When creating a budget for an energy efficiency project, it’s essential to consider the factors that impact the cost. Understanding these factors can help you build a strong business case for efficiency and maximize your investment.
Energy efficiency can significantly benefit your organization. Moreover, it can increase profits, promote your company, and enhance marketability among environmentally conscientious customers.
Cost
Cost is a significant factor when budgeting for an energy efficiency project. Some projects can offer immediate cost savings through lower utility bills, while others will take longer to repay a capital investment.
In addition to financial costs, a business must account for operational and non-financial costs to determine the project’s total cost. These costs include installation, project management, training, and maintenance.
Many businesses have adopted efficiency upgrades as a way to reduce their operating expenses and meet sustainability objectives. These upgrades can be completed through internal resources or an energy service company (ESCO) partnership.
ESCOs provide turnkey energy efficiency solutions that often pay for themselves for energy savings over time. These solutions include lighting retrofits, HVAC upgrades, and renewable energy technologies.
Another common way to fund an energy efficiency project is through a loan obtained from a financial institution. These loans can be up to 100% financing, with various interest rates and payback periods.
Whether you’re a commercial or residential property owner, building manager, or a building owner’s representative, the first step in budgeting for an energy efficiency project is understanding your business’s specific goals and objectives. Then, you can use energy and financial metrics to build a strong case for the project. Comparing electric rates with websites like EnergyPricing.com would also be beneficial since it gives you an overview of what to expect with the cost, and you can decide carefully with your electric planning.
Energy Savings
Energy efficiency can save businesses money on their utility bills and improve the quality of their facilities. Whether switching out your lighting to LED bulbs or replacing your office equipment with Energy Star-qualified products, energy-efficient upgrades are an investment that will pay off in the long run.
When budgeting for an energy efficiency project, there are many factors to consider, from a business’s actual energy usage and future electricity rates to the amount of energy savings that can be achieved. To get the most out of an energy efficiency upgrade, a business owner and contractor should establish an accurate energy baseline to begin their calculations.
A contractor can help a business identify energy conservation measures that can be installed at a reasonable cost and explain how each step could affect a business’s monthly bill. However, the most crucial factor to consider is the energy savings that can be achieved by implementing these measures.
In addition to the financial benefits, energy-efficient measures can reduce greenhouse gas emissions and improve energy performance. This is especially important for buildings in areas with poor air quality. As the climate changes, governments are investing in energy efficiency measures.
Payback Period
When planning for an energy efficiency project, it is essential to understand the payback period. This is the time required for a business to recover its initial investment in a project. It is also a key factor to consider when budgeting for any project because it can determine how much a company is willing to invest.
The payback period is also a good indicator of whether or not a project will be profitable. If a task takes too long to reach breakeven, it could negatively affect the project’s profitability.
Some energy efficiency measures offer quicker payback periods than others. Lighting retrofits, ventilation upgrades and building controls have the fastest payback periods, around 2-3 years on average. Motor replacements, heating and air conditioning upgrades have a slightly more extended payback period, typically around 5 years on average.
However, the payback period is simplistic and does not consider all cash flows. This can make it hard to identify investments that will provide a return on investment in the long run. It may also lead to sub-optimal capital budgeting decisions.
Taxes
The cost of an energy efficiency project may be influenced by taxes that may be associated with it. These taxes can include property, income, sales, and other taxes.
For example, if a business decides to improve its efficiency by adding new HVAC equipment or replacing an old roof, it could qualify for a deduction on its tax return. This deduction would reduce the money it needs to set aside for these projects and, thus, increase its cash flow.
Another type of tax that can affect the cost of an energy efficiency project is a carbon tax. Studies have shown that a carbon tax can lower energy costs while reducing CO2 emissions.
In addition to reducing carbon dioxide emissions, carbon taxes can encourage more energy efficiency improvements and create jobs. According to research, this can lower overall budgets by increasing economic growth and generating additional government revenue.
Some energy-related tax credits are expected to expire in the next few years, while others will be extended through legislation. For instance, the Inflation Reduction Act of 2022 retroactively extends two energy-related tax credits. The bill also reinstates a tax break to purchase new electric vehicles. This may help lower the price of these cars, which can be a good option for buyers with higher incomes.
