For example, when I was trying to set myself up as an energy advisor, I wrote a spreadsheet that worked out an expected rate of return on the investment in a piece of energy saving technology. It treated the extra you might have spent as an investment and the money saved as though it were the interest. At the end of the product's expected lifetime it assumed that you got back the original sum along with the interest and calculated what rate of bank interest would have given the same overall return. It even took into account the money you would have forgone by not being able to put the original investment in the bank. I had no idea that what I was working out was called an Internal Rate of Return and has its own Excel function " =irr ".
I though this was marvelous, give people the tools to make sensible decisions and that's what they'll do. Trouble was, that whilst I was into education, giving people the skills and a little bit of technology to make decisions for themselves, the very same people were being bombarded by schemes that promised to do it all for them, albeit at a cost. My slightly feeble efforts were drowned in a sea of cynicism.
Despite this, I found it useful. Some investments turned out to be complete, as they say, no brainers. For example here's a screen shot for replacing a 35p 100W filament bulb by a £2.99 20W Compact Fluorescent Lamp
| Original/Replacement | 100W filament/20W CFL |
| Original power (W) | 100 |
| Replacement power (W) | 20 |
| Power saving (kW) | 0.080 |
| Original cost (£) | £0.35 |
| Replacement cost (£) | £2.99 |
| Extra cost over use life (£) | £3.07 |
| Orig. lifetime (hrs) | 1,000 |
| Replacement lifetime (hrs) | 10,000 |
| Cost per kWh (p) | 9.00 |
| Deposit rate (%) | 4.50 |
| Use per day (hrs) | 8 |
| Net lifetime saving (£) | £72.43 |
| Use life (yrs) | 3.42 |
| Extra rate of return (%) | 154% |
| Payback time (yrs) | 0.13 |
| Saving per year (£) | £21.16 |
The calculated quantities are the ones between the solid lines. It's assumed that you could have put the £2.99 in the bank at 4.5% interest for 3.42 years and that's why the extra cost isn't £2.64 (£2.99 - 35p) but £3.07 and why there's an extra rate of return which is the return above and beyond leaving the money in the bank. At 154% it was a very good deal.
A few years later a local hotel received a grant from the local Energy Advice Centre (part of the Energy Saving Trust) of £5000 in order to install energy saving light bulbs. Why???
The only effect of this grant was to tell other businesses that it was only worthwhile investing in energy efficient bulbs if you were given extra money to do it. It was giving out precisely the wrong message.
After the first Rio Earth Summit back the American Govenment put an enormous price on improving energy efficiency. They argued that if it was cost effective it would already have happened. The market would have delivered.
When Amory Lovins, from the Rocky Mountain Institute, challenged this by asking what would happen if the participants in the market didn't have perfect information (i.e. didn't realise what opportunities there were to save money through energy efficiency) the answer he got was
"Well then it would be different"
Markets seem to be alright when you're comparing two essentially similar products A and B but it has trouble if you then throw in something a bit different, such as C. For equipment which uses energy, too many decision makers simply see the cost up front and, for something like a light bulb or a fridge, that just doesn't work.
Postscript; Having looked again at the spreadsheet I have, of course, found a mistake. To save the suspense, I underestimated the savings because I compared the original cost of the CFL with just one filament bulb and not the 10 that it would actually replace.
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