Rising Energy Prices Shrink Payback Period of High Efficiency Equipment
by Isaac Elnecave (Codes Project Manager) and Jim O'Reilly (Public Policy Director)
The summer months may seem like an odd time to think about home heating equipment, but, in fact, now is the ideal time to consider upgrades to heating equipment, for a number of reasons.
To begin with, heating costs in the Northeast make up a significant share of home expenses, and the ever-rising costs of natural gas and heating oil that are so much in the news these days will only continue to impose financial burdens on residents.
Ironically, for every dollar the price of a barrel of oil rises, the payback period shrinks on the incremental costs between high efficiency heating equipment and standard equipment. (See chart below.)
Another reason to think now about next winter’s heating needs is that the utilities and other administrators of ratepayer-funded energy efficiency programs (as well as merchant energy service contractors) see the highest demand for heating system upgrades either immediately prior to or during the heating season, which will undoubtedly leave some homeowners short as program demand and restricted budgets will likely result in service delays, or, in some cases, denials if homeowners wait until next fall or winter.
Within this context, promoting high efficiency heating equipment, whether through programs or policy, should remain a high priority. Several states in the region already recognize this fact. Five of them – Massachusetts, Rhode Island, New Hampshire, Vermont and Maryland – have in recent years or months adopted new minimum energy efficiency standards on natural gas furnaces or furnace fans. This action was taken despite the fact that federal laws preempt states from setting appliance standards on products for which the Department of Energy has already done so, meaning these states will need to go through the process of petitioning for a preemption waiver. But given that the federal standard would have done little to help cold-weather states like those in the Northeast, and that the DOE encouraged those states to seek a preemption waiver, policymakers in the Northeast have recognized the substantial savings to be afforded their residents by taking this route.
Massachusetts has taken the lead on preparing this waiver, with assistance from NEEP, and other states are anxiously awaiting the completion of this process so they can dovetail their own waiver petitions onto the Bay State’s.
To get a sense of why states have acted, it is helpful to see how rising energy prices have affected the simple payback on high efficiency natural gas furnaces and furnace fans. The table below shows the simple payback for high efficiency gas furnaces and furnace fans. (The simple payback period is the amount of time it takes to recover the incremental cost as a result of paying lower energy bills.) Given the dramatic rise in fuel costs we have experienced over the last six months, it’s clear that the simple payback period will continue to drop even faster.
Simple Payback Period for High Efficiency Natural Gas Furnaces and Furnace Fans in Massachusetts 1
Year |
Annual Savings from Purchasing and Installing a High Efficiency Natural Gas Furnace 2 |
Simple Payback for High Efficiency Natural Gas Furnace 3
(Years) |
Annual Savings from Purchasing and Installing a High Efficiency Furnace Fan |
Simple Payback for High Efficiency Furnace Fan (Years) |
Simple Payback for Combined Furnace and Fan (Years) |
2001 |
$116 |
3.2 |
$81 |
1.2 |
2.4 |
2002 |
$89 |
4.2 |
$71 |
1.4 |
2.9 |
2003 |
$114 |
3.2 |
$75 |
1.3 |
2.5 |
2004 |
$127 |
2.9 |
$76 |
1.3 |
2.3 |
2005 |
$140 |
2.7 |
$87 |
1.1 |
2.1 |
2006 |
$152 |
2.5 |
$108 |
0.9 |
1.8 |
2007 |
$145 |
2.5 |
$117 |
0.8 |
1.8 |
While evident that energy efficiency remains the most cost-effective way of dealing with rising energy prices, the payback period for high efficiency gas furnaces and furnace fans underscores the need to continue our focus as a region on ramping up energy efficiency policies and programs. As residents in the Northeast continue to suffer from some of the highest energy prices in the nation, expanded energy efficiency programs and stronger policies such as minimum efficiency appliance standards and stronger building energy codes continue to be key policies to deal with this threat to the economic well-being of the region.
1 Energy prices found at Energy Information Agency website (www.eia.doe.gov)
2 Natural gas prices reflect the average monthly cost in a given year.
3 Incremental costs for furnace come from the U.S. Department of Energy Technical Support Document for Furnace and Boilers Rulemaking, August 2004. This reflects a conservative assumption on incremental costs as these costs tend to diminish over time.
For more information, please contact Isaac Elnecave at ielnecave@neep.org
