Winter approaches.
But no pressure, as I slowly work through the tax angles on this HVAC equipment replacement decision. And bring somebody in for another quote for new equipment. And maybe, eventually, get everything working again.
If nothing else, this whole episode shows me that it’s good to have multiple heating systems in your home.
Even with one heat pump dead, we have some heat.
And that is way better than no heat.
The post in brief
- Home energy efficiency tax credits are heavily skewed in favor of ground-source heat pumps (over air-source heat pumps and other types of heating). The taxpayers will cover 30% of my cost, without limit, if I go for ground-source. They’ll cover 30% of the cost, up to a limit of $2K, for air-source. Virginia further skews the situation in favor of ground-source units.
- Given the HVAC options that I’ve been offered, I see no rationale for that. The ground-source heat pumps I’ve been offered are not significantly more efficient than modern off-the-shelf air-source heat pumps. Best guess, this skew in the law reflects technology as it existed two decades ago.
- Worse, tax credits would cover 30% of the cost of replacing my existing ground-source heat pumps with identical units. It will pay for literally zero improvement in my home’s HVAC energy efficiency.
- If my experience with electric vehicle tax credits is any guide, the primary beneficiary of the ground-source tax credit is probably my local monopoly installer of ground-source heat pumps.
- None of that will stop me from using those tax credits. If nothing else, if I don’t, given the resulting high prices, I must take advantage of the tax credits merely to avoid taking a financial beating on the inflated prices of ground-source heat pumps.
Quick recap of my situation
I have two ground-source heat pumps, one dying (heats the upstairs), one dead (heats the downstairs).
The ground loop (the expensive water-filled pipe in the ground) is fine. It’s just that the 20-year-old Freon (R22)-based heat pumps are worn out.
The quote for replacing both 3-ton units is $50,000, before any extras.
At that price, I decided to study the situation a bit before signing on the dotted line.
It’s a good thing I did. I found that:
a) My first-floor HVAC ducts are grossly undersized. There’s one 6″x18″ duct (0.75 square feet) for maybe 1600 square feet of living area. That’s about a third the size of what is recommended for use with heat pumps. This likely explains why the kitchen is freezing cold in the winter.
In hindsight, that makes perfect sense. The previous owner simply hooked up his new heat pumps to the existing 1959-era ductwork designed for gas-fired forced air heat. First, it’s no surprise that the old ductwork is too small. The temperature rise (“heat”) produced by gas-fired forced air heat is two to three times that of typical heat pumps, which means that the ducts only needed to carry one-half to one-third the air flow, in order to achieve the same rate of room heating as a heat pump. Second, fixing this problem — installing a main duct properly sized for heat pumps — would mean losing standing headroom in the finished basement. I’d have to duck the duct, to get from one side of the room to the other. So, in the end, the existing situation makes sense, in that I can plausibly explain how I arrived at this situation.
b) The ground-source heat pumps for which I got the $50,000 replacement quote are no more efficient than latest-generation off-the-shelf air-source ductless mini-splits heat pumps.
Red is heating, green is cooling, higher numbers are better. This table is my best guess at an apples-to-apples comparison of three different heat pump options. See Post #2032 for details.
c) Which, to complete the circle, means that the huge pro-ground-source bias in the tax code makes no sense. Best guess, it’s an artifact of the way technology looked twenty years ago.
A huge tax credit does not necessarily translate into savings for the consumer. My experience with the EV tax credit.
Supply, meet demand.
I got up to speed on the Federal EV tax credits this year when I bought a used Chevy Bolt (Post #1986 and several others).
It was a learning experience, and not in a good way.
Back in the day — the day being 2005 — we took advantage of the tax credits then offered on the purchase of a hybrid car. That was the era when the breakthrough technology was hybrids. The $4K tax credit essentially paid for the higher cost of the (then-new) hybrid technology. And as a result, for the past two decades, we’ve been driving a Prius that gets 46 MPG EPA, instead of a Ford Ranger that got 21 MPG. So that tax credit worked out pretty much as intended.
Fast forward to the present: The Federal government now offers a tax credit for new American-made EVs, to the tune of about $7500. The rationale is the same as for the (long-expired) credit on hybrids. For a long-lived capital purchase decision like a car, it’s in our best interest to entice people into opting for the something energy-efficient, with a low carbon footprint. The idea being to make an efficient EV as financially attractive as in inefficient conventional gas car.
I figured, what a deal. I could see the MSRP for the car. And with a $7.5K discount, from tax policy, it looked like a new Bolt was going to be a great deal. (Artificially great, for sure, but still a great deal.)
But this time around, with EVs being trendy at the time, you can probably guess the punchline.
All my local Chevy dealers marked the car up by $7,500 over MSRP. Every blessed one of them. All by that same amount, to within a small margin of error. MSRP was around $27K, every car within 100 miles of my home was $34K and change.
Actual savings, to the purchaser, from the tax credit, was zero. In my locality, “the market” fully negated any impact that the policy was intended to have.
I’m an economist (or was) by trade, and even I was surprised at how effectively market forces (or, for all I know, covert collusion among dealers) nullified this well-intentioned tax credit. Instead of dropping the price to the consumer, and so putting the efficient new technology on a financial par with less-efficient tech, it simply added to dealer profits.
Currently, now that EVs have fallen out of favor, if you can find a new Bolt (2023 is the last year that was produced, I think), the dealer markup is closer to 60% of the value of the tax credit. So in a softer market, looks like dealers around here chose to share, a bit. Either way, the end result of the $7500 subsidy is nothing even remotely close to knocking $7500 off the MRSP to get to the consumer’s purchase price.
From an environmental-impact standpoint, you might as well have raked that EV tax-rebate money up into a big pile, and burned it. (Less the resulting air pollution.) It’s not clear that anyone should have anticipated that, but that was the net impact.
This is a large part of why I bought a used Bolt. By the time I’d done my research, I was leaning toward getting a new car. But I felt that, unlike a new Bolt, with a used Bolt, I could at least get an honest price from the dealer. There, the tax credit was about $4K (for the first resale of a used American-made EV), but used-car dealers were largely unaware that any tax credit existed. So it seemed to me — and I think in fact was the case — that the tax credit went into my pocket, not the dealer’s pocket.
So, the lesson learned is that the presence of a big tax credit does not necessarily mean any reduction in net cost to the consumer. It depends on the market behavior of suppliers. The money’s going to end up in somebody’s pocket, for sure. Econ 101 tells us that the closer suppliers get to a monopoly (one-seller) or oligopoly (few-sellers) situation, the less of that tax credit will end up in the purchaser’s hands, and the more that tax-credit money will stick to the hands of the seller.
And hey, guess what. There’s exactly one firm in my area that specializes in the installation of ground-source heat pumps. They seem like really nice people, and they seem to know their stuff. But they’re still my local monopoly supplier of heat pumps. And I can’t believe that’s going to result in the lowest cost to me.
Hence, $50K to replace two three-ton heat pumps. And attach them to the existing wiring, ground loop, and ductwork. With the installer fully realizing that it’s not going to cost me $50K, it’s going to cost me more like $32K, accounting for all Federal and State subsidies.
Lesson #2: Equipment lifetime is a big determinant of your annualized HVAC cost.
The sole point of this section is that you can’t just compare installation costs of two different pieces of equipment, if you expect one to last longer than the other. That’s not rocket science, but my first instinct was just to compare the installation costs, which ain’t right.
If nothing else, this equipment failure forces me to come to grips with the actual annual cost of HVAC for my home. If it takes $50K worth of equipment, with an estimated 20-year life, plus maybe $800 in electricity each year, then the fully-allocated annual cost of my home heating and cooling is shown above. Roughly three-quarters of the cost is “capital consumption”, that is, using up the 20-year-lifespan of the expensive capital equipment.
That’s not a huge surprise, as (e.g.) the cost of driving an EV is even more skewed toward capital cost, and away from fuel cost.
My only point is that you must factor in any likely differences in equipment lifetime when you look at your HVAC options. In particular, ground-source heat pumps are located inside, out of the weather, and are expected to last longer than air-source heat pumps, for which the electrical components and compressor are located outside.
A likely set of guesses would be 20-25 years for ground-source (indoor) heat pumps, versus 10-15 years for air-source. That’s a good match to the warranties. For the equipment I’m looking at, the ground-source pump comes with a 10-year warranty, while the air-source pump comes with a 7-year warranty.
But the actual cost adjustment for that isn’t simple. At least, not if you do it right, That’s because future spending should be “discounted” by some expected rate of interest, relative to dollars that you pay out right now. And, in my case, I need to discount for the fact that my house will be torn down and replaced with a (gigantic new) house when we move.
When I plug all that into a spreadsheet, assuming a 5% rate of interest and a 10% per year chance that this house will be razed (in years 11 and later), I need to add one-third to the cost of the air-source units, to put them on a par with the ground-source units. That’s to account for the likely need to replace those air-source heat pumps, in the far distant future, after fewer years of service than I would get with comparable ground-source units.
YMMV.
Finally, the tax angles on heat pumps, in detail.
If you want chapter and verse on how the tax credits work, in the case of heat pumps, the IRS description of home energy tax credits is clear and concise. (Geothermal heat pumps are in the section on the Residential Clean Energy Credit.)
Here’s the key point about tax incentives and heat pumps. As shown above, if you install a qualifying new heat pump, Uncle Sam will cover 30 percent of the cost. Up to $2000 (per year) for air source. But without limit (and with rollover across tax years) for ground-source heat pumps.
Virginia then piles on an on-going annual payment, which further tilts the playing field in favor of ground-source heat pumps (over air-source). But I’m going to need an entire separate post to describe what Virginia is doing. That’s not a tax credit, it’s another thing entirely.
Example: equal-valued purchase of equipment leads to much lower net cost for ground-source.
A one-point-in-time installation of
- $50K of ground-source heat pumps will cost you $32K.
- $50K of … air-source … heat pumps will cost you $48K
Both figures net of all tax advantages offered by the Federal government and an estimate of the first-year value of what Virginia is offering. Which, as noted, is weird enough that it’ll take a separate post to explain it.
Example: Fully accounting for the installed price, equipment life, and tax bias
In my case, when all the dust settles, for ground-source equipment whose true long-run cost is about 50% higher than for air-source, I’ll end up paying less than 15% more. I end up almost indifferent to the choice between air-source and ground-source heat pumps.
The moral of the story being, more-or-less, hey, why not waste (somebody else’s) money, to achieve a result with ground-source heat pumps that I could have achieved more efficiently with air-source?
More formally, if I do a crude cost-per-ton-C02-avoided, with the baseline being an old-style (70% efficient) gas furnace, the tax credits for the ground-source heat pumps work out to be about $700 per ton C02 avoided. The tax credit for the air-source heat pumps works out to be about one-fourth of that.
Any new equipment qualifies, including replacing an existing ground-source heat pump with another ground-source heat pump.
I had to track this down from a couple of sources, to be sure this is actually how the law reads. But, in fact, the unlimited 30% tax credit applies to the installation of any new equipment, regardless of what that equipment replaces.
To be clear, I’m just fixing a broken, existing ground-source HVAC system. I’m replacing a ground-source heat pump with another ground-source heat pump. Attached to the pre-existing ground loop.
Near as I can tell, I’m getting very close to zero additional energy efficiency out of the deal.
And yet, I qualify for $Ks in tax breaks.
I marvel that nobody even tried to write the law more selectively. Or maybe I marvel at the pull of HVAC equipment manufacturers, many of which are still based in America. So maybe this is, at root, a covert buy-American policy?
But why? Does the tax code understand that this moment but the merest flicker in the eternity of all existence?
Eternity being roughly how long the buried plastic ground loop will last, if left undisturbed.
In this section, I grasp at straws to try to explain the current bias in the tax code. All the alternative explanations I could think of, other than, yep, the law is that out-of-step with recent improvements in air-source heat pump technology.
Spoiler: In the end, I think the law is either confused, or out-of-step with current technology. Or both.
But maybe the Feds purposefully overpay, because there’s some significant additional societal benefit from that essentially-permanent ground loop. Or from some other aspect of ground-source relative to air-source.
Guess #1: The current technological tie between ground-source and air-source is expected to be temporary. Maybe you can expect ground-source refrigeration technology to catch up with air-source over time. Maybe the “normal” situation does show a significant efficiency advantage to ground source. By getting somebody to install that (essentially) permanent ground loop, you’ll more-or-less have locked that home (and its subsequent owners, until the end of civilization) into that lower-energy-use, ground-source technology.
But if so, the rebates ought to be on the ground loop cost, not on, as in my case, the equipment end-of-lifetime replacement costs.)
Guess #3: It’s also possible that ground source offers enough advantage to “the grid” that it’s worth favoring. Ground-source doesn’t strain as hard as air-source during very hot or very cold periods. Those tend to be periods of high electrical demand. So, ground-source offers the grid the advantage of not piling on during peak electrical demand, the way air-source does. (A lot of utilities have, at one time or another, literally paid customers for peak-clipping behavior, such as paying them to install devices that will let the utility cycle the homeowner’s AC on and off during peak loads in heat waves.)
But I’m grasping at straws. (And there is no Guess #2.)
In reality, I think the bias is in the law because people still have this 2000s-era notion of the relative efficiency of ground source heat pumps, relative to air-source.
Final straw: Diminishing returns to efficiency
Finally, if nothing else, efficiency is a game of diminishing returns. And you need to factor that into your decision as well. How much do you really get, if you insist on buying nothing but the most efficient HVAC equipment on the market.
Here, the weirdest fact is that halfway between COP 3 and COP 6 is … COP 4?
Yep. Going from a COP 3 unit to a COP 4 (run-of-the-mill heat pumps) will cut your electricity use by 25%. And going from COP3 to COP 6 (cutting-edge heat pumps) will cut it by 50%.
Ergo, half the environmental benefit you achieve in making the leap from COP 3 to COP 6, you’d get by making the run-of-the-mill jump to COP 4 instead.
Conclusion
In my case:
For my first floor, the inadequate ductwork is the deciding factor. Or, to put it another way, once I casually mentioned to my wife that we might be able to have a warm winter kitchen, for the first time since we moved here, the decision was made in favor of replacing the ducted ground-source heat pump with ductless mini-splits. It just took me some time to realize that.
All I’ve managed to do here is show that this decision is harmless, both financially and environmentally. That, because it’s more-or-less unheard-of to go “backward” in heat pump technology. That is, even though I have a working ground loop, I’m going to ignore it and replace my ground-source heat pump with air-source mini-splits. And I’m not going to feel guilty about it.
For my second floor, I’m going to install a new ground-source heat pump with the old one finally dies. Which, by law, it cannot do until we hit the coldest part of the year. And I’m now secure in the understanding that, with the longer expected life and the huge bias in the tax system, I’ll pay no more for that, annualized, than I would have for cheaper air-source heat pumps.
It’s a fair bit of money, for sure. But it’s a low-stress decision. Basically, it’s hard to go wrong, either way.
