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How To Calculate The Cost Of NOT Being Energy Efficient

Posted on Sat, Jul 23, 2011

What Is The Cost Of NOT Being Energy Efficient?

Why Save Energy?

Energy savings can come from small changes, but the most significant impactHow-To-Calculate-ROI-From-Energy-Efficiency comes from re-trofitting existing electrial systems such as lighting  

There are a number of ways to have the improvements pay for themselves.

As a business owner, or a contractor involved in energy efficiency, you will be able to see or show all of the monetary benefits of calculating energy efficency.  OUR GOAL: ROI 

Consider the following example;

Step 1- Determine Building Dimensions

You own a building that is 20,000 Square Feet (If you need to measure, try the Bosch DLR130 Distance Measurer) and it is more than 10 years old. 

You have a quote of $25,000 to upgrade the lighting in the building. 

Let’s assume you are upgrading 120 400Watt Metal Halide fixtures. 

Your cost of energy is .08 per kilowatt hour

Step 2- Determine Energy Saving Tax Deduction:2005 EPAct 

The Energy Policy Act of 2005

This allows a building owner to take a straight tax deduction of $1.80 per square foot on your facility. 

The deduction is divided into three areas;

  1. Electrical
  2. HVAC
  3. The Building envelope

Each of the areas qualifies for a $.60 per square foot deduction.  I

In the case of lighting, consider the following example;

Calculating Tax Savings:

To Calculate your potential tax savings from The Energy Policy Act of 2005:

You would simply take 20,000 x $.60 per square foot to get a $12,000 tax deduction. 

That means any improvement up to $12,000 would be a straight write off in the year you make the improvement. 

(There are many variables that determine the actual cash benefit of the Energy and Policy Act, you must consult your tax attorney for exact amount)

But your cost for the improvement is $25,000, you need an additional $13,000. 

Step 3- Calculate Energy savings From Upgrading to Energy Efficient Lighting

Upgrading the 400 Watt Metal Halide with a High Bay Fluorescent will net a 50% savings in energy consumption. 

This will save your company $11,400 per year. 

So of the $13,000 left, after considering energy savings for the first year, you would still have a payout of ($13,000-11,400)$1,600.

Step 4- Calculate Utility Incentives

Assuming this project is within one of my own local utilities, the installation qualifies for a rebate of $80 per fixture. 

So, 120 x 80 = $9,600. 

At this point you only needed $1600, so now you actually have a surplus of $8,000 from doing your energy upgrade. 

Step 5- Calculate Maintenance Savings

New lighting products and systems have much longer lives than old technologies. 

So it would be reasonable to assume you won’t have to relamp these new fixtures for up to 10 years. 

What would that save you in labor? 

What would that save you in not having to purchase 120 bulbs every 3 years? 

What would that save you in the equipment needed to relamp the fixtures? 

For this example, let’s assume you would save $1000 per year, would that be fair? 

Energy Savings Numbers; It's the Real Deal.

Step 6- Put the Numbers together

So, let’s recap the project;

Your upgrade is going to cost $25,000.

Your building qualifies for a $12,000 tax deduction.

Your energy savings from year 1 is $11,400.

You qualify for $9600 in local utility incentives.

You save $1,000 in maintenance in year 1.  

Step 7- Determine Energy Efficiency ROI

$25,000 – 9600 = $15,400 actual payout in year 1. 

$15,400-$11,400=$4000 Balance after energy savings.

$4000 - $4800 (Cash Value of Tax deduction assuming 40% Bracket) = $800 Positive Cash Flow.

$1000 Savings in Maintenance + $800 Positive Cash Flow = $1800 positive cash flow Year 1. 


Life of the system?

New Lighting system last for 42,000 hours of service.  You use the lights 4200 hours per year = 10 year life.

9 years(We used Year 1 above) * $11,400 = $107,100 that you would put in your pocket OR if you do nothing, that is how much you would pay to your utility. 

So if you invested $25,000 and only considered the savings, you would net $114,000 over 10 years ($114,000/$25,000)= 456% ROI. 

But since you only had to pay out $15,400 your ROI would be ($114,000/$15,400) = 740% ROI. 

Energy Efficiency vs. Stock Market

How does this type of investment compare to your stock portfolio? 

How about compared to real estate investments?

An investment in energy is a great investment.  The disappointing part of this process is that people are skeptical, think it is a scam or don’t think it is possible to save that kind of money. 

If you do nothing, you will still pay the utility all of that money.

The utility is going to continue to raise rates and that cost will get higher. 

So, those who believe the possibilities of energy savings are those who will be rewarded with a solid investment. 

Are you interested in saving money?

Like to know more about an Energy Efficiency Audit?

Please comment below on what you are doing to save energy!

Topics: Energy Cost, Energy Efficiency

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