E
Estimating the Net Costs and Benefits of Energy Savings

As described in this appendix, the question of whether an energy-efficient option will result in net cost or savings to the consumer depends on various considerations and can differ from consumer to consumer. For a product with a first cost higher than its less efficient equivalent, such as a compact fluorescent lamp (CFL) compared with an incandescent lamp, the savings would result from lower energy expenditures over the economic life of the product. However, those savings depend on the price of energy and the intensity of usage. For example, when replacing an incandescent lamp with a CFL in a fixture that is used for only a few hours per year, it would take many years for the higher initial cost of the CFL to be recouped, whereas a lamp used continuously would pay off the increased cost within a month. Similarly, high-priced energy increases the payoff of the energy-efficient product.

The answer to the question of whether there is a net cost or benefit also depends on the interest rate that the consumer must pay to finance the higher-cost, more efficient product. In some cases the customer has no ability to borrow the additional purchase price at any interest rate. More generally, customers can use their credit cards, borrowing the money at an interest rate of about 20 percent per year. In still other cases, the additional purchase price is paid from money in a checking account that earns no interest. An energy-saving product might be out of the question for the customer who cannot afford the additional cost, might be of marginal benefit for the customer using a credit card, and might be of large net benefit to the customer paying a zero interest rate.

Analysts attempt to measure energy savings to consumers by means of various measures. They often use the net present value (NPV) of the energy savings,



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E Estimating the Net Costs and Benefits of Energy Savings A s described in this appendix, the question of whether an energy-efficient option will result in net cost or savings to the consumer depends on vari- ous considerations and can differ from consumer to consumer. For a product with a first cost higher than its less efficient equivalent, such as a compact fluorescent lamp (CFL) compared with an incandescent lamp, the savings would result from lower energy expenditures over the economic life of the product. However, those savings depend on the price of energy and the intensity of usage. For example, when replacing an incandescent lamp with a CFL in a fixture that is used for only a few hours per year, it would take many years for the higher initial cost of the CFL to be recouped, whereas a lamp used continuously would pay off the increased cost within a month. Similarly, high-priced energy increases the pay- off of the energy-efficient product. The answer to the question of whether there is a net cost or benefit also depends on the interest rate that the consumer must pay to finance the higher-cost, more efficient product. In some cases the customer has no ability to borrow the additional purchase price at any interest rate. More generally, customers can use their credit cards, borrowing the money at an interest rate of about 20 percent per year. In still other cases, the additional purchase price is paid from money in a checking account that earns no interest. An energy-saving product might be out of the question for the customer who cannot afford the additional cost, might be of marginal benefit for the customer using a credit card, and might be of large net benefit to the customer paying a zero interest rate. Analysts attempt to measure energy savings to consumers by means of vari- ous measures. They often use the net present value (NPV) of the energy savings, 

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8 Real Prospects for Energy Efficiency in the United States computed using a particular interest rate, minus the initial purchase price. A varia- tion on this method is to calculate the return on investment, or ROI. This method calculates the interest rate implicit in equating the higher initial cost to the stream of energy savings over time. For example, if an efficient air conditioner costs $300 more than a less efficient model and saves $30 per year in electricity, the ROI is approximately 10 percent. For the more efficient air conditioner, there is no net savings for someone who would have to pay a credit card interest rate, but a large savings for someone taking the money from a checking account. The ROI and NPV depend both on the annual savings and on how long the air conditioner provides these savings—for example, if the building in which the air conditioner is installed will be torn down and the air conditioner destroyed in 3 years, that is the relevant period over which to calculate the return.