Greening the University’s bottom line
Canada Savings Bonds offer an annual interest rate of only 1.25 per cent or so, yet people buy them because reliable investments with set returns are hard to find. We'd like to draw your attention to another investment opportunity that offers attractive returns and also is good for the environment.
Energy conservation measures (ECMs) save money. That’s guaranteed. New lighting or better heating and air conditioning systems reduce operational costs, and the savings are as good as money that’s earned any other way. Better actually, since it's tax-free.
The cost of such ECMs should be viewed as an investment, one for which the return usually begins immediately and often continues indefinitely. Unfortunately, in the past, people have focused on the upfront costs of these improvements. That's certainly the case today. Yet the reality is that hard times should instead force us to make the comparison between spending on ECMs and other potential uses of capital. This is especially true in the case of large institutions, such as Queen's and other universities. Consider the following simplified example, which shows why this is the case.
If a building retrofit that costs $1,000 saves $200 per year in energy costs, it will pay for itself in five years. Most people would be put off by the seemingly long payback time. However, if the retrofit is, for example, a furnace upgrade and lasts for 10 years, then it will earn an annual average of 16 per cent. That’s a far greater return than most other legal options. If the retrofit is improved insulation that lasts for 25+ years, then the average return per year for each of those 25 years will be 19 per cent. That is worth repeating. In these two examples, the initial cost will be entirely repaid and the investment will have “earned” an additional annual return of 16 or 19 per cent. Only credit card companies have a chance to make that kind of profit.
The lifetime of any device, system, or retrofit is enormously important, and yet it’s almost always ignored. What’s more, if energy prices increase after an ECM is in place, the actual “earnings” become correspondingly greater.
These opportunities are available to everyone, including small businesses and homeowners, but they are especially relevant to large institutions such as Queen’s. That’s why such organizations should immediately begin making investments in ECMs and liquidating financial investments that supply less of a fiscal return.
Some large institutions are already aware that energy conservation improvements offer savings and, often as a matter of environmental stewardship, they fund ECMs that can pay for themselves. Some forward-thinking decision makers have accepted projects that can pay for themselves, even if they take as long as three years. The money for these projects is sometimes taken from the utilities budget on the theory that any savings will ultimately flow back to that same ledger account. Unfortunately, many organizations still demand that such investments pay for themselves in one year. If the cost can’t be recouped in one budget cycle, then the opportunity is ignored.
Yet even a three-year payback policy is short-sighted. As the above example shows, the real opportunity to profit on the investment doesn’t end after a mere 36 months. If a new piece of equipment has an anticipated lifespan of 20 years, then even if it takes, say, 12 years to pay back the upfront cost, there’s still room for a healthy 20-year average annual return of more than five per cent. And some ECMs come with specific guarantees that they will last for 15 or 20 or 25 years, such guarantees make decisions easy.
Financial people are already accustomed to making precisely the kinds of calculations that are involved in understanding the return on ECMs, and a straightforward formula can be created that lays out the likely return that benefits us all.
Joshua Pearce is an assistant professor in Mechanical and Materials Engineering. Tom Carpenter is senior manager of the Queen’s Institute for Energy and Environmental Policy.