Selling with Rebates: The Simple Payback

  The easiest way to show a homeowner how their investment in high-efficient equipment will help their wallet is to use the "Simple Payback" Calculation.  This 'tried and true' sales tactic will quickly explain how many years before the additional investment to upgrade is paid off.  Of course, there are many features that a high-efficient system provides, like superior levels of comfort, wether it be climate control or just condenser noise just outside their children's bedroom.  These factors can be hard to quantify for most homeowners, and for replacement systems you will likely find they are not weighted as high as the almighty dollar.  So, although costs can vary drastically from Manufacturer to Manufacturer, or even Contractor to Contractor, try inserting your prices, rebates, etc. into the equation next time you recommend an upgrade.

As you can see, there are a few pieces of information needed to calculate the Simple Payback (in Years) for an upgrade in efficiency.  First, you will need to know the total cost (equipment/materials + Labor) of the installation of the base model equipment.  

 

In this example, we will say the replacement 13 SEER system will cost $5k.  Then, you will need to calculate the total cost of the 16 SEER/13 EER installation.  For example purposes, we will say the investment will cost the homeowner an additional $1,300, total $6,300.  The operating costs of the high-efficient system will save the homeowner a conservative estimate of $50 per year, based on the few run hours in MA & RI.  If you were to not include rebates and tax incentives, or the hard to quantify comfort, the system's simple payback would be an astonishing 26 years, well beyond the life expectancy of the system - maybe two systems!

If you were to introduce available local utility rebates, including the MA & RI Cool Smart Quality Installation Verification (QIV) ince..., this system would qualify for $650 paid to the homeowner!  This would be in addition to the $300 25C tax credit, extended through 2013.  By reducing the initial investment from $1,300 to $350, then taking into account the annual energy savings, this system would now have a simple payback of only 7 years!  Did I mention the system that qualifies for the rebate will likely qualify for a 0% Loan, for a period of up to 7 years!  Yes, you read that correctly!  Plus Mr. Or Mrs. Homeowner, you will be more comfortable with a much quieter system that will be installed with the highest of quality!  Where do I sign?

Excess Air

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Comment by tedkidd on June 7, 2013 at 3:45pm

Craig, I've been having much better luck with cost.  People can relate to and understand what things cost better than they can understand "payback".  

They also get the concept of leverage.  They like the idea of leveraging $1 into $2, or $1 into $3.  

They also get the concept of affordability.  If they can afford $50 a month but can't afford $200, selling payback on a $200 project doesn't really matter.  

So take the time to understand the wants and needs of homeowner and home, design solutions that fit, and leverage the savings so they can get more from the money they can afford.  If you can take $50 and leverage it into a $90 project where $40 is energy savings, everybody wins and discussions of "payback" don't enter in to confuse things.  

Isn't it nice to tailor solutions, fix problems, help people leverage their money and avoid discussions of "payback?"

BTW, what if a thing someone wants has a payback of "never" how do you get yourself out of that box you created for yourself?   

Comment by Craig Bird on June 7, 2013 at 11:07am

I think simple payback is the measure a homeowner can most relate to and understand - even though (and because) it is simple and leaves out other factors. My next statement after giving them and ESTIMATED payback, is that their savings continue to put money in their pocket after they have paid for themselves and of course the icing on the cake - comfort and health benefits, which it is hard to put a price on(and is very valuable to a customer!)

For ease of understanding, I think just stating the other issues that make the investment even better than paying back quickly, is sufficient. Rob makes great points - just make the statements without going through the complicated metric - energy costs will go up, savings can be reinvested etc

Comment by Ed Minch on June 7, 2013 at 8:53am

Following "savings" from a small sample can be very misleading.  I have been involved in scorekeeping of programs by three university research groups and this is about the sample size they requested

20 row houses

20 2 story houses

20 1 story houses

then an equal number of untreated house in each category for a control group.  And they all wanted more but recognized the difficulty.  The control group takes the cooperation of a larger entity, like one of those universities or a state or utility program.  Any thing less than this I would consider anecdotal as I have seen the control group add or subtract substantially to savings.

And I have not found a way to sell a retrofit without making simple payback part of the conversation.  You can use the cost of money, equivalent stock market performance, of any one of a number of other metric, but the people we are selling don't have the background or desire to use these methods.  Comfort is still the best sales too.

Comment by Rob Buchanan on June 7, 2013 at 7:26am

One thing that is lost in this conversation is how little the payback period actually reveals. There are marginally more complex, but vastly more explanatory than simple payback.

Simple payback includes no risk premium; there is no accounting for whether (how much) energy prices will increase. There is also no valuation for how homeowners can reinvest their energy savings, inflation, or any other variable. The bottom line is that a dollar today is not worth what it will be tomorrow, in a month, or in five years.

Simple payback also stops at the point at which a project pays for itself. For the sake of argument, say the sample project does have a payback period of seven years. If the AC lasts 16 years (again for the sake of argument), there a nine years (!!!) of energy savings that simple payback completely ignores. Savings don't stop when the unit is "paid off."

A more accurate measure would be to utilize the Net Present Value.  It is a slightly more complicated measure to calculate, in that it cannot be readily done with scratch paper and pencil.  Conversely, it is most clearly and easily explained to clients in one sentence: "Doing this project is similar to putting $xxxx in your pocket today if you do nothing." The hardest part would be to estimate a reinvestment rate: what the client has as a rate of return for their investments, inflation, increases in energy cost, etc.

Comment by Craig Bird on May 29, 2013 at 2:56pm

Ok, so if you need to build a power plant to meet customer demand it is infrastructure, but if you avoid building it through other means its a tax? Efficiency measures = infrastructure.

Comment by tedkidd on May 29, 2013 at 2:40pm

Craig, I sense you see something I'm missing.  Maybe if you take another shot at it it will become clear to me.  

I simply see Utilities as an extension of government, and anything other than fees to cover basic infrastructure as a tax. I'm not implying this is evil or bad, demand side management appeals to the economist, financial planner, and the efficiency obsessive in me.  I see these things as important societal investment in the long term greater good. 

Comment by Craig Bird on May 29, 2013 at 2:17pm

Ted - I do not believe they are one and the same. If any business incurs a cost of doing business they are going to pass that on to their customers. My point is that cost will be passed on to consumers whether or not it is to pay for peaking plants or demand side management programs - So call it what you want, the consumer still pays for the companies cost of doing business when costs rise.

Comment by Robert (Bob) Bacon on May 29, 2013 at 2:01pm

Thanks Craig, you are absolutely right. I neglected to mention that there are indeed "economic incentives"such as "demand side management" programs that, although tactical, aren't deceptive "psychological devices". In fact, demand side management programs work tactically because their promoters clearly present the direct link between the variable costs of usage and what the consumer will pay for those costs. I wish we could structure such an arrangement with the gas and oil industries but I think we are too far into our addiction.

I should also add that I am strongly in favor of the government spending my tax dollars to advance the 'greater good' by incentivizing conservation of all kinds. BTW, I grew up in Phoenix and remember the electric utility promotions from the 50s and 60s to build "Total Electric - Gold Medallion" homes. That promotion also worked well, but there there seemed to be little concern at the time about the long term consequences.

Comment by tedkidd on May 29, 2013 at 1:51pm

Funds charged to ratepayers by regulated monopolies may not technically be defined as taxes.  I suppose they'd more accurately be called "fees or charges" but ultimately isn't that getting hung up on semantics?  

Comment by Craig Bird on May 29, 2013 at 1:32pm

 but, in reality, these tactics are psychological devices that work because they are transferring some of the real costs of these technologies or improvements into tax-funded subsidies.

Careful with this statement Bob. Many utility incentives have no tax funding at all. They are demand side management tools which are some of the lowest cost avenues to reducing very expensive peak power production for utilities. (Especially here in the desert land of millions of AC units running a the same time in the middle of the day) Sure utilities will increase their rates to implement these programs, but when have utilities NOT raised their rates? Rates will go up whether they have to build a new peaker plant, or implement energy savings programs. One method puts money back in the pockets of those who take advantage of the program, one does not.

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