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Since there will usually be a number of acceptable design alternatives
for any project, cost/benefit analyses help you select the ones
that have the best savings potential.
Depending on the aggressiveness of the design, experience has
shown that it costs no more than 10% more to build high-performance
buildings. Some high-performance buildings cost less to construct.
Sometimes additional upfront costs can be justified because the
investment will reduce operating costs through the life of the building.
The added cost, if any, of system investment each year is compared
to the cost of fuel saved each year. Total energy costs are, on
average, about 50% less than those for conventionally designed buildings.
In many cases, the right-sizing of mechanical systems through passive
solar design offsets the costs for additional windows or controls.
In analyzing alternative building energy efficiency improvements,
conversions, or purchases, cost/benefit analysis is used to determine
if and when an improvement will pay for itself through energy savings,
and to set priorities among alternative improvement projects. Cost/benefit
analyses may be conducted using a simple payback analysis or a more
sophisticated analysis of total life-cycle costs and savings. Since
most electric utility rate schedules are based on both consumption
and peak demand, your analyst should be skilled at assessing the
impacts of both.
Before beginning any cost/benefit analyses, you must first determine
acceptable design alternatives that can meet the heating, cooling,
lighting, and control requirements of the building being evaluated.
The criteria for determining whether a design alternative or alternative
fuel is "acceptable" should include reliability, safety, conformance
with building codes, occupant comfort, noise levels, refueling issues,
and even space limitations.
Simple Payback Analysis
A highly simplified form of cost/benefit analysis is called simple
payback. In this method, the total first cost of the improvement
is divided by the first-year energy cost savings produced by the
improvement. This method yields the number of years required for
the improvement to pay for itself. For new construction, it can
be used to evaluate conventional construction to energy-efficient
design alternatives.
In simple payback analysis, you are assuming that the service
life of the energy efficiency measure will equal or exceed the simple
payback time. Simple payback analysis provides a relatively easy
way to examine the overall costs and savings potentials for a variety
of project alternatives. However, it does not consider a number
of factors that are difficult to predict, yet can have a significant
impact on cost savings. These factors may be considered by using
a more sophisticated life-cycle cost analysis.
As an example of simple payback, consider the lighting retrofit
of a 10,000-square-foot commercial office building. Relamping with
T-8 lamps and electronic, high-efficiency ballasts may cost around
$13,300 ($50 each for 266 fixtures) and produce annual savings of
around $4,800 per year (80,000 kWh at $0.06/kWh). The simple payback
time for this improvement would be $13,000/$4,800 annually = 2.8
years. That is, the improvement would pay for itself in 2.8 years,
a 36% simple return on the investment (1/2.8 = 0.36).
Standardized Payback Equations
You can take advantage of a building energy measurement and verification
guideline that standardizes procedures for quantifying energy savings
from energy-efficiency projects. Called the International
Performance Measure Measurement and Verification Protocol, this
guideline reduces risk and standardizes paperwork. It also enables
loans to be bundled together and sold on a secondary market, like
mortgages.
Life-Cycle Cost Analysis
Life-cycle costing (LCC) is an analysis of the total cost of a
system, device, building, or other capital equipment or facility
over its anticipated useful life. LCC analyses allow a comprehensive
assessment of anticipated costs associated with a design alternative.
Factors commonly considered in LCC analyses are initial capital
cost, operating costs, maintenance costs, financing costs, the expected
useful life of equipment, and future equipment salvage values. The
result of the LCC analysis is generally expressed as the value of
initial and future costs in today's dollars as reflected by an appropriate
discount rate. The Rebuild
America Life-Cycle Cost Calculator helps you to calculate the
net present value of two alternatives and compare them using this
cost-benefit method.
The first step in performing an LCC analysis is to establish the
general study parameters for the project, including the base date
(the date to which all future costs are discounted), the service
date (the date when the new system will be put into service), the
study period (the life of the project or the number of years over
which the investor has a financial interest in the project), and
the discount rate. When two or more design alternatives are compared
or when a single alternative is compared against an existing design,
the variables compared must be the same to assure that the comparison
is valid. It is meaningless to compare the LCC of two or more alternatives
if they are computed using different study periods or different
discount rates.
Selecting the "Best" Alternatives
Generally, all project alternatives should be initially screened
using simple payback analyses. A more detailed and costly LCC analysis
should be reserved for large projects or those improvements that
entail a large investment, since a detailed cost analysis would
then be a small part of the overall cost. Both simple payback and
LCC analyses will allow you to set priorities based on measures
that represent the greatest return on investment. In addition, these
analyses provide a preliminary indication of appropriate financing
options:
Energy efficiency measures that have a short payback period
of 1 to 2 years are the most attractive economically and should
be considered for implementation using operating reserves or other
readily available internal funds. Energy efficiency measures that have payback periods from 3
to 5 years may be considered for funding from available internal
capital investment monies, or may be attractive candidates for
third-party financing through energy service companies or equipment
leasing arrangements. Frequently, short payback measures can be combined with longer
payback measures of 10 or more years to increase the number of
measures that can be cost-effectively included in a project. Projects
that combine short- and long-term paybacks are recommended to
avoid "cream-skimming" (implementing only those measures that
are highly cost effective and have quick paybacks) at the expense
of other worthwhile measures. A selected set of measures with
a combination of payback periods can be financed either from available
internal funds or through third party alternatives.
If simple payback time is 10 or more years, economic factors are
very significant and LCC analysis is recommended. In contrast, if
simple payback occurs within 3 to 5 years, more detailed LCC analysis
may not be necessary, particularly if price and inflation changes
are assumed to be moderate. Under this assumption, a simple payback
analysis will often be within 15% to 20% of the payback time estimated
from a detailed LCC analysis. In general, detailed LCC analyses
may not be justified if the payback of the improvement is less than
five years.
In any cost analysis, it is very important to include avoided
cost as part of the benefit of the retrofit. When upgrading or replacing
building equipment, the avoided cost of maintaining existing equipment
should be considered a cost savings provided by the improvement.
Weighing Societal Impacts
Some factors related to building heating, air conditioning, and
lighting system design are not considered in either simple payback
or LCC analyses. Examples include the thermal comfort of occupants
in a building and the adequacy of task lighting, both of which affect
productivity.
Conventional cost/benefit analyses also normally do not consider
the societal benefits from reduced energy use (e.g., reduced carbon
emissions, improved indoor air quality). In some cases, these ancillary
benefits are assigned an agreed upon monetary value, but the values
to be used are strongly dependent on local factors. In general,
if societal benefits have been assigned appropriate monetary values
by a local utility, they are considered in savings calculations.
However, your team should discuss this issue with your local utility
or consultants working on such values in your area.
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