Simple payback hides risks of energy projects

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Simple payback hides risks of energy projects

Simple payback is a misleading financial ratio.

Conventional wisdom says that short payback is a sign of a better project. Wrong.

The goal of an investment is not to get your money back, but to make invested money make more money with minimum risk.

Simple payback does not even consider risk of not getting money back, forget making more money for the years to come.

The only guaranteed way to never lose your money is to not invest it all (put inflation aside for a moment). This is not how business works, right?

Seek to minimize risk, not to shorten promised return.

How to reduce risks of investment into an energy efficiency project?

  1. Use a proven technology.
  2. Hire a reputable vendor.
  3. Link payment to vendor to savings validated by an independent M&V consultant.
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