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The 20% Rule

October 11, 2010

Is it possible to determine whether conservation efforts are good or bad? Or for that matter, whether it’s worth the effort to improve efficiency?

A simple example can help clarify the issue: The compact fluorescent lamp (CFL).

A standard CFL lamp, not an overhead spotlight, costs about $2 more than a 100-watt incandescent bulb. A CFL uses 75% less electricity than a 100-watt incandescent bulb. When electricity costs ten cents per kWh, the CFL can save $0.075 per kWh. It would take 267 hours of continuous operation for a CFL to pay for the extra $2 cost compared with a 100 watt incandescent bulb.

If used four hours per day, it would take around 67 days, or a little over two months, for the CFL to pay for itself.

Clearly, when used for 4 hours per day, the CFL is a good investment.

But should every incandescent bulb be replaced with a CFL?

A bulb in a clothes closet may get used for only ten minutes a day. In this instance, it would take over four years for a CFL to pay for itself.

An incandescent bulb in a broom closet may get used for less than five minutes a day. At five minutes per day, it would take a CFL nine years to pay for its higher cost.

This example uses dollars as a measure for determining whether a particular conservation effort is worthwhile.

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. (Worker productivity can be measured by hours worked per GDP, but this productivity measure doesn’t measure the economy in its entirety.)

Using money efficiently results in improved productivity and better living standards.

Return on investment (ROI) is how businesses prioritize their investment dollars.

Making the best use of investment dollars would indicate that not every incandescent bulb should be replaced with a CFL.

An ROI of 20% would indicate that an investment should pay for itself in five years.

An ROI of 20% is very often the cut-off point used by businesses, though some investments are required to have larger ROI’s.

For example, an investment in a new process that will become quickly obsolete could be required to have an ROI of 30% or more.

The corollary for a home owner would be the uncertainty of how soon the owner might move. A young family may move every two or three years, in which case the family should require an ROI of 30% or higher.

While CFL’s represent a small investment, replacing refrigerators, furnaces or windows require large investments.

Is it wise for a family to replace the windows in its home to conserve energy? Should government regulations force the family to replace the windows in its home to save 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 for replacing 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 investment.

(Individuals can look at their heating and electric bills and calculate estimated savings for their home.)

Using an ROI of 20% as the basis for making the decision, the home owner should not replace the windows.

It’s wrong for the government to force homeowners to replace their windows for two reasons: First, and foremost, this is a free country where people can make decisions for themselves: Second, it wastes resources because the money spent on replacing windows could be used for an investment having a better return.

Similarly, decisions on upgrading insulation in a home or replacing furnaces or making any investment should be made by individuals without government intervention.

Resources would be allocated most effectively if a minimum 20% return on investment was the basis used by the government, industry and individuals for making investment decisions related to energy efficiency and conservation.

© Power America, 2010. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Power America with appropriate and specific direction to the original content.

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