below ground, where the temperature is stable year round — about 55 degrees Fahrenheit in the Bay watershed. There is plenty of heat to be drawn out at 55 degrees.

Properly sized and installed, ground-source heat pumps can keep homes comfortably heated and cooled, according the Energy Star program.

A new generation of air-source heat pumps are able to operate efficiently down to zero are just beginning to come on the market. Ground source heat pumps have been on the market since the 1950s.

Geothermal heat pumps can also be highly effective in larger structures. The Montgomery County, MD, school system, with 154,000 students and 202 schools, has been putting them in new schools since 2001, spokesman Derek G. Turner said. The system’s facilities department estimates that geo-exchange systems are 20–25 percent more efficient than conventional systems, Turner said.

But the capital and installation costs are higher, and the payback takes seven to 15 years, depending on the size of the school. Over the short term, the life-cycle cost of hydronic heat pumps, a new kind of geothermal system that uses water and is less efficient, but does not require underground pipes, is a better investment, Turner said.

The Fairfax County, VA, school system, with 167,000 students and 196 schools, has chosen to use hydronic heat pump systems because of the lower up-front costs and very long payback for geothermal systems, spokesman John Torre said.

The initial costs of geothermal heat pump systems are a challenge, conceded Doug Dougherty, president of the Geothermal Exchange Organization, a trade industry association based in Springfield, IL.

For new construction, geothermal heat pumps will cost at least twice as much as conventional heating and cooling systems. And replacing an existing conventional system with a ground-source heat pump is even more expensive, as installation requires excavating and laying underground pipes on developed land, where space may be scarce, Dougherty said.

To ease that up-front hurdle, the federal tax code offers significant incentives for installing ground-source systems. Homeowners can get a 30 percent income tax credit against the cost. For businesses, there is a 10 percent investment tax credit and accelerated depreciation.

In addition, a handful of states offer their own incentives, by treating geothermal heat pumps as a form of renewable energy, Dougherty said.

Maryland is the only state in the Bay watershed that has put geothermal heat pumps in its renewable energy portfolio. Such programs encourage the development of green energy by requiring power companies to get a certain percentage of their electricity from renewable sources, or pay to support it elsewhere. In that way, homeowners of geothermal heat pumps can get paid by power companies wanting to take credit for their systems.

That has resulted in significant additional incentives for Maryland homeowners. The state energy administration has awarded about 4,200 grants of $3,000 each since 2007, according to an agency official. At least two utilities — Pepco and Baltimore Gas and Electric Co. — offer $1,800 rebates. BGE, for instance, has provided 1,769 rebates since 2012, a spokesman said, saving the company 5,642 megawatt-hours of electricity. Baltimore County also offers a property tax break to homeowners who install geothermal heat pumps.

In Virginia and Pennsylvania, two states that do not count the systems toward their renewable energy portfolios, incentives are fewer. Dominion Virginia Power offers a $250 rebate for geothermal heat pump purchases, while Penn Power offers a $600 rebate.

Even so, the incentives, especially the federal ones set to expire at the end of the year, have stimulated sales.

When Congress voted last year to extend renewable energy tax breaks into the 2020s, several green technologies with smaller market shares were left out, including geothermal heat pumps, small wind power systems and fuel cells, Dougherty explained.

Homeowners have seven months left this year to sign contracts and begin installation work. For businesses to get their tax breaks, though, the systems must actually be installed by Dec. 31, Dougherty said. The incentives include accelerated depreciation, which allows a business to “write down” most of the expense of the system over seven years, earning tax deductions.

“No one will buy something that has to be depreciated over 39 years,” Dougherty lamented.

The geothermal heat pump industry worked to get an extension tacked onto an appropriation bill earlier this year, but the Senate failed to oblige. The best hope for keeping the tax breaks now would be during a lame-duck session of Congress after the election, he said.

A spokesman for a gas industry group said they dislike such tax breaks. “We want a level playing field so that consumers can choose the energy options that are best for them based on affordability and efficiency,” said Jake Rubin, spokesman for the American Gas Association, a DC-based industry group.

Dougherty suggested that in the not too distant future, renewable energy will spread to the point that gas is no longer used to heat buildings.

Natural gas is inexpensive today, though, helping make gas furnaces and water heaters very economical choices for homeowners with access to the fuel. But the low price is the result of a vast increase in the domestic supply of natural gas, made possible by hydraulic fracturing. For the environmentally minded, that’s a problem.

Catherine Thomasson, executive director of Physicians for Social Responsibility, said there are environmental concerns over fracking, including the potential for drinking-water contamination, methane releases at the drilling sites and the carbon dioxide produced when gas is burned. Even if it is only half of what’s produced from burning coal, it is a strong case for using ground-source heat pumps instead, she said.

Thomasson said she has installed geothermal systems in her District of Columbia home and in two other houses she owns in Portland, OR.

There can be significant practical challenges with retrofitting, Thomasson conceded. With new construction, a large field of pipes — typically 140 feet long by 140 feet wide — is laid in the ground as a house is built.

In a retrofit, the homeowner might have limited space, and utility lines can get in the way, Thomasson said. The pipes can be laid vertically instead or horizontally, in a few pipes extending down 300 feet, requiring special drilling equipment and expertise.

“Nonetheless, geothermal heat pumps are the most efficient heating and cooling systems you can buy and they can be put in anywhere,” Thomasson said.

Nathanael Greene, director of renewable energy at the Natural Resources Defense Council, agreed. But he suggested the industry’s future looks grim, in part because geothermal heat pumps are largely unknown.

Just why the geothermal heat pumps are below the radar is hard to pin down, but Greene suggested that people can see solar panels and easily monitor the electrical savings, up to net-zero electricity use. Unlike other types of renewable energy, “geothermal is not displacing electricity,” he said.

Geothermal might benefit if the Environmental Protection Agency’s Clean Power Plan required that states include the heat pumps in their compliance plans, Greene suggested.

The Obama administration has included geothermal heat pumps in another carbon reduction initiative. A 2015 White House executive order calls for a 25 percent reduction in the energy used in federal buildings by 2025. Geothermal heat pumps are among the listed technologies.

In the nonprofit sector, the Chesapeake Bay Foundation, for one, has gone all-in on ground-source heating and cooling. It uses a geothermal heat pump at its headquarters outside Annapolis. The nonprofit advocacy group’s newest building, the Brock Environmental Center in Virginia Beach, also includes one.

Mary Tod Winchester, the foundation’s vice president for administration, said the geothermal heat pumps are about 50 percent more energy efficient than a conventional heating and cooling system. They are also quieter and more comfortable, she said. As an added benefit, they can be used to heat the water, she noted, which eliminates the need for a separate water heater or boiler.

At the Brock Center, the geothermal energy heats the building by sending warm water through pipes in the floors. “That feels wonderful,” Winchester said.

About Jeff Day
Jeff Day covered government policy developments for more than 20 years at Bloomberg BNA, including Chesapeake Bay restoration efforts since 2009. .(JavaScript must be enabled to view this email address).
Read more articles by Jeff Day

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