Part 1 - Initial Return on Investment
"What is the return on the investment (ROI) for new lighting for the schools?... (total cost for changeover no matter where the money comes from and the savings.)" Jack, POWER blog subscriber
This blog post is written to answer a great question from our blog post yesterday from Jack.
We have been talking about all the benefits of investing in energy efficiency in schools, but haven't spent a lot of time talking about costs or return on investment from the total cost for changeover.
Comparing Old Technology with New Energy Efficient Technology
We have stayed away from that part of the conversation because there are so many different variables (...you will notice this is part 1, part 2 tomorrow..) when comparing the old technologies with new technologies.
But it is reasonable to suggest there is a tremendous amount of room for improvement since the average school is over 30 years old and even the average age of remodeled schools is pushing 16 years.
The best way to look at ROI is to look at specific project completed by Hovey Electric where the ROI is trackable. Gymnasium's are common among most schools and universities, so our project at Northwood University is a perfect example.
Gymnasium Lighting-Hach Gymnasium Northwood University
Gymnasium's typically have 400 watt Metal Halides in them. This is a fixture we have talked about repeatedly because it is so easy to make a case for their replacement. Here are some of the articles:
At Northwood University in Midland, MI, we replaced 86 400 Watt Metal Halide fixtures. The fixtures that were replaced, were actually only 8 years old. But the case for annual savings and utility incentives, made the return on investment just a little over 1.5 years.
Initial ROI vs Lifetime ROI
When looking at ROI, we created 2 classes of ROI calculations; Initial Return on Investment and Lifetime Return on Investment. We define initial ROI as the immediate payback from the original investment. You could call it break even analysis. If I invest today, how long will it take to get my investment back.
Lifetime ROI looks at the return over the lifetime of the project. In this case you would be saying If I invest today, what is the ROI over the lifetime in this project. This analysis can take a project that is borderline acceptable on paper to a remarkable project over the lifetime. Multiplying several thousand of dollars in annual savings can really add up over time. I will illustrate the difference in the Northwood numbers:
Initial Return on Investment (I-ROI)
Initial Investment: lights for a retrofit cost of approximately $31,100.00
Annual Savings: $16,000 per year
Calculating I-ROI with No Incentives:
Straight Payback, No incentives: Just under 24 months
($31,100 Upfront Investment/ $16,000 Annual Savings = 1.94 years)
Utility Incentive: $8500.00
Calculating I-ROI with Incentives:
Payback with Incentives: Just under 15 months
($31,100-$8,500 =$22,600 then $22,600 Upfront Investment/$16,000 Annual Savings = 1.41 years)
Therefore, Northwood got 100% of their investment back in the first 2 years without any incentive. The incentive accelerated that payback by simply reducing the amount the project cost the college.
Is Initial Return on Investment Enough?
I would argue that no, it is not enough. A decision maker could easily justify not completing a project due to the result from the Initial Return on Investment. Long term ROI or L-ROI, makes the argument for an upgrade much more compelling.
Need Help Figuring Out the Numbers?
Hovey Electric does calculations every for energy efficient decision making. Looking at the right numbers is the key to determining if the project makes good financial sense or not. Let us do the numbers for you or learn more from our FREE e-book; Business Owners Guide to Energy Efficiency (..works for schools too!)
The guide walks you through all of th key metrics you should look at when making decisions related to energy efficiency upgrades.
Does this make sense? Too complicated? Let us know what you think in the article below....