Are Tax Incentives Enough To Grow the GHP Market?

But recent generous federal and state tax incentives, industry analysts agree, will help grow the GHP market, even during tough economic times. “While people’s ability to invest in their homes is diminished, as the housing market stabilizes, these incentives should encourage investment [in GHPs],” said Akash Shah, senior analyst at SBI Energy. “We still saw significant sales in the GHP market even during the recession,” he said.

According to a recent SBI Energy report, “the geothermal market, which declined in value by 3 percent from 2007 to 2008, could rebound in 2010 given the substantial tax credits of up to 30 percent of total cost offered through the American Reinvestment and Recovery Act (ARRA) of 2009.” With no upper limit and effective through 2016, the ARRA credit is a substantial increase from the tax credit under EPAct, which was 10 percent up to a $1,500 cap.

The ARRA tax credit for commercial GHP installations is 10 percent and allows for accelerated depreciation, making it as attractive an incentive as the residential credit, said John Kelly of the Geothermal Heat Pump Consortium (GHPC).

Crunching the Numbers

While GHPs have the lowest lifecycle cost of any heating/cooling system currently available, Kelly said, the upfront costs are greater than conventional systems, mostly due to the cost of burying the piping. A new geothermal heat pump costs an average $2,500 a ton, or about $7,500 for a typical 3-ton residential installation. Site preparation and drilling take the total up to between $17,000 and $20,000. Laying pipes horizontally – as long as there is space – costs less than vertical installations.

“The 30-percent credit closes the gap substantially between GHPs and conventional systems,” Shah said. Without it, conventional heating/cooling systems are about half the cost of a GHP system.

On a $17,000 GHP installation, a 30-percent tax credit would knock $5,100 directly off a homeowner’s tax bill, taking the total out-of-pocket costs down to $11,900. Figure in the 30- to 50-percent electricity savings compared to a conventional heating & cooling system’s electricity use, and a GHP homeowner could recoup the differential in three to four years.

States also are offering tax credits, Kelly said: “Many states have created rebates or incentives that are similar to the federal incentives.” New Mexico offers a 30-percent tax credit up to $9,000 per system, for both personal and corporate installations, through 2020. Montana likewise offers a $1,500 maximum tax credit for GHPs with no end date.

Utility rebate programs also pay consumers back for installing GHPs. The DSIRE database, an online resource of state and utility incentives for renewable energy, shows several utilities offer GHP rebates. For example, in North Carolina, Duke Energy and Progress Energy offer a $300 rebate for new home GHPs.

Are Incentives Enough?

The question is will consumers catch on to the technology, even as incentives abound and the economics of a GHP become increasingly attractive?

The United States is the current world leader with 959,000 GHP installations and 56 percent of the world’s total installed GHP base in 2008, according to another 2009 SBI Energy report called Geothermal Energy Markets: Technologies and Products Worldwide. Sweden is second with 440,000 units in 2008. Germany came in third (6 percent), then Canada (4 percent), Switzerland (3 percent), and Austria (2 percent).

At a fraction of the size of the United States, these European countries, especially Sweden, have a higher GHP-density per capita. “One of the big reasons for the difference is there is a much different treatment of GHPs in terms of the regulatory environment,” said Kelly.

In Sweden, geothermal technology began gaining traction more than 30 years ago, when the government funded several large heat pump demonstration projects. Currently, the government assists households to convert oil burning or electric resistant heating to GHPs or pellet burners. But according to an article by Mattias Tornell of the Swedish Energy Agency, higher oil and electricity prices have driven greater consumer adoption of GHPs, while subsidies are “tricky policy measurements.”

Additionally, extensive research and development at Swedish GHP manufacturers and technical institutes and universities have resulted in “reliable and robust” heat pump technology which is important for market confidence, according to Tornell. While it has taken time, Swedish consumers are familiar and comfortable with geothermal technologies.

Building U.S. Consumer Confidence

In the United States, that confidence leaves something to be desired. “A lot of people are not familiar with [geothermal heat pumps]. They’re reluctant to do it … if it increases the cost of the house. They’re afraid to try something new,” said John Lund, director of the Geo-Heat Center  at the Oregon Institute of Technology.

Awareness of the technology is a big issue, Shah agreed. “Even though efforts to increase awareness are growing, there is a difference in the U.S. consumer mindset. The U.S. consumer tends not to think first of green solutions.”

Adoption of GHPs in the United States historically has been more concentrated in the Northeast. “Most manufacturers are in the East. On the other hand, the growth rate out West is faster, in places like California, because there is a catch up phenomenon going on,” Kelly said.

Western areas lack the necessary infrastructure, Lund said. “We don’t have a lot of trained installers and designers [out West]. [GHPs] are more popular and stronger in the East because the infrastructure is stronger,” he said.

Kelly agreed training and certification is a challenge. “With a 40-percent growth rate and the demand it creates, it is a challenge,” he said. The International Ground Source Heat Pump Association (IGSHPA) provides training for system installers and designers. “They have seen their training increase way, way up from previous years,” said Kelly.

Time will tell if the U.S. consumer will warm up to the idea of heating and cooling their homes with geothermal energy. While it appears there are plentiful incentives, customer adoption also depends on confidence in the technology, which will grow as more systems successfully come online and word about them spreads. That appears to be happening.

“What we hear from our members who install conventional heating and cooling and have expanded into GHPs,” Kelly said, “is that if it weren’t for GHPs, their business would be down.”

Janneke Pieters is a freelance writer on energy, electricity and other issues. She is the former associate editor of Electric Perspectives magazine, published by Edison Electric Institute.