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Geothermal Investment as Housing Capital
Geothermal technology is gaining momentum as a clean source of heating and cooling capacity that competes with traditional HVAC systems in multifamily housing. However, high startup costs remain a considerable barrier for affordable and mixed-income developments seeking to adopt this emerging technology. In recent years, an array of federal tax credits, U.S. Department of Energy (DOE) grants, state-mandated pilot programs, and innovative lending products has created a patchwork of funding sources for geothermal. This brief reviews the benefits of geothermal in multifamily housing before exploring recent case studies that demonstrate three ways geothermal systems can be developed alongside multifamily projects:
Model 1: Local public developer. A public entity such as a city government or public housing authority absorbs the cost of the geothermal system outright, taking primary responsibility for the coordination of diverse funding sources. Because public developers have unique access to regulatory tools and can tolerate lower returns from revenue-generating projects, they can absorb the risks of system buildout when private capital is more skittish. While Model 1 is the most flexible and broadly accessible model, it requires significant public capacity and places the most execution risk on the developer.
Model 2: Regulated utility. An investor-owned utility takes on the upfront cost of building the geothermal system and recoups it over time through state-authorized ratepayer charges. This model allows the utility to maintain its customer base while sparing the housing developer from high startup costs, but its success is contingent on state regulatory politics and the utility’s own capacity and interest in various parts of the geothermal system.
Model 3: Private non-utility. A private clean energy startup or specialized geothermal developer finances, builds, owns, and operates the geothermal system for a specific housing development. Acting as a micro-utility, the owner of the geothermal system provides thermal capacity and equipment for customers, who pay for service via a monthly flat-fee thermal lease or a metered thermal purchase agreement. This business model is known as Energy-as-a-Service (EaaS). EaaS companies face less regulatory burden than regulated incumbent utilities but have no public backstop if costs exceed expectations.
This brief is not an exhaustive analysis of possible financing structures. For example, under a hybrid ownership structure, a utility might own the distribution infrastructure, a private entity the heat pumps, and a municipality the boreholes. However, across the three sample models examined here, shifting energy infrastructure costs off the housing developer’s balance sheet frees conventional housing capital—Low-Income Housing Tax Credit (LIHTC) equity, tax-exempt municipal bonds, and other financing—to do what it is best suited for: building and preserving units. In service of more predictable funding for geothermal projects, this brief concludes with three policy recommendations for state and federal agencies: the creation of thermal energy lease templates, the establishment of geothermal-specific development-to-construction and construction-to-permanent debt products, and wider adoption of engineering-based utility allowances.