Estimating Fuel Price Inflation
Customers want to know the payback period for their investment, often deciding yes or no based on how many years it will take. They look to us, the salespeople, manufacturers and installers, for a payback period projection. While it is impossible to predict the future, a little due diligence can go a long way toward reassuring the customer and closing the sale.
In order to estimate the payback for a renewable energy system or other energy-conserving investment, we need to know how much money it is going to save over its expected lifetime. To do this, we need to determine a rate of inflation applicable to the fuel being conserved. A reasonable inflation assessment takes into account both past performance and economic indicators.
Table 1 shows that heating fuels have increased in price roughly 5 percent per year, while increases in electrical prices have been more modest. Past performance points to the use of an inflation figure substantially higher than the long-term consumer price index inflation rate of about 3.24 percent when offsetting heating fuels.
Future fuel prices are affected by multiple economic and political factors:
- Rising population and affluence increase demand. The U. S. Energy Information Administration reports that world oil consumption has increased by 33 percent in the last 30 years. Oil consumption in the last decade in China and India is up 71 percent and 46 percent, respectively. Increasing demand on a finite resource generally leads to higher prices.
- Rising national debt in conjunction with monetary-easing policies exert inflationary forces on the dollar, particularly for imports.
- With hot issues such as global warming and greenhouse gas emissions, a carbon tax or regulation could increase fuel prices.
- Unrest in oil-exporting countries tends to push up prices.
- The ongoing financial slowdown has reduced oil consumption in the United States and Europe, lowering world consumption by 1.8 percent between 2007 and 2009. The recession, depending on the extent and duration, acts as a downward force on fuel prices.
When fuel prices increase faster than prices for other goods and services, the incentive to invest in renewable energy systems grows. For example, if fuel prices increase faster than solar collector prices, over time the collectors will become a better investment. Innovation and increased production tend to reduce costs and improve efficiencies for renewable energy generation. It is reasonable to expect continued growth in renewable businesses driven by shorter payback periods.
Past inflationary trends and present economic indicators make renewable energy and conservation investments look good. Oddly enough, whether or not we choose to invest in renewable energy, we still have made a choice. With investment we hedge against inflation, cut down on carbon emissions and increase our energy independence both individually and nationally. If we don’t invest, we might miss out on a far greater opportunity than we thought.