How is the payback period for an energy efficiency investment calculated?

The payback period for an energy efficiency investment is calculated by dividing the total cost of the investment by the annual energy savings generated by that investment. This method provides a clear time frame for how long it will take for the initial investment to be recovered through the savings produced.

For instance, if an energy efficiency project costs $10,000 and is expected to save $2,000 per year on energy bills, the payback period would be calculated as $10,000 divided by $2,000, resulting in a payback period of 5 years. This straightforward calculation allows stakeholders to quickly assess the financial viability and return on investment of energy efficiency initiatives.

Other proposed methods do not effectively convey the essence of the payback calculation. The first method, focusing on dividing the total investment by the years of use, neglects the annual savings aspect. The second method involves an incorrect operation of multiplying costs by savings without regard to the time factor. The fourth method of averaging monthly savings over a year does not directly assess the time required to recover the initial investment. Thus, dividing the total cost by annual energy savings is the most accurate and relevant approach to determining the payback period for any energy efficiency investment.