calculate energy savings 101
To bolster the business case by showing the cost savings associated with energy savings upgrades when combined with tax incentives, check out these calculations:
Calculating simple payback periods for energy upgrades
Calculating the deductible value of depreciating assets using diminishing value (DV) method
Calculating simple payback periods for energy upgrades
Simple payback
A simple payback period is calculated by dividing the initial investment value by the estimated annual energy savings of the project. Estimated annual energy savings are calculated by multiplying the anticipated energy savings – in kWh for electricity and GJ for gas – by the price paid per kWh or GJ.
cost of project or investment ($) / (savings per annum (kWh or GJ) X energy tariff ($))
= payback period (years)
As an example, a $2 million capital investment in new LED lighting and rooftop solar, which has been assessed to yield annual savings of $350,000 in electricity costs, will enable the business to recover the costs of the upgrade in just under six years without any benefit from a tax incentive:
LED lighting and rooftop solar upgrade payback period
$2,000,000 / $350,000 = 5.7 years
Simple payback including a tax incentive
To calculate the payback period when incorporating a tax incentive, subtract the tax incentive from the initial investment, and then divide that amount by the estimated annual energy savings of the project:
(cost of project or investment ($) – value of tax incentive ($))
/ (savings per annum (kWh or GJ) X energy tariff ($))
= payback period (years)
When a tax incentive – like temporary full expensing – is added ($2 million x 30 per cent company tax rate), the payback period is reduced to four years:
LED lighting and rooftop solar upgrade payback period with tax incentive
($2,000,000 - $600,000) / $350,000 = 4 years
The payback period may be further reduced by calculating additional savings not included in the simple payback method, such as savings on maintenance costs and productivity gains.
Calculating the deductible value of depreciating assets
Calculating the deductible value of a depreciating asset using the diminishing value (DV) method
Under the DV method, businesses use the following formula:
asset base value x (days held ÷ 365) x (200% ÷ asset’s effective life)
= deductible value of depreciating asset
An asset’s base value can be calculated in two ways based on timing:
1. For the financial year the asset is first used or installed ready for use: its cost; or
2. For a later year: the sum paid to hold the asset and any amount paid that year to bring the asset to its present condition, less any decline in value.
As an example, a $500,000 investment in a new solar PV system that has an ATO determined effective life of 20 years, and would have been held for the entire period – i.e. 365 days during the first year of ownership – would be eligible for a tax deduction of $50,000.
$500,000 x (365 ÷ 365) x (200% ÷ 20) = $500,000 x 1 x 10% = $50,000
Based on the decline in value of the asset each year, the deductible value of the asset in the second year – and each year onwards – should consider the previous years’ deductions. For example, in the second year, the asset’s opening adjustable value would be $450,000, made by deducting the $50,000 decline in value for the first year from the initial cost of $500,000. This means that the second-year depreciation would be $45,000, provided that it is not a leap year.
($500,000 – 50,000) x (365 ÷ 365) x (200% ÷ 20) = $450,000 x 1 x 10% = $45,000
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