The Payouts on High Efficiency Gas Furnaces

The following is a guest post from Furnace Compare. This piece is written assuming that the buyer needs a new furnace and has to decide on which efficiency model to buy. In a future post, they'll discuss the payout considerations associated with replacing a current, working furnace (with several years of life remaining) with a higher efficiency model.

If you are buying a new furnace, you can quickly become overwhelmed by the range of options.  Industry professionals, such as Dwight Klippel, of Energy Consultants, Inc, often recommend that homeowners choose the most efficient systems: “With the rising cost of natural gas, the additional cost of a high efficiency gas furnace will be recovered in just a few years,” he says. However, it's wise to understand how to do the math yourself and ensure that the furnace you buy best matches your needs.

First, here are some terms that you need to understand:

• AFUE (annual fuel utilization efficiency) is a measure of heating efficiency on a yearly basis that is shown as a percentage. A mid-efficiency furnace is 80% efficient, a high-efficiency furnace is 90%, and a very high-efficiency furnace 95% or greater. Thus, a furnace that has an 80% AFUE converts 80% of the fuel it uses into heat -- the other 20% is lost up your chimney.

• ENERGY STAR® is an energy-efficiency rating based on guidelines set by the Department of Energy (DOE) and the U.S. Environmental Protection Agency (EPA). Furnaces that bear this label must meet a minimum AFUE of 83% (for oil-fired furnaces) or 90% (for natural gas furnaces).

• Condensing furnaces have an extra heat exchanger that extracts heat from the exhaust gases and pumps that additional heat into the home. Traditional, non-condensing furnaces, vent this additional heat out the chimney. 

• The payback period is the amount of time it takes an investment to pay off its initial costs. The cost benefit of an investment starts when the payback period ends. So, how does the average homeowner figure out what is the best buy?

Let’s assume you are considering 3 furnaces:

• a mid-efficiency system (AFUE 80%) that costs $4000
• a high-efficiency system (AFUE 90%) that costs $5000
• a very high-efficiency system (AFUE 95%) that costs $6000

First, figure out your current heating costs. Gather 4 recent utility bills - 2 from winter months and 2 summer bills - and find your average monthly cost by adding them together and dividing by four. Calculate your yearly cost by multiplying that average by 12. For this example, let's say the yearly cost with your old furnace is $1000.

Next, figure out how much you will save with a new furnace. If your old furnace is 70% efficient, and your new furnace is 90% efficient, the difference is 20%. Divide 20% by 70%, and you will find that your new furnace is 28.5% more efficient than the old. That means you can expect to save $285 per year (28.5% of $1000) on your bills. In five years, you will have saved $1425. 

In comparison, the new 80% efficient furnace is only 10% more efficient than your old furnace. 10% divided by 70% is 14%, so you would expect to save $140 per year. At the end of 5 years, you would have saved $700 on your bills, plus the $1,000 you saved on the initial purchase of the furnace. From a purely cost perspective, your savings comparison is $1425 with the high efficiency furnace (90%) and $1700 with the mid-efficiency furnace (80%) -  an extra $275 in your pocket by buying the less efficient furnace.

Finally, we're ready to calculate the payback period: the number of years before you would "pay-back" the higher cost of the 90% efficient furnace as compared to the 80% efficient furnace. The 90% efficient furnace saves $145 per year more than the 80% efficient furnace ($285 - $140 = $145).  So, you simply divide the cost difference ($1,000) by the savings per year ($145) to get a payback period of about 7 years. (Of course, you could make this calculation much more complex by assuming that the initial $1,000 saved earns 8% interest each year; or by saying that you think $1 in your pocket today is worth $1.10 a year from now -- but the payback period is typically discussed in the simpler terms presented here.) 

Initial cost and payback period are fairly direct calculations, but other factors such as properly insulating your home, repairing or replacing leaking ductwork, extra installation costs, and furnace maintenance are also relevant. Additionally, there are rebates available from manufacturers, utility companies, and government agencies for the purchase of many high-efficiency furnaces that can reduce the initial investment.

Comments

[Paula]

We bought the worst house in the neighborhood 11 years ago and have been replacing items as we need to. We have taken advantage of every rebate from the local gas company and have bought all energy efficient appliances. We had to replace our furnace and decided to add air conditioning at the same time. We bought the two tier energy efficient heater and air systems (separately) and while they were a little more expensive upfront my gas and electric bill both average around 45 dollars a month. Compared to my neighbors at 400 + a month, we are quite happy.

Mind you I am cheap with the heating and air, as I would rather put a sweater on but still I think a great investment.