Q&A: Calculating the payback period for manufacturing equipment

At Sensorfact, we help manufacturers to save energy by analysing data from our Energy Management System (EMS) and implementing energy saving measures. After analysing energy consumption on machine-level, our energy consultants regularly propose energy savings that involve investments. This could be a more efficient machine, installing cos-phi capacitor banks or fixing compressed air leakages. 

We always calculate the payback period on investments so our clients can make data-driven investment decisions. Our energy consultant Kathelijn will share insights into calculating the payback period.

Question: How does Sensorfact calculate the payback period?

Answer: The payback period is calculated by dividing the total investment costs by the amount of yearly savings. These yearly savings are calculated by multiplying the energy price by the amount of kWh one can save on a yearly basis. To have an accurate estimate of how much you will save, you only need to regard the variable part of the energy price. Fixed costs such as costs for connecting to the grid are excluded, as they do not change when the energy consumption changes. 

For example: if a customer can save 1500 on a yearly basis by fixing their compressed air leakages, and the costs for having the leakages assessed and fixed are 3000, the payback period is 3000 / 1500 = 2 years. 

Question: What are acceptable outcomes?

Answer: When mapping a customer’s savings potential, we filter our advice on acceptable payback periods to keep our advice realistic. As a rule of thumb, we only propose investments that have a maximum payback period of 5 years. One exception is LED lighting, for which we use a payback period of up to 10 years. 

Common examples
You can expect different payback periods for different savings. Small investments usually have a payback period of 1 or 2 years, for example:

  • Fixing compressed air leakages: 1- 2 years. 
  • Improving the power quality (increasing cos-phi) by installing a condenser: 1 – 2 years. 
  • Installing a valve for separating different operation zones of a compressed air system: 1 year. 

Larger investments – such as replacing older electromotors for new and more efficient ones – will usually have a payback period between 3 – 5 years. 

Question: Aren’t there other factors we should take into account when calculating the payback period?

Answer: Yes, our approach only provides an estimate of the payback period. For smaller investments, this method is quick and more than sufficient. For higher investments, e.g. when replacing expensive equipment, I recommend to look into the following factors as well:

  • Net Present Value (NPV): this formula is a more complete calculation and takes into account the time value of money, considering all future cash flows and interest rates. 
  • Maintenance: maintenance costs can vary considerably depending on the type of equipment and brand. Calculate all maintenance costs associated with the investment.
  • Life Cycle Costs Analysis (LCCA): with this method you calculate the full life cycle of the equipment, such as frequency of breakdowns and demolition or disassembly costs.
  • Subsidies: if you want to make larger investments you may be entitled to a national or European subsidy. This can help you save on investment costs, or convince you to go for a more sustainable option.

Get insights into your energy consumption and discover profitable investments

We love helping our customers save on energy with our plug-and-play Energy Management System. On average, our clients save up to 10% on their energy bill. This is the result of comparing machines, eliminating energy waste, fixing leaks and making profitable investments. Curious to find out how you can start with smart energy management? Download our white paper 5 Steps to Smart Energy Management.

Written by Annick Sprokkereef

Annick Sprokkereef

Marketing Assistant