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Does Adding Insulation Pay Off?

Key Points
  • 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.

Insulation contractorAdding 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.

Calculating payback

Payback is the amount of time—typically in years—for the total cash flow from a project to reach zero. Cash flows all the costs and savings associated with a project. Even if cash flows vary over time, payback is easy to understand and calculate.

Calculating payback will help you 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 as follows:

Insulation chalkboard

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 ContentCost/Unit* $/Btu* 
 Electricity  3,412 Btu/kWh  $0.12/kWh  $0.0000351
 Natural Gas  103,000 Btu/ccf  $0.90/ccf  $0.0000090
 #2 Fuel Oil  140,000 Btu/gallon  $3.50/gallon  $0.0000250
 Propane  91,600 Btu/gallon  $2.25/gallon  $0.0000246
 * For estimating purposes only; prices may vary

To fully understand how payback works, it's 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 percent efficient and the current price for natural gas is $0.90 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:

Insulation chalkboard

The expected payback period for this scenario is approximately 4.6 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.

How accurate is payback in predicting financial outcomes? Money changes value over time, so payback is limited as a financial tool in some applications. For insulation projects where future costs and benefits are fairly well known, however, payback can be an effective tool for comparing different upgrade options.

Image source: iStock 

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