Energy Economics

While watching television you may view commercials or programs that encourage doing something to save energy. Any of these actions would save energy, but how do you decide what to do next? This is where energy economics comes to the rescue.

Most energy saving actions require money up front at the time or before starting the action. It is expected these actions will reduce energy use. In other words, reduce your utility bill. The big question is, when does the energy saving, which occurs over time, equal the initial cost? Once this point is crossed, you are saving money.

When you pay for an energy saving action, you expect your utility bill to go down. It is always nice to see a lower bill, but for a while these savings just offset your earlier expense. Energy savings really have their biggest significance when their value exceeds the initial cost.

You may spend 200 dollars for a new window. Assume this new window results in lowering your utility bill by 5 dollars each month. The 5 dollars each month is not real savings because you are out 200 dollars for buying the window. At some point in the future the reduction in your utility bills will equal the 200 dollars spent on the window. At that point you have recovered your initial expense. After that point in time, you are making real savings. These savings will continue as long as you have that window. This magic point when the cost of energy saved matches initial cost is called payback.

For the example above, it will take 40 months (3-1/3 years) to payback. For the first 40 months you are just compensating for the cost of the window. After 40 months you will have real savings from the new window.

Payback is equal to the cost of the project divided by the expected annual savings. Payback will be in years.

Money has a time value. You could invest that 200 dollars in an interest bearing account. At the payback period above, your 200 dollars would have increased in value because of the interest earned by that account. To be totally accurate, the payback shown above should include the time value of money. When this is done, it is called compound payback. When calculations are performed without accounting for the time value of money, it is called simple payback.

The calculations for compound payback are more complicated and may not yield more accurate results. This is because the energy savings is only an estimate. In the example above, there will not be a consistent 5 dollar reduction every month. Varying weather conditions will greatly affect the savings. Simple payback calculations can serve just as well as compound payback for home owners. Commercial energy saving projects may require compound payback calculations as part of funding the project.

Energy Economic Strategy

Following is a recommended strategy for saving energy in your home.

1. List the energy saving actions you want to do.

2. Determine a simple payback for each action. Actions that do not require initial cost will have a zero payback.

3. Order the actions from lowest payback to largest.

4. Perform the actions as long as money is available.