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Banish ‘Payback’

Call the money you spend an ‘investment’ rather than ‘costs that must be recovered’

The cost to bring the author's 900-square-foot home in Bend, Oregon, to net-zero-energy performance was $39,900, before state, federal, and utility incentives.
Image Credit: Bruce Sullivan

Every conversation about zero-energy homes (ZEHs) eventually comes around to the question of “cost.” The negative connotation of added cost and, even worse, “payback,” always puts ZEH advocates at a disadvantage. For years, I’ve encouraged advocates to call energy expenditures investments rather than “costs that must be recovered.” So, let’s banish the entire idea of “payback” and “payback period.”

Would anyone judge a stock investment or an interest-bearing bank account by calculating how long it would take the earnings to equal the principal? No, that would be absurd. Likewise, it’s counterproductive to consider funds used for energy improvements to be costs. They are investments with a financial return — both immediate and long-term — that is both significant and predictable.

When you spend money to reduce energy use, you receive a tangible financial benefit that begins the first month and continues for as long as you own your home. Let’s say that you’re building a new zero-energy home. You can calculate how much it will cost to increase insulation, reduce air leakage, improve equipment efficiency, and add photovoltaic panels. In most cases the investment will be in the tens of thousands of dollars. This investment will return immediate benefits whether you finance the purchase or pay with cash.

Savings begin as soon as you move in

To illustrate the idea, let’s use an example of an investment of $40,000 in energy-efficiency measures needed to bring a new house to net zero energy. In my area, financial incentives from the electric utility, state, and federal government cover just under half the costs and reduce the amount to $21,000. If you finance this home with a conventional 30-year mortgage, with current mortgage interest rates at 4%, you’ll pay $50 per month for each $10,000 you add to your principal amount.

If we assume that you financed the additional construction cost of $21,000 (after incentives), then your monthly added payment for energy improvements would be $100. Based on energy modeling, let’s assume the home will save $200 per month for energy.

That $200 return starts the first month you live in your house, and in this example it exceeds the added monthly mortgage payment whether incentives were used or not. With incentives, the net return after paying for the energy improvements is $100 per month; without incentives the net return is $8 per month.

You can also turn this calculation around by first looking at savings and then calculating how much money you could afford to invest. By building a home that saves $200 per month, you could afford to invest $40,000 in energy improvements.

In return for your investment, you pay nothing or very little for energy from the day you walk in the door. The monthly savings almost always offset the additional mortgage payment. Many zero-energy homes will realize a profit on their investment during the very first month, as in this example. It’s a very simple idea. If the monthly energy savings exceed the monthly financing cost, you win!

Businesses do this all the time, and they call it “leverage.” They borrow money to make an investment. If the return is higher than the outlay, they make a profit. If you think of energy improvements in this way, it opens a new way of thinking about ZEHs.

While the figures used in this example will apply to many areas of the U.S., your return will depend on individual circumstances. Home size, local construction costs, local energy costs, interest rates, and locally available incentives are key factors that will need to be considered. The key point to remember is that your investment has an immediate return, as well as a long-term return.

With financial investments, in addition to receiving interest and dividends, eventually you will withdraw the principal, when you close your bank account or sell a stock. How does that compare with money invested to improve the energy efficiency of your home? How do you recover the capital?

Although there will always be real estate price fluctuations, it’s generally true that homes will grow in value over time. A number of studies show that energy-efficient homes, especially ones with solar collectors, sell faster and receive higher prices than conventional homes in many areas of the country, making highly energy-efficient homes a positive real estate investment.

A hedge against rising energy costs

So far, I’ve shown you the return on investment starting with energy-saving “dividends” on move-in day and ending with a higher return on the day you sell your home. Another security you get with a ZEH is that the home’s features provide insurance against rising energy costs. Electricity price inflation has been steady at about 3% for decades and will undoubtedly continue to increase. Natural gas and petroleum prices are more volatile, but who wants to chain their home to unstable, carbon-emitting fossil fuels for decades to come?

There are also many important non-monetary returns with ZEHs that should be taken into account: These homes are more comfortable, healthier, quieter, more durable, and kinder to the planet.

The concept of “payback period” complicates and obscures both the solid financial returns from investing in a zero-energy home and distracts from the many non-financial benefits of the home. So let’s banish “payback” from our vocabularies.

A real world example

For a real world example. I’ll use my own ZEH. It was completed in September 2015 in Bend, Oregon (Climate Zone 5). It’s a small house, a bit more than 900 square feet. The building shell has extra insulation, including 10-inch thick walls, and a very low rate of air leakage (1.0 ach50). There is a ductless heat pump for space heating and a heat-pump water heater. Efficient appliances include a two-burner induction cooktop. To power all this, there is a 4.3-kW photovoltaic (PV) system. I kept careful records of all the construction costs and, for comparison, estimated the cost to build the house to a minimum code efficiency level.

The investment in energy-efficiency measures required to bring the house to zero energy was $39,900. Financial incentives from the electric utility, state, and federal governments covered just under half of that, reducing my cost to $21,206. However, I was able to reduce construction costs by doing most of the air sealing and installing the ventilation system myself. Including sweat equity, my costs for energy improvements dropped to $16,085, so my added monthly mortgage payment was only $77.

My energy model predicted energy savings worth $92 per month. Adding the higher mortgage payment and subtracting these monthly energy savings, I’m making a profit of $15 per month. Each year as energy prices increase, I will be making a little more. And if I ever were to sell my home I would get a price premium for the energy upgrades it contains and quality of life it provides. In the meantime I am living in a home that provides more comfort, more quiet, fresher air, and more durability.

Bruce Sullivan is a building science consultant. This post originally appeared at The Zero Energy Project.


  1. dvaut | | #1

    Real world but not so real world.
    Yes Bruce, most stocks, interest bearing bank accounts and almost all investments are judged on their rate of return and risk which payback is directly related to. There is significant costs to building a net zero home and their are risks to constructing super insulated walls and roof assemblies. To ignore the costs, rate of return on an investment, and risks would be folly and not very real world. In your example a 4.3-Kw PV system is significantly undersized an average American home in zone 5. Average sized homes are over 2,000 square feet in the US. While this maybe excessive it is a fact. Most people (or builders unfortunately) don't have the knowledge and skills to achieve 1 ACH50. So suggesting to ignore the increase in costs to air seal and installing a whole home ventilation system is not very real world. If you are financing these energy efficient upgrades you should understand that while you maybe making a profit of $15 a month, you should also remember you are still paying interest on the principal used to pay for them. Additionally suggesting that every year your payback will be greater in the future because energy prices will be higher is an assumption. This increase in profit per year probably will not exceed inflation. While your payback may increase in dollars every year, those future dollars are worth less. Another consideration is energy prices have been trending lower due to better technology in fossil fuels, and solar. I don't mean to be a downer but building a ZEH is harder, costs more money, and leave a home more susceptible to moisture problems. That being said it would be awesome if all homes were built this way. I think for the foreseeable future zero energy homes will be built for the most part by and for people who have a passion for these sort of things, like green building advisor members who compulsively research the best way to make their homes ZEH, or where money is not much of a concern. Don't get me wrong, I fully believe in trying to make a house as energy efficient as possible, but ignoring the costs is unrealistic to most of the general population.

  2. Expert Member
    Dana Dorsett | | #2

    Banish straw man examples
    "...let’s assume the home will save $200 per month for energy."

    Let's not.

    That's a hair more than I spend on energy for my sub-code-min ~2400' 2x4 framed 1920s antique in a high energy-cost state in US climate zone 5A (MA). A code min house at code-max air leakage would use less energy than my house, and well under $200/month. The average home in my state is over 50 years old, and the average annual energy expenditure was $2500/year in 2009, which was before natural gas and heating oil prices crashed:

    Including the subsidies in the financial analysis makes sense for individual cases, but does not translate to a generic case.

    "Electricity price inflation has been steady at about 3% for decades and will undoubtedly continue to increase."


    In inflation-adjusted dollars electricity pricing has been DE-flationary over the past half-century, and has not been keeping up with the general inflation:

    Now that both utility scale wind & utility scale solar have crashed in lifecycle levelized cost (pre-subsidy) to beat even combined cycle natural gas @ $3.50/MMBTU (current spot pricing is ~$2/MMBTU, but power generators buy on long term contracts as a volatility hedge), the downward pressure on electricity pricing is increasing. The 40-year trending learning curve on PV is about 20-25% drop in installed cost per doubling of capacity, and capacity is doubling about every two years and the learning curve has increased in the past decade from the long term trend. With wind the learning curve has been 15-20%, and the doubling rate slightly faster. Wind has been cheaper than utility scale through 2015, but PV will be beating all comers (even in less sunny states) well before 2025. The investment bank Lazard publishes periodic levelized cost analyses in this space, the most recent of which (Novermber 2015) lives here:

    The notion that electricity pricing has inflationary price pressure is ludicrous! You can't even fuel a legacy nuke for the 20-30 year US contract pricing of utility scale PV at 2016 prices, and in much of the world the contract pricing is well below US pricing. Wind has already been putting legacy thermal coal out of business in Texas and the midwest, and is cutting into capacity factors on combined cycle gas too. But the wind industry is already feeling the PV breathing down their necks. The ERCOT grid operator in Texas estimates that nearly all thermal coal retirements between now and 2030 will be replaced by solar, at a net cost savings to the ratepayers.

    I have nothing against Net Zero Energy houses in fact I'm a big fan of the concept, and believe it makes sense to require it by code by the mid-2020s as PV pricing crashes even further. (Net Zero Energy will be code-min for new houses in California beginning in 2020, and Net Zero Ready (just add solar!) is already code in Austin Texas.) But I am against disinformation and straw man arguments.

  3. Jon_R | | #3

    And if I ever were to sell my

    And if I ever were to sell my home I would get a price premium for the energy upgrades...

    And many real-estate agents say "very little". How long one will own a house is likely to be critical to the financial wisdom of energy saving "investments" and it would be absurd not to use this in calculations.

  4. Jon_Lawrence | | #4

    Electricity Inflation
    Fact Check: Dana claims electrical pricing does not have inflationary price pressures

    Looking over my quote from one of the solar installers back in 2012, my utility rate at the time was $.167/kwh and it was estimated to be grow to $.214/kwh 4 years later. Had I not switched to time of use in 2014, my utility rate now would be $.165/kwh. However, with TOU it is now .$135/kwh.

    Verdict: True - at least where I live.

  5. GBA Editor
    Martin Holladay | | #5

    Vermont report
    "A new report by the US Energy Information Administration (EIA) finds .... [that] last year (January 2014-January 2015) ... Vermont's overall rate went down 1.6 percent to 14.24 cents/kwh and Green Mountain Power's rates went down 2.46 percent. GMP is Vermont's largest electric company. Vermont was the only state in New England that saw rates fall in 2014. ... Most other regions of the country saw little change, with the Mid-Atlantic states of New York, New Jersey and Pennsylvania showing the largest decline (12.81 cents/kwh, down 6.6 percent)."


  6. Reid Baldwin | | #6

    I agree with the title - but not the article
    When I read the title, I expected the article to say that we tend to rely to heavily on financial returns to evaluate energy efficiency actions. I would have agreed with that. A lot of the things we spend money on in our houses do not yield financial returns, but we still invest in them. I believe we should treat energy efficiency similarly. That doesn't mean we disregard cost (I don't disregard cost on flooring, countertops, etc.). It is true that the non-financial benefits of energy saving investments tend to be socially shared rather than personal. Some people do not want to make personal investments for socially shared benefits. I understand that sentiment, although I disagree with it. The article didn't seem to make that point, instead simply advocating a different way to think about the financial returns.

  7. Expert Member
    Dana Dorsett | | #7

    Some prediction- 6% price inflation! (@ Jonathan Lawrence, #4 )
    "Looking over my quote from one of the solar installers back in 2012, my utility rate at the time was $.167/kwh and it was estimated to be grow to $.214/kwh 4 years later. "

    Was that the installer's estimate? That would be a 6% year on year inflation rate, which seems to become the standard inflation disinformation delivered by some solar companies in recent years. Whenever I see than number (and it's been a good half dozen times over the past 18-24 months) I keep my hand on my wallet! Compared to 6% price inflation makes solar look like a no-brainer at almost any installed price, but making that comparison is coming dangerously close to fraud in my book.

    The actual fall to $0.165 even has some of the residual price spike left over from the Polar Vortex of 2014 when gas generators were unable to deilver due to gas pipeline constraints. In the period from 2012 to now the amount of solar & wind on the grid has more than doubled (IIRC it has more than tripled), which has had an increasingly moderating effect on peak power pricing (at least in summer).

    New Jersey is in the PJM region, which was one of the early movers on demand response programs. There was a price spike in most of the PJM region after the Polar Vortex of 2014 due to gas generators being unable to deliver due to pipeline capacity limitations, but the fledgling demand response industry in the PJM region made the spike a bit lower than it was in New England, where there was no demand response market. The U.S. Court of Appeals for the District of Columbia Circuit vacated FERC Order 745 in May of 2014, which knocked the demand response industry on it's heels, effectively sidelining it, which probably kept the price from being even lower than $0.165, since with an active and growing demand response market peak prices would have been much lower. But since the Supremes reversed that, blessing the full force of FERC Order 745 in January of this year, the industry is back, and growing.

    The 18-19 month hiatus was a bit of a nail-biter, and halted the development of a demand response market being designed for the ISO-NE region (where I live) which delayed the ratcheting down of rates in Massachusetts from the late 2014 price spike. Rate cases are every 6 months in this state, and even though the ISO-NE demand response market won't be launched for another 20 months or so, between the burgeoning solar industry and subsidized efficiency markets in this state I would expect the rates to drop to pre-Polar Vortex levels even before demand response begins to erode rates.

    Wintertime grid peak loads coming up against gas infrastructure limitations are still a risk in the near term, but spikes of that magnitude will become a distant memory once the demand response industry here takes off in earnest. If the mandated 1.6 gigawatts offshore wind and the 1.2 gw of hydro import capacity for MA, gets built on schedule the return of the Polar Vortex price spikes of any real magnitude will evaporate, since the anticipated capacity factor of the wind south of Martha's Vineyard will more than cover shortfalls in pipeline capacity to the gas fired generators, and more than cover the retirement of the remaining coal & nuclear plants bidding into the MA electricity markets.

    Texas is the only state where raw electricity demand has been continuously growing over the past decade, and prices there have been falling, largely due to renewables filling the breach (and then some!). The economic crash of late 2008 made a downward blip in overall nationwide demand in 2009, but even after the recovery demand has been flat or slightly falling relative to pre-crash levels, with very little year on year change. Zero demand growth has become the new normal- efficiency increases have been keeping up with population & economic growth, and there is no reason to believe a dramatic change is coming any time soon.

  8. user-1119494 | | #8

    And let's not forget equipment lifespan...
    The article mentions "improve equipment efficiency", but (unlike most investments in the stock market) equipment wears out. An efficient fridge might wear out the seals in a decade, an inverter for the PV panels might die in the same time span, superwindows sometimes fail, LED light-bulb makers are trying to limit lifespan (

    I love the idea of a net zero home, but accurate assumptions are necessary for realistic models.

    That said, I salute folks who will explore ahead into untested waters... and will watch with interest.

  9. Dana1 | | #9

    The levelized costs of efficiency (@ Skip Harris)
    When levelized costs of energy are calculated by academics and the investment banking sector both the anticipated lifespan and maintenance costs are normally included. The methods of assessing average lifecycle & maintenance vary slightly in the particulars between different studies, but this is by not being ignored, and has long been a part of the calculations. When/where hard data exist for mean time between failure on a product type, that data is used.

  10. user-1052275 | | #10

    This is the kind of article that turns serious people off
    As Dana and others have already written, not only is there a lot of wishful thinking and assumptions going on here but some ideological blinders have been turned up as well.

    Just as the fantasyland economic advisors for Bernie Sanders and Jill Stein have done no favors for the progressive movement, this blog post does no favors to those who wish for purveyors of green building tech to be taken seriously.

  11. Expert Member
    Dana Dorsett | | #11

    I dunno... (@ Josh)
    Is it wishful thinking that I can save $200 month in energy costs, given that my energy costs in my sub-code house already average less than$200 /month? ;-)

    Net Zero Energy can be a lot cheaper than the quoted pre-subsidy $40,000 in the straw man example too particularly in climate zones 1-3, so it doesn't really need to be a $200/month energy savings to be break-even. The cost of new housing didn't really go up in Austin TX when Net Zero Ready became code-min, and it doesn't take $40K of PV to turn those homes into actual Net Zero Energy. PV is cheaper per installed watt in Texas than most states, and the insolation levels higher. As PV panel efficiencies continue to grow incrementally even as the installed costs continue to fall, many pre-existing homes will be able to retrofit to Net Zero Energy for less than the $40K with an array that still fits on the house, provided that utility regulators keep up.

    Austin TX just passed an update to their code requiring smart WiFi or cable thermostats in all new construction too, to help them manage the mid-day PV output and PM peak ramps from the growing fleet of distributed PV. It doesn't require Austin Power customers to subscribe to their "PowerSaver" automated demand response program- you don't have to give the utility control over your thermostat set-point, or even enable the Wi-Fi features if you don't want to (but the utility will pay you for that access), which allows them to avoid more expensive grid-storage or fast-ramping peaker solutions for those grid stabilization services. With utility control over the thermostat they can pre-cool the thermal mass of the houses when there's an excess of mid-day PV power available, which increased the mid-day load to better match the power generated, lower the PM peak, and control the mid-day ramp to the PM peak. Those who want to retrofit a smart thermostat can get an $85 rebate on the cost of the thermostat too.

    The upcharge for Carter Scott's Net Zero Energy house developments in MA are also less than $40K compared to similar sized code-min houses in comparable neighborhoods & towns, and it's getting cheaper every year.

    Of course this could all be wishful thinking on my part too(?).

  12. user-1052275 | | #12

    Dana, my comment was directed at Bruce, not you
    Sorry for not making that clearer. I think Bruce is the wishful thinker, not you.

  13. Expert Member
    Dana Dorsett | | #13

    I understood that...
    I understood, but used it as an excuse to continue my prior rant! :-)

    And to that end...

    Like Austin Texas, I don't expect to see a significant uptick in CA new house prices when Net Zero becomes code minimum. Updated methods & materials costs will be wrung out by the volumes, and there should be a knock-on effects that extend to other western US house markets.

    Net Zero will never be more expensive than when it's a one-off custom house design, as it has been for most of the US to date. With the falling cost of solar and the increasing efficiency of heat pumps over time there will be trade offs on how to get there, but there's no doubt that it can get there for much lower cost than the $40K (or even the $21K post-subsidy, or $16 sweat-equity) cost adders being used in Bruce's article.

    Installed rooftop PV today in the US averages ~$3.50/watt, all-in, pre-subsidy, but it's under $2 in some US markets, and in Australia it's running about AU$1.63/watt (= USD$1.26/watt) using pretty much the same panels, inverters & racking, and artifact of a large and competitive market. See: (all pricing is in Australian dollars = 77 US cents.) Australian installers take lower gross margins, and have lower marketing & advertising costs than in the US since there it's a commodity, with little hand-holding/education of the customer required. By 2020 the installed price in Australia will be under a buck a watt USD.

    That can happen here too (with state & national policy support), and when that happens the cash outlay of getting to Net Zero is going to be substantially lower than when Bruce built his house.

    And when PV is that cheap, the whole notion that electricity price inflation will be 3% year-on-year (rather than the actual 50 year DE-flationary trend), becomes completely impossible, since the levelized cost of that home-brew power will be WAY below residential-retail rates. Even with battery storage at today's $500/kwh (installed) buck a watt solar beats retail in many US markets. Even fairly small batteries can make a huge difference in how much grid power is needed, and are becoming a hot commodity in Australia's expensive retail electricity market:

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