Sustainable investing Greening your home: Does your heating system work for you?

A focus on short- and long-term energy reliability and security, as well as a growing population and increasing urbanization in emerging markets, is creating opportunities for companies tied to the “Clean air and carbon reduction” investment theme, including the renewable energy and energy-efficiency segments of the theme. While this is a compelling investment opportunity, in our view, for most Americans their primary residence is their largest source of wealth, making it important to understand how energy efficiency or renewable energy may be relevant to each family in ways that extend beyond their investment portfolio.

The topic is particularly timely for two reasons: the financial incentives for homeowners set in place through the Inflation Reduction Act, and the continued volatility in prices of energy. In fact, although energy prices have recently come down from the highs of summer 2022, they remain elevated, adding to the monthly household energy bill. As of mid-December, natural gas prices are up over 80% on the year.

Homeowners have another tool available in the toolkit if they are looking for longer-term cost management while reducing their carbon footprint: switching to renewable energy-based heating and cooling systems.

In 2021, the residential sector in the US used 96% of total electricity sales and made up 22% of primary energy consumption for the entire market. Looking within the individual home, over 50% of energy consumption is driven by space cooling and heating, and water heating (Fig. 1).¹.

Fig. 1: US residential energy consumption in 2021

In our “Greening your home: How to think about energy efficiency” report, we discuss why investing in energy efficiency for residential real estate may be a way to reduce energy consumption while reducing CO₂ emissions. In addition to “smart refurbishing,” homeowners may also consider whether “greening” their heating system is appropriate for them.

Innovations in the HVAC space can help homeowners reduce their home’s footprint while potentially reducing their monthly energy bill. Options exist across technologies including solar, geothermal, and hydronic, to name a few alternatives to using gas-based heating and cooling.

Each of these technologies comes with its own complexities and cost structure. Geothermal pump systems, for example, work through a system of pipes buried underground that leverage the constant temperature below the earth’s surface. According to the EPA, this is one of the most energy-efficient and cost-effective heating and cooling systems,² yet the upfront cost could be steep and range widely based on location.

Hydronic heating, another option, involves installing a water-based heating system that involves an energy efficient boiler and a system of pipes set up in the flooring or the walls. Finally, there are multiple ways to harness solar energy and turn it into a home heating and cooling system as well—from flat plate to tube solar collectors, which employ different technologies to turn solar power into heat that can circulate within a building. Beyond cost, space and availability of daylight throughout the year are considerations for homeowners when it comes to these technologies.

Importantly, while these options may all be helpful in managing energy bills and reducing carbon emissions, also considering energy-efficiency measures can have an impact on both accounts. For example, simple solutions like installing smart thermostats may already go some way toward managing home temperatures and energy use.

At a high level, we expect that over the longer term, leveraging renewable sources of energy to replace fossil fuel sources should result in positive benefits for the wallet and for the world.

That said, while the trend may hold in general, the actual economics of the decision will be unique for every household. We recommend considering a range of factors when deciding whether—and when—to time a renovation that would move a home in this direction.

A first consideration is the remaining life of the existing heating and cooling system, and whether the remaining lifespan justifies a replacement with a new, more sustainable system. Second, digging deeper into specific state- or local-level incentives is also key. While most US states have incentives to move toward renewables, the actual magnitude, scope, and eligibility will vary widely. And third, homeowners should balance short-term costs with the expected longer-term savings, and consider their personal savings and investment strategy based on their liquidity needs and investment objectives.

¹. University of Michigan, Center for Sustainable Systems, "Residential Buildings Factsheet," accessed 10 December 2022

². EIA, "Geothermal heat pumps explained," accessed 10 December 2022