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By David Cosaboon
December 2012 -
Energy Efficiency Article Use Policy
Low- and no-cost measures to address energy-wasting systems in facilities typically are easy to implement, but getting funding for capital-improvement measures can be more difficult. To build a business case and determine if an identified energy-conservation measure is financially feasible, managers will have to perform an economic analysis.
One key metric decision makers use is a project's ROI, which managers can calculate by subtracting the implementation costs from the cumulative savings and dividing the result by the implementation costs. The cumulative savings are the projected savings associated with an energy-efficiency measure over the life cycle of a retrofit.
Consider the installation of a VFD on a pump as an energy-saving opportunity. A manager projects the VFD will reduce the pump's annual operating costs by $750. Assuming an installation cost of $8,000 and a VFD life cycle of 15 years, the cumulative savings would be $11,250, and the ROI would be 40 percent. This ROI is good, but this simple example negates depreciation and the time value of money.
An ROI of less than zero indicates that a project does not pay back, whereas a return on investment greater than one indicates a project that does pay back. The higher the ROI, the greater the financial benefit of the initiative compared to other options.
The ROI is an important financial metric to consider when weighing the pros and cons of various conservation measures. One project might have a higher initial cost than another, but it might result in a much higher ROI.
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