Investment Truths

Improving energy efficiency is an important objective.

Equally important is the efficient use of money, a limited economic resource.

Improving energy efficiency without regard to cost is not a sound objective, yet this has become the mantra for this administration and environmental organizations.

Business recognizes the importance of investing money wisely, which is why it has adopted return on investment (ROI) as the criteria for evaluating alternative investments. Obviously other criteria are also used, such as safety or whether the existing structure has reached the end of its useful life.

Using money as the basis for decision making, whether for conservation or for improving efficiency, is consistent with the objective of improving living standards.

Gross domestic product (GDP), which is a measure of living standards when expressed as GDP per person, is measured using money. Productivity is essentially a measure of how much money is used to produce the gross domestic product.

With ROI it’s possible to answer whether it is wise for a family to replace the windows in its home to merely conserve energy.

Replacing windows in a home with 15 windows, not unusual for a two story home, could cost $15,000. Assuming this investment saves 15% on heating and cooling costs, a generous assumption, annual savings could be around $300.

Under these assumptions it would require 50 years to pay to replace the windows.

Some have estimated much higher annual savings of around $1,200.

With savings of $1,200 per year, it would require 12.5 years to recover the investment1.

Neither of these examples would warrant replacing the windows when an ROI of 20% is used to evaluate projects.

This makes sense, since people frequently move before the rewards are fully realized. Equally important, the money is not being put to best economic use.

When money is squandered on uneconomic projects, it’s not available for use where economic benefits are greatest.

Yet, this administration, together with environmental organizations, wants to force people to make unwise decisions, such as replacing windows and upgrading insulation.

The American Council for an Energy Efficient Economy (ACEEE), an advocacy group, has established criteria for evaluating the United States progress toward improving energy efficiency2.

Among its 15 criteria, is whether Green House Gas emissions, i.e., CO2, are being cut. Cutting CO2 is, of course, the real agenda of this organization and this administration.

Another of the 15 criteria is whether energy use in buildings is disclosed. The objective here is to force homeowners to have their homes evaluated for energy efficiency, and then to make this information public. The Waxman-Markey, cap and trade legislation would have required the energy efficiency rating for your home to be on the deed, thus compelling the home owner to add insulation, or whatever, since not doing so would make it virtually impossible to sell the home3.

Another of the 15 criteria establishes whether states have mandated efficiency codes that specify minimum requirements for energy efficiency, regardless of cost or need.

Last year, the ACEEE determined, that, in the residential sector the United States scored a 1 (nearly the worst possible rating) while China scored a 5 (best possible rating).

New apartment buildings in China don’t have heating or air-conditioning and lack elevators below the fifth floor. The government assumes people don’t need heating with temperatures of 40 degrees F since they can put on sweaters or jackets. People also don’t need air-conditioning with temperatures of 95 degrees F. Both these temperatures are not uncommon in much of China.

Air-conditioning units and clothes hanging to dry. Photo by Dears
Air-conditioning units and clothes hanging to dry. Photo by Dears

While the ACEEE has changed its criteria this year, its message is still the same: The United States should improve its energy efficiency no matter what the cost in money or personal freedom.

 

Notes

  1. Individuals can look at their heating and electric bills and calculate estimated savings for their home.
  2. The ACEEE report can be downloaded from http://aceee.org/white-paper/ee-is-the-us-improving

 

  1. The ACEEE, in its comments on disclosure says. “Disclosure of a buildings energy use can assist in recognizing the value of energy efficiency benefits at the time of a purchase or lease.”

 

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0 Replies to “Investment Truths”

  1. Neil:
    Thanks.
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