Payback analysis: an impediment to sustainability

In my 15 years of promoting renewable energy use in Wisconsin, I have come to believe that the most persuasive advocates are those who back up their words with their wallets. So when the federal government in August 2005 established tax credits for residential solar water heaters, it was time for me to act.

Last January our household became one of a growing number of households that heats a portion of their domestic water with a solar system. Between April and September the solar system provided most of the hot water we use. During the cooler months, the natural gas water heater becomes the primary—though not the sole–source of hot water. If we chance upon a sunny stretch of weather during the winter solstice, our solar collector is there to gobble up the low-altitude sunshine and convert it into warm water.

Scaling back consumption of natural gas, a high-density and highly versatile fossil fuel, serves two beneficial purposes. First, the less we burn, the less carbon dioxide is released into the atmosphere. Even though natural gas has a reputation as a clean fossil fuel, the amount of CO2 that is released from a combustion process weighs more than the gas that went into it.

Though our furnaces and water heaters are every bit as responsible for climate change as automobiles and power plants, they are generally overlooked as greenhouse gas sources, in large part because burning natural gas produces less schmutz–Yiddish for impurities– than coal, diesel or gasoline.

The second purpose served by substituting sunlight for natural gas is that it slows down the unnecessary depletion of a high-quality energy resource that should be used for other, more valuable purposes. This is not an academic matter in North America, where, according to recent government estimates, natural gas reserves amount to about 10 years’ supply at present rates of consumption.

Consisting primarily of a collector panel (66 square feet) and a second hot water tank that stores the preheated water, our relatively small system was purchased and installed for $6,700. Between an installer’s rebate, a Focus on Energy cash-back reward and the federal tax credit, our share of the system came to about $3,000, which we paid out of a savings account.

The site assessor who characterized our “solar window” predicted, on average, savings of 120 therms per year, or 10 therms a month. Presently, Madison Gas and Electric charges natural gas customers about $1.00 per therm. Thus, if the price of natural gas keeps pace with the prevailing rate of inflation, it would take 25 years before our annual savings of $120 would equal the $3,000 we shelled out for this system.

To a traditional economist, one who boils life’s complexities down to income, outflows and the time value of money, our decision to install a solar domestic hot water system doesn’t make a whole lot of sense, principally because the return is tiny relative to the large up-front outlay.

But in reducing this transaction to simple, measurable flows of dollars in and dollars out, economists filter out a great deal of relevant information that might confound their notions of rational economic decision-making. Though economists will concede that there are other valid factors besides pure price considerations on which to base one’s purchasing or investment decisions, they aren’t likely to register meaningfully in the economic models they use. Instead, these factors are categorized—and marginalized—as “externalities”—a semantic purgatory designed to ensure that they will not enter the mainstream of economic theory, where they could be used to justify government decisions to support “no-build” options.

Moreover, such crude calculations rest on two assumptions that are highly questionable and cannot help but lead to distorted conclusions. One is that the solar water heating system is a typical appliance which depreciates over time, just like a toaster. The other is that natural gas is a limitless source of energy that will not become scarce and/or expensive over time.

Regarding the first point, a solar water heater is a simple, low-maintenance system that, once installed, can be kept in good working order for many decades at little cost. It is different from other household appliances like microwaves ovens and furnaces in that the outside source of energy (sunlight falling on the roof) it runs on is cost-free, a savings which is reflected in every monthly energy bill. For that reason, it is more proper to consider a solar domestic hot water system as a built-in feature of the house it serves, rather like south-facing windows. If kept in good repair, houses tend to appreciate over time, unlike microwave ovens and furnaces. All else being equal, a house with a solar water heater should command a higher selling price than a house without one.

As for natural gas supplies, the outlook is not good. Thanks to decades of depletion, the North American resource base is in terminal decline. It simply cannot support consumption at present levels, no matter what price point you pick. Imports from overseas suppliers like Qatar will increase to be sure, but will they be able to offset declining output from mature fields? Not very likely.

But those individuals who believe that my solar water heater will take 25 years to pay itself back also assume, with complete confidence, that enough new sources of natural gas will be discovered and brought to market to keep overall supplies from diminishing. Unless they happen to be petroleum geologists, they can’t possibly know what will happen to natural gas supplies in five years, but that doesn’t stop them from making calculations that discount the importance of future supplies.

Solar water heaters aren’t as flashy as other renewable energy systems, like photovoltaics or windpower, perhaps because they involve plumbing and don’t produce electricity. But they can be counted on to produce savings month after month, rather like interest from Treasury bills or a money market account. Unlike the interest from these instruments, the savings from a solar water heating system are not taxed. And if the price of natural gas goes up, the savings grow larger.

Alas, Americans would rather spend discretionary dollars in casinos or on cruise ships than take preventative action against the possibility of higher heating prices. This should not be surprising in a society where the very idea of personal savings has become passé. Last year, the personal savings rate went negative for the first time since the Great Depression. It is the borrowing against future income that is propping up the American economy right now, not the savings from past and present wealth. Instead of directing present-day wealth to make more lifeboats for ourselves and our children, we are, as a society, chopping up the ones we have for firewood to help us stay warm a little longer. There is nothing remotely sustainable about this arrangement.

When people first started asking me: “How long is the payback on your solar water heater,” it took all my self-control to keep from responding with “It’s paid back the day I have hot water in my house and you don’t.” In actuality, I believe my out-of-pocket portion of the system will be fully captured in the sale price of my house, though I have no intention of testing that proposition any time soon. Until then, we plan on taking the $10 or more in monthly savings and applying them to our son’s college education.

Note: Portions of this column appear in the October 2006 issue of Sustainable Times.

Contributed by Ed Blume