Make the Most of the New Tax Credits 

By now you’ve probably heard about the new Stimulus Plan Tax Credits our government has made available to incentivize people to buy higher efficiency equipment. Unfortunately they’ve once again missed the mark demonstrating they still don’t really understand what delivers true energy efficiency. The credits are based on the same old myth that HVAC system efficiency is a commodity that can be unitized and purchased in boxes (the appliance).

Delivered Performance: Where It’s At

Any contractor who has taken the time to learn about delivered system performance will tell you that so much more performance can be gained by “fixing the system” than installing a higher efficiency box. There’s increasing evidence that replacing the box without fixing the system in can result in zero net efficiency gains and in some cases, lower efficiencies than with the old box.

What does “fixing the system” entail? It requires a real-time test of operating performance and measurement of delivered btus. Then you diagnose what it will take to get 90% or higher of the BTUs the equipment is capable of producing delivered into the home (We call this percentage of delivered BTUs CSER™ or Cooling System Efficiency Rating). By the way, the national average is around 57% delivered BTUs in homes and most light commercial buildings.

“But,” you may protest, “consumers are still interested in taking advantage of as much of the tax credits as possible, particularly during these tough economic times. How can I still capitalize on this new opportunity?” The answer is to educate your customer to understand the value of reinvesting the tax credit into “fixing” their system to obtain delivered performance that exceeds 90%. By doing this they actually receive 90% of the performance the new equipment is capable of. When you calculate the delivered Return On Investment (ROI), the result will blow you away. Today we have the technology and knowledge to give your customer much more value for their dollars invested in their comfort system.

A Tale of Two Systems

Let’s compare installing a new 13 EER (16 SEER) 4 ton unit in an existing home with original 9 EER, 11 SEER equipment and 60% delivered performance versus installing the same equipment on a system that has been renovated to deliver 90% of its capable btus into the home. The prices in the example below are for example purposes only, and will vary based on brand, climate, and installation type:

Scenario A: Let’s say the old 9 EER equipment is actually operating at a delivered 5.4 EER versus its rated 8 EER (you measured 60% CSER™).

9 EER X .60 = 5.4 EER

If the box is replaced without addressing the system, the new 13-EER system will perform at 60% delivered btus (CSER™), for a delivered 7.8 EER:

13 EER X .60 = 7.8 EER

7.8 EER – 5.4 EER = 2.4 EER Improvement

That gives us roughly an effective 2.4 EER improvement. If the original annual cooling cost was $2,000, it will be reduced by roughly 31% or $615. If the new high efficiency 16 SEER, 13 EER unit cost $7,500, and qualifies for a $1,500 tax credit (up to 30% with a $1,500 cap) their net invest would be $6,000.

$2,000 Annual Cooling Cost X 31% = $615 Savings

$7,500 Installed Equipment Cost - $1,500 = $6,000 net investment

With a $615 per year savings, the payback period would be just under 10 years.

$6,000 investment / $615 Annual Savings = 9.76 year payback

2.24 year additional life X $615 = $1,385 Residual Value

After that the consumer would get about 2.24 years of additional useful life (calculating a 12 year lifespan) at $615 per year or $1,378 in residual value from their $6,000 investment in high efficiency (after tax credit) – roughly a compounded 2% return over 12 years! Most CDs yield twice that.

Scenario B: Now let’s take the same equipment replacement with a system renovation that added $1,500 to the job. Total system price is $9,000, less the $1,500 tax credit for an investment of $7,500.

If the system renovation brought the delivered efficiency to 90% CSER™ the effective EER would be 11.7. or a 6.3 EER improvement over the original delivered EER of 5.4. This would put the new annual cooling bill at $923 or roughly 46% of the original bill for an annual 54% savings of $1,077.

13 EER X .90 = 10.8 EER

11.7 EER – 5.4 EER = 6.3 EER Improvement

$2,000 Annual Cooling Cost X 54% = $1,077 Savings

$7,500 Installed Equipment Cost + $1,500 Duct Renovation - $1,500 = $7,500 net investment

$7,500 investment / $1,077 Annual Savings = 6.96 year payback

5.04 year additional life X $1,077 = $5,423 Residual Value

Based on a net cost of $7,500 the payback period would be about 7 years. After that the homeowner would get about 5 years of additional useful life at $1077 savings per year or $5,423 in value from the investment. That’s $4,038 in additional ROI for the additional $1,500 they paid to fix the duct system – about 2-1/2 times return on the additional investment over a 12 year period. That’s equivalent to getting 9% interest compounded over the 12 year period on that $1,500!

Can you think of a more secure place your customers can invest their tax credit? And this doesn’t include the inevitable increases in electric rates over the 12 year period. In addition they will have improved comfort, and a longer system life because the equipment will run as it was designed to with proper airflow and refrigerant charge.

Other Benefits

This is a very conservative example of addressing the entire system. In some cases a poor duct system will actually cause the new equipment to operate at a lower delivered efficiency than the older equipment did on that same system, as the older equipment perhaps ran less and actually was able to deliver more btus than the newer identical equipment. For example, if the replacement in Scenario A only resulted in a 1.4 EER improvement, the reduction in annual energy usage would only be 20% or $400, bringing the payback period up to 15 years. That’s 3 years beyond the equipment life expectancy. This basically shows a negative return on investment if the new equipment needed to be replaced after 12 years!

Similar calculations can apply to a heating system replacement. Instead of calculating delivered efficiency using EERs, you would calculate the differences in furnace AFUE, using the measured Heating System Efficiency Ratings (HSER™) for your system performance numbers. The added bonus not included in these calculations is that when you fix the air distribution system you get additional savings from the existing equipment that was not replaced. For example if you are installing new cooling equipment and you perform a duct system renovation, you will reduce winter consumption as will, even if you didn’t replace the furnace.

While the above examples are just for illustration purposes, it’s easy to see how reinvesting a tax credit from a high efficiency equipment purchase back into improving total system performance can be the best investment you customer could make with that money. It will return far more value, comfort and energy efficiency to your customers than just replacing the equipment. The bonus is happier customers and more dollars to your bottom line.

(As published in Contracting Business on Apr 1, 2009 12:00 PM, BY DOMINICK GUARINO)