Just as an air-source heat pump (be it a heat pump or an air conditioner or a refrigerator) pumps heat from the air against a temperature gradient using a refrigerant loop, a ground-source (geothermal) heat pump pumps heat from the ground using a similar principle. The obvious advantage is that once you get more than a few feet below the ground, the temperature becomes very stable, so you no longer have the issue of the air temperature dropping as the heat loss increases. The heat loss still increases as the temperature drops, but your heat pump is operating from a constant source temperature (50-55 degree soil), so the curves end up being much better. The method used to actually couple the heat pump to the ground source can vary. Some systems use refrigerant tubes buried directly into the soil; these are fairly rare, and I'm not really going to go into discussing that technology, as it really needs to prove itself more. More commonly, the heat pump passes refrigerant through one side of a coaxial or flat-plate heat exchanger, and water is passed through the other side. That water may be a closed system (often containing stabilizers and antifreeze) which runs through pipes buried in the ground, or it may be an open system, where water from a well or spring is used and then discarded.
A closed system is less efficient, since the plastic pipe used for the loop(s) impedes heat transfer, and water which has been cooled by the removal of its heat is being returned to the source (albeit inside a pipe). Equipment must be de-rated to account for that (ie, a system rated for 60kbtuh output would only supply 48-54kbtuh), and the operating costs will tend to be a bit higher. However, such installations avoid issues of freezing the water (since anti-freeze can be added), and are not impacted by water quality.
An open system is more efficient, since the heat is extracted from the water, and the cooled water is then discharged into a drain, allowing fresh, 50-55-degree water to be used for the incoming water. The quality of the water (hardness, mineral content, acidity, salinity) can be an issue in these systems, and (even if it checks out initially) should be checked on a yearly basis to protect the system from any detrimental changes over time. The ability of a well or spring to produce the necessary amount of water can also be a major hurdle. Many residential wells only produce 5gpm on a continuous basis. Geothermal systems need approximately 3gpm per ton, and most houses in this area would need a 5-10 ton system. That is an awful lot of water to be extracting from the ground, both in terms of the risk of running the well dry, and in terms of having to dispose of the water (your neighbors probably don't want it dumped on their lawn). A "dry well" or even a second drilled well in proximity to the first well can allow the water to be re-introduced into the local aquifer, but give it time to be re-heated by the earth. A well which does not produce enough can still be used, by discharging some or all of the water back into the well. This reduces efficiency to some extent (since already-cooled water is being re-introduced into the well), but generally not as much as with a closed system. Being able to supply domestic water at the same time as geothermal water may require the use of a cistern for the domestic water. The well pump fills the domestic cistern when the geothermal system is not operating, and a second pump draws water from the cistern and pressurizes it for use in the house.
The well pump itself may not flow enough for geothermal, and may need to be upgraded. Variable-speed pumps are often a good idea in that case, as they will cycle less under the varying demands of the system, improving both efficiency and pump life. Standard pumps may require large pressure tanks to reduce short-cycling. Two-stage geothermal equipment can maximize efficiency by matching output more closely to the demands of the house, and reduce cycling issues as a result. A clean, reliable spring or pressure-producing well is obviously the best match for geothermal.
As with an air-source heat pump, geothermal can be supplemented by resistive, fossil fuel, or other heat sources. This can be useful if the well cannot produce enough water to supply the full load, and space or cost constraints prevent the installation of a closed-loop system. In areas like the Northeast, where cooling loads are generally much smaller than heating loads, the geothermal system may be sized for the cooling load, allowing it to supplement the heating load, but not provide full heating of the structure. Similarly, older homes which are being upgraded may have a system sized for the future (ie, after the windows are replaced and the walls insulated better), and temporarily use backup heat to make up the difference until such time as those structure upgrades can be performed; that eliminated the initial cost and future maintenance issues of an oversized system.
Thermodynamic efficiencies are obviously never more than 100%, but since you don't pay to heat the ground (the sun does that for you), the cost efficiency (electricity used versus energy delivered to the house) can be in excess of 500%. Factoring in the conversion from kwh to btu, and you can get performance factors in the 20-30 btu/kwh range. Of course, all that comes at a price. The equipment itself is expensive, and installation is often very expensive (particularly if a well needs to be drilled or upgraded). Some utility companies have loans, grants, or rebates for switching to heat pump systems, and may offer separate metering for the heating system (at a lower price per kwh), and those factors can offset the costs to a substantial extent. Only a full analysis of the system on a case-by-case basis can make the determination as to what geothermal will cost to install and to operate for a given structure.
Obviously, if more homes switch to geothermal, open systems with open discharge may become a thing of the past, as the water table will not tolerate everyone drawing off many gallons per minute at the same time, and neither will the convenient places to discharge that water. The electric grid will also run into issues if too many homes are switched to electric-based heating systems. But these systems do offer an attractive alternative for many applications.
Joe