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Retrofit Funding: ecoENERGY Incentive – Understanding Simple Payback

Before you decide to proceed with an energy investment or retrofit, you will want to know the "simple payback" or the number of years it will take for a measure to pay for itself (i.e. energy savings to equal the project costs). Payback can also be used as an indicator of risk. Generally, short-term events can be predicted more precisely than events in the distant future. Therefore, assuming that everything else is constant, projects with a shorter payback period are usually considered less risky.

Net Simple Payback

Net Simple Payback is the payback period of a project, after taking into account funding from other sources, such as incentives from a utility, another Government program, department or agency. Natural Resources Canada' s Retrofit Incentive was designed to help implement energy saving projects that have net simple payback periods of a greater than one year, and will reduce the net simple payback to no less than one year.

Total project cost is the cost of implementing an energy-saving project, which comprises the costs of the engineering services, equipment and installation, plus other costs that might have an impact on implementing the measure. For example, additional costs could relate to the costs of the disposal or removal of old equipment.

Net Simple Payback = ((total project cost – funding from other sources)/Annual Energy Savings) ≥ 1 year to be eligible for assistance

Example:

Total project cost: $10,000
Energy savings: $1,000/yr
Utility incentive: $1,500
Net Simple Payback:
= ($10,000 – $1,500) / $1,000 = 8.5 yrs
Therefore:   Net Simple Payback: 8.5 yrs

Changes to the Payback

Future savings depend on several factors, such as the accuracy of the engineer's calculations, equipment performance, use or loading and fluctuating energy prices. Should any of these change after the retrofit project has been implemented, this will change the payback period. Therefore the calculation of the simple payback using the present values of energy cost and equipment use/loading is deemed conservative. 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.

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 to 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.