Evaluating the energy savings of new equipment for the farm can prove challenging. A new publication from Iowa State University Extension gives examples for comparing the payback periods of energy-related purchases.
"Some energy-saving investments cost more initially," says Mark Hanna, ISU Extension agricultural engineer. "Saving money today by purchasing equipment with a lower initial cost — and higher energy demands — puts the buyer at risk when energy prices rise in the future."
Look at initial cost, useful life and energy savings of various farm expenses
This new publication addresses the concepts of initial cost, useful life and energy savings for different types of farm expenses. Examples include a lighting project, replacing an electric motor and upgrading a farm truck. Using simple payback calculations, these examples estimate the time it would take for energy savings to equal initial cost.
"During harvest, volatility in the markets may have overshadowed the fact that this year's fuel prices are the highest we've seen since 2008," says Dana Petersen, ISU Extension program coordinator with ISU Farm Energy. "It is critical to consider energy costs in your plans before you start a project or make a significant purchase for your operation."
Calculating a simple payback period, how to figure it for energy costs
Calculating the simple payback period for a purchase means dividing the initial cost by the projected annual energy savings. For example, if the cost for new equipment is $3,600 and the projected annual energy savings at current energy prices is $900, the initial cost is repaid through energy savings after four years ($3,600/$900).
Simple payback is typically helpful for comparing purchases with relatively short payback periods. However, this method does not account for continued energy savings (return on investment) after a project reaches its break-even point. To do this, you need reliable information about the equipment's useful life. Some examples illustrating the benefits and limitations of the simple payback method are available in the latest ISU Farm Energy fact sheet, "Estimating payback for energy efficiency" (PM 2089S) at http://farmenergy.exnet.iastate.edu.
* Lighting. Initial cost to replace bulbs in a livestock facility is $400, but the projected annual electrical savings is $2,000. The simple payback period is 0.2 years ($400/$2,000) with a savings of $1,600 in year one and $2,000 in year two. Estimated bulb life for the project is two years, so return on investment is $3,600 over two years. Extra labor costs may be incurred to make the switch to new light bulbs or fixtures, but consider if the energy savings from the upgraded, energy efficient lighting will cover labor and installation costs.
* 10 horsepower electric motor. A 10 hp electric motor is being used 10 hours per week to grind feed. A new replacement motor is estimated to save one kWh of energy during each hour of operation, saving 10 kWh each week or 520 kWh annually. Assuming electricity costs $0.10 per kWh, annual cost savings are $52. If replacement cost for a 10 hp motor is $1,000 on average, the simple payback is 19.2 years ($1000/$52). If economics are the only factor considered, replacing would most likely be delayed until near the end of the motor's useful life.
* Pick-up truck. The existing farm truck has an estimated fuel efficiency of 15 mpg, but a late-model truck gets an estimated 25 mpg and is available for $15,000 plus trade-in. Assuming 18,000 annual mileage, the newer truck would consume 720 gallons (18,000/25) of fuel versus 1,200 gallons (18,000/15) for the existing truck. At fuel prices of $3.00/gal, the extra 480 gallons of fuel conserved equals $1,440 annually. The simple payback period is 10.4 years ($15,000/$1,440). However, at increased fuel costs of $4/gal, the simple payback is 7.8 years ($15,000/$1,920).
As shown, simple payback is helpful for estimating how long it will take to recoup your investment, but it doesn't show a project's profitability. When only energy costs are considered, purchases with a long payback may not pay for themselves until they're nearly worn out. Unless your goal is to quickly recoup invested funds and put them to work again, look beyond the simple payback. Consider the total cost, useful life, maintenance and energy savings of a purchase to determine if it's a wise investment.The Farm Energy publications are part of a series of farm energy conservation and efficiency educational materials being developed through the ISU Farm Energy Initiative. The purpose is to increase farmers' awareness of opportunities for improving efficient use of farm energy. The initiative also will help farmers and utility providers to explore alternatives to reduce farm energy demand and to improve overall profitability in a rapidly changing energy environment.