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Can you afford not to install geothermal power for your home?

geothermal.jpgSome people were surprised by the expense — about $20,000 — to install geothermal heating in their homes. I have a slightly different take. For $20,000, can you afford not to tap into geothermal energy?

Says one commenter:

For 15k – 30k it sure seems like there would be higher-impact things you could do to reduce your footprint. Find a friend who drives 20 miles to work every day in an SUV and buy them a Civic hybrid for 22k!

But unlike a Civic hybrid, the geothermal system is better than free. Despite the painful start-up cost, the investment pays for itself many times over, and fairly quickly too.

Let’s put some numbers around this. Malcolm Gladwell’s father conservatively estimates that he saves $2,000 each year in heating oil costs. Bean counters have a word for investments that throw off a constant amount of cash every year from now until forever: a perpetuity. And it just so happens that the one thing I remember from my finance classes is how to calculate the value of a perpetuity.

Dividing the annual savings by the prevailing interest rate, which I’ll ballpark as 5%, I arrive at the following value for a geothermal energy system:

$2,000 / 5% = $40,000

There you have it. Harness geothermal energy for $20,000 and double your money.

But wait, there’s more! My simple calculation assumes that the geothermal system will save a constant $2,000 per year in fuel costs. But fuel prices, you may have noticed, don’t remain constant. They rise. Historically, they’ve tracked fairly closely to inflation, and recently they’ve far outpaced inflation, a trend which is likely to continue.

So the yearly payout from geothermal energy is likely to grow over time. This is called — surprise — a growing perpetuity, and its value is also easy to calculate. Let’s conservatively assume that oil prices will track inflation, which I’ll estimate at 3%.

$2,000 / (5% – 3%) = $100,000

Now we’re talking! Install a geothermal energy system and make five times your money. Will putting your money in a Prius yield a similar rate of return? (Hint: you’re better off buying a nice bike.)

A caveat: this is a simplified analysis, and there are other ways to run the numbers. In fact, I’m kind of hoping people tear into them in the comments section. The comments to the original Gladwell post touch on this topic as well, although errors do sneak in.

For those interested in learning more about geothermal energy, the Department of Energy has a lot of info here and here.

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