Energy Efficiency ROI: Payback, NPV & IRR (Worked Examples)
The short answer
Calculate efficiency ROI with three numbers: simple payback (cost ÷ annual savings), net present value (NPV — today's value of all future savings minus cost), and internal rate of return (IRR — the discount rate at which NPV is zero). In Ohio in 2026, include three kinds of savings — energy (kWh), demand (kW on the utility bill) and capacity (the PJM tag in your generation price) — because capacity costs are now large enough to change the answer.
The formulas
- Simple payback (years) = Net project cost ÷ Annual savings
- NPV = −Cost + Σ (Savings in year t ÷ (1 + r)^t)
- IRR = the r that makes NPV = 0
Counting savings correctly
| Savings type | How to value it | 2026 reference |
|---|---|---|
| Energy (kWh) | kWh saved × your all-in energy price (generation + per-kWh delivery) | FirstEnergy GS default ≈ 9.4¢ generation; Ohio average all-in commercial ≈ 13.8¢ (Jan–Jun 2026, EIA) |
| Demand (kW) | Monthly peak kW reduced × your tariff's $/kW × 12 | From your rate schedule |
| Capacity tag | Summer-peak kW reduced × about $120 per kW-year | PJM 2026/27 price $329.17/MW-day |
| Maintenance | Avoided repairs, lamp replacements | From records |
Worked example 1 — LED retrofit in a warehouse
- Cost: $60,000 installed.
- Saves 180,000 kWh/yr at 11¢ = $19,800.
- Lowers peak by 40 kW: demand at an illustrative $9/kW-month = $4,320; capacity tag −30 kW × $120 = $3,600.
- Maintenance savings: $1,500.
- Total ≈ $29,220/yr → simple payback ≈ 2.1 years; NPV at 8% over 10 years ≈ $136,000.
Worked example 2 — Staggered equipment starts (controls only)
- Cost: $4,000 for controls programming.
- No kWh savings, but monthly peak drops 60 kW at $9/kW-month = $6,480/yr, and the summer peak drops 20 kW × $120 = $2,400/yr.
- Payback ≈ 5–6 months. Demand-focused projects are often the fastest paybacks on Ohio bills.
Ohio-specific inputs
- No utility rebates to include. As of 2026, Ohio's utilities don't offer general business efficiency rebates, so don't assume one in your model.
- Federal tax items changed. The Section 179D deduction ended for projects beginning construction after June 30, 2026; commercial solar credits required construction to begin by July 4, 2026 (or service by December 31, 2027); storage credits continue for projects starting construction through 2033. Confirm with your tax adviser.
- Supply contract interaction. Large kWh reductions can push you below your contract's bandwidth — tell your supplier.
- Financing. C-PACE financing is available in many Ohio communities for qualifying building improvements; see funding efficiency without rebates.
FAQ
What is a good payback for an energy efficiency project?
Many businesses target three years or less for operational projects and five to seven years for capital upgrades; NPV is the better test for long-lived equipment.
Should I include capacity savings in ROI?
Yes, if the project lowers load during PJM's summer peak hours — at roughly $120 per kW-year in 2026/27 it can be a large share of savings.
Why use NPV instead of payback?
Payback ignores savings after the payback year and the time value of money; NPV and IRR capture both.