Oil to Heat Pump Economics: A Step by Step Guide

In last week's blog post, I walked through the decision path for switching from heating oil in my new home to ductless heat pumps.

Putting a new system in my home showed a payoff of approximately $20,000 after fifteen years, including an upgraded electrical panel. And some of you reached out on my equations, wanting to do the math yourself in your own homes.

So we are back! With a step by step walkthrough of how to determine your potential heat pump payoff period.

If you are following along and doing your own math, fill in the blank whenever you see a green number.

Step 1: Determine your baseline.

Before we look at any math related to heat pumps, first we have to determine the cost of my current oil system, removing any "noise". A great place to start here is collecting your bills from last year, or account statement with your oil provider, and determine the quantity (in litres) you burned in a one year period.

If you are in a new to you home, details on the last homeowner's oil purchases might have been in your property disclosure package, or you can find out this information through a Home Energy Audit, sometimes referred to as an EnerGuide Rating. Connect with your local energy efficiency company if a home energy audit is right for your situation.

Here are some images from my recent home energy audit, where I discovered my oil tank burned over 3,000 litres per year!

Depending on your water heating setup, you may want to normalize this number so you are only accounting for heating your home. Remember, we don't want any noise in this math!

For ease of this walkthrough, I'm going to assume that 3,000 litres of my oil is for home heating, adjusting for my oil fired hot water tank.

Now, for the heating oil price. Looking up prices from retailers in my area, prices ranged from $1.15 up to $1.40, depending on the provider. But this is the height of summer, and prices fluctuate pretty quickly in the winter months.

A quick google of historic heating oil prices in my area, and I found this chart in YCHARTS:

Today's price of $1.40 per litre seemed like a good baseline, but spikes up to $2.25 only two years ago made me a bit nervous. With this in mind, I chose a reference point of $1.50, and assumed a 2% (R) annual increase for inflation.

I also needed to understand the efficiency of my furnace, sometimes referred to as an AFUE (Annual Fuel Utilization Efficiency).

Sneaking down into the basement with my handy flashlight, I found the model number of my Buderus boiler, and googled it, with "AFUE" included in my search description, finding it had an 80% efficiency.

A boiler will usually be either 80%, if an older model, or 87% which is indicative of a high efficiency model.

Our baseline in terms of total cost, is going to be fifteen years (n), roughly the lifespan of a new heat pump system.

Finally! The math, using all our collected data to provide a year cost:

(Litres * Oil Price / AFUE) * [(1 + R ) ^ n - 1)]/ R

(3,000 * 1.50 / 80%) * [(1 + 0.02 ) ^ 15 - 1)]/ 0.02 = $97,275

This math tells me over the course of the next fifteen years, I am likely going to spend $97,275 on heating oil to keep my home warm. Not accounting for the extra sweaters and blankets I may need when oil prices spike and I'm feeling extra frugal with my thermostat.

Step 2: Determine your capital cost of a new heat pump system

Much of this portion of the math is covered in the previous post, which you can read again here.

This is the part you need some professional assistance on. Call some of the reputable heat pump installers in your area and get their opinions and quotes on the size of system your home requires. Investigate online some of the models and compare prices. Do your research!

My home is 3,000 square feet over three floors. The general consensus was that five units inside and three units inside was the most effective layout. Plus an electrical panel upgrade from my current 100 amp setup in order to accommodate all this new load.

Total purchase price? $27,500.

This is the crux (you see what I did there?) of the question. Will the reduced heating costs from this system payoff the $27,500 capital cost before the fifteen years is up?

Let's find out.

Step 3: Determine your new cost of energy

Because we already know how much heat we use in terms of heating oil, we can convert that over to equivalent kWh, using a generally accepted conversion factor of 10.35. This is how many kWh of electricity equal one litre of heating oil.

3,000 Litres of Oil * 10.35 = 31,050 kWh

But all things are not equal, heat pumps are far more efficient in their use of electricity compared to oil.

The heat pumps I selected for my install have a system efficiency of approximately 250%, on average. This is sometimes referred to as coefficient of performance or CoP.

Pay attention to what temperature the CoP on your system is advertised as. Often times, brands reference extremely cold temperatures, when your system will be less efficient.

My units have a 1.90 CoP or 190% efficiency rating at -18°C, but there are only a few days a year it will be this cold, and if we used 190% the total cost would appear more expensive on paper than in reality. So our math will use 250%.

Heat pumps also require some additional maintenance to my budget. Even with the warranties applied, it is good practise to have them cleaned on an annual basis, which also has the benefit of keeping their efficiency high.

I've allotted $250 per year for this new expense.

We now have enough information to apply the current electricity rate and extend out over fifteen years. In my area, I pay $0.1856 per kWh as a variable rate. Consistent with the increase in oil, I'll apply a 2% annual increase:

[(kWh * Electricity Price / CoP) + (Annual Maintenance)] * [(1 + R ) ^ n - 1)]/ R

[(31,050 * 0.1856 / 250%) + ($250)] * [(1 + 0.02 ) ^ 15 - 1)]/ 0.02 = $44,187

This math tells me over the course of the next fifteen years, I am likely going to spend $44,187 on electricity used by my heat pumps. Depending on your region and seasons, this is the point I would suggest blending some of the oil price in.

For example, your region could have 10% of the year where it is simply too cold for the heat pumps to operate effectively. In that circumstance, you should use 90% of your heat pump total cost and 10% of your oil heating cost to get a blended total for the fifteen year period.

($44,187 * 90%) + ($97,275 * 10%) = $49,496

This ratio might be aggressive for my area, especially considering the excellent CoP ratings of heat pumps to temperatures as cold as -18°C, but I'm risk averse, so my math swings conservative.

You can adjust your own and season to taste, just like your favourite recipe.

Step 4: What is the total savings?

Pulling it all together we can now figure out total savings.

• Step One told us oil would cost $97,275

• Step Two told us heat pumps were an investment of $27,500

• Step Three told us electricity would cost $49,496

$97,275 - $27,500 - $49,496 = $20,279

Taking into account all my assumptions and adjustments, it looks like I will save myself $20,279 over a fifteen year period.

The real answer is it will likely be more. Factor in potential savings from:

• Enrolment in a demand response program where a utility or efficiency company can adjust my heat pump thermostats remotely during a critical peak event.

• A few warmer winters where I don't ever need to use my oil as backup heat during extreme cold days.

• A greater ability to program my thermostats for daily use patterns when I am in and out of the house.

• Post purchase rebates from my local efficiency company on the heat pumps installed.

Will I spend some of these savings on my newfound ability to cool my home with air conditioning? Probably. But even then, this investment is well worth it.

The math proves it.