Overview

When it comes to deciding on the right HVAC system for your home, the most important factor is usually how much energy your new system will conserve and how that translates into the amount of money you’ll save on your power bill each month.

In this article, we’ll provide full transparency on how we calculate your energy savings, so that you make the best decision for your home.

Tetra’s mission

Our main goal is to help people save money and save the planet by making it easier and more affordable than ever to upgrade to an energy-efficient HVAC system. We do this by providing free, virtual estimates, upfront pricing, top-rated contractors, and help finding and applying for rebates on your behalf. All of this results in a seamless experience from estimate to install. Schedule your free virtual consultation today.

The approach

We use the data provided by the National Renewable Energy Laboratory (NREL - nrel.gov) to estimate your energy savings. They gathered energy usage statistics from 2.3 million buildings across the country. They combined this data with physics-based energy savings models to predict the decreases in energy usage when you upgrade to an energy-efficient HVAC system like heat pump or heat pump water heater. By applying NREL’s work with some adjustments (noted below), we can predict how much energy your individual home can save with a new HVAC system. 

Disclaimer: the information provided is meant to give you directionally accurate information on your potential energy savings. However, there are too many factors to model accurately for each home and other factors that are outside of our control. 

Ok, let’s get nerdy 🤓

Step 1) Find houses similar to yours and calculate your utility costs

We start by looking up homes that are similar to yours in the NREL dataset. We look at characteristics like the climate zone of your home, the region of the US you live in (i.e. northeast, midwest, etc.), the square footage range of your home, insulation levels, heating source (natural gas, oil, electricity), and whether you have central AC or use room ACs. 

The NREL provides data on how much homes use for heating, cooling, hot water, and total energy consumed. Data for each fuel type is provided in 15 minute intervals. From there, we aggregate the data into monthly amounts, which is the smallest unit of time we’ll be using for the energy model. 

We know that ultimately, the money you’ll save on your bill is the most important factor to you. We just need to take a couple steps to convert the data into utility costs. The NREL provides all the energy data in kWh. However, utility bills for natural gas aren’t measured in kWh, they’re measured in thousand cubic feet (Mcf). The billing unit for fuel oil is gallons. Electricity is billed as kWh so no conversion needed. Below are the standard conversion rate factors for converting kWh to the respective energy billing unit:

Natural gas to thousand of cubic feet=kwh used 0.003412

Fuel oil to gallons = kwh used40.6

Now, we have the energy used per month converted into their relevant billing unit. Next, we need to convert the energy used into dollars. To get your local utility rates, we use the most recent data published by the US Energy Information Administration by state. The full formula is:

Monthly naturalgas cost=kwh used 0.003412 local $/Mcf

Monthly fueloil cost = kwh used 40.6 local $/gallon

Monthlyelectricity cost = kwh used local $/kwh

Output: 

Using the data from NREL and the formulas above, we are able to establish a baseline estimate of the heating and cooling costs of homes similar to yours. 

Step 2) Adjust these estimates to get a more accurate picture for your specific home

While the baseline utility costs are based on the data gathered from thousands of homes that are similar to yours, each home is unique. Factors like the temperature you set when you sleep, the number of people using water in your home, whether you work from home or in an office, can all have a meaningful impact on your utility bills. 

We have a few ways to customize your estimate for your home. First, we’ll provide you with specific data around your energy usage like how much your electricity bill or natural gas bill were last month. You’ll then tell us whether the baseline costs are roughly right or if they seem high or low. We’ll then use your feedback to adjust the utility cost assumptions, which will carry through to all the heating and cooling costs and savings estimates. 

This should be enough information to calculate your adjusted baseline heating and cooling costs by month for the last 12 months.

Step 3) Calculate the new utility costs per year if you were to upgrade your home

In 2024, the NREL published a physics-based model that uses their library of data to calculate energy savings for specific upgrades: heat pumps, insulation, heat pump water heaters, and overall electrification measures (i.e. replacing a natural gas stove with an electric induction stove). For heat pump upgrades, we use the NREL models. For replacing your existing fossil fuel system with a more energy-efficient counterpart, we have a different calculation. We’ll cover each system type:

Replacing a fossil fuel system with an energy-efficient upgrade: 

To understand the potential improvement in efficiency, we need to start with the efficiency of your current system. To find this number, we’ll need to look back at the efficiency standards established by the Department of Energy when your heating system was installed. The minimum efficiency standards were 80% Annual Fuel Utilization Efficiency (AFUE) for furnaces and boilers with either gas or oil as the heating fuel. We then use research published on the performance degradation of heating systems over their lifetime. https://www.tetra.com/blog/boilers-everything-you-need-to-know have a longer life expectancy than furnaces, therefore they have a lower compounded rate of deterioration. 

With these two data points, we know the starting AFUE and how much performance has degraded over the age of the system. That gives us our starting AFUE. 

To calculate the efficiency gain, here is some context on how AFUE is calculated. AFUE measures the amount of energy your system is wasting. If your AFUE is 55%, then you’re wasting 45% of the heat created. If you upgrade to a high efficiency furnace with a 90% AFUE rating, then you’re only wasting 10% of the heat generated. To calculate the energy savings, we use your adjusted baseline energy consumption and take the difference between the AFUE ratings to calculate your updated heating costs.

‍Degradation over 20 years

Central heat pumps

For central heat pumps, we use the closest energy model provided by the NREL as our baseline which they’ve called, high efficiency cold-climate air-to-air heat pump with electric backup. 

1. We go through the same data aggregation process discussed in step 1 to convert the data into monthly utility costs. 
2. We then go through two adjustments of their baseline data. We need to adjust the data using the same percentage difference you gave us to calculate your adjusted baseline utility costs. In addition, the NREL assumes an 11 Heating Seasonal Performance Factor (HSPF). 
3. We then need to adjust your energy costs based on the HSPF rating of the various equipment. For instance, if a brand has a 12 HSPF rating, then it’s more efficient than the NREL assumptions and we decrease the expected utility bills to account for the more efficient equipment.

Central heat pump with backup

If you want a central heat pump, but also want to keep a backup gas or oil system, then we use the NREL upgrade labeled, ENERGY STAR air-to-air heat pump with existing system as backup. We then go through the same adjustments for the heat pump costs, but keep the same efficiency rating as your current system. If you choose to also upgrade your existing system, then the calculation is the same for replacing your natural gas or oil heating system, but the savings are only applied to when you would use the backup system. 

Insulation: 

We always recommend pairing a heat pump with insulation. The NREL provides a separate energy model we then apply to each option if you choose to also add insulation above the level of your local building code.

Ductless heat pumps (mini splits):

To calculate ductless heat pump energy costs we used the same calculation as the central heat pumps with one exception. Ductless mini splits are more efficient because the heating and cooling elements are in each room, which allows them to avoid distribution losses. For context, all efficiency ratings (AFUE, HSPF, SEER) all calculate how efficient the equipment generates heating or cooling. However, after the heating is generated, it needs to travel through the distribution system, (ductwork, baseboards, or radiators) to the room. Inevitably there are efficiency losses. To calculate these efficiency losses, we referenced a study published by the Department of Energy stating that the average home loses 25%-40% through distribution losses. We took the average between the range (32.5%) and decreased the expected utility costs for this upgrade by that amount. 

For climate conscious homeowners, ductless mini splits are the most efficient heat and cooling system. While ductless mini splits often have better efficiency ratings, they also usually have higher upfront costs than central systems. 

Air conditioning

For air conditioning, the calculation is the same as the above, but we use Seasonal Energy Efficiency Ratio (SEER), instead of HSPF. HSPF measures heating efficiency for heat pumps, while SEER measures cooling efficiency. 

The final product

After all this math, we’re able to give you a close estimate of your monthly utility costs for each upgrade option that we offer, so that you can compare your potential energy savings over the course of the year. 

Here’s an example: 

Here are the monthly utility costs for a home in Massachusetts with oil, central AC, 2,000 sq. ft., and insulation that’s up to the building code. You can see that there are savings associated with a standard efficiency furnace (80% AFUE), but even more for a ductless heat pump. 

Step 4) Calculate utility costs over the lifetime of the system

A new heating and cooling system should last between 15-20 years or more. It’s a long term investment that is best made with as much information as possible. To do this, we need to look at the energy savings over the lifetime of the system. However, this brings up some complications, like what is the future cost of energy. If we knew the future price of energy then we’d be sitting on a beach somewhere (who are we kidding, we love what we do). We do however know that energy prices will increase with time, so we used the EIA data(footnote 2) and then went back to 2015 prices to calculate the compounded annual growth rate (CAGR). With this information, we’re able to estimate the average increase in energy prices per year. We also calculated these estimates by climate zones.

With CAGR and the most recent energy prices in your location, we can forecast the energy price increase over the next 20 years. 

Full disclosure: energy prices are volatile. Here’s a comparison of NY gas and electric prices since 2015. They are consistently going up, but depending on the month and year, they can go up or down by a large margin.

This data will give you:

An estimate of energy costs for each system upgrade option over the next 20 years. 

Step 5) Calculate the energy savings, financial savings, and environmental impact

• Calculate the savings by subtracting the forecasted energy cost per year from the adjusted baseline
• Calculate the payback by taking the price after rebates for each upgrade option and subtracting the savings by each. The payback year is the first year the savings are greater than the cost.
• 20 year savings are calculated by adding up the energy savings per year. 
• Monthly savings are calculated by taking the annual savings and dividing by 12. The actual monthly savings will vary based on the season and how much energy you use.

This brings us to our last step where we bring everything together. To calculate your expected energy savings, we subtract your energy savings each year from your adjusted baseline energy costs. 

While energy savings are important, they are most useful when comparing the upfront costs to determine the first year when your savings are greater than your bill. To calculate the payback, we take the price after rebates and subtract the aggregate savings per year. The payback year is the one where aggregate savings are greater than the upfront cost. 

Important: we did not put in an additional cost assumption for insulation. If you are installing insulation in conjunction with your upgraded system, then you should add that cost to the price after rebate to find your payback.

Do you remember that example we gave of a home in Massachusetts? Take a look below to see how the options compare. Both of those paybacks are great with exciting first year savings. If you look at the 20 year savings you can really see how the benefits of a more efficient system can really compound over time. 

Lastly, while the savings are impressive in year one, where you can really tell the difference between fossil fuels and heat pumps is in the metric tons of CO2 saved. To find this number, we used the EPA’s greenhouse gas calculator. Heat pumps are dramatically more efficient than gas or oil systems because they move air, rather than generating energy to heat or cool the air. Heat pumps usually have a better ROI than gas systems, but if you’re looking to have the biggest impact on the climate, heat pumps are the way to go.

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