What do they mean by “payback period” when it comes to deciding on energy-saving measures or purchases?

Payback period is the time it will take for your energy savings to pay for the cost of the energy-saving thing you bought.  Say you spend $2 on switching to a 9 watt LED light bulb from a 60 watt incandescent bulb that is used for 4 hours/day. The LED bulb will save you about $1 per month in electricity cost, so its payback period will be 2 months.  After that, you simply have an extra dollar in your pocket every month compared to your old bill (and incidentally, LED bulbs last 10 years or so, believe it or not!).

You always want to consider the “useful life” of the thing you are purchasing, and bear it in mind when looking at the payback period. It does no good if something saves $50 per year and costs $1,000 (20-year payback) but lasts only 10 years, because it will have to be replaced before it pays for itself.

The shortest payback will usually be for the least expensive things (such as light bulbs and sealing leaks around windows and doors), but sometimes even a big purchase can pay for itself quickly, and subsidies or rebates can ramp up the payback dynamic considerably at times.

One such example would be a heat-pump water heater, right now, in Maine.

In most households the water heater is the most energy intensive appliance.  If you have a standard electric water heater (resistance heater) and you use 40 gallons of hot water per day (slightly less than national 3-person average), the cost is about $32 per month or about $390 per year.  If you are about to replace your water heater, should you consider a heat pump water heater? The payback on a heat pump water heater might guide your decision.

A heat-pump water heater uses the same technology as a heat-pump you use to heat a home.  Heat is taken from the air and used to heat the water. The advantage is that you can get the same amount of heat for less than one-third of the electricity.  In other words, about 30% of the energy comes from electricity and 70% from the surrounding air. In terms of cost that means you pay less than one third as much.  Using the example above, that means you would pay only around $10 per month or $120 per year for hot water. That is a savings of $270 per year.

So what is the payback time? That will depend on the cost of the heater and the installation cost. An electric heater is the least expensive and easiest to install.  So it might be tempting to simply go with that. The average water heater installation cost is estimated by ConsumerAffairs.com at $750. The electric heater itself will run between $400 and $600.  So your total cost should be somewhere between $1,150 and $1,750. (You should check with your local installers as these costs may vary.)

The heat pump water heater is quite a bit more expensive. They start at around $1,100 and the installation, according to ConsumerAffairs.com, would be $700-$900.  So normally the installed cost could be in the vicinity of $1800 to $2400. But right now in Maine, you can get a $750 rebate for a heat pump water heater. (see efficiencymaine.com for details.)  This means the cost of the two will be virtually the same.

Since the heat pump heater and electric heater are almost the same in cost, installing a heat pump water heater rather than a regular resistance water heater right now with the rebate will provide more or less an “instant payback”:  You will save ⅔ of your water heating costs (typically around $20 per month) from then on!

We welcome any questions on this or other Energy Matters columns.  Please contact us at the email address below.

Paul Stancioff, PhD., is a professor of Physics at the University of Maine Farmington who studies energy economics on the side.  He can be reached at pauls@maine.edu.  Cynthia Stancioff, MA, Public Administration, is an amateur naturalist and wordsmith.

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