Tom Konrad CFA
Geothermal Heat Pumps (GHP) are a niche market. They
Disclosure: Long WFIFF, short LXU puts (a net long position.)
A Better Mousetrap?
Ralph Waldo Emerson never said “Build a better mousetrap, and the
world will beat a path to your door.” The mousetrap that
likely inspired the misquote was
invented seven years after his death. Unfortunately, many
people take it literally. GHPs have all the hallmarks of a
better mousetrap: They do the job of heating and cooling a
building more efficiently than any other option. Despite the
larger up-front cost, they are a mature technology and usually the
most economic option for buildings that can accommodate them.
Not only can GHPs cut energy costs for heating and cooling by up
to 80%, they can also provide other benefits such as essentially
free hot water when in cooling mode, lower reliance on
fossil fuels, and the elimination of above ground outdoor
equipment. These advantages have earned GHPs a small but
dedicated cult of true believers, but not broad market acceptance.
The world has not yet beaten a path to the GHP door.
Instead, GHPs have a slim and only modestly growing market
share. A study by Frost and Sullivan projects the
market for GHPs in North American commercial buildings to grow at
a 7.8% annual rate from 2012, 4.7% faster than the North American
climate control market as a whole. An industry representative
pointed me to a Navigant
study which projects the world installed base to grow
from 13.3 million tons to 36.2 million tons in 2020, see chart
Unfortunately, growth in installed base is not comparable to
industry sales. For a young industry with a low installed base,
sales are approximately the increase in the installed base.
I eyeballed the chart to get annual estimates of world
sales from the chart, and found that Navigant is projecting less
than 5% sales growth in 2013 to 2015, followed by rapid growth
(20-30%) in the 2016 to 2018 time frame. Navigant’s
discussion makes clear that the later rapid growth rates require a
revival of the economy and easier access to capital.
In the short term, Navigant’s study seems less optimistic than
Frost & Sullivan’s, while it is more optimistic in the medium
to long term. Using either projection, the near term less
than 5% annual market share growth is clearly not the type of
market transformation many would expect from a “better
mousetrap.” Does the rapid market growth Navigant expects
after 2015 have to depend so greatly on easy access to capital?
Are other factors holding the GHP market back?
I struck a few raw nerves when I asked if
air source heat pumps are a threat to geothermal heat pump
suppliers last month, despite the fact that I answered
my own question with a “No.”
Except in moderate climates, super-insulated homes, or situations
where the installation of a geothermal heat pump (GHP) would be
particularly difficult, GHPs have the better economics. This
is despite recent advances in air source heat pump (ASHP)
technology, which led me to ask the question in the first place.
ASHPs don’t provide hot water, while many GHP systems can.
Also, as the recent heavy snows in the Northeast
demonstrated, there are some advantages to having a heat exchanger
which is not exposed to the elements (see pic).
One advantage of a geothermal heat pump’s ground loop
compared to the air source heat exchangers shown is that
you don’t have to dig them out after a snowstorm. This pic
also shows an installation problem which is allowed under
manufacturer specs, but may lead to less than optimal
performance if both pumps are operating simultaneously:
one heat exchanger blows air directly at the other. This
problem is analogous to poor ground loop design for GHPs.
Given all these advantages, why the raw nerves? I suspect it’s
because geothermal heat pump sales continue to disappoint and
proponents are looking for someone to blame.
ASHPs in Net-Zero Buildings
Another target of geothermal advocates’ ire is Marc Rosenbaum
(who teaches the online
Net Zero Energy Homes course in the Northeast
Sustainable Energy Association’s Building Energy Masters Series.)
He also raised hackles when he recommended minisplit
air source heat pumps (ASHPs) for most single family net zero
homes (I quoted Rosenbaum extensively in the previous article.)
the story of the Putney
School’s 16,000-square-foot Net-Zero Field House. The
team designing this building modeled its heating costs using a
GHP, and also using ASHPs with additional solar photovoltaics
sufficient to provide the extra electricity needed to run
the ASHPs. They found that it was cheaper to expand the
solar system to power the ASHPs than it would have been to pay the
extra installation costs of a GHP. Furthermore, the price
of solar has fallen significantly since the Putney Field House was
built; the price of the ground loop for a GHP has not.
Nevertheless, Rosenbaum’s preference for ASHPs in highly
insulated buildings does nothing to explain GHPs’ low market share
growth rate. Net Zero buildings are the exception, not the
rule, and have a far lower market share than geothermal heat
pumps. When the heating load is very low, the operating cost
advantage from the greater efficiency of GHPs is not enough to
repay the additional installation costs. That is not the
case in 99.9% of new and existing buildings today.
GHPs Almost Everywhere Else
My own home, a farmhouse built in 1930, is much less efficient
and requires a lot more heat than a Net Zero home, despite my own
significant improvements. I don’t have enough suitable roof
space for photovoltaics to make up for the extra energy ASHPs
would require, even if that could be done economically. I
opted for four ductless minisplit ASHPs rather than a GHP system,
but it was because the minisplits allowed me to do the install
without adding air ducts. Adding air ducts to my 85 year old
home would have significantly increased the cost and disruption of
installing a GHP system.
ClimateMaster, a division of LSB Industries (NYSE:LXU),
makes a ductless split system called the Tranquility
Console Series which probably would have been suitable
for my needs, but I did not know about it until I received
comments on an earlier version of this article telling me about
it, nor did any of the geothermal installers I spoke to.
Unfortunately, the efficiency ratings are low for GHPs with
a COP of 3.3 in the ground loop configuration. This is not much
better than the Mitsubishi air source units I had installed, which operate at a
COP of around 2 from around -10° to 20°F outdoor temperatures,
and exceed 3.3 COP when the ambient temperature is 35°F or more.
The added efficiency at low temperatures would probably not
have been sufficient to pay for the ground loop, but I would have
been interested to get a quote. Waterfurnace Renewable
Energy (TSX:WFI, OTC:WFIFF)
offers the Envision
Series Consoles with slightly higher heating efficiency
(up to 3.5 COP) for certain models.
Since GHPs are economic in most situations, other
factors must be holding them back.
The relative complexity of a geothermal system is one
likely suspect. As Rosenbaum says about
“[O]ne thing I really like about the minisplits is how
they are packaged systems from a single supplier, and are highly
engineered as a system and therefore very reliable. GSHP systems
are, at least where I have practiced, essentially custom
engineered and installed, usually by several entities who have a
shared responsibility to make sure the systems perform.”
Given the large up-front cost of a GHP system, the risk
of a poor installation is likely to deter nonprofessionals from
using GHPs even more than it deters experienced professionals like
The Curse of Complexity
The cure for installation risk would be a way to
validate the performance of GHPs in the field, and track problems
back to their source. When contractors lose the ability to
blame others for their mistakes, they quickly stop making those
mistakes or they go
out of business. Without such monitoring, it’s nearly
impossible to track increased electricity use back to the source.
I recently spoke to Matt Davis, the co-founder of Ground Energy
Support and a professor of hydrology at the University
of New Hampshire. Ground Energy Support provides GHP
monitoring to GHP owners and contractors, as well as data and
analysis to support the development of the industry.
Ground Energy Support recently published a 14 page Homeowner
Guide to Geothermal Heat Pump Systems. While I found
the guide easy to understand, it makes clear that GHPs are not for
everyone. The start of the guide directly helps homeowners
decide if they and homes are suitable for a GHP, while its length
indirectly makes the point that GHPs are not always “plug and
play.” The six pages dedicated to finding and selecting a
suitable GHP installer indirectly makes clear that the process is
not for anyone with only casual interest in GHPs and their savings
If GHPs are to become commonplace, the process of
financing and purchasing a reliable GHP system have to be
simplified to the point where it becomes a matter of calling a
name in the phone book. The success of SolarCity Corporation
(NASD:SCTY) in providing solar to homeowners who are more
interested in the green in their checking account than the green
of their electricity shows the potential. That success is
based on SolarCity’s ability to provide financing, installation,
maintenance, and performance verification services internally.
All the homeowner needs to do is pay the monthly bill for
electricity production. The value proposition is simple: a
hassle-free installation and savings from day one.
The SolarCity of Geothermal
Geothermal heat pumps also have the economic potential
to deliver that same value proposition: hassle free installations,
and reliable savings from day one. But if the industry is to
achieve this potential, several things have to come together:
- A single company responsible for the entire installation, from
engineering to installation to maintenance.
- Reliable monitoring of heat production from the ground loop.
- A financing tied to the geothermal installation itself, to
allow a lease-like structure which allows homeowners to see the
benefits from day one.
We already have the corporate and financial structures
to bring the solar lease model to GHPs. In fact, it takes
little stretch of the imagination to see a solar lease company
acquiring or partnering with GHP installers and offering a
geothermal lease along with the solar lease to its customers.
In cold climates not known for their sunny winters such as
the Northeast US, the underlying economics
of GHPs are far superior to those of solar photovoltaics.
These economics should enable very attractive GHP leases, as
soon as the other pieces are in place.
First, the homeowner and the geothermal lease company
would have to have a reliable, objective way to monitor the
performance of the GHP system.
Ground Energy Support is tackling this problem with its
GXTracker, which monitors the heat output of the ground loop and
monitors or models the electricity consumption of the pump itself.
Heat production monitoring lets everyone know if a system is
operating as designed, and helps diagnose the problem when it is
Of the 30 GHP systems Ground Energy Support has been
monitoring for the last two and a half years, 60% have had some
operational, maintenance or mechanical issue. Most of these
were minor maintenance issues or improper settings which caused
only minor drops in performance, but which would have gotten worse
if undetected. But 17% of the systems had significant design or
installation problems. A third of these were oversized
systems which can lead to higher energy costs but were likely the
result of homeowner preferences. Another third were easily
fixable and not the fault of the installer: a failed heat pump
(covered under warranty), and an air duct which was left open to
an unfinished garage. The rest (high pumping penalty caused
by too large a pump or too small pipes, and an undersized ground
loop) could have been avoided if the homeowner had been able to
vet the installers’ track records – another potential benefit of
One other way proper monitoring of GHPs might help the industry
is enabling the implementation of incentives for renewable heat
production from geothermal ground loops, analogous to the
incentives for photovoltaics. The Massachusetts legislature
currently working on
a bill to allow heating and cooling with renewable fuels to
benefit from the same incentives the state give to renewable
electricity. The bill states that the heat must be “verified
through an on-site utility grade meter” or similar means.
Advocates of geothermal heat pumps should spend less time
discussing the well established attractive economics of GHPs in
theory, and more time delivering those economics. The key to
this is making the buying process simple for the customer while
providing verification and taking responsibility if those
economics fail the be acheived . While GHPs are not the best
fit for every home, in many climates the majority of such homes
will benefit more from a GHP system than a new conventional
heating and cooling system.
The solar lease is an excellent model for taking a renewable
energy system and making it attractive to the general public.
The GHP industry can follow down this path, but first it has
to adopt reliable monitoring as a standard feature. This
will hold installers to account for their design and
implementation, while giving customers confidence that they will
get what they pay for.
Adopting monitoring could start with customers wanting to know
that their systems are operating as designed. It could also
begin with states like Massachusetts giving incentives for
verifiable renewable heat production, or an installer deciding to
break open the market by offering a geothermal lease.
UPDATE: It looks like at least one installer, Orca Energy, is alreadyoffering
a geothermal lease to developers of new homes in a
partnership with GHP manufacturer Bosch
Thermotechnology. New homes are a natural starting
point for residential geothermal leases because of the lower
installation costs and greater ease of design.
It seems to me that the group that has both the most to gain and
the most power to affect change is GHP manufacturers. If
they were to include monitoring as a standard feature, they might
be able to catalyze this market themselves.
To Davis’ knowledge, only Waterfurnace Renewable Energy (TSX:WFI,
Disclosure: I own this stock.) and Modine
Manufacturing Company (NYSE:MOD) currently offer any sort of
energy monitoring. Modine’s is part of their optional Orb controller.
Waterfurnace seems farthest along in this regard.
Sensors are standard on Waterfurnace’s most advanced (and
efficient) models, the 7 Series. According to the company,
the thermostat retains 13 months of energy usage data. I’m
inquiring to determine if that includes heat production.
I suspect the extra costs of making such monitoring standard
would be more than compensated by greater customer satisfaction
and increasing sales.
Is this the start of a move by manufacturers towards better
monitoring, or will change come from the bottom up? If
geothermal heat pump sales are going to soar, change will have to
come from somewhere.
This article was first
published on the author's Forbes.com blog, Green Stocks
on February 28th.
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