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Evaluation of federal and state subsidies for ground-source heat pumps

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Abstract

Energy efficiency can be a powerful way to lower energy bills, as well as the external (social) costs associated with energy consumption. Previous experience and research, however, has demonstrated that consumers are often unwilling to make investments in energy efficiency, even when such investments have relatively short payback periods. Because energy efficiency can contribute to correcting negative externalities associated with energy use, subsidies and other programs have been proposed as a way to increase efficiency investments. Thus, under the right circumstances, such subsidies can improve economic efficiency. In this paper, we analyze the economics of energy-efficient space conditioning using data from an actual household in rural Pennsylvania to evaluate ground-source heat pumps (GHP). GHP technology has been advocated as a potentially appealing energy efficiency measure for rural communities. We find that with current subsidies GHP is economically viable for a wide range of electricity prices. We also find, however, that current subsidies are actually greater than those that can be economically justified. Using the efficient level of subsidies reduces, but does not eliminate, the economic case for GHP technology. We also evaluate the economics of efficiency subsidies using an ambitious program in Pennsylvania as a case study. The program, known as the Alternative Energy Investment Act (AEIA), provides subsidies for GHP among other technologies. We find that the substantial federal subsidies for GHP undercut the economic efficiency arguments for the AEIA with respect to GHP.

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Notes

  1. Ground-source heat pumps are also referred to as “geothermal” heat pumps. In this paper, we will use the term “ground-source heat pump” to differentiate from geothermal technologies that use the Earth’s heat to generate electricity.

  2. A 2011 revision to the residential renewable tax credit limits the total amount that an individual consumer can claim. This is discussed further in the “Ground-source heat pumps as emissions offsets” section.

  3. http://www.pasenategop.com/news/archived/2008/0708/whitemj-070408.htm

  4. http://www.portal.state.pa.us/portal/server.pt/community/energy_independence/10473. We note that GHP units are unlikely to relieve issues of electricity price spikes in Pennsylvania, as such spikes are generally confined to urban areas.

  5. http://apps1.eere.energy.gov/states/residential.cfm/state=PA

  6. We note, however, that this may not apply in other locations. In particular, this conclusion is based on the relatively low price of land in rural Pennsylvania.

  7. Commercially available desuperheaters claim to capture around 40 percent of the waste heat from the household, which could be used to pre-heat water, reducing the usage of electric water heaters (U.S. Department of Energy, 2011b).

  8. See Blumsack, Brownson and Witmer (2009); more information on TRNSYS is available at www.trnsys.com.

  9. See, for example, http://www.treasurydirect.gov/RI/OFNtebnd, viewed May 12, 2011, http://www.treasurydirect.gov/RI/OFNtebnd, viewed May 12, 2011.

  10. Heat exchangers are typically warranted for 20 to 30 years, while the ground loops are typically warranted for 25 to 50 years.

  11. Chillers powered by natural gas are not commonly used in household applications. We assume heating and cooling with a gas-powered system to provide a bounding analysis for comparison with the all-electric system. Lekov et al. (2010) consider a gas-fired system that provides only space heating and hot water.

  12. Since hours of high cooling demand correspond to overall system peaks in the PJM territory, there is an additional social cost of electric cooling in the form of increased risk of blackouts. These are not considered in the emissions calculations in this section.

  13. Emission allowance prices are taken from the EPA’s Clean Air Markets website, www.epa.gov/airmarkets. We note that all externality values are necessarily imprecise.

  14. Prices from the European carbon market were obtained from the web site of the European Climate Exchange, http://www.ecx.eu/market-data/ecx-historical-data/eua-futures. The Regional Greenhouse Gas Initiative (RGGI) in the Northeastern U.S. also operates a tradable permit system for CO2 emissions. Prices in the RGGI market have been significantly lower than recent prices in the European carbon market.

  15. As Kleit et al. (2010) indicate, electricity prices are approximately 1 to 2 cents per kilowatt-hour higher in eastern Pennsylvania than western Pennsylvania due to transmission constraints.

  16. Act 1, §603(B).

  17. See http://www.infoplease.com/us/census/data/pennsylvania/economic.html.

  18. http://www.rural.palegislature.us/about.html.

  19. A full menu of loan options is available at www.keystonehelp.com. Rates vary depending on a wide variety of variables, such as the type of investment made and agreeing to perform an energy audit.

  20. Act 1, §704(A).

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Acknowledgments

This research was funded by a grant from the Center for Rural Pennsylvania. We thank Center staff for helpful comments.

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Authors and Affiliations

  1. Department of Energy and Mineral Engineering, The Pennsylvania State University, 213 Hosler Building University Park, PA, USA

    Seth Blumsack & Andrew Kleit

  2. Westcott Consulting, 110 Hosler Building, Boulder, CO, USA

    Stephon W. Smith

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  1. Seth Blumsack
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  2. Andrew Kleit
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  3. Stephon W. Smith
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Correspondence to Andrew Kleit.

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Blumsack, S., Kleit, A. & Smith, S.W. Evaluation of federal and state subsidies for ground-source heat pumps. Energy Efficiency 5, 321–334 (2012). https://doi.org/10.1007/s12053-012-9144-z

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