The Big Payback: Will Home Improvements Save You Money?

When managers of commercial, industrial and even government-owned facilities consider an investment in energy efficiency or renewable energy, they are primarily interested in the financial return on investment. Different organizations will have their own standards for how long an acceptable payback period is, but unless there are other compelling benefits to a project, everyone will agree that it should—at worst—pay for itself before the end of its useful life.

For those of us with good intentions but limited resources, it’s important to think through this process when faced with energy-saving opportunities at home. A few years ago, some LED light bulbs cost $90, a sum that only keen early adopters would pay. Now that LED bulbs can be had for under $10, is it worth it to you? Let’s find out.

Say you have a light in your kitchen that stays on for four hours every day, or 1,460 hours in a year. If you pay $0.12 per kilowatt-hour of electricity, then a 60-watt incandescent bulb costs $10.51 per year to operate (0.06 kW x 1,460 hours x $0.12/kWh). A $9 LED replacement is just as bright but uses 11 watts, so it costs $1.93 to operate for a year (a savings of $8.58). The simple payback period is the project cost divided by the annual savings, in this case one year plus a couple of weeks. After that, you’ve got an extra eight bucks or so per year to use for something else until the LED bulb dies; it has a rated life of 25,000 hours, so at 1,460 hours per year, it should last about 17 years. This seems like a pretty good investment—even if you move, you can take the bulbs with you, Money Pit-style.

No conservation measure can save you more in a year than the total amount you spend on utilities—the average household in Georgia spends about $2,000 per year on energy—so it is important to track your bills over time and know how they’re calculated. Fancy light bulbs are a low-risk investment, but is it worth ditching an old but working refrigerator for a more efficient one? Often it isn’t, at least if your only motive is energy cost savings. But if you must replace a piece of equipment, and you have a choice between one model and a more expensive and efficient one, your payback analysis should be based on the cost difference and relative energy savings between the two. In these cases the payback is usually pretty good, especially if rebates or tax credits apply.

Things get tricky when you want to invest in projects to save on heating and cooling. How do you know how much of your annual utility costs are for air conditioning versus laundry, cooking or water heating? Luckily, we’re at a great time of year to find out—what we call the “shoulder season,” when you don’t need AC or heat. Assuming you do just about everything else the same year-round, your bills for this part of the year and around April will show you your baseline, non-HVAC-related energy use. Deduct that amount from your annual usage to estimate how much energy you use for heating and cooling. Remember that some portion of your electric and gas bills is a flat, monthly “customer service” or similar charge that won’t change with usage.

If you’re looking into a large and expensive home improvement project, it is worthwhile to have a consultant run a computer energy model of your house to evaluate the energy savings potential of different options. This is the best way to know how cost-effective your planned improvements are, weighing in other factors, such as how long you intend to keep the house and the potential effects on resale value. Remember that if you need to do a project anyway, such as replace shingles, you want to calculate the payback for energy efficiency options based on the relative cost between more efficient products or methods (e.g. more reflective roofing) and the bare minimum option (e.g. basic shingles), not the full cost of the project.

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