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ESTIMATING FUEL PRICE INFLATION

By Solarbair, LLC © June 24, 2011

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.

The FUEL PRICE INFLATION TABLE below shows that heating fuels have increased in price roughly 5% 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 3.4% when offsetting heating fuels.

Future fuel prices are affected by multiple economic and political factors including:

- Rising population and affluence increase demand. World oil consumption has increased by 33% in the last 30 years (EIA). Oil consumption in the last decade in China and India is up 71% and 46% respectively (EIA). 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 global warming and greenhouse emissions hot issues, a carbon taxes or regulation could increase fuel prices. - Unrest in oil exporting countries tends to push up prices.

- The ongoing financial slow down has reduced oil consumption in the US and Europe, lowering world consumption by 1.8% between 2007 and 2009. The recession, depending on the extent and duration, acts a downward force on fuel prices.

The fuel inflation rate makes a significant impact on both the payback period and money saved over the lifespan of a renewable energy system. In the example from the Payback For Businesses article, using 5% instead of 3% for fuel inflation shortens estimated simple payback while increasing estimated cumulative savings over 25 years by 44%. To see how a current fuel cost of $3,500 per year accumulates over time see the ESCALATING FUEL COST TABLE below.

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 investments 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.

If you want to do some financial analysis of your own see the BUSSINESS PAYBACK CALCULATOR. Be advised the calculator uses the Excel program.

 

fuel price inflation table

escalating fuel costs table