Economics-Does an energy audit out perform interest on a savings account?
This time of year tax return checks are starting to come in for a multitude of American households. I usually use mine to buy necessities like new tires, pay down some debt, and if there is a small amount left over I can put it in savings. Currently, savings accounts don't pay out much in interest so where can one invest money to receive bigger returns than the bank will give? Most investments include risk, but investing in energy efficiency is very low risk. I looked at how an energy audit and a single repair would stack up to a savings account.
I found three houses that I have audited recently, one small, one medium, and one large. Each of these homes had different issues at the top of their priority list. I included in their analysis the price for the audit, the estimated price of the most important repair, and the estimated savings. Comparing to and contrasting from each of these audits I used a fictitious savings account with an invested principle equal to the cost of the audit and repair with a 0.35% annual interest rate compounded monthly. Interest rates change and home improvements degrade over time. We have assumed that the interest rate will be steady for all time or at least for the next 50 years. The likelihood that it will go up considerably is slim. I accounted for a degrading home improvement by applying a fractional multiplier to the monthly savings which shrinks from 1 to .606 over the course of 50 years. This is enough to shrink the savings to only 5 percent of the original value by the fiftieth year. This isn't perfect. Some improvements like window caulking need to be repeated every ten or so years and equipment like an air conditioner may need replaced every ten-twenty years. However, if the caulking of windows is not done, you would lose more money each year (this is not calculated into the savings account as a negative) and equipment would have to be replaced whether it was efficient or not. All of this considered, I do not believe a more precise analysis would be more accurate. The value gained from a home energy audit is first, the knowledge of how severely a change needs to be made and second, what change would give you the greatest bang for your buck.
The first home I want to examine is the smallest. This home was audited for less than $200 but had the most expensive initial repair- it needed a better space heater. At about $15,000, a heat pump is not what you want to hear as your best course of action. Unless your tax return is enormous, this could really be a problem. But lets compare our options. Option 1: put the $15,183.53 in the savings account. In the first month alone you earn $4.43 in interest, after ten years your savings have increased by nearly $540. Option 2: You get the audit and upgrade your furnace to a heat pump and you start off $15,183.53 in the hole. By year ten you are still in the hole over seven thousand dollars. But fear not, each year you are saving nearly $850 dollars on your energy bills so within the first twenty years you have broken even and by year fifty your energy savings have actually surpassed the $18,000 in the bank account alternative. This would take forever, or at least longer than most people stay in one home. Eventually, though, if you stayed in the home long enough, the power of compound interest would once again overtake the degrading savings and in the extremely long term (428 years) the bank account wins and will stay on top for ever unless a new investment in efficiency is made.
A bigger house will have a more expensive audit. But this house had a relatively cheap fix to eliminate the majority of the energy loss. All in for $990.88 this home could expect to see a little more then $10 in savings per month while $990.88 in an account would yield only 9 cents in the first month. None the less, this home sees the audit and repairs payed for by year eight and the repairs out perform the bank account by year eighteen. At that point, the improvements are earning 27 1/2 times as much as money in the bank.
Some might say that eighteen years is still too long a period to consider the investment prospects of energy savings. It is trickle-in, not lump-sum so it can go unnoticed. But lets consider one more home. The medium home, about half the size of the big home and twice the size of the small home, has an audit and estimated repair cost of only $665.07. That amount could earn 19 cents the first month in the bank or over thirteen dollars if invested in the home. This scenario takes advantage of the cheaper audit and the fact that larger homes are often built to a greater quality standard and cheaper repairs can have a greater impact on energy savings. By year four the investment has paid itself off and by year eight, the energy savings have eclipsed the cash in the bank account.
Once again, I have to argue that if you pay a utility bill, your best investment is in efficiency. Better still, unlike interest, savings are not taxed.