The benefits and pitfalls of using simple payback calculations to determine a renewable energy system’s return on investment are described in a University of Wyoming Extension publication.
Simple payback determines the number of years for the energy savings from a renewable energy system to offset the initial cost of the investment, wrote researchers in the Department of Agricultural and AppliedEconomics in “Renewable Energy Investment Analysis,” B-1235
They use examples to show how the formula works; however, they caution simple payback does not take into account electricity price escalation, cannot easily accommodate variable rate electricity prices, is not well-suited to comparing alternative investments and does not factor in theenergy savings and costs that occur after the payback period.
There are alternative analyses that solve most of the problems of simple payback, they wrote.
The bulletin is available for free download by going to www.uwyo.edu/ces and clicking Publications on the left-hand side of the page. Type B-1235 in the search field.