One of the most effective ways for property managers and energy engineers to improve the energy efficiency of a building’s envelope is to install window film. Window film makes glass more energy efficient, at a much more affordable cost than new windows or other glazing improvements.
Of course, there is a wide variety of energy efficiency improvements to choose from, everything from photovoltaic solar power systems to building insulation. One of the best ways, from a financial perspective, to evaluate a particular energy saving technology is to determine the payback period.
The estimated payback calculation is an excellent decision making tool for evaluating competing energy saving technologies. It’s pretty basic – indicating how fast the money spent be returned.
How to calculate payback
There are several ways to calculate the payback of your energy improvements, ranging from the simple up to the relatively complex. The primary difference is between them are the assumptions incorporated into the calculations. Adding assumptions and variables makes the calculations more complex, but sometimes is necessary to get an accurate estimate. The two most useful ways to determine the payback period…
1. Simple Payback
2. Cash Flow Analysis
Both methods provide a reasonable estimate of the payback without getting overly complex
Simple Payback Analysis
The primary benefit of simple payback analysis is that it is simple while still providing useful information. To calculate the simple payback, simply divide the cost of the improvement by the estimated savings to yield the payback period. For example, if you spend $500 to install energy saving measures that save $150/year the payback is a little over three years, $500/$150 = 3.33. Energy savings after this period is pure profit.
Of course, this leaves out a lot of variables that can impact the actual realized savings. Variables like maintenance costs, energy cost increases and inflation are not taken into account, but the method has the advantage of being quick, simple and easy to understand.
Cash Flow Analysis
Cash flow analysis is the next step up in terms of complexity. Taking more variables into consideration, things like maintenance, energy cost increases and inflation, cash flow analysis gives a truer picture of the payback, especially when these costs are high. This type of analysis is best done with a spreadsheet program to simplify the calculations.
To determine payback using cash flow analysis the initial cost of the improvement is combined with the estimated maintenance costs, including an estimate of any increased costs over the expected life of the improvement as well as with an estimate of energy cost increases over the same period.
For example, in examining the costs associated with replacing an HVAC system with a newer, more energy efficient system, using a simple payback would not suffice, as HVAC systems involve regular maintenance that is needed to ensure the life of the system. Because maintenance is critical, and subject to cost increases over time, this needs to be factored into the payback calculation to give a true picture of the potential savings, or lack thereof.
Now let’s look at an example using window film, an energy efficiency improvement with virtually no maintenance costs associated with it. Assume a window film installation requiring an investment of $385,000 that realizes yearly savings of $168,000. With a simple payback equal to 2.29 years and virtually no maintenance costs there are very little that will noticeably impact the payback period. Energy costs will increase over the life of the window film, but these will tend to lessen the payback period as the savings realized will be greater than the initial estimate.
As far as maintenance is concerned, window film doesn’t require any, but over its lifetime some replacement will be needed because of damaged window film and for upgrades associated with tenant improvements. The cost of these replacements should never exceed 0.5% – 1% of the total amount of windows in a building. Again, the impact of this on the realized savings is negligible.
Here’s a story that will illustrate the practicality of using these two methods to figure out the payback period versus other, more complex methods.
A bag of gold was placed on a table in a room. Two people, an engineer and a scientist, were told to enter the room and to try to get the gold. The only rule was that every time they moved towards the gold, they could only traveling half the remaining distance between themselves and the gold. The scientist decided to leave, declaring “if you can only approach half the distance remaining you’ll never get there. It’s impossible.” The engineer on the other hand simply took two steps, said, “Close enough for an engineering approximation,” grabbed the gold and was gone.
Payback calculations are a lot like the example in the story. You can make more and more refinements and assumptions but in the end most of the time you can determine a workable payback using the simple payback method, which can be done on the back of an envelope. If you can however, and especially when there are large variable costs, use the cash flow analysis method to factor in some of these costs.
We live in a world of financial constraints, requiring solid financial reasoning to make a particular investment, so we need to make some basic calculations to ensure were smart about how we spend our money. For maximum efficiency and effectiveness the focus should be on investments offering a quick payback, which can usually be determined adequately with the simple payback method or, when maintenance costs are high, with the slightly more complex cash flow analysis. Both methods are useful tools for the energy manager.