First, think about the comfort issue. A fixed capacity system is only the right match for your house at one operating condition. Most of the time it is larger than you need. Fixed capacity systems have to shut on and off because they typically produce more capacity than is needed at most operating conditions. This means that they will be over-conditioning, shutting down and waiting for the temperature to fluctuate, and then coming back on. A variable capacity system can operate close to the actual capacity needed to heat or cool your home even at different conditions. This means you will not be over-conditioning, shutting off for a while, and then over-conditioning again. The temperature can remain more constant.
Energy efficiency is the second big plus you get from a modulating system. The least efficient operation for any system is when it starts. For air conditioners and heat pumps, it takes a few minutes for the refrigerant pressures to stabilize and start producing at rated capacity. However, your system uses the most energy at initial startup. This means that at the very moment the system is using the most energy it is producing the least capacity. Obviously this represents inefficient operation. If a system only runs a few minutes before shutting off, it is always operating at its most inefficient state. Furnaces have similar issues. At startup you are not delivering any heat into the house, but the furnace is using fuel. Again, the most inefficient operating condition. A furnace that cycles on and off every few minutes is operating at its leas efficient condition. Variable capacity systems increase efficiency by reducing these cycling losses. The system operates for longer periods, but uses less energy because it is only using as much energy as is needed for the current condition.
In cooling, longer operation often gives better humidity control in areas where humidity control is as important as temperature control. If an over-sized cooling system cycles rapidly, it does not have time to remove a lot of moisture. The homeowner feels uncomfortable even though the temperature is satisfied. So what do they do? They crank the temperature down until they do feel comfortable. Net result, they over-cool the house to feel comfortable because the system is not removing moisture adequately. Modulating systems can solve this problem by varying both the refrigeration capacity and the airflow capacity – keeping a cold coil even at reduced capacity operation. They operate longer because of the reduced capacity, allowing them to remove more moisture. Variable capacity systems gaining in popularity because they keep you more comfortable while using less energy.