Geothermal Heat Pumps Strategic Renewable for NYC

It is time to revisit geothermal heat pumps, and the battle of renewable energy versus energy efficiency. It has been noted with some regularity on this blog that NYC Clean Heat, and its comrade in arms the NYSERDA MPP are destroying real estate values in NYC, and not contributing much to reducing GHG reductions. I was an early advocate for geothermal heat pumps as the single most strategic renewable technology for energy retrofits in NYC buildings, and in April of 2013, then Mayor Bloomberg finally commissioned a serious study of geothermal energy for New York.  We had been advocates (with my consulting firm DaBX) since 2011 at least in our PlaNYC2020 report, and then hurricane Sandy did its bit to promote geothermal heat pumps. It is time now to demonstrate why not only does geothermal have "certain advantages," but is actually the single most important strategic renewable energy technology in the city.

Multi-family Buildings and Geothermal Heat Pumps

In general, if you are looking at any building, energy that you can generate on-site with renewable energy technology (Site Derived Renewable Energy, or SDRE) has numerous advantages. Most importantly, financially, if you analyze long-term (say 30 years) cash flows, thirty years of no cost energy often beats out the "savings" of 15-25% that are achieved by most energy efficiency overhauls. This pays for the heavy capital commitment up front.

1. The first advantage is that you have no transportation losses.
2. A second efficiency factor is that because there are no transportation losses, you can often save the conversion to electricity and pure thermal technologies win the day, because heating and cooling are the larger part of the energy budget, often 75%.
3. On top of that, if you are operating with pure process heat, you have a pretty economical way of storing that either at high temperature (i.e. process heat from solar thermal), or as pre-heated hot water (from geothermal).

A geothermal heat pump is 400% efficient: for every joule of energy it uses (electricity), it returns 4. To take the simplest application in a building, for Domestic Hot Water (DHW), it was traditionally provided by a coil in the boiler, and the efficiency of such systems is typically in the range of 45-75%, in particular because those boilers were oversized relative to the need for hot water, and the need for hot water is year round.

Why the NYSERDA MPP marginalizes Renewable Energy (RE)

The NYSERDA MPP is built on a set of mistaken assumptions and foolish economics. It bundles a set of energy efficiency programs and incentivizes the building owner to deliver efficiency retrofits that score above (currently) 15% gain. It all but marginalizes renewable energy. It all results in owners trying to find the cheapest way to qualify for the incentives, and technologies are selected based on their marginal energy savings, just to get the incentives, in terms of advantaged financing etc. The program focuses on energy efficiency (EE), which always yields high returns at first,  but suffers diminishing returns later, and it is biased against renewable energy (RE) projects, which are capital-intensive at first, but come with a "long tail" of free energy.

The Math of Geothermal Heat Pumps

Here is the typical math for a geothermal heat pump in the DHW application - based on the assumption that the prices for the BTU inputs (oil, gas, electric) are all the same:

1. Old situation: DHW from a coil in the boiler - oil/steam, usually 60% efficient (between 45-75%)
2. New situation: DHW from geothermal heat pump (electric, 400% efficient), and natural gas secondary heat cum backup at 95% efficient, in about 70/30 proportions, so that the combined efficiency is 0.7*400+.3*.95 =280%+29%= 309% efficient.
3. Let's round it off: 60% efficient vs 300% efficient
4. Therefore, if the Btu pricing was all the same that would be the comparison, meaning in case OLD our marginal energy cost is 1.67x the Btu demand, and in case NEW it is 0.33x the Btu demand. In other words the marginal Btu input of the new system is ca 20% of what it would be under the old system.
5. In real life this picture is then complicated by the pricing differences between oil/gas/electric,  but the point is clear, the innate efficiency of the solution is staggering.
6. We should emphasize again, if we can generate any of our own electricity, with wind energy or solar PV, we can store it as pre-heated hot water, and get a higher return than selling it back to the utility.

Geothermal Heat Pumps: The Math of Effective Btus

Again, this beautiful equation will evidently have different outcomes depending on the actual pricing of the different energy sources.

1. We were buying oil to heat the hot water, and the Btu value of #6 fuel is approximately 153,000 Btu per gallon. In the winter of 2014, in NYC, a gallon of #6 goes for $4.00, therefore, the cost per 1000 Btu is 2.61 cents.
2. We are substituting this with electricity, which in the winter of 2014 in NYC, goes for about $0.25 per KwH, and the thermal value of a kWh is about  3,214 Btu. The cost per 1000 Btu therefore is ca. 7.78 cents; and with natural gas as a secondary fuel, which goes for about $1.25 per therm (100,000 Btu) and therefore costs ca 1.25 cents per 1000 Btu.
3. For argument's sake, we needed 1,000,000 Btus for a given quantity of DHW, and the comparison now becomes: Old style (oil/steam): 1.67 x $0.0261 x 1000 = $43.59, and New style (geothermal plus gas): (0.7 x 7,78 x .25 + 0.3 x 1.25/.95) = 1.36 + 0.39 = 1.75 cents per 1000 Btu, or $17.50 for 1,000,000 Btu.
4. Now, if we can generate some of that electricity ourselves with a wind turbine or with solar PV, we have the benefit of storage, which gives us a higher return than selling it back to the grid, and we are compounding our savings.
5. In short, most building owners got taken to the cleaners when they invested lots of money in converting to natural gas, and made some small savings and efficiency improvements, but long-term they are still at the whim of energy prices. Their buildings have become LESS resilient. With DHW being 30-50% of Btu requirements in the typical apartment building, the geothermal solution would be a hands down winner, and perhaps a first step towards a mostly renewable heating and cooling solution...
6. From the standpoint of clean energy and reducing GHG emissions, we are now servicing 70% of this Btu requirement (DHW) with electrically driven geothermal heat pumps, with 400% efficiency. In short, 75% of the 70% is GHG-free, representing over 50% of this requirement is now free of GHG-emissions.

What really happened...

The conversion to natural gas under the NYC Clean Heat program, combined with the NYSERDA MPP has been neutral event for GHG-emissions because, while gas burns cleaner, the production and transportation losses of methane make it about as bad as coal for overall air quality, although within city limits there would be some reduction of smog.

Only very few buildings made the conversion to geothermal hot water systems, and when they did, these systems were most often wrongly designed, as just water heaters, and not with a view to pre-engineering whole building energy solutions, in which boilers might eventually be replaced with a solar thermal plant, at most with only a simple boiler for backup.

In most cases, conversions were from oil to gas, which reduced building resiliency, for we are now in a city that is wholly dependent on a single fuel, and if you watched the news tonight, one pipeline explosion could cause a tremendous amount of havoc, as they are finding out in the Mid West.

Conclusion

Energy efficiency programs mean that building owners are paying for making energy from the grid more economical, instead of investing in their properties and generating their own energy with (mostly) thermal technologies. Though finally geothermal heat pumps seem to be getting some more recognition, it is clear again that energy efficiency gets prioritized by current programs at the expense of renewable energy, and ultimately to the financial detriment of building owners.

Financing Energy Retrofits and Capital Destruction

Creative finance solutions for energy retrofits abound, but most underwriters, including alternative financing programs such as PACE bonds, fall for the generally accepted delusion that energy efficiency should get top priority. This is a mistake - majoring in a minor - which increases underwriting risk, instead of decreasing it, for several reasons:

• If you start out with "energy efficiency" of an existing installation, that is not an energy retrofit at all, for you blithely accept that the design that was in place was the best one possible, and you are merely upgrading it, as in with more efficient versions of the same technology. The point of an energy retrofit is to use newer technology, which may necessitate a different design. An efficiency improvement in most cases is not a capital investment, but an operational expenditure.
• Since many of the newer technologies are about generating energy with solar, wind, geothermal, or even hydropower, they all imply a different model, and different designs. Specifically they enhance the capital asset, the building, with independent generating capacity. Financially they are also a permanent price hedge against energy price increases.
• Energy efficiency upgrades are also by nature short-term, they usually only achieve about a 30% improvement, which is easily wiped out by a few price hikes, therefore such upgrades should not be financed with long-term money, let alone be subsidized.

As demonstrated in earlier posts, financing energy efficiency with long-term money in most cases is a mistake, because the typical 30% or so improvement is all too easily wiped out by one or two price hikes, and because of the issue of diminishing returns, there is no follow-on strategy, and therefore it is financially unsound. Financially, energy efficiency is a horrible dead-end and should be avoided like the plague: again, it increases underwriting risk if it is pursued at the expense of an existing renewable option. As a strategy, investing in energy efficiency should be an absolute last resort, if you can't do anything better.

Renewables are an immediate and permanent asset of the building, regardless if you use solar, wind, or geothermal, or hydro-electric, plus any improvements to the building envelope now come back to you directly in terms of reducing the installed capacity you need. Renewables are an immediate energy price hedge. Because of diminishing returns, "investment" in energy efficiency is financially a shaky proposition, while renewables immediately raise building value.

Energy Retrofits Gone Wrong

Energy retrofits that prioritize energy efficiency amount to capital destruction, assuming there was an economically viable renewable option available. Thus underwriters of financing for buildings who focus on energy efficiency first are in most cases likely to be deteriorating their portfolio and needlessly increasing underwriting risk. This is long-term money for a short-term benefit, and that does not make for financial stability of the asset. Even PACE bonds have completely missed this issue, and all programs that I know of focus on energy efficiency first.

With proper financial planning, which is to say a 30 year capital budget for energy upgrades to a building, it will become very visible that renewable options are financially superior, for 30 years of zero energy bills will outweigh 30% energy savings. Or to put that differently, renewables may initially have a longer payback, but, properly evaluated, the renewable solution with a 7 year payback, may be superior over its life to a 4 year payback on an efficiency component, which "saves" 10%. The renewable energy equipment comes with zero energy bills, or in the worst case some 10-15% in back-up from a fossil fuel source.

How to underwrite energy retrofits

renewables improve value

The bottom line is that responsible financiers should demand a 30 year CAPM analysis of energy retrofits to the building, which could include an installation that could be spread over several years, and obviously realistic measures for maintenance and operating costs, noting that O&M are typically lower for renewable energy than for fossil fuel. Further, underwriters should rate projects based on the percentage of energy that is derived from renewables. The higher it is, the greater the financial stability of the building. My consulting firm DaBx Demand Side Solutions, publishes the DaBx Renewable Energy Retrofit Portfolio Standard (DaBx RERPS)

Conclusion: renewables reduce underwriting risk

Financing energy efficiency means financing short-term operational improvements with long-term money; energy retrofits with renewables reduce underwriting risk and improve the asset value of the property.

Off the grid in four easy lessons #3

Getting off the grid is a direction, and it does not have to be an absolute destination, not everybody can have a net zero house, particularly on a retrofit basis, but the goal is to spring free of the trap of burning fossil fuel, and paying for energy ad infinitum on a subscription basis. That slavery is symbolized financially by the fact that if you start making your fossil fuel-based (subscription) energy household more efficient, you are in effect ensuring that the value of your property remains dependent on fossil fuel - you never get out of the hole. With every dollar you invest, you are making it harder to switch to renewable energy. Effectively, you are cementing your dependence on the fossil fuel system, and its predictably unpredictable price hikes, with every dollar you "invest," and the long-term value of your property remains hostage to external fuel supplies and pricing. Therefore, as long as there is a renewable energy alternative, that should have top priority. Off-Grid Real Estate is easier if you build it from scratch, but on a retrofit basis, the design objective becomes simply making a long-term green energy plan, based on a proper financial model of your property, and planning your investments in such a way that you gradually slip out of the noose of carbon energy and build up the long-term value of what is for most people their major asset in life, their house. Your journey to net zero has begun. The design goal here should be anything over 50% energy reduction, which cannot usually be done with energy efficiency.

The energy efficiency trap and the green energy answer

Prioritizing energy efficiency projects is a trap, because of diminishing returns. Salesmen for various energy efficiency technologies, or even for renewables, will try to sell you their equipment on the basis of a payback period, never mind if it makes sense for the value of your home. They come waving Energy Star labels and tax incentives or other programs in your face, but their interest is selling their wares, not increasing the value of your property. That part is your responsibility. The first "efficiency" investment may be $3,000 with a 3 year payback, and you think great, this reduces my energy bills by 15%, fantastic. Then the next best opportunity is $10K with a 6 year payback, based on another 15% reduction. By this time your bills are 85% of what they were, so now your overall reduction is another 13% off the original at best. And the next investment you can find is another $15K, which would reduce the remaining 72% of your bills by another 10% (or 7% off the original), and the payback now is 15 years, and you judge it not to be worthwhile. So if you're lucky you've reduced your energy bills by 28% until the next price hike, and then you can start all over again. You keep paying your oil bills or your utility bills stay in hock to carbon fuel. This is called diminishing returns, ever bigger investments for ever lower returns. Your goal is walking away from you, and your investment path amounts to capital destruction in terms of the value of your property. There is another dimension to the efficiency trap: The Efficiency Trap: Finding a Better Way to Achieve a Sustainable Energy Future. The perverse side effect is that if a resource becomes more efficient, people use more of it. So again, don't start making a fossil fuel system more efficient, but first pursue green energy alternatives to make your property energy independent. OFF THE GRID: HEAT PUMPS AND OTHER MULTIPLIERS In green energy,

Green Energy is Power

the basic technologies most people are familiar with are wind turbines, solar PV, and solar thermal, but another important technology is heat pumps, starting with geothermal. A good geothermal heat pump may have a Coefficient of Performance of 4.0 (COP), and it could handle HVAC and Domestic hot water pre-heat, and possibly a snow-melt system, or heating your pool water. If you can power it with wind energy or solar PV, you win big, for again it produces four times the heat output of what it uses. If you must use power from the grid, perhaps you can put it on time of use. More and more wind turbines are coming to market which are suitable for mounting on buildings. Other great adjuncts to help you towards net zero, are heat exchange ventilators. The more you can eliminate combustion from your house, the tighter you can make it, and heat exchange ventilation can retain the heat or cooling, and still provide fresh air. Try to eliminate gas or oil from the house entirely, that will allow you to tighten up your building envelope. Cook with electricity, not gas. The old standbys are insulation, windows, roofs, etc. Notice that in the renewable energy model, improvements to the building envelope reduce the installed generating capacity, and tend to reduce your up front capital requirement, while in the carbon energy model they pay for themselves over time from energy savings.

Towards net zero: Breaking dependence on fossil fuel

What matters in a retrofit is that you have a long-term plan, based on a 30 year model of your property, in which you can compare the various options. Net zero does not have to be an absolute goal, but avoid the investment trap of energy efficiency if you can help it at all. If you are methodical about the steps you follow, the payoff will be breaking the 50% barrier of energy reduction and eventually coming closer and closer to net zero, and you are adding to the value of your property as you go along. Most importantly, with a green energy investment plan, you will end up finding synergies and compounding returns, so that two components which might individually seem unattractive, might provide superior returns when put together, such as the heat pump with the wind turbine, etc.

Off the grid by plan, not by accident

When you set up your model, use the original condition as a starting point, and systematically compare an alternative A and B, in which A is the efficiency model, and B is the green energy/net zero model. Use 30 year cash flows, and include maintenance, replacements, fuel costs and so on. Alternative B is the renewable energy model. Try to see if you can eliminate one fuel from your house entirely (oil or gas). In a green energy model this will have a multiplier effect, because you are eliminating a major source of indoor air pollution. Notice that the renewable energy project will be more expensive up front, but the reduction in your energy bills will be far greater, and, you may have serious synergies between different aspects, a heat pump run on the grid may be expensive to run, but run on 70% wind or solar it may be a winner. Synergies like this will move you off the grid gradually and propel you towards net zero. There is a reason utilities and oil companies like you to invest in energy efficiency, and even offer cheap financing and other incentives: they retain you as a customer. Every step towards energy independence increases the value of your home. 

The Geothermal DHW Dimension

One of the most strategic renewable energy components in residential living, and even more so in multi-family buildings is no doubt geothermal hot water (DHW). The reason is simple, everyone needs hot water for domestic purposes, and simple hot water tanks allow the water (and thus the heat) to be stored for later use, with minimal loss, and energy storage is the holy grail for the smart grid. Solar thermal is a superior solution for that reason also, because it is capable of far higher energy density than PV, but also because the storage problem is solved more easily in the form of DHW than it is with PV and batteries.

Unfortunately, manufacturers have a habit of living in silos circumscribed by their respective technologies, all the while pretending that their technologies are the solution to the exclusion of others. This creates the impression that e.g. geothermal DHW and Solar Thermal DHW are competitive solutions, when in fact they are potentially complementary, because of the extremely different behavioral characteristics of the technologies. Particularly, from the standpoint of designing energy generating systems, geothermal energy is base load capacity, i.e. within some limitations it can produce whenever you turn on the switch, whereas Solar and Wind power are peak load generating capacity, which are dependent on the weather, and thus may or may not produce when you turn on the switch. Therefore, solutions that are routinely presented as mutually exclusive, often are complementary instead.

As a result of the technology-centric approach, the field has been plagued by false tries, and in one extreme case a leading manufacturer of geothermal heat pumps, who is promoting their technology for the DHW application, in fact promotes a financial model for the application which leads to inherently wrong systems design. The problem here seems to be that the manufacturers should worry about what happens within their systems, and specifying the proper warranty specs, which become in effect minimum design standards, but NOT design specifications which should be engineered appropriate to the building not to the equipment. Building-centric design is the key. The answers are not the same for all buildings and all markets.

The unfortunate example alluded to here can be found at: Faulty Cost/Benefit Analysis for Earthlinked DHW Systems Designs which is a model apparently intended for design of geothermal DHW systems, but which cannot reliably predict the economic viability of such systems, and moreover makes the design error that generating DHW is the purpose of such systems, when in fact the storage of energy is much more important from the standpoint of designing renewable energy systems. The central problem of dealing with peakloads is how do I store the energy, and thanks to the constant demand for DHW in residential facilities, water storage allows us to harvest economical, renewable peak load power, or even off-peak power from the grid.

In a hybrid system, where the geothermal heatpump preheats the water typically to ca 100F, there is a backup source of heat, to take the water from 100F to the typical storage temperature of 140F (ASHRAE 12), and/or to serve as backup in case of failure. Therefore, preheating the water with geothermal heatpumps only makes sense as long as the cost per delivered BTU of the electricity which drives the heatpumps is lower than the cost per deliverd BTU of the fuel for the backup heating, these days most often Natural Gas. Therefore should the backup fuel be cheaper, it makes no sense to run the heatpump. Particularly when the cost of the two fuels move at different rates, this situation bears watching. Specifically gas is seasonally low in the summer when electricity is seaonally high, and the reverse happens in winter, when electricity is seasonally low, and gas seasonally high.

The model above uses an average for the two input costs, gas and electric in our example, wich is only usable in cases where the prices of the two fuels are far enough apart that the cost per delivered BTU cannot ever cross over, however, when the prices are in a narrow band, and do cross over seasonally, this model will give false indications of the savings that can be obtained by such a system, and if a false positive is used to design a system, the result will be a system which roughly saves money 9 months out of the year, and dis-saves money 3 months out of the year, and if the summer peak is bad enough, it could wipe out the savings of the other nine months. In short, such systems will fail, if they are rigidly based on such evidently false assumptions. Be that as it may, I've seen systems fail for these reasons, and get sold with entirely wrong predictions of their economic value, and in this case the manufacturer's patently faulty financial model is the cause of it.