returnoninvestment.auWhat spending brings back to a business
Notch 4 of 6 · Counting the years
Payback on an energy upgrade
A payback period is the number of years an upgrade takes to repay its capital cost out of what it saves. NSW Government guidance on lighting adds that when old equipment is due for replacement anyway, the more realistic cost to weigh is the extra paid for the efficient option over a standard, like-for-like one.
A guide published by Dotto. General information about estimating payback. The figures below are energy.gov.au’s general statements for whole sectors, not estimates for any particular building or business.
- The load
- The upgrade’s cost, or its extra cost over like-for-like
- The counterweight
- What it saves each year
- The reading
- Years until the cost is repaid
The sum, and the cost that belongs in it
The NSW Office of Environment and Heritage (as it was named in 2014) gives a payback period for each upgrade covered in its lighting technology report, and explains it as the number of years in which the capital cost would be repaid. The report dates from 2014; the NSW Government’s energy efficient lighting guide still links to it.
The report’s second point changes the answer. Where lighting is near the end of its life, it says the marginal cost of a high-efficiency system over a standard one is more realistic than the total cost, and that return calculations at that stage should weigh the difference in capital cost between replacing like for like and buying the efficient equipment.
- Extra cost of the efficient option over like-for-like
- $300
- Energy cost saved each year
- $100
- Payback period
- 3 years
$300 ÷ $100 a year = 3 years. Weighing the full price of the efficient option instead of the difference would make the payback look longer than the choice actually in front of the business (this guide’s reading of the report’s point).
What energy.gov.au says, upgrade by upgrade
energy.gov.au’s business pages give rough payback periods for many common upgrades. They are written as general ranges for a sector or a type of equipment.
| Upgrade | What energy.gov.au says | Page |
|---|---|---|
| High-efficiency motors | Can cost up to 40% more than standard motors, with a payback that can be under 2 years from the energy saved | Motors and variable speed drives |
| Variable speed drives, in chemicals and plastics | In some cases up to 50% energy savings, with a 3-year payback | Chemicals and plastics |
| Compressed air, in food and beverage | Improvements can often be made cheaply, with paybacks under 2 years | Food and beverage |
| LED lighting, in food and beverage | Payback under 2 years, with lower ongoing maintenance | Food and beverage |
| Lighting, in retail | Energy savings of up to 80%, with a typical payback of 1 to 4 years | Retail |
| Refrigeration, in commercial buildings | Many measures need capital outlay, but case studies indicate payback is often under 3 years | Building owners and tenants |
| Rooftop solar, in commercial buildings | Payback in as little as 3 years, because sunshine often falls in business hours and most of the energy is used on site | Building owners and tenants |
| Insulation and HVAC, in food and beverage | Payback can often be reached within 5 to 7 years | Food and beverage |
| Full-scale electrification of process heat | Can be costly, with payback often achievable within 5 to 7 years | Process heat and steam |
| Upgrades on fruit farms | Energy audits of 30 orchards and packing sheds in 10 growing regions found that, on average, fruit businesses could save $16,300 a year from cost-effective upgrades with a payback of 6 years or less | Agriculture |
The spread in the table runs from under 2 years to 5 to 7 years. A figure for a sector is a starting point for questions, not a promise for any one site.
Costs that sit beside the energy saving
energy.gov.au’s guidance on energy efficiency assessments says a whole-of-business view, going beyond cost and energy, gives a better understanding of an opportunity’s overall costs and benefits. It lists the factors that may be considered:
energy.gov.au, Conduct an energy efficiency assessment. © Commonwealth of Australia, CC BY 4.0.
- “shutdowns or downtime”
- “changes in production output”
- “changes in other process inputs, such as water or raw materials”
- “changes in maintenance costs”
- “hardware changes that make spare parts inventories obsolete”
- “business plans or forecasts that affect the lifetime or throughput of the process being affected”
- “costs of training or new skills”
- “occupational, health and safety impacts”
- “environmental impacts”
- “public relations and waste disposal costs”
- “project risks.”
It then suggests the payback period or cost savings of each improvement as a good starting point for setting priorities, with a business case that sets out the costs and benefits of each opportunity and fits the business’s own rules for approving capital spending. The NSW lighting report’s business case template asks for the payback period alongside the internal rate of return and net present value, so there payback is one measure among three. Net present value is explained in costs and benefits, the government’s way.
Getting the numbers: audits and meters
energy.gov.au describes three types of Australian Standard energy audit.
- Type 1, basic An overview of energy use and a broad estimate of savings with fairly short paybacks. Useful for smaller businesses, and for larger ones that have not looked at their efficiency before.
- Type 2, detailed A closer analysis that puts figures on potential savings from data about each site’s equipment and operating conditions, with a financial evaluation of the opportunities against agreed criteria.
- Type 3, precision subsystem Focused on one major subsystem, such as boilers or compressed air, with extra measurement to quantify the opportunities more accurately. Useful for larger businesses with specialist equipment or major production facilities.
energy.gov.au notes that auditor training and accreditation vary between states and territories. It also says detailed meter data can help build the business case for an upgrade by putting figures on the expected savings and payback, which can help with finance and grant applications. For a single appliance, it points to the Energy Rating Calculator for comparing running costs and estimating what a product really costs over its lifetime.
Paying for it
business.gov.au lists ways to fund energy improvements without paying the whole cost up front: leasing efficient equipment; on-bill financing, where the retailer pays for the equipment and is repaid through the energy bill; an energy performance contract with an energy service company, which uses the savings to cover the upgrade; and energy grants. Each one changes the cost side of the sum: the first three spread it over time, a grant reduces it (this guide’s reading).