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Business Energy Efficiency Analysis

For business owners to make rational business decisions about which energy efficiency actions are the most cost-effective to implement, cost/benefit analysis provides a useful set of tools. There are various levels of this type of analysis, from very simple to extremely complex.

While many energy efficiency investments appear to be more expensive than less environmentally sound choices, a careful long-term analysis of them most often reveals that the greenest upgrades or investments are often the most cost-effective over the long term, not simply by considering the initial cost of investment. Most energy efficiency measures have a relatively short payback period and provide good returns on your investment.

As energy prices continue to escalate, the affordability of efficiency becomes much clearer. To analyze the economic impacts of your energy efficiency measures, you can use two basic economic analysis tools.

Simple Cost Payback Analysis

In order to make rational business decisions about which energy efficiency actions to implement, you may wish to run a simple cost payback analysis. In this method, the total initial cost of the improvement is divided by the first year energy cost savings produced by the improvement. This method yields the number of years required for the improvement to pay for itself. Cost payback analyses can be far more complex and include many other variables, but let’s take a look at a simple, straight-forward example.

Let’s look at the replacement of incandescent lights. If your business currently has, say, 100 incandescent bulbs and wishes to replace them with modern compact fluorescent bulbs, the calculations would be as follows:

100 new compact fluorescent bulbs, at $5/bulb, would cost $500.

Each old incandescent bulb is 100 watt and is on for 18 hours/day for 260 days/year, thus using 468 kilowatt hours of energy (100 X 18 X 260 = 468,000). At an average rate of 10¢ per kWh, this would cost approximately $47/year/bulb in energy. For 100 bulbs then, this amounts to about $470 annually in electric bills.

New compact fluorescent bulbs use only 20 watts of energy for the same time and days, (20 X 18 X 260 = 93,600) thus using only about 94 kilowatts of energy, costing only $9.40 annually or $94 for all 100 bulbs annually.

Thus, if you replace the older less efficient bulbs, the yearly savings would be $376 ($470 $94 = $376). If you divide the initial cost of the upgrade by the first year cost savings, your payback period is shown (in years).

Cost of upgrade $500 / Savings per year $376 = 1.33 years payback period.

Thus, the full cost of upgrading all 100 of the incandescent bulbs to energy efficient compact fluorescent would be paid back in about 16 months. Over a 10 year period, this upgrade would save $3,760 dollars in electricity costs alone. This assumes that the actual costs paid for electricity will not rise. Of course, if the cost for electricity does rise (and no one actually expects the price to go down over the next 10 years), your savings would be even greater. This simple analysis also doesn’t take into account that, over that 10 year period, you would not have to replace those new bulbs, nor would you have to spend maintenance time doing such replacements, or disposing of the worn out incandescent bulbs.

Simple Return on Investment Analysis

Another standard measure of economic feasibility is the return on investment formula. This is a measure of the percentage return provided by a particular investment. The standard formula for return on investment (ROI) is:

Net return / capital cost of investment = percentage return on investment

For the net return figure, you need to determine the life of the investment (in years) and multiply it by net annual savings. Use the net annual savings figure that you generated in the cost payback analysis. Then deduct the initial capital cost.

Net annual savings x life of investment capital cost = net return

Thus, for our example, if we assume a 10 year life for the new bulbs, our Net Return is:

$376 X 10 = $3,760 $500 capital costs = $3,260 net return

Then, using this net return figure, our return on investment (ROI) is:

$3,260 net return / $500 capital costs = 652 percent ROI = the return on the investment over a 10 year period.

Then, by dividing that figure by the years of life of the investment, you have a
652 / 10 = 65.2 percent annualized rate of return

These formulas can additionally include calculations to discount the dollar amounts over time and other more sophisticated approaches. For example, full life cycle cost analyses are a more in depth alternative to return on investment analyses. This simple approach, however, can provide you with a quick and simple way to compare energy efficiency investments with other business investment choices. In addition, remember that there are many other valuable non economic benefits to conserving energy in your business.
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This article has been excerpted from Chapter 6: Green Business Energy Use, Greening Your Business: The Hands On Guide to Creating a Successful and Sustainable Business by Daniel Sitarz. This 320 page book contains hundreds of energy savings tips and tricks, dozens of computer fillable business assessment forms, energy calculation Excel® spreadsheets, and additional publications on its included CD. This book/CD set is available from most brick and mortar and online booksellers for $29.95, ISBN 978 1 892949 46 2. For more information, please see www.GreeningYourBusiness.org

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