Cost-Effectiveness of Home Energy Retrofits

Are Energy Saving Retrofits Cost-Effective?

by Don Ames

weatherization program

Government and Utility based programs that offer weatherization and other energy saving retrofits are concerned about the cost-effectiveness of the program. Simply stated, how many months or years will it take for the cost of the work to pay us back in energy savings.

You and I should also be concerned with the length of the payback period.  We need to decide how we are going to handle the decision to spend money on a retrofit that will not pay us back in energy savings for a number of years - especially when the payback period is longer than the life expectancy of the product.

Let's look at this example:

You have an 80% efficient gas furnace that is 20 years old. You decide to upgrade the furnace with a 95%  model that will cost $3,500.00. The new furnace will save you $120.00 per year in heating costs. At that yearly payback amount, it will take about 29 years to get the $3,500.00 back in energy savings. The life expectancy of the new furnace is 25 years. Does this make energy saving sense?

The question remains, is it cost effective to replace the furnace? The simple answer, considering just the dollars and cents,  is no - it is not cost effective.

Other things to consider:

Now let's look at a few things that may effect your decision concerning the cost-effectiveness of a energy retrofit.

80% efficient

The old furnace, beyond it's life expectancy, may give-up-the-ghost on a very cold winters evening and the new furnace would have been worth it's weight in gold. The life expectancy of the old furnace is a consideration for keeping warm, but not necessarily a consideration for justifying the additional cost for energy efficiency.

The cost of gas will go up in the coming years and shorten the payback period. In the initial calculation, increased fuel cost were not factored in. It is difficult to forecast how much fuel costs will rise and therefore, fuel cost are usually not part of the payback calculation, but should be.

A new efficient furnace will contribute less carbon to the atmosphere and have less impact on global warming. Some might look at just the dollars and cents and decide the cost of the new furnace is not worth it, the payback period is too great. Others will look at the reduction of carbon and figure - the heck with calculating just a financial payback period, in carbon credits, the new furnace is cost effective right now.

Energy we don't use is energy we don't have to produce. The higher efficient furnace will use less power, which means the world will have to produce a little less power, which means the world can reduce carbon production and conserve natural resources. These are things that even a moderate environmentalist will use to effectively shorten and justify any payback period.

Yes, I know it takes power and natural resources to manufacture a new furnace. Realistically, the power and resources used to make a new furnace should be considered in the payback calculation. There is even a difference if the furnace is made in the U.S. where there are EPA guidelines or made in China without restrictions.

A work force is needed to build a furnace. Putting people to work is a great idea and important if people are going to be able to pay their power bills. For the person who is out of work, the heck with payback periods, just buy a new furnace.

Final Cost-Effective Calculation

how much power usage

It is my opinion that replacing a furnace or undertaking any other home energy saving work is a little more cost effect if the following items are true:

  • The home is in an area where coal fired power plants produce a majority of the power.
  • The retrofit does indeed use less energy or effectively reduce the amount of energy that is wasted.
  • The appliance or material is made in the U.S. by a laid off worker that drives an electric car that is recharged by a wind turbine.

Now that we have recognized a number of things, besides dollars and cents, that effect the cost-effectiveness of energy efficient retrofits, let's take a closer look at some additional determining factors.

Fuel Usage:

  • The more power a home uses the more potential there is for energy savings. Total fuel usage helps to determine the level of investment appropriate for a particular residence.

Fuel Costs:

  • The higher the fuel costs, the more cost-effective any retrofit will be.


  • The farther the outdoor temperature is from the indoor temperature, the more power is used for heating or cooling and the more power there is to be saved.

Existing Conditions:

  • Retrofit possibilities and the more energy a home wastes will determine the amount of cost and labor appropriate to spend on the home.
adding insulation

Retrofit Selection:

  • The cost-effectiveness of a retrofit package will depend on the skill of the energy auditor and their ability to put together an optimal plan.

Material Cost:

  • The final calculation of cost-effectiveness will depend on the retrofit design and the skillful selection and purchase of material.

Labor Efficiency:

  • If the inspectors, auditors, and contractors are well-trained, organized and well-managed, the home energy retrofits that they recommend and install are most likely to be cost-effective.
Back to the example with the 80%, 20 year old gas furnace, what do you think now, what would be your position on replacing the furnace as a cost-effective, energy saving retrofit? What would be your position on replacing the furnace to support a healthier environment, cleaner air, and a stable economy?
Here's what I would do. The minute the old furnace had a hic-cup, it would be gone and a shiny, new, high efficiency furnace would be sitting in it's place.

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Tags: air, cost-effective, energy, insulation, retrofits, save, sealing, weatherization


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Comment by Christopher Cadwell on October 19, 2011 at 10:37pm

Define "efficiency." = Health, comfort, durability and finally "energy savings" in that order. It took me awhile to get it; that I had efficiency all backwards.


If the furnace is cracked and or the furnace is inside the thermal boundary, then replacing it with sealed combustion yesterday is cost effective. If the blower fan blades are dirty and it only pushes half the air and grandmas room is cold, then it would be efficient to replace. If the cost of repairs would be wasteful, then it is cost effective to replace. 


Efficiency upgrades are cost effective.


"Government and Utility based programs that offer weatherization and other energy saving retrofits are concerned about the cost-effectiveness of the program." - define "offer." Offerings mixed up with cost effectiveness. Am I too drunk to understand any logic in that? Lol.





Comment by Ed Minch on October 14, 2011 at 1:32pm

We are looking at the wrong thing here.  The question is not "will the furnace save its entire cost over a number of years".  If it needs replacing anyway, the question "is will it pay back its INCREMENTAL cost".  If I have to replace a furnace, and a new 80% cost $2500 and a new 95% cost $3500 and the saving is $120 a year, then the extra expenditure will pay back in 8 years, faster if the cost of fuel goes up.  We find that it is still hard to sell environmental arguments to most people, and we have to stick to economic arguments.  That said, it is still possible to make an economic argument for replacing a heater that is not yet at it's useful life looking at these same factors.

Ed Minch

Comment by tedkidd on October 13, 2011 at 10:37am

Can we agree that "my refrigerator still works, so I'll wait until it breaks" is really stupid thinking if the old ones energy use is $300 a year and the new one $50?  That waiting until you run out of incandescents before replacing the top 5 used light bulbs with CFL's (or LED's) is not wise financial decision making?  


Most look at retrofit/efficiency work as individual products that can simply be plugged in, this is where the disconnect exists.   Taking the BPI classes I came to enjoy having my false preconceptions ripped apart, then rebuilt on an actual foundation of truth. The ability to understand the meaning of comprehensive approach requires a reorientation in the way we think. 


Jumping from an 80% efficient furnace to a 95% efficient furnace is no guarantee of energy savings.  A furnace is NOT a refrigerator.  It is not it's own independent system that you simply plug in and get effective operation.  A furnace's ability to operate effectively is highly dependent on a long chain of other factors that require subtle balance for optimal results.  


I save my customers 30-70% on their energy bills.  That is not done by waiting for a hic-cup, then replacing a furnace.  If you want to save big on energy, particularly if your equipment is fully depreciated (past life expectancy), waiting for a hic-cup doesn't save anything. 

It starts with understanding current conditions then spending some time with the model.  The typical result is you fix the house so you can aggressively down size your equipment, which will now work properly on your previously inadequate duct work, provide extremely long run cycles with super efficient output, with the result of  comfort going through the roof and energy consumption dropping through the the floor. 


We need to get unstuck from legacy thinking.  


Comment by Doris Ikle on October 13, 2011 at 9:55am

Don makes a good point that the cost-effectiveness of Home Energy Retrofits is a complex and uncertain calculation due to the many soft variables involved.  It becomes easier if, instead of asking "how many months or years will it take for the cost of the work to pay us back in energy savings" we asked "will the annual savings on the energy bill pay for the annual cost of the improvements." If the answer is yes, then the retrofit is affordable. Indeed, since, as Don points out, the cost of energy will go up, the retrofit will be profitable. Perhaps most important, if affordability rather than payback is considered, and the loan is long-term with a low interest rate (but not subsidized) the affordable group of improvements are more than double those chosen when payback is the criterion.  

As most  investments in energy retrofits are financed, comparing the annual costs and savings makes sense. If the house is sold before the loan has been repaid, the remaining value of the improvements to the new owner will presumably be reflected in the price. This justifies the seller paying off the remaining balance of the loan.        

Comment by Kelly Lerner on October 13, 2011 at 8:48am
I'd use an integrated approach that started out with air sealing and insulation before I laid out the cash for a new furnace. Or do them all at the same time so I would get the biggest bang for my buck. Comfort is also part of the equation. We buy products all the time to make ourselves more comfortable without even considering the ROI (return on investment). Thanks for the great thoughts.


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