Banish Payback

green_house-300x300Every conversation about zero energy homes (ZEHs) eventually comes around to the question of “cost.” The negative connotation of added cost and, even worse, “payback” always puts ZEH advocates at a disadvantage. For years, I’ve encouraged advocates to call energy expenditures investments rather than “costs that must be recovered”.  So, let’s banish the entire idea of “payback” and “payback period.”

Would anyone judge a stock investment or an interest bearing bank account by calculating how long it would take the earnings to equal the principal? No, that would be absurd. Likewise, it’s counter-productive to consider funds used for energy improvements to be costs. They are investments with a financial return that is both significant and predictable – both immediate and long-term.

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Which of these two houses cost more overall?

When you spend money to reduce energy use, you receive a tangible financial benefit that begins the first month and continues for as long as you own your home. Let’s say that you’re building a new zero energy home. You can calculate how much it will cost to increase insulation, reduce air leakage, improve equipment efficiency and add photovoltaic panels. In most cases the investment will be in the tens of thousands. This investment will return immediate benefits whether you finance the purchase or pay with cash.

To illustrate the idea, let’s use an example of an investment of $40,000 in energy efficiency measures needed to bring a new house to zero energy. In my area, financial incentives from the electric utility, state and federal government cover just under half and reduce the amount to $21,000.  If you finance this home with a conventional 30-year mortgage,  with current mortgage interest rates at 4%, you’ll pay $50 per month for each $10,000 you add to your principal amount. Let’s assume that you financed the additional construction cost of $21,000 (after incentives), then your monthly added payment for energy improvements  would be $100.  Based on energy modeling, let’s, assume that the home will save $200 per month for energy.

 

That $200 return starts the first month you live in your house,  and in this example, it exceeds the added monthly mortgage payment whether incentives were used or not.

Financing Summary Additional Investment Monthly Payment (30 yrs at 4% ) Monthly Energy Savings Net Return
With Incentives $21,000 $100 $200 $100
Without Incentives $40,000 $192 $200 $8

You can also turn this calculation around by first looking at savings and then calculating how much money you could afford to invest. By building a home that saves $200 per month, you could afford to invest $40,000 in energy improvements.

In return for your investment, you pay nothing or very little for energy from the day you walk in the door. The monthly savings almost always offset the additional mortgage payment. Many cost-effectively built zero energy homes will realize a profit on their investment during the very first month, as in this example. It’s a very simple idea. If the monthly energy savings exceed the monthly financing cost, you win!

— Bruce Sullivan, BASE zero, LLC, www.basezero.biz

– See more at: Zero Energy Project

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