If you are considering investing in an energy-efficiency improvement for your home — for example, additional attic insulation or a photovoltaic system — you probably expect the investment will lower your energy bills. So it’s only natural to ask, “Is this a good investment?”
For example, let’s say that you are considering spending $5,000 on an improvement that will save you $350 a year on your energy bills. Does the investment make economic sense? The answer, of course, is “it depends.” Among the factors affecting such a decision:
Some of the items on this list — for example, the interest rate on a loan — are quantifiable. Others — for example, the rate of energy cost inflation — can only be estimated. And some — for example, how much one values having a reduced carbon footprint — can’t be quantified at all.
There are so many variables in this list, in fact, that some home performance contractors and solar equipment installers are sick and tired of hearing payback questions. The usual reaction from the sick-and-tired crowd is, “Nobody ever asks what the payback period is for a granite countertop or an SUV!”
(Where would we be without granite countertops? They’re such handy devices for making almost any argument…)
However, I’ve noticed that the people who make this speech are usually people who sell home improvements with a very long payback. You never hear CFL manufacturers make the same speech.
Let’s face it: payback matters. It isn’t the only factor in making home improvement decisions — other factors are important, including improved comfort and a smaller carbon footprint — but it’s an important one.
So now we come to the question: How should we calculate payback?
If you start diving into the world of payback calculations, you quickly learn that there are many ways to…