The decision to make your business more sustainable by making energy efficient upgrades can seem like a never-ending list of potential projects. It's easy to get lost in a research rabbit hole trying to figure out which upgrades are best. You want to save energy and money, but some of these changes might be big investments.
The first step is figuring out the anticipated return on investment (ROI) and how long it will take to be paid back for your investment (payback). In this article we'll dig into what ROI and payback are and how you can use them to make your energy saving investment decisions easier.
Definition of terms
There are many ways of measuring the financial implications of energy efficient investments. We'll take a deeper look below at two of the most common methods.
What is Return on investment (ROI)
Return on Investment or ROI is the calculation used to determine how much profit you can earn from an investment in the form of a percentage. For example, if you determine you would get a 25 percent ROI by upgrading to energy saving equipment. that means you recover the initial investment plus another 25 percent. You calculate it by dividing the total energy savings minus the investment cost by the total investment cost. Then multiply the result of that equation by 100 to get the percentage.
You can use ROI before the start of a project to estimate the cost and return so you'll know if it's worth the investment before you start. That calculation is called “anticipated ROI”. You calculate “actual ROI” once a project is finished and demonstrates the real profit for the project.
What is Payback
The payback or payback period is simply the length of time it takes your business to recoup an investment. The Commercial Building Retrofit Program can provide up to $1.25 Million towards energy efficient upgrades to help shorten the payback period. That means you get the full financial benefit of your energy-efficient upgrades sooner.
The Industrial Energy Efficiency Program also provides incentives for both electric and non-electric saving opportunities. Energy saving projects such as process improvements, HVAC systems and refrigeration are just a few examples. If you don’t know where to start, an energy audit is your first step and will help identify areas for improvement and key opportunities in your operations. If you have a project already in mind, start with a feasibility study to help ensure the retrofit is cost effective.
The simple payback calculation for energy-saving projects measures the time it takes for the energy savings to pay back the investment. You find the timeframe by dividing the investment by the estimated energy savings. The faster the payback, the sooner you can reinvest into other projects.
Some other ways to look at this, if you decide to purchase a variable speed drive for your operation but don’t go through the Industrial Energy Efficiency Program you may still have a payback plan. By going through the program you can receive an incentive to cover part or all of the upgrade. Another example, you can decide to pre-pay part of your electricity bill for the next two years and receive a free lighting retrofit through the Industrial Energy Efficiency Program.
When looking at payback for energy efficient investments, remember it doesn't take the equipment lifespan into account. You need to factor in lifespan and maintenance costs, and even energy rates, into the final decision.
How to measure ROI/payback
Now that we've discussed ROI and payback, we can discuss how to measure them for energy saving projects.
When you have a list of exciting possibilities to make your business more sustainable, it might be tempting to add all the projects you want to do together to find an overall ROI and payback period. For accurate numbers, you need to determine the ROI and payback for each project individually. But that doesn't mean you can't make several energy upgrades at one time. Making multiple strategic upgrades at the same time can give you the best energy savings.
After calculating ROI and payback for each project, you can rank them by which projects have the highest returns.
What are the electrical savings? What are other fuel savings?
Electrical savings are the yearly savings from reduced electricity use. The Business Rebate Program can help you save money while upgrading to energy efficient lighting or more efficient heating equipment.
Suppose your business uses other fuel sources like propane or gas. You calculate the anticipated ROI and payback by estimating how much fuel the new upgrades can save your business each year.
Does this purchase require more or less maintenance?
Total savings is the energy savings plus the operational and maintenance savings. Always consider the reliability and durability of the new equipment. Look at the reviews for the new equipment to see if there are maintenance problems with the model. What's the estimated lifespan of the new equipment? Compare the estimated maintenance costs to your current costs.
Using deferred maintenance costs to finance further efficiency projects
Once you know the amount of money you'll save on maintenance with your new equipment, you can roll those savings into a fund to finance other projects on your list. This way, each project starts to compound, giving you more savings over time.
What are the operational benefits?
Energy efficiency upgrades have additional benefits on top of saving energy and money. The new equipment can provide improved comfort and better lighting. Depending on the upgrades, you could experience faster processing times and, as necessary, the ability to ramp up or down.
Not all changes have to be big changes; consider easy behaviour changes as part of your plan.
Behavioural changes can start as early as today before you've decided on which projects you'd like to tackle first. Start with a conversation with your employees about your desire to become more energy-efficient. Getting employee buy-in can go a long way to helping you achieve your goals.
How long will the investment last (lifetime expectancy of the equipment or upgrade)?
The lifetime expectancy of your new equipment and other upgrades depends on the type of upgrades and how well they are maintained. For example, ENERGY-STAR® rated LED light fixtures should last twice as long than as traditional fluorescent fixtures. Look at the equipment's estimated life expectancy as part of your decision-making process.
Are there incentives available?
The Business Rebate Program gives your business 25 percent back with approved energy upgrades. That gives you flexibility to do more within your budget.
Measure ROI and payback for easier decisions
Deciding which energy efficient upgrades to do first can seem like a big task. Measuring the ROI and payback for each project helps make the decision easier. Once you know how much you'll get back from your investment and how long it'll take to get it back, you'll know which projects to start with and plan for future energy saving projects as well.
How do you calculate ROI?
You can calculate ROI by subtracting the actual or estimated income from a project from the actual or estimated costs. That number is the net profit. Then, divide the net profit by the costs. Multiply by 100 to get the percentage.
The formula for ROI is:
How do you calculate payback period?
You can calculate your payback period in a couple of ways. A simple formula for the payback period is:
Payback Period = Initial investment ÷ Cash flow per year
How do you calculate payback period for efficiency projects?
Using the simple payback calculation above, divide the initial or estimated cost of the project by the estimated annual energy savings.
The formula for payback for an energy efficiency project is:
Payback period = Initial or estimated project cost ÷ Estimated energy saving per year
What is payback period for energy conservation?
The payback period for energy conservation is the amount of energy saved over the lifespan of the efficiency upgrade. You use the amount of energy saved per year to see how much energy your efficiency projects can save over time.