- An insulation upgrade can save on long-term energy costs, but requires a large upfront investment.
- Payback is an excellent tool for predicting the potential return on investment.
- Payback calculations include installation and energy costs, insulation values, heating system efficiency, and climate.
Adding insulation to walls and ceilings is a great way to save on energy costs and increase occupant comfort. However, an insulation upgrade can come with large upfront costs. In a competitive economy, operating budgets are limited and any energy-efficiency project has to be financially sound. Simple payback is an excellent tool for evaluating the risks associated with a project and for demonstrating the potential return on investment.
Payback is the amount of time—typically in years—for the total cash flow from a project to reach zero. Cash flows include any initial and subsequent costs associated with an energy project, as well as any savings directly relating to it. Even if cash flows vary over time, payback is easy to understand and calculate.
Calculating payback will help you to estimate the cost effectiveness of adding insulation in terms of the years to payback for savings in heating costs. For simplicity, the calculation will be limited to the impact of an insulation upgrade on the heating bill—the same insulation will help reduce cooling costs as well.
The formula for calculating payback is a follows:
P = CI x R1 x R2 x E
CE x [R2 - R1] x HDD x 24
- P is payback in years
- CI is the cost of insulation in dollars per square foot
- R1 is the initial R-value of the insulation
- R2 is the final R-value of the insulation
- E is the efficiency of the heating system
- CE is the cost of energy in dollars per British thermal units (Btu)
- HDD is the heating degree days for your location
- 24 is a multiplier to convert heating degree days to heating hours (24 hours per day)
R-value is a measure of the insulation's resistance to heat flow. The higher the R-value, the greater the effectiveness of the insulation. Heating degree days are measurements of outdoor air temperature and are designed to reflect the demand for heating. HDD data for your location can be found on the National Climate Data Center website.
Efficiency (E) values of natural gas, heating oil, and propane heating systems typically range from 0.6 to 0.96; for electric resistance heating, use 1.0. Heat pumps have an efficiency rating greater than 100%; use 1.6 to 2.4 for air-source heat pumps, and 2.8 to 3.5 for ground-source models. To calculate fuel cost for different heating systems, they must be made energy-equivalent. The following table provides the Btu content of typical heating system fuels, along with average prices to calculate the price per Btu.
| Energy Source|| Btu Content||Cost/Unit* ||$/Btu*
|| 3,412 Btu/kWh
| Natural Gas
|| 103,000 Btu/ccf
| #2 Fuel Oil
|| 140,000 Btu/gallon
|| 91,600 Btu/gallon
| * For estimating purposes only; prices may vary
To fully understand how payback works, it is a good idea to see the concept in action. Take for example, an increase in roof insulation from R-19 to R-38. The facility uses a natural gas furnace that is 88% efficient and the current price for natural gas is $1.20 per ccf. The total installation cost of the insulation is 18 cents per square foot. The total heating degree days for your location is 6,000. By plugging these numbers into the formula, you can obtain the payback:
3.48 = 0.18 x 19 x 38 x 0.88
$0.0000120 x 19 x 6,000 x 24
The expected payback period for this scenario is approximately 3.5 years. This could change if one of the factors is altered. For example, if natural gas prices rise to $1.40 per ccf, then the payback would be reduced to less than three years.
When To Use Payback
Payback calculations work best for uniform sections of the building. For example, you can estimate payback period for multiple areas of a building if you start with the same amount of insulation and add the same amount. For areas with varying levels of insulation, payback must be calculated separately. Variations in energy prices and the changing value of money over time can also distort the accuracy of payback period calculations. For insulation projects where future costs and benefits are fairly well known however, payback can be an effective tool for comparing different upgrade options.