Calculating the best alternative should involve comparisons

The starting point in my case is a house with an existing electric heater and an existing air to water heat pump. Both of these devices are old, so there is better equipment on the market. Also, it means that since i have water carried heating through radiators, I can select between many different alternatives. All these alternatives carry different costs with them For the installation, for the parts, ... For example:

• air to air heat pump (relatively small investment)
• air to water heat pump (larger investment)
• geothermal heat pump based on a hole into the hill (much larger investment)
• heating of household water using heat pump (an additional investment)
• ...

Vendors bundle things, making it hard to compare

There is a number of differences to keep in mind. For example, an investment in a heat pump might need an additional investment for the heat pump to warm the household water as well. An investment in a heat pump might need to be aided by an additional heating device when the heat pump is not enough. Depending on the vendor offering the equipment, this might be included in the base package (which then likely is more expensive) or it might be an option that has to be paid by the side. Since the vendors treat this differently, and call their items differently, it has to be given thought in order to compare apples to apples and not compare a cheap alternative with an alternative providing more features.

Comparison should be done also to the other possible alternatives

It is neccessary to think of the investment not only as an investment solving the current situation, but also as an investment made to improve one of the possible alternatives. To explain this, let us start with a simple example, a house needing 20000 KWH per year for heating, currently having an ordinary heater and household water heater.

Say also that we in one way or the other has determined that:

• An air to water heat pump can produce most of this heat with the use of 8000 KWH energy, aided by an additional 1000 kwh electric heating when the heat from the pump is not enough.
• A geothermal solution can solve this useing 6700 kwh per year, and not needing the additional heating.

Comparing to current situation we find two good alternatives

Using a price of 60000 SEK for the air to water heat pump, and a total price of 140 KSEK for the geothermal solution (out of which 90000 SEK is for the hole and the installation and so on), we can calculate the different pay back times:

• Air to water heat pump: Saving of 11000 KWH per year, which is approximately 11000 SEK a year, gives a payback time of a little more than 5 years.
• Geothermal heating: Saving of 13300 KWH per year, which is approximately 13300 SEK per year, gives a payback time of a little more than 10 years.

Since the Geothermal solution is cheaper per year, it looks like a good thought to invest in that solution. But that is because we are comparing both solutions to the current situation. Instead, we should compare them to each other. That makes a huge difference.

Comparing the most expensive investment to the second most

The calculation in this case, using the figures from before, becomes that the Geothermal heat is saving 2300 KWH more per year than the air to water solution, worth approximately 2300 SEK per year. The additional investment of the Geothermal solution compared to the air to water solution is approximately 80000 SEK.

This means that investing in the Geothermal solution instead of the air to water solution has a very long payback time. The additional 80000 SEK only save 2300 SEK a year. Payback time is thus almost 35 years.

Comparing alternatives to current situation is a lot different than comparing to alternatives themselves

The above two comparisons shows the difference very clearly. We have done two comparisons with very different results:

• Comparing investment to current situation has a payback time of only 10 years
• Comparing highest investment to second highest has a payback time of 35 years

The difference in the two comparisons above is huge. The geothermal investment has an acceptable payback time (10 years). But the additional investment need a very long time (35 years) to pay off. If the geothermal heat pump breaks down during that time, we are forced to reinvest in something that has not yet payed itself from the beginning. Also, even if there is no breakdown, due to the long time and possible developments during that time, we might find ourselves tied to an investment that is unfavorable compared to modern solutions.

Exemplifying significance of comparisons between alternatives

A way to think in order to realise the importance and reason for comparing with the alternatives instead of current situation, is using the thought of changing ones mind. Take the solution with the so far best payback time, and think of it as if you had already bought it. With the example above, that means you have just bought a air to water solution.

Now, think of it as changing your mind. You take the additional 800000 SEK out of your wallet, go to the phone, and dials the company you bought the air to water solution from. Then you tell them you changed your mind, and ask them to instead come and fetch your money, and install the geothermal solution instead.

Doing that, the additional cost, the difference between the alternatives, becomes apparent, that is what you have to pay extra. But also the longer payback time for this decision becomes apparent. You already had bought the other solution, you just changed your mind. Since you had already bought it, you already had the gains from it available to you. Thus, the profit you gained from spending the additional 80000 SEK was not anything related to your old situation, it was related to the situation with the best payback alternative. Tha means, for the 80000 SEK the call cost you, you only got a yearly decrease of cost of 2300 SEK. Not a very good investment.

Comparing with air to air makes other business cases hard

The matter becomes even more complicated if we bring in the air to air solution and the tap water into the comparison. The air to air solution can not improve the economy through tap water heating with the heat pump without an additional investment. But that put aside, it will be about as good as the air to water heat pump, and that based on an investment of about 20000 SEK. This makes the air to water investment hard to profit from compared to the air to air solution.

One alternative I do not myself select between is air to air heat pumps. They are normally the best economic alternative unless you are capable of installing geothermal heating in a deep hole, and willing to calculate your investment over 40 years or more. But I do not want more fan noice in the house, and thus it is out of the question.