Calculate Payback Time for a Geothermal System in Massachusetts
The first thing they teach us in ‘geothermal sales school’ is to never talk about payback time and to always talk about return on investment (ROI). The problem is that everyone understands payback time and that number is more tangible than a percentage value. In this post, I will show you how to calculate the payback time and how that number relates to ROI.
The payback time is the amount of time it takes for your geothermal system to pay for itself.
There are many products that are marketed as saving consumers money that will never pay for themselves. Two that come to mind immediately are:
- Most vehicles that promote fuel economy
- Most high efficiency fossil fuel furnaces
The payback time on these products is never which means that you will not make your money back within the lifespan of the product. Geothermal systems save you so much money that it will pay for itself within its lifetime.
Suppose we have a home that is heated by fuel oil and a new furnace is needed. The numbers would break down like this:
A simple payback calculation would show a payback period as follows:
Cost of geothermal system = $40,000 – $12,000 – $10,000 = $18,000
Simple payback = $18,000/$1,825 = 10 years
In this example, the simple payback would be approximately 10 years if the price of oil and electricity stays the same. This number also assumes that the oil furnace and the geothermal system will have the same lifespan.
Now, suppose we apply an inflation rate of 5% to oil and electricity. Note that the price of oil has actually increased at a rate greater than 5%. (To see how the price of fuel oil has changed over the past 20 years, please see our earlier blog post.) With a 5% inflation rate, the savings over time would look like this:
When the cumulative savings equals the amount invested (i.e. the cost of the geothermal system = $18,000), that is your payback time. In this example, the system is paid off in 2019 which is equivalent to a payback time of 8 years. AND after 22 years, you will have $55,500 in your pocket that you wouldn’t have had if you had installed an oil furnace. If you had to purchase a second oil furnace after 15 years, the savings would be more than $65,000!
An 8 year payback time for a geothermal system is roughly equivalent to an ROI of 13%. Compare that to bank interest rates of less than 1%.
For additional information, EnergySage has an excellent article about how renewable energy helps you keep more of your money in your pocket. Click here to learn more.