Financing Energy Efficiency Upgrades
Financial Evaluation Tools
You can prioritize energy upgrades simply by doing an energy audit and creating an upgrade plan. (See Eco-Friendly Measures are Good for the Environment and Business.) This will allow you to select projects that can be done for the least cost and begin generating savings to offset the expense of future projects. Once these projects are complete, a business will often see an opportunity for a larger upgrade that may require more complex financing. There are two common evaluation tools a business can use to determine if the cost of an upgrade is worthwhile financially—simple payback and internal rate of return.
Simple payback is the number of years it takes to recover the cost of the energy upgrade based on the energy savings, or when that upgrade will create positive cash flow. Usually a simple payback under four years indicates a worthwhile project; a simple payback of less than 1.5 years is an excellent opportunity and should be implemented as soon as possible. Achieving positive cash flow in less than four years is not even necessary for the energy efficiency upgrade to be financially successful. The monthly energy savings need not equal or exceed the payment for the upgrade, as long as the savings are at a rate that you find acceptable (i.e. greater than the interest rate paid on a savings account).
The Internal Rate of Return (IRR) can help compare the financial results of an upgrade against other investments. IRR, sometimes referred to as yield, is the return rate earned on an investment, and is used to compare against alternative investment options. It is the rate of return needed on an investment to make the net present value (NPV) of the investment equal to zero. (For more information and to calculate the IRR for a project, check out the Financial Calculator on the ENERGY STAR website.)
Types of Finance Options
Cash—A cash purchase almost always makes the most sense if your business is financially healthy. If you can raise the cash you’ll avoid interest changes on loans. In turn, all of your energy efficiency savings go directly to your bottom-line.
Generally, a business should use cash for relatively simple, less expensive efficiency improvements such as programmable thermostats, occupancy sensors, LED exit signs, or office equipment. Larger, more complex and expensive improvements—such as a complete lighting upgrade, a new HVAC system, boiler or windows, etc.—make sense to finance over time and may require a loan.
