— Bob Ramlow with Benjamin Nusz

People often ask, "Why would I consider purchasing a solar water heater that costs several thousand dollars when I can purchase a gas or electric water heater for only several hundred dollars?" The answer lies in the fact that they do not think about life cycle costing. Life cycle costing adds the original cost of a piece of equipment to its operating cost over the equipment's lifetime, or at least over a certain amount of time. Using an analysis like life cycle costing gives an accurate analysis of the real overall cost of a purchase and allows you to make accurate and informed comparisons.

This is why it is important to figure out the energy inflation rate. We know, for example, that natural gas prices will increase rapidly. The question remains: by how much? The energy inflation rate is simply the percentage more you have to pay each year for the same amount of energy. The average energy inflation rate over the past 30 years for natural gas in the residential sector was 7.54 percent.

Over the past 5 years natural gas has increased at a average rate of 11.10 percent, and this is just the start. The rate increases of the last couple years have been over 20 percent.

You can't just use the cost of energy during the first year for each additional year because we know that the cost is rising at such a sharp rate. The lowest energy inflation rate that can be use is the historical 30-year average of around 7.5 percent. However, using this rate does not take into account the fact that dwindling supplies and increased demand will have a strong impact on rate increases. Conversely, using an inflation rate in the 20 percent range like we have seen in the last couple of years may result in unrealistic estimates. We made that mistake before, during the oil embargo. Nevertheless, it is best to err on the side of caution and try to be conservative in your estimates without being unrealistic. When I estimate the life cycle costing, I use ten percent as the energy inflation rate. I think that this is the lowest it will realistically be over the next 30 years. Most likely we will see the next 30-year average in the 15-20 percent range.

In Figure 2.2 you can see an example of life cycle costing. This example compares both an electric water heater and a natural gas water heater to a solar water heater. All three systems are producing the exact same amount of hot water. But solar water heaters have NO OPERATING COSTS. Like any other piece of mechanical equipment they do require some maintenance, but this only amounts to around $2.00 per month.

As you can see in the table, viewing the systems in the long term makes for a more fair comparison. The cost of the solar water heater is equal to the operating cost of the electric water heater after only 8.5 years and the natural gas water heater after 14.5 years. This number is commonly referred to as the pay-off date, since you would have paid for the system with the money saved from not having to purchase energy from the utility. However, I want to stress that this is a misstatement. As I said before, a solar water heater is paid off the second you install it because of what you have gained in equity.