Summary of how to develop a Return on Investment calculation

Here we summarise how to develop a return on investment calculation for a church. Return on investment is usually interpreted in financial terms and this forms the major part of this calculation. However, this is not the whole story. In addition, it is valuable to consider the return on investment from a greenhouse gas perspective: purchase of capital equipment necessarily entails a significant release of indirect emissions and this is to be balanced by the reduced emissions associated with running a church exclusively using electricity for its ongoing energy needs. This shouldn’t be considered as an optional view since we remind ourselves that the need to change is primarily to play our part in reducing emissions. This greenhouse gas return on investment is the second part of this calculation. Finally, there is a sort of return on investment associated with purchase choice, often described as ethical purchasing: the suppliers and manufacturers of the equipment will have an effect on people and the environment, often in places far away, and it is only right to consider these aspects too. We may not directly see these effects, but considered alongside the economic and emissions return on investment calculations, a well-researched purchase choice may create positive returns for people and locations far from the church buildings. This ethical return consideration is not part of this calculation and is left for the purchaser to note and act on.

1. Description of the Methodology

General inputs

Both the economic and emissions return on investment calculation require us to have knowledge of the existing energy use in the buildings and the potential for solar generation at the site. The approach outlined here allows the incorporation of solar panels, batteries and heat pumps. It is useful to understand the future electricity needs of the buildings by including heat pumps even if your decarbonisation journey starts off without them so that you can size your solar panel installation to be future-proof.

We first look at the electricity and gas use month-by-month in a typical year. If you have energy monitoring or a Smart Meter then this information may be readily available. If you do not, it is likely that all you know is the energy use in a typical year. Splitting a typical year’s energy use to monthly usage is approximated by using grid average consumption values (heuristics).

The solar power potential for a site is determined by a site walk round as described in this STEM activity or in this example. This is readily evaluated using the database on europa.eu to give a month-by-month prediction for solar power for the site.

Batteries are increasingly used to store electricity generated for use later since maximising solar self-consumption is usually economically desirable. Here the battery size may be selected based on site usage or it may be decided not to have one. The approach here is to assume a single electricity tariff applies throughout the day (time of use tariffs such as Economy 7 allow more active use of a battery by buying and selling electricity at different prices which could give a further economic benefit).

Understanding the space heating requirements of the buildings follows. If we know what the old boiler efficiency is and how much gas is used for heating (as opposed to cooking) then we can back-calculate the heat required for space heating. Knowledge of the heat pump Coefficient of Performance or CoP (what heat you get out divided by the electricity you purchase to run your heat pump, often in the range of 2.5 to 5) for the usage profile gives the electricity required for future space heating.

Calculation

The monthly usage kWh and the monthly generation kWh give us a view of the typical daily usage and typical daily generation we might expect (solar generation can be above or below this depending on weather and cloud cover). The self-consumption at the time of generation comes from scaling the usage during the day with the approximate daylight hours and approximate solar utilisation percentage. The shortfall is the usage minus the consumption. The surplus is the generation minus the consumption. If the battery is charged principally from excess solar generation then the electricity required to be stored is the shortfall divided by the battery round-trip efficiency. The actual electricity stored is the minimum of the battery capacity, the surplus solar and the electricity required to be stored. The electricity recoverable is this multiplied by the battery round-trip efficiency.

Exported kWh = Generation kWh – Self-consumption at the time of generation kWh – Electricity sent to the battery kWh

Grid Purchased kWh = Usage kWh – Self-consumption at the time of generation kWh – Electricity recovered from the battery kWh

These are translated to month-by-month:

• Demand kWh
• Generation kWh
• Purchased kWh
• Exported kWh

Economic Return on Investment

We need to set some cost assumptions:

• What is the cost of grid electricity in p/kWh?
• What is the cost of grid gas in p/kWh?
• What, if anything, is the solar export payment available in p/kWh?

Then we need to establish a Rough Order of Magnitude cost for the solar panel installation, the battery and the heat pump installation. If installers give quotes or estimates then these are clearly preferable to estimating a cost. Freely available academic papers and internet searches have enabled a rough cost number to be created here (with the caveat that this may already be out of date due to high inflation on the one hand and manufacturing cost reductions on the other, plus there are offers sometimes available on older stock for example):

• Solar costing example: £300 per panel + £600 per 10 kW rating on the inverter + £2000 per installation per roof (basic installation including the cost of a low power inverter, one storey scaffolding, wiring, setup and paperwork) + exceptional costs (the scaffolding cost on a church is best assessed by knowledge of the last time scaffolding was used)
• Battery costing example: £500 per kWh size + £1000 installation.
• Heat pump costing example: £2-£4 per annual input kWh (lower costs are for air-to-air types, higher costs for air-to-water types, an installer estimate is preferred due to location of units and layout complexities)

The sum of these installations gives us the project capital cost.

First, calculate the baseline annual running cost without the project:

• Electricity
• Gas
• Sum of Electricity and Gas

Second, calculate the annual running cost with the project completed:

• Electricity
• Gas
• Export Earnings
• Sum of Electricity and Gas minus Export Earnings

The basic view is that the number of years to break-even is the capital cost divided by the improvement in annual running costs

It is better to use a Net Present Value calculation here. In a Net Present Value calculation, we weight future earnings less than current earnings by the discount factor or interest rate. We could have instead invested the capital in another project or held financial investments like shares instead. Or we could have borrowed the capital with a loan which itself has an interest rate and needs to be repaid. This method gives a more robust view of the return on investment and is recommended.

Emissions Return on Investment

The inputs for this are already established. Now we require the carbon intensity for grid electricity and grid gas. For this we use location-based carbon dioxide equivalent emissions values, not those claimed by energy supply companies. There are a number of good reasons for this: one is that it means our building is not reliant on a particular supply contract, another is that it encourages us to seek equipment that is most efficient, and finally it so happens that very few supply companies reflect the true emissions associated with the supply of energy when using the alternative market-based method.

• In 2023 the UK electricity grid has a location-based carbon intensity of 275 gCO₂e/kWh (including emissions associated with well-to-tank and transmission and distribution losses) [1].
• In 2023 the UK gas grid has a location-based carbon intensity of 213 gCO₂e/kWh (including well-to-tank emissions) [1].

For the purchased equipment, the following embedded emissions are used:

• Solar example: 143 kgCO₂e/panel (panel manufacture) + 980 kgCO₂e/roof (other equipment manufacture and installation). These are, in part, estimated from the lifecycle emissions from roof-mounted solar panels which are around 41 gCO₂e/kWh according to the IPCC (AR5) [2].
• Battery example: 73 kgCO₂e/kWh capacity (battery manufacture) + 100 kgCO₂e/battery (installation).
• Heat pump example: 2 kgCO₂e/annual kWh (estimated, using UK government guidance).

The emissions are actually highly dependent on the supply chain and the carbon intensity of the electricity used in manufacture as well as transport emissions. The sum gives an embedded emissions number in kg, equivalent to the capital cost.

There are two sources of operating emissions: the largest is associated with using grid electricity and the other is fugitive emissions if using a heat pump with a high global warming potential refrigerant.

First, calculate the baseline annual emissions without the project:

• Electricity
• Gas
• Sum of Electricity and Gas

Second, calculate the annual emissions with the project completed:

• Electricity
• Gas
• Fugitive Emissions
• Sum of Electricity and Gas and Fugitive Emissions

The basic view is that the number of years to break-even from a greenhouse gas perspective is the embedded emissions for the complete installation divided by the improvement in annual emissions.

It is insightful to include the projected electricity grid emissions reduction, since we know that the carbon intensity of the electricity grid will be reducing as we approach 2050. By applying a 5% year-on-year reduction in emissions from bought in electricity we can re-check the project benefit.

2. Examples

Full decarbonisation using solar panels + battery + heat pump

Here are two example scenarios for two fictional churches for introducing solar panels, batteries and a heat pump. It is assumed that there is a limit to the number of panels that can be installed.

	Church A	Church B
Annual Gas	40 000 kWh @ 8p/kWh	60 000 kWh @ 8p/kWh
Annual Electricity	5000 kWh @ 30p/kWh	15 000 kWh @ 30p/kWh
Solar Panels	50 x 400Wp facing South (including some minor shading)	20 x 400Wp facing South, 20 x 400Wp facing West (including some minor shading)
Battery	12 kWh	20 kWh
Heat Pump	Air-to-air CoP 4.0 replacing 75% efficient system boiler	Air-to-water CoP 3.5 replacing 70% efficient boiler
Capital Cost	£41k	£65k
Old Running Cost	£4700 per year	£9300 per year
New Running Cost	£1025 per year	£5000 per year
NPV years to break-even with a 5p/kWh Export payment	13 (4% discount factor, 2% electricity inflation)	18 (6% discount factor, 4% assumed electricity inflation)
NPV years to break-even with a 15p/kWh Export payment	11	18
Embedded Emissions	24 tCO2e	33 tCO2e
Old Annual Emissions	9.9 tCO2e per year	16.9 tCO2e per year
New Annual Emissions	1.5 tCO2e per year (excluding displaced emissions of exported electricity)	4.8 tCO2e per year (excluding displaced emissions of exported electricity)
Greenhouse Gas years to break-even	3 (5% expected year-on-year grid decarbonisation)	3 (5% expected year-on-year grid decarbonisation)

The time taken to break-even financially is long in Church B. The financial benefit is quite sensitive to the performance of the heat pump, with lower CoP installations potentially showing little or no payback potential. This indicates that careful specification and design of the heat pump system is important to select high performance systems and ensure its installation does not compromise its performance. It should be noted that this calculation does not compare the cost with the installation of a new gas system (it is assumed that the current gas installation is working and that there is no capital cost required to continue operating it). If it is known that the gas system needs replacing then the heat pump capital cost should be reduced by the capital cost of a new gas system. Unsurprisingly, this means that heat pump systems are more attractive if it is known that more investment would be required to keep burning gas. Furthermore, no discount has been applied to take account of external grants or subsidies. Again the grant amount could be subtracted from the heat pump capital cost for comparison. If the decarbonisation effort were staged for affordability reasons it could be that solar panels are installed first, then a battery and then a heat pump (see next example).

The residual greenhouse gas emissions of 1.5 tonnes (Church A) and 4.8 tonnes (Church B) reflect the carbon intensity of the UK electricity grid today. Because it is a fully electric system, as the UK grid decarbonises, so will these annual emissions figures. These scenarios are compatible with net zero in 2050.

Partial decarbonisation with solar panels then plus battery but without heat pump

Church B with the marginal financial case is looked at with solar only then solar and battery. Note that the sizes of solar installation and battery are maintained at future full decarbonisation requirements to future-proof the installation.

	Church B (solar only)	Church B (solar + battery)
Annual Gas	60 000 kWh @ 8p/kWh	60 000 kWh @ 8p/kWh
Annual Electricity	15 000 kWh @ 30p/kWh	15 000 kWh @ 30p/kWh
Solar Panels	20 x 400Wp facing South, 20 x 400Wp facing West (including some minor shading)	20 x 400Wp facing South, 20 x 400Wp facing West (including some minor shading)
Battery	None	20 kWh
Heat Pump	None	None
Capital Cost	£18k	£29k
Old Running Cost	£9300 per year	£9300 per year
New Running Cost	£7300 per year	£6500 per year
NPV years to break-even with a 5p/kWh Export payment	11 (6% discount factor, 4% electricity inflation)	12 (6% discount factor, 4% assumed electricity inflation)
NPV years to break-even with a 15p/kWh Export payment	8	12
Embedded Emissions	7.7 tCO2e	9.3 tCO2e
Old Annual Emissions	16.9 tCO2e per year	16.9 tCO2e per year
New Annual Emissions	15.5 tCO2e per year (excluding displaced emissions of exported electricity)	14.6 tCO2e per year (excluding displaced emissions of exported electricity)
Greenhouse Gas years to break-even	7 (5% expected year-on-year grid decarbonisation)	5 (5% expected year-on-year grid decarbonisation)
Notes	Panel slope, orientation and shading comes from a real case study, so directions are close to but not exactly South and West facing.	Assumes a single electricity rate, not day and night time rates. Fractional improvement in years to break-even with 15p/kWh Export payment does not show when years are rounded up.

Both of these options still use gas and are therefore not compatible with net zero. The residual greenhouse gas emissions of 15.5 tonnes (Church B, solar only) and 14.6 tonnes (Church B, solar plus battery) show little reduction from the original 16.9 tonnes.

Knowledgable readers may observe that our costings are a little conservative. This should give confidence that even if ethical purchasing requires slightly higher unit costs, the return on investment opportunities are still available.

A STEM educational resource is being developed to support this return on investment piece and will be posted later this year. Or if you would prefer more tailored support for your church please contact us.

[1] UK Government GHG Conversion Factors for Company Reporting, Department for Energy Security and Net Zero and Department for Environment Food & Rural Affairs, 2023.

[2] IPCC AR5 2014 carbon intensities: https://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_annex-iii.pdf, p.7