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Four Reasons Simple Payback Isn’t Enough

Things to Consider When Proposing Energy Efficiency

By: | March 10, 2014 9:39 am

Most businesses believe in the idea of energy efficiency and know that adopting energy efficient solutions will save them money in the long-run. But if that’s the case, then why are so few businesses actually taking the next step and investing in these solutions?

One cause could be that many businesses look at energy efficiency improvements as (short-term) projects and not as financial investments. While most business investments are measured using varying rates of return, many business analysts are still evaluating the benefits of energy efficiency upgrades only in terms of “simple payback,” or the amount of time it takes for the upgrade to “pay for itself.”

The problem with evaluating energy efficiency upgrades using only simple payback is that it overly simplifies the investment, leaving out lots of valuable information. This seems near-sighted given that many of these proposals total in the tens of thousands and even up to millions of capital investment dollars.

The Drawbacks of Using Simple Payback in Energy Efficiency Project Proposals

1. Simple payback doesn’t take into consideration the vast multitude of benefits that accrue after the energy efficiency improvement has paid for itself. It only measures until the investment’s breakeven point.

2. Since simple payback is just a measure of time, it cannot accurately measure the increasing wealth of having a highly productive asset like an energy efficient system as it continues to grow year over year.

3. Simple payback does not calculate the cost of “doing nothing.” No matter what, a business is going to spend more money, either for the improvements, or for the excess energy that is wasted. The problem with doing nothing is that the wasted energy still has a cost, and it often grows year-over-year.

4. Simple payback does not consider the possibility of rising energy costs over time, so a breakeven point is calculated using a rate that remains flat over the life of the investment; however, businesses should note that the investment increases in value over time if energy prices rise.

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