Weighing Costs and Benefits

Typically, one of the first things people ask when they are thinking about energy improvements to a house is, “What is the payback?” I find this interesting, because most of us make hundreds of other purchase choices -- buying a car, paying for a vacation -- every year without ever asking that question. But one of the obvious reasons to conserve energy is to save money, so it is understandable that homeowners think about how much they will save and how long it will take to reclaim that investment. We I believe this also happens because energy-efficiency improvements are not things that can easily be seen -- it’s much easier to show off a new deck, patio, or kitchen countertop, so people want to be able to justify energy conservation by some objective means.

Value beyond energy saved

A cost-benefit analysis can be a useful tool, but payback should not be the only criterion for deciding how much to spend and what to do. As we’ve pointed out in this section, there are many nonenergy benefits that may be realized simply by treating the house as a whole system, which means doing a thorough, thoughtful analysis. These benefits include improved health and reduced building maintenance, both of which are likely to have economic benefits for your family. However, the influence is difficult to measure; both also have the potential to greatly improve your quality of life.

There are other, noneconomic, factors that may affect your decision to invest in energy improvements. The most obvious noneconomic benefit of energy efficiency is comfort. Actually, I think that more comfortable people are likely to be happier and healthier, characteristics that probably create some economic benefits as well. Aesthetics and convenience are also important factors, for example, in the choice of whether to replace windows.

If you know the cost of a project and the energy savings, it’s not difficult to calculate the payback; however, predicting energy savings is more complex.

Financing Energy Improvements

Instead of focusing on payback, cash flow can be a more useful way to look at financing energy improvements. Shown here are the estimated savings from air-sealing and insulating a house financed with a home-equity loan, as shown on a Home Energy Rating report. The annual cost of financing the work is less than the annual energy savings, and the annual cost for energy plus financing the improvements is less than the pre-improvement cost of energy alone, The monthly payment on the loan eats up most of the energy savings, leaving about $5 per month in positive cash flow to the owner; however, the house is more comfortable, has less environmental impact, and is better protected against rising energy costs.

Fig 25-0: Energy costs ($/yr.)

Net Present Value

You can think of savings from your current energy expenses as a tax-free income stream every month. A savings of $10 per month for 10 years has a net present value (NPV) of about $950, assuming an interest rate of 5%. This means that it would be an economic benefit to invest as much as $950 on a project that will save you $10 per month. The NPV is less than you would think—isn’t $120 a year for 10 years worth $1,200? But NPV includes the interest earnings you have given up for the money you invested in the project. On the other hand, a savings of $10 per month represents about $14 per month before taxes; if you factor that in, the NPV increases to more than $1,300.

Environmental issues may also be a motivating factor. More and more people are taking time to recycle, or they are willing to pay higher prices “green” or environmentally beneficial products, even if there is no direct payback whatsoever. Energy consumption in housing is one of your family’s biggest environmental impacts (transportation and food consumption are the largest), so reducing your energy budget by a significant chunk will also help the planet and reduce our dependence on nonrenewable fuels.

TIP:

Don’t rely on accidental ventilation to dilute pollution sources in your home. Build tight, and ventilate right.

Specifically…

There are a number of negative health effects associated with very dry or very humid conditions. Dust mites and mold growth -- common respiratory irritants and asthma triggers -- thrive in high-humidity conditions. To minimize the negative health effects of very high or low humidity levels, The American Society of Heating, Refrigeration and Air-Conditioning Engineers (ASHRAE) recommends maintaining residences at a relative humidity of between 30 and 60 percent.

Although a comprehensive look at health issues in homes is beyond the scope of this book, a number of other books have been written about indoor air quality and health issues. Later, we will present for a list of resources that we’ve found to be useful for helping identify and deal with sources of pollution in your own home.

Home Energy Ratings

Most states have programs called Home Energy Rating Systems (HERS), which can provide technical assistance and financial tools for home energy improvements. Local utility companies, state agencies, contractors, or private companies may run these programs. There are national standards that govern the activity of energy raters, and I recommend that you find a certified rater from an accredited program. You can find information on accredited HERS pro grams at www.natresnet.org.

An energy rating can provide the following benefits:

• A professional assessment of your energy situation and recommendations for cost-effective upgrades.

• Special equipment and diagnostic tools to test your house for air leakage, duct leakage, and other energy problems.

• Referrals to contractors. Note that some states and financing programs limit the ability of raters to recommend themselves as contractors to work on your house.

• Access to preferred financing for energy upgrades.

An energy rating may cost between $250 and $400, and some raters provide contract management services for an additional fee. In some cases, a local utility company or the lender (through project financing) may pay for part or all of the cost of the rating.

This Home Energy Rating report tells you how your home scores on a scale of 1 to 100, and it estimates the energy consumption in your house.

Cost-benefit calculations (So, what is the payback?)

The basics of cost-benefit analysis are pretty easy. If you invest $100, and it saves you $10 per year, the payback is 10 years. This is called simple pay- back. There are many other methods for calculating payback and cost-effectiveness; some of them take into account the interest you could earn on that same money if you invested it. Other methods express future income streams in terms of net present value (NPV). Note that future increases in fuel prices make any conservation investment more cost-effective. Energy prices are generally rising, but how quickly is fairly unpredictable over time. Getting a truly objective picture of payback is more guesswork than most people may think.

It is also difficult to predict what the savings will be. Some people in the energy industry use simple rules; their accuracy is highly dependent on the experience of the user, the age and geometry of the home, the energy-improvement details, and the climate. Even professional energy analysts who use complex engineering calculations to estimate savings can make mistakes.

For the average do-it-yourselfer, it’s not practical to account for all these variables. Generally, the approach I advocate is to plan for the available budget; to prioritize, given the information in this book and the specifics of your house; and to try to balance energy savings with a whole-house approach. For example, don’t ignore fresh-air ventilation just because it doesn’t result in energy savings. Also, contact your local utility companies, and find out whether they can offer technical or cash assistance for energy conservation. Electric and gas utilities often provide energy audits, and some even contribute money toward energy improvements for their customers’ homes. Many community action agencies and other aid organizations run weatherization -- assistance programs for income-qualified homeowners. Find out what is offered, and take advantage of any available help when planning your home weatherization project.

Opportunity savings

One other element to consider when thinking about payback is what I call opportunity savings. This is sort of the opposite of what economists call opportunity cost, which refers to the negative impact of benefits consumers may forego (for example, interest earnings on investments) when they decide to spend money in a certain way Opportunity savings is the reduction in cost of energy upgrades when you plan those upgrades to coincide with other necessary building maintenance or equipment replacement.

For example, adding a significant amount of insulation to an insulated cathedral ceiling may be expensive, but if the roof shingles need replacing anyway that cost may be reduced substantially Insulating exterior walls with extra layers of rigid— foam insulation is rarely cost-effective unless you are already re-siding your home anyway When heating or cooling equipment breaks, the added cost to replace it with high-efficiency equipment is much less than it would be otherwise, because you are already paying someone to take away the old machine and put in a new one. Remodeling— one room or an entire house—provides an unparalleled opportunity for including energy upgrades. Try to take advantage of these opportunities when planning your energy retrofit projects.

Prev.: Air Barriers and Indoor Air Quality
Next: Air Leaks (Priorities)

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