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ROI of Home Energy Upgrades

Whenever you open a newspaper, you’ll likely find ads for home improvements such as new windows, insulation, and furnaces. These ads regularly promise energy savings that will allow you to recoup your investment in a short period of time, often something like “5-7 years” or maybe even less. But unless your utility costs are well above average, you might question the credibility of these claims (“how can $10,000 worth of windows pay for themselves in 7 years if my utility costs are only $1500 per year?”).

The truth is, most of the advertised payback periods are based on upgrading an extremely inefficient home with very high utility costs. This post will evaluate the savings possible in more typical situations.

Furnaces

According to Natural Resources Canada, space heating accounts for about 60% of the average home’s energy costs, so it makes sense to focus on this when making energy improvements. You’re probably using a gas furnace to heat your home right now. If it was made before 1995, it’s probably only about 65% efficient. If it was made between 1995 and 2009, it’s probably about 80% efficient. By comparison, new furnaces are 90-98% efficient, so you’ll save 18-34% on heating costs by upgrading. But new furnace costs are in the $5000 range, and natural gas prices are at a 10-year low. So you’ll have to evaluate how much you spend on space heating (it usually accounts for most of your gas bill). If you have a larger home with high heating costs, the payback periods can still be short (7 years or less) if you have an old, inefficient furnace. But if you have a smaller, better insulated home, the payback periods can be long (20 years or so, assuming gas prices remain low).

Heat Pumps

A heat pump is basically an air conditioner that can run in reverse, and can thus provide both heating and cooling. Since they only move heat from one location to another, rather than creating heat, they can operate at efficiencies of over 300%. Unfortunately, electricity costs have been rising in many parts of Canada over the past few years, whereas natural gas prices are at a 10+ year low. Since electricity is now relatively expensive, this means the savings on heating costs over newer furnaces can be marginal. So the main reason to install a heat pump would be for the air conditioning. However, if natural gas prices rise again, heat pumps will once again provide large savings on utilities.

Tankless Water Heaters

Note that while space heating accounts for about 60% of home energy costs, water heating only accounts for about 10%. So the potential savings is much less. Installing a tankless water heater will typically save about $100 on energy costs. But the units costs at least $2000 to install. Plus, if you want a higher capacity unit that can supply 2 showers at the same time and that truly offers “all the hot water you could want”, you’re likely looking at closer to $4000. Plus, the manufacturer’s recommended maintenance will probably negate your energy savings. So you can upgrade for the space savings, infinite hot water, reduced risk of water damage, and other benefits, but don’t expect a quick payback.

Note that if you’re building a new home it may be a different situation. A tankless hot water heater may cost less than $1000 more than a hot water tank, because you’re only paying for the higher cost of the tankless unit, and not for the differing installation requirements.

Windows

According to the EPA, home owners who install new Energy Star windows can expect to save $126 to $465 per year when replacing single-pane windows, and $27-$111 when replacing old-style double pane windows. The variation depends on the region, so Canadian home-owners should expect savings toward the higher end. But with a nice set of replacement windows often costing over $10,000, this is clearly something that should be done mainly for looks, not energy savings.

Insulation

The payback on this item varies widely depending on your current insulation levels and how accessible the area to be insulated is. Adding insulation to an under-insulated attic or to an uninsulated unfinished basement can have a very fast payback (especially if you do it yourself). By contrast, adding insulation behind the walls of a finished house can be very uneconomical.

Weather stripping

With the former federal ecoENERGY program (where an energy auditor certified by Natural Resources Canada would visit your home and recommend energy upgrades), draft proofing was the most highly recommended upgrade (followed by high efficiency furnaces and then attic insulation). This is because it has the highest return on investment. On older homes, DIY weather stripping (see the EPA’s excellent guide) can reduce heating costs by 10% for a very small investment. Professional weather stripping usually costs less than $1000 and can cut heating costs by 20%. But there is a drawback: A thorough air-sealing can make the air in your home very stuffy. Installing a heat recovery ventilator (a ventilation system that is able to remove heat from outgoing indoor air and transfer it to incoming outdoor air) allows your home to be airtight while still having fresh air, but costs thousands to install.

6 thoughts on “ROI of Home Energy Upgrades

  1. Very useful information. I’ve been considering a heat pump for our next house as I would definitely like the cooling aspect of it during the summer months. That’s definitely something I will have to consider if I have the luxury of getting that granular when choosing our next house.

    If we were to ever build a house, I’m pretty sure I would go the heat pump route but time will tell.

  2. Thanks for the great tips. I have to get more insulation in our house mainly in our attics as we need more. The quote was around $2k to top up the insulation. It will pay back in the long run and as they say it’s not always about the aesthetics of the house it’s what’s behind the walls and the shell that counts first.

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