Electric Heat Cost vs Oil Heat, Gas or Propane Cost

One of the interesting things that's come up lately with house shopping is comparing heating systems. After all, everybody knows that electric heat costs a fortune vs oil, natural gas or propane, but as usual, everybody is operating on obsolete information. While electric heat does still cost somewhat more than burning fossil fuel in the basement, the break even point is getting closer, and has already been reached in countries where the tax burden on oil is higher.

The basic unit of heating is the BTU, British Thermal Unit. Home heating oil gives 138,000 BTU/gal, Natural gas around 1000 BTU/cubic foot and propane around 91,000 BTU/gal. Electricity use is measured in KWh, where 1 KWh is equivalent to 3413 BTU. You can assume that electric heating is around 100% efficient, in that the electricity is converted to heat within the heating device, say an oil filled electric radiator. That's not to say that generating electricity is always efficient, but it happens on the other side of the meter, along with the transmission losses. The Kilowatt hours you pay for are all on your side of the meter, where the heating you generate from them is around 100% efficient.

Most existing homes still have lower efficiency heating units, estimate around 75% for oil or 70% for natural gas or propane. The losses include heat going up the chimney as result of the combustion process, and inefficiency in the thermal transfer to a medium fluid, like hot water or steam, and the lack of heat recovery from that fluid. The Dept of Energy has a nice guide explaining the differences between the worst heating systems, down around 50% efficient, and the newest high efficiency furnaces, between 90% and 95%.

Just to keep the math simple, lets pretend that all heating systems are 100% efficient, so we're only dealing with the fuel cost. Keep in mind that ignores not only the true efficiency of the heating systems, but also the cost of the system. Furnace and fluid transfer systems are expensive to install and maintain vs simply putting electric radiators in every room with independent thermostats right on the radiator, which is equivalent in some ways to an expensive multi-zoned central heating system.

The bottom line where I currently live and electricity costs about 19 cents per KWh is that $1.00 of electric bill buys about 18,000 BTU. That means that the break even point on electric vs oil heating cost (fuel only) comes when home heating oil reaches $7.67/gal. But in a real world situation, if you have an old oil system running at 70% efficiency, the break even point is $5.37/gal which we might reach this winter. And if you have one of the ancient oil furnaces running down around 50% efficiency, the break even is $3.83/gal for oil, which we've already passed.

Natural gas sells by a unit known as the therm, where 1 therm = 100,000 BTU. That means that the break even with electricity at $0.19/KWh comes when 1 therm costs around $5.56. That's a long way off for most US homeowners, which also goes to point out that natural gas is currently a much cheaper alternative than oil for home heating. If you have an incredibly inefficient old gas furnace, like a coal conversion (I saw one of these in a house a few weeks ago) the break even would be down around $2.78/therm, which is still a ways off.

The break even with electricity at $0.19/KWh for propane at 100% efficiency comes when propane costs $5.06/gal. This is close to happening already in the US, and if you have an older propane burner, the break even cost may already have been reached. But keep in mind this only refers to metered electricity coming off the grid. If you're running a generator to generate electricity, heating with electricity would be like burning piles of dollar to keep warm. On the other hand, if you have a nice solar electric array or a windmill, electric heat is a great way to siphon off the excess without having to store it. If you pay more for electricity, the break even point is higher, but if you pay less, If you're only paying 9.5 cents per KWh delivered, you can divide all of the break even points above in half.

Note that the U.S. average cost for electricity in Jan 2008 was 10.2 cents/KWh, or $0.102/KWh. At those prices a dollar of electricity buys 33,450 BTU. That means the break even with the imaginary 100% efficient oil comes at $4.13/gal (already there) and if you have an old oil heating system, you're deep in the hole vs electricity. The 100% efficient natural gas break even is at $2.99/therm and the break even with propane cost is at $2.72/gal. Assume 70% efficiency for middle of the road, older systems, and the break even is $2.09/therm natural gas and $1.90/gal propane.

Wow, I'm going to have to check my math for mistakes!

Direct Bank Owned Home Sales

I've been looking more and more at bank owned homes lately, they present the only reasonably priced houses around here. Most of the bank owned homes I've double checked against the registry of deeds are being sold for between 60% and 70% of the outstanding mortgage amount for which the bank foreclosed. The banks were in a big hurry to earn commissions by selling mortgages based on incredibly unrealistic valuations, and now they are finally trying to move the inventory before it falls further. But whenever I tried searching for bank owned foreclosures, I ended up at various subscription sites. Here's the only real bank owned sales lists I've found to date for large banks:

Bank of America

Countrywide

Citibank

Fannie Mae

Freddie Mac

Good luck finding a house, I'm driving out to take a look at a local one I just found on the Fannie Mae list.

Mortgage Deductiion Tax Efficiency

I'll admit it, I was taken in by the notion that buying a house was more tax efficient than renting. Everybody knows about the mortgage tax deduction, real estate agents positively shine when they talk to first-time home buyers about the savings. But I figure it's a pretty big decision to make based on rumors, so I sat down and worked the math on the mortgage tax break. In my case, and in the case of about half of American homeowners, it's not worth a dime. In the case of those homeowners who do take the the mortgage tax deduction, I'll bet the savings comes to less than the property tax for most of them.

The problem is two-fold. First of all, taking the mortgage tax deduction requires itemizing versus taking the standard deduction. If your itemized deductions on Schedule A come to less than the standard deduction for your filing status, there's no point in itemizing, you'd be throwing money away. Second, if you aren't already paying a lot of taxes and a whole lot of mortgage interest, the savings won't amount to much. It's a great deal for wealthy people who keep upgrading to more expensive homes, especially if they buy them in elderly areas with small school systems and low property taxes:-)

Check out the math if you're curious, but the bottom line is that the average American won't save beans on their taxes by purchasing a house with a mortgage. I went to the bother of figuring it out because I'm trying to talk myself into buying a house. It didn't help. I'm really focused on finding a rental at this point, and I'm spoiled by renting furnished. I'm beginning to see some furnished off-season vacation rentals showing up on craigslist, lake front properties in New Hampshire that the owners are trying to rent from September through May. The time frame sort of works for me, but many vacation properties are built without garages. Also, I'm not sure about the building codes in New Hampshire, I don't know that they are required to do energy audits, so some of these places may be near impossible to heat in the winter. I did see one that included heat, and I think I'll drop them a line.