Making Good Investments

Most consumers are looking for the greatest return for the least investment. This does not necessarily mean, though, that you should buy the least expensive product or system on the market. In fact, spending a little more money initially for an energy-efficient product or system (as opposed to spending less and sacrificing energy efficiency) is often more economical in the long run because your investment will pay for itself in energy savings.

Generally, there are two ways to analyze the costs of energy efficiency investments: simple payback period, which is the amount of time required for the investment to pay for itself in energy savings; and full life-cycle , which is the total of all costs and benefits associated with an investment during its estimated lifetime.

You can obtain an estimate of the simple payback period by dividing the total cost of the product by the yearly energy savings. For example, an energy-efficient dryer that costs $500 and saves $100 per year in energy costs has a simple payback period of 5 years.

Computing life-cycle costs is more difficult. Life-cycle costing is a method of economic evaluation in which all values are expressed as present dollars. This evaluation method sums the discounted 7 Products or systems with payback periods that approach or exceed their projected life are usually not worthwhile. investment costs (less salvage value); operation and (nonfuel) and repair costs; replacement costs; and energy costs of an appliance or building system. For definitions of these and the formula for performing life-cycle cost analyses, see the Life-Cycle Costing Manual for the Federal Energy Management Program, NBS Handbook 135, Revised 1987. This manual is available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Before making your decision, examine your budget, the expected payback periods, and estimated lives of different alternatives. Products or systems with payback periods that approach or exceed their projected life are usually not worthwhile. Compare the life-cycle costs of similar products or systems. These include installation (if any), operation, and maintenance costs.

Although most of the federal tax of the early 1980s have been discontinued, your state or local government may offer economic incentives or financial assistance to implement energy efficiency measures. Also, check with your local utility to see what incentives are available.

If you are buying a new home, you may want to investigate the possibility of obtaining an energy-efficient mortgage (EEM). EEMs allow home buyers to qualify for a larger mortgage by allowing a higher debt-to-income ratio than lenders normally use to calculate loan potential. EEMs allow the significant monthly energy savings of an energy-efficient to be put toward a higher monthly mortgage payment. Home buyers upgrading an existing home to qualify as an energy-efficient home may add the cost of energy measures to the mortgage. By adding this cost into the mortgage, the home buyer may profit from the tax benefits and longer term interest rates.

You can find out if EEMs are an option for you by asking your lender. Four federal lending programs—Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Housing Administration (FHA), Federal National Mortgage Association (Fannie Mae), and Veteran's Administration (VA)—offer EEMs. Therefore, EEMs are available nationwide. Unfortunately, most lenders and home buyers are either unaware of EEMs or choose not to use them.

Currently, 23 states have at least one lender who facilitates EEMs. FHA is establishing an EEM pilot program for existing homes in Alaska, Arkansas, California, Vermont, and Virginia.

–U.S. Department of Energy, April 1994