When you're considering a retrofit to building equipment or spaces to save energy, you want to be assured of a few things regarding your investment. One major piece is the payback period or return on investment (ROI) of your capital investment. A payback period is the amount of time before the cash flows from your investment repay the initial investment amount.
An HVAC system upgrade can provide maintenance cost savings, employee productivity gains, time savings for your staff dealing with customer or tenant complaints, and substantial progress toward your corporate sustainability goals.
You have options as you're considering equipment, software and engineering firms. In this arena for technology disruption, the "you get what you pay for" rule doesn't always apply. Depending on installation and equipment costs, a very good, high-tech solution could be less costly to install and maintain, competing with less capable, industry-standard energy management systems.
Calculating payback depends on a few factors, some of which vary by state and utility provider, such as energy prices, interest rates and available energy efficiency rebate programs.
The Simple Payback Period Calculation for HVAC Upgrades
Step 1: You will need the following pieces of information:
- Your average current energy payment per period (usually per month or per year) vs. your estimated energy payment per period with the retrofit. The average payment amount should normalize for weather and seasonal variations.
- Subtracting your estimated payment from your current payment will provide you with energy savings per period.
- If that timeframe is one month, multiply it by 12 to find your estimated annual savings (S).
- The initial value (Vi) of the retrofit investment.
P = Vi / S
What Other Metrics Should You Consider?
You can also use these figures to calculate the net present value (NPV) of the upgrade. Additionally, you may want to consider how significant the contribution of this retrofit will be to your net operating income (NOI). A larger amount of annual energy cost savings combined with the gains in productivity and facility administration efficiency will have larger positive impacts on your NOI.
Perhaps, you have made an investment in an emergy management system (EMS) recently, but the payback period is longer than is optimal for your business needs. You can consider using an energy conservation measure (ECM), such as a smart HVAC upgrade or advanced lighting retrofit to help pay for an EMS with a longer payback period.
Research Makes the Case for Smart HVAC Upgrades
The more energy your building uses, the more potential energy savings you could achieve annually with a smart HVAC and building controls upgrade. Strong correlations exist between building square footage, building energy use and energy cost savings, as shown in a 1994 study of the performance of energy management systems by Oregon State University.
In 2011, the UCLA Institute of Environment and Sustainability, in cooperation with CB Richard Ellis, produced a study on the trends and challenges of increasing building energy efficiency in retrofitting commercial real estate.
The researchers found that commercial real estate buildings constitute 18% of all U.S. energy consumption and that energy saving retrofits hold great potential for significant consumption reductions. Research focused on insulation, lighting, HVAC, and solar retrofit projects and found that lighting retrofits are often the least expensive retrofit. HVAC upgrades are often the most expensive to install per square foot, but they offer greater potential energy cost savings after insulation is optimized.
Retrofit report analysis and surveys conducted by the researchers suggested decision makers expect a three- to five-year payback on any energy efficiency retrofit.
Achieving a three-year payback (or less) requires honest conversations and transparent metrics from your contractor. There are several HVAC upgrade options that will get you there, but you should consider all benefits, compromises, capabilities and the lifespans of the systems you are evaluating before making a strictly financial decision.