The Energy Tax Credit: Is it Worth it? Part 2

By Vernon Trollinger, July 25, 2009, Energy Efficiency, Save Money

How it Works: Windows & Water

To see how the credit works, let's look at an example of a modest starter home: a single-story 3-bedroom 1750 sq. foot home built in 2008 on the Gulf Coast.

Replacing old-style single-pane aluminum framed windows with energy efficient windows with good air seals can save money. Upgrading windows on our little starter home to triple-pane insulating low-E, argon gas wood-framed windows can save $69 per year (note: windows and skylights installed after June 1 require a U-factor and SHH Coefficient of .30 or less). Factor in the tax credit for $1600 and you can deduct $480 from your 2009 taxes. Your total cash layout for the windows comes to $1120 (excluding installation labor). Even though adding in the energy savings brings the return to $549, that might not seem a big return on the first year. But the energy cost savings are immediate. Over the windows' 30 year lifetime, this becomes an energy savings of $2070.

Heating water in your home accounts for 17% of annual energy costs. That's $221 of Energy Star's annual cost of $1,300. Most of the water heater's time will be spent keeping the water heated for when it is eventually used. Putting a water heater blanket around it will help some, but you are still paying for this "stand-by heat" whether you use the water or not.

In our example home, the 40 gallon electric water heater's tank is warranted for 6 years.  he average lifespan of any electric or gas home water heater tank averages about 8 to 12 years depending on local water quality. The water heater tank will eventually degrade from deposits of calcite and corrosion and then leak; forcing us to purchase and install a new one. So we have several options: install a comparable electric model, install an equal capacity high efficiency Energy Star heater, or install a tank-less water heating system.

Generally speaking, electric models make better use of energy, primarily because gas water heaters lose some of their energy up the exhaust vent. A comparable non-efficient replacement may cost $370 (without installation labor). A new Energy Star gas water heater, meanwhile, transfers 98% of the heat to the water, leaving exhaust fumes so cooled that they are vented to the chimney by a fan.  Such extra-efficient gas water heaters cost more than a baseline electric heater; or about $550 (without installation labor). By installing this kind of water heater, we would save $30 annually compared to the baseline electric version and receive a $165 tax credit. That's about $195 recouped the first year.
Installing a tank-less water heating system breaks the expensive cycle of replacing leaking water heaters. Both electric and gas-fired tank-less systems do not store water, so they do not need to continually heat the water. They heating water only on-demand; that is, only when the water is running through the pipe. Not only are they over 80% energy efficient, you can achieve even greater energy savings of 27%–50%. Add to this the expected 20-year life-span and the return on investment ranges between 48% and 97%.

However, tank-less systems are by no means cheap; a whole house system runs around $1,200. But when you consider our little example house, the annual cost of $221 for hot water drops $106 to about $115. We also get a 2009 tax credit of $360. That adds up to $466 for a return on the first year. Of course, there's the amenity of never-ending hot water adding value to the house at sale time.

View part 1 of this series.

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