Editor's Letter

11/01/2015 | By Chris Olson

As Policy, Simple Payback Is Simpleminded

Chris Olson, Chief Content Director

The KISS saying – a.k.a. Keep It Simple, Stupid – has become widely known since its origin in the U.S. Navy as a design principle to make aircraft easily repairable under combat conditions. Like all rules of thumb, it has its limitations. Anything can be oversimplified, and that seems to be the case with an amendment to H.R. 8, The North American Energy Security and Infrastructure Act of 2015. The amendment would change the energy code development process for buildings and limit the participation of the DOE.

Not only would the H.R. 1273 amendment limit economic considerations to simple payback calculations, it would also limit these calculations to periods of three, five and seven years. The Secretary of Energy would be prohibited from providing any technical assistance about any code provision with a payback greater than 10 years.

As numerous articles in BUILDINGS have pointed out, simple payback is only one method – and a narrow one at that – to evaluate the value of energy improvements. Energy consultant and BUILDINGS contributor Eric Woodroof has noted that the simple payback calculation may not tell the whole story, despite its frequent use as a means to seek approval from financial officers for energy measures. Energy improvements can pay back for many years after implementation, even throughout a building’s lifetime.

Last year, the Continental Automated Buildings Association (CABA) released a report entitled Life Cycle Costing of Intelligent Buildings. The report explains that simple payback can offer only a cursory view of initial costs and preliminary savings. The life of energy-saving equipment may be much greater than 10 years, so savings accrue for long after. Initial costs and projected savings do not account for equipment lifetime, maintenance costs or comfort factors.

Another shortcoming with simple payback is that it ignores the expense of doing nothing – a factor that economists have repeatedly shown is more persuasive to most consumers than the prospect of savings. If building owners look at how much money they will lose if they don’t include an energy-saving measure, their actions may be the opposite of what they would do if they think of the improvement in terms of simple payback alone.

Homebuilders support the amendment as a means of simplifying construction and limiting costs for initial buyers. However, commercial building owners, even those with a very short-term outlook, recognize that appraisers are increasingly using energy efficiency in the valuation process and that less efficient buildings are less valuable. When we typically plan for a building life expectancy of 60 years or more, it seems shortsighted to develop building energy codes with a timeframe that accounts for just 15% of that lifetime. It is also wasteful to limit the DOE’s input and its considerable expertise to evaluations of 10 years or less.

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