News

Paying for energy conservation

By Tim Gould
Published: March 11, 2008

This year more than ever, people are motivated to do something about saving energy, but they also wonder: Can I afford it?

When it comes to making home energy improvements, naturally homeowners want to know what their payback will be. Simple payback is the most straightforward approach and is the amount of time it takes for the improvement to be fully paid for through the savings that are generated by the improvement.

It is an investment in your home that pays you back in energy savings. That is, if you replace an old energy-hog refrigerator with a new one for $1000 and it saves you $138 each year in electricity bills, you can easily figure out when it has paid for itself.

However, some home improvements may be substantially more costly than a new refrigerator, such as new windows, a new oil furnace, or an upgrade to your insulation. Instead of looking at these in terms of payback, it is better to consider your cash flow.

Compare the annual cost of financing an improvement against the annual cost of energy without any improvement. Though the annual cost for financing some home improvements may be greater than the savings you see in your energy bills, you will often find the cost is actually less than the total energy cost for your home prior to making these improvements.

For example, if you spend $3,500 in heating each year, you may decide to take a loan out to finance ten new energy-efficient windows costing $250 each.

Though the annual cost of that loan may be more than the savings you see in your energy costs, the combined cost of financing the improvements plus your new lower energy bill will be less than your original home energy costs before you made the investment in your home. And you should never underestimate the value of improved comfort. Increasing your own daily comfort and enjoyment of your home will be an immediate payback for any energy-efficient improvement you make.

Life-cycle cost analysis is a third and more sophisticated way to measure the cost-effectiveness of a home energy improvement. Life-cycle cost analysis takes into account initial cost of the energy savings upgrade, energy costs and savings, operation and maintenance costs, component replacement costs, salvage value, and other factors that will affect cost over the entire life of the project.

An upgrade for a heating system provides a good example. A furnace or boiler will use $1,500 over the next 20 years, costing $30,000 if no action is taken. A new heating system costing $5,000 will use $1,000 per year over 20 years. The new system's initial cost plus fuel totals $25,000, resulting in a savings of $5,000 over the life of the system. Determining the Savings to Investment Ratio (SIR) when performing a life-cycle cost analysis helps you to prioritize energy improvements when considering more than one improvement at a time.

A professional energy audit can help you in considering whether to go for immediate payback or to consider annual cash flow. An audit report will present you with a life-cycle cost analysis of upgrading many systems in your home, which will help you make an educated decision on how to spend your energy dollars to give you the most comfort and energy savings.

Tim Gould is director of Energy Egghead, an Amesbury-based company that can be found at www.ENERGYEGGHEAD.COM and provides professional energy audit and conservation services.