There is no official method for determining cost-effectiveness, but local governments must make a cost-effectiveness determination, based on the method they deem appropriate, and show the evidence they used to the California Energy Commission.
In practice, cost-effectiveness is often measured by a benefit-to-cost ratio. Put simply, the benefit equals the total energy bill savings expected from the energy conservation measure(s) and the cost is the incremental cost of installing the measure(s). A ratio of at least 1.0 is considered cost-effective, indicating the benefit exceeds the cost. Another commonly used measure of cost-effectiveness is simple payback. Simple payback is calculated by dividing the upfront installation cost by the annual utility savings. The resulting value indicates the number of years it takes to pay back the initial cost. Generally, an energy-efficiency measure is considered cost-effective when it pays back less than 15 years. The exact cutoff value is a matter of opinion and depends on the context, but usually falls between 10 and 20.