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Door: Carbon footprint management, 18 September 2015


How do I calculate the payback period of an energy saving investment?

Taking energy saving measures is interesting for several reasons. For example, because it contributes to reducing CO2 emissions and simply because such an investment generates money. But when is such an investment economically viable? And how do you calculate the payback period of an energy-saving measure?

A payback period provides insight into the relationship between the investment of an energy-saving measure (minus any assigned subsidies or other tax benefits) and annual cost savings. Basically, a power-saving measure that is paid back within five years is considered economically profitable.

Simple payback calculation

money earned with energy savingsA payback period can be calculated using a simple formula. This simple calculation is sufficient in most cases to calculate the profitability of an energy saving measure. This simple calculation can be applied when the cash flow, during the lifetime of the taken measure is constant. The result of the calculation only gives insight in the time it takes to recover a given investment. The formula for calculating the payback period is as follows: Investment* of the measure divided by the savings ** (Thus: Investment / Savings).

* Investment for energy saving

All costs that are necessary to obtain an energy-saving measure fall within the concept of investment. In the item ‘investment’ must also be taken in account the possible revenues. Revenues, such as grants or tax arrangements, which are linked to some measures, can lead to a lower investment. Often it concerns the following costs or revenues:

-Purchase costs of certain equipment or technique;
-Construction and installation costs;
-Revenue from grants awarded;
-Revenue from old facilities / equipment;
-Demolition and disposal costs.

** Savings

To calculate the savings, you take the current integrated energy price. It regards full price, so including standing charge, transportation costs, et cetera. Often the VAT is not included in the calculation. For companies that cannot deduct the VAT (including foundations) VAT is taken into account. Taking energy-saving measures can also lead to lower maintenance or operating costs. Such returns should not be overlooked.

So when you enter our 5-step roadmap towards a carbon neutral business and you consider energy saving measures, you can use the preface calculation to examine if the investment is economically viable.

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