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Step 4: Understand Payback

Before you decide to go forward with an energy investment or retrofit, you will want to know the “payback,” or how many years it will take a measure to pay for itself.

Future savings depend on several factors, such as the accuracy of the engineer's calculations, equipment performance and fluctuating energy prices. To make a fully informed decision, look at both the expected return or cash flow projection and the risk that the returns will not be achieved. You should also weigh other benefits of energy efficiency measures, such as improved building comfort, increased building value and reduced greenhouse gas emissions.

Simple Payback

If you want to install new equipment or adopt new measures, simple payback will indicate the amount of time needed for energy savings to equal the purchase price. For example, if a new energy-efficient measure costs $10,000 and will save you $1,000 in energy costs each year, the simple payback is 10 years. You can estimate simple payback on new lighting using the Simple Payback Calculator. The Web site for Energy Efficient Equipment can also show you simple calculations of how much you could save by using more efficient equipment.

Incremental Payback

If you are installing a new type of equipment or if your old equipment is at the end of its life cycle, incremental payback will tell you the length of time needed to pay for the difference between an efficient and less efficient unit. For example, suppose that an energy-efficient replacement model costs $700 and a less efficient model costs $500. If you can save $100 a year by buying the efficient model, the incremental payback of the efficient replacement model is two years compared with buying the less efficient replacement model. Please note that some applications do not differentiate between simple and incremental payback.

New Building Simulations

If you are designing a new building, we offer free software for simulating energy savings.

More Complex Formulas

Rate of return (ROR), return on investment (ROI), hurdle rates and other more complex formulas usually incorporate life-cycle costing and are more accurate measures for investment decisions. An energy management services company or an accountant can also help you determine these numbers.

If you are looking specifically at motors upgrades, CanMOST – The Canadian Motor Selection Tool helps determine the simple payback or before- or after-tax return on investment. The software also displays cash flows, net present value, the benefit-to-cost ratio and rate of return.

Next: Step 5: Choose your measures