Is Rainwater Harvesting a Good Investment?
by John Hammerstrom and Doug Pushard
Is harvesting rainwater a good investment? We will explore that question in depth in this three-part series, beginning in Part One with a traditional economic payback approach.
The short answer is, yes, rainwater harvesting systems can deliver a good return on investment. In certain areas of the country and the world, catching rainwater for household use is the only cost-effective solution. In locations like central Texas, parts of Northern Mexico, and arid rocky areas where no municipal water system is available and where well drilling can be prohibitively expensive, harvesting rainwater is a smart economic and environmental choice.
Additionally, with rising costs of utility water, rainwater harvesting systems can now make good financial sense for homeowners in high-water-rate areas (e.g., Santa Fe, NM; San Diego, CA, etc.), and we can calculate the payback. For homeowners with monthly water bills of $200 or more, short-term, positive returns can usually be demonstrated, and long-term returns may also be realized through increase in property values. Here we will focus on short-term returns.
Why does rainwater harvesting pay off in the short term?
Higher water rates and new, tiered rate systems (i.e., rate systems that are not flat fees per water used, but tiered so the more water used, the higher the cost per gallon) are frequently making rainwater harvesting systems economically viable. Just a small sample of some of the recent water-rate increases:
Water rates can be expected to continue to increase faster than the rate of inflation, so in more areas rainwater harvesting will make great economic sense. These increases are being driven by population growth and demand, diminishing fresh water supplies, and greater costs to process water to make it drinkable. Increased costs will spur more conservation, but it will also make the option of rainwater harvesting more viable for people (see related articles). As an aside, ironically, because many water utilities’ revenues are tied directly to the sale of water, they often have to raise rates to compensate for improved efficiency and conservation, which creates an upward spiral of cost that benefits the rainwater harvesting argument.
When does a system make good financial sense?
A quick and easy way to answer this question is to determine how soon the investment will pay for itself (i.e., the Payback Period). Then determine if this length of time is acceptable compared to other investments you could make.This method provides a simple comparison tool to weigh one expenditure against another. Similar calculations are often done for other appliances, for example:
- New refrigerators are significantly more efficient than the previous technology, and depending on the relative efficiency of your old and chosen new fridges and the cost of electricity, the electricity bill savings can “pay for” the new appliance in short order, and continue to deliver the savings for many years.
- The same calculation is true of replacing an old HVAC unit.
- New clothes washers save electricity and water, often for a terrific payback.
A cold financial analysis would compare home improvement purchases to investment purchases (i.e., investing money in a mutual fund). Sometimes spending money on a money-saving device may deliver a better return on your investment. The savings will continue to mount for the appliance or rainwater-harvesting system’s lifetime and the savings often accelerate as the cost of the alternative rises (higher water rates).
So calculating the Payback Period is a simple method to evaluate the investment of a rainwater system, given local water rates.
The calculation is:
Payback Period = Amount to be Invested/Estimated Annual Savings
An installed active rainwater system (i.e., with pumps and associated components that are more expensive than passive systems) will typically cost about $3 to $6 per gallon of system size, depending on system specifics (above or below ground, amount of piping required, number of pumps, etc.), not including gutters. The numbers used below are for illustrative purposes and will vary widely for your specific local rainfall, cistern size requirements, water rates, system features, installation costs, etc.
So for example, a 4,000-gallon system might cost $15,000. Assume a household with a current water bill of $200 a month, or $2,400 a year. Over ten years this household would pay $24,000 (10 x $2,400) to the water company, assuming no rate increases! If water rates increase just 3% a year for ten years, the total utility water cost would be $27,513. At 7%, it would equal $33,159. And heaven forbid, at 10%, it would total $38,250!
Assuming that 50% of the total household water use would be replaced by rainwater, then a 4,000 gallon system would pay for itself in 12.5 years at today’s prices.
$15,000 / $1,200 = 12.5 years
At a 3% annual price increase, the payback would be even quicker. The annual value of the utility water saved is $1376 (50% x $27,513 ÷ 10).
$15,000/$1,376 = 10.9 years
At 7%, the payback period is nine years, and at 10%, 7.8 years.
Of course, these calculations assume that your rainwater harvesting system is paid for up front with no financing costs. If you are financing your rainwater harvesting system with an interest bearing loan or credit card, this must be factored in to your Payback Period calculations.
How to compare to other investments
Another way to determine if a system makes good financial sense is to compare it to other investment alternatives.
Which is a better investment: paying $15,000 for a rainwater system that yields $1200 a year in savings, or putting that money in a money market account bearing 4% interest a year?
A 4% interest-bearing account would yield $600 a year on your $15,000 investment, whereas your rainwater system would yield $1,200 a year. To put it another way, a $1,200 annual yield on a $15,000 investment is equivalent to an 8% return.
It is currently unlikely to find a low-risk, interest-bearing investment that returns 8% a year. And the return on a rainwater system will only improve over time as utility water rates rise.
So, not to mention the environmental and societal reasons that we will discuss in subsequent articles, installing a rainwater harvesting system is often simply a good investment.
In Part II of this series we will use a Return on Investment tool to compare rainwater harvesting system investments with other investments. We’ll also review the impact of financing a system. Part III will discuss the indirect financial considerations (intangibles) that could be included in your decision to install a rainwater harvesting system.