How to select, prioritize, & justify economically viable energy projects

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1 How to select, prioritize, & justify economically viable energy projects Eileen Westervelt, Senior Energy Engineer U of I Business Presenter s Innovation name Services; Professional Naperville, Title (eg. IL architect/energy specialist..) Smart Energy Design Assistance Center (SEDAC), University of Illinois at Urbana Champaign Providing effective strategies for public and private buildings in Illinois

windmill, solar panel, green roof - Sticker shock can cause a stall or

2 Economics Brings Context to Grand Efficiency Plans We tend to get started with energy efficiency w/ a Let s Go Green enthusiasm windmill, solar panel, green roof - Sticker shock can cause a stall or derailing of efforts. - There is a time and place for windmills, usually not first

3 Outline Start with option and impact table Select your projects Prioritize projects Justify projects

4 Sample Options and Impact Table Annual Savings Measure Electricity (kwh) Electric Demand (kw) Natural Gas (therms) Building Energy (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) Lighting 274, % $28,524 $107,000 24% $72, Heat pump -4, ,320 30% $2,919 $148,515 2% ($88,000) 50.9 Boiler 0 0 6,729 16% $7,572 $45,000 14% $12, Window #1 7, ,539 21% $4,336 $244,530-8% ($207,618) 56.0 Window #2 46, ,022 11% $9,861 $123,750 5% ($819) 13.0 Roof Insulation 6, % $1,598 $20,136 17% $4, T-Stat % $1206 $ % 9, VSD 31, % $3,445 $20,000 15% $45, What to do? What first? Priorities?

5 Outline Start with option and impact table Select/Screen your projects Prioritize projects Justify projects

6 Select Projects for Further Consideration - Key Ideas 1. Instead of first cost, look at life cycle 2. Set and screen for criteria that matches your business model (cash flow, MARR, planning horizon) 3. Consider overriding criteria (comfort)

7 Select Projects First blush desires: Low First Cost Quick payback Annual Savings Measure Electricity (kwh) Electric Demand (kw) Building Natural Gas Energy (therms) (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) But first cost screening doesn t capture the nature of energy projects

returned over many years $30,000 $25,000 $176,695 $135,887 $20,000 $15,000

8 Select Projects: Recognize the long term nature of energy projects Project Life: Lighting, Controls (~10yrs) Envelope, HVAC Equipment (~25yrs) Benefits returned over many years $30,000 $25,000 $176,695 $135,887 $20,000 $15,000 First Cost $10,000 Operations $5,000 $

9 Select Projects: Recognize the long term nature of energy projects Life Cycle Cost Analysis More fitting, comprehensive approach than first cost Accounts for Time value of money Lifetime of projects (laptop vs. roof) Persistence of savings SEDAC Level 3 assessments includes life cycle cost analysis (available on larger projects), Level 2 quantifies energy savings.

10 Select Projects: to set criteria, review your business model Cash flow Planning horizon (long or short haul) Discount rate (self determined time value of money) Typically 5% public, 10% private institution Minimum acceptable rate of return (get real)

11 Select Projects: Example Other Investments Type APR Time commitment RISK Prime Rate 3.25% n/a n/a Savings Account 0.50% None low 1 year CD 0.75% 1 year Low 5 year CD 1.40% 5 year Low 24% 1 year S&P 500, average 38% 3 year -5% 5 year Med/high Energy Efficiency Loan 5% Varies Med

12 Select Projects: Investment Horizons help ID target projects Quick SPB Longer SPB ECRM Computer Power Mgt. Programmable T- Stat Typical Simple Payback (Median-Average) <1yr Lifetime 1-5 yrs yr 10 yrs Boiler Tune Up 1 yr 1-2 yrs Motion Sensors 2-3 yrs 10 yrs Sealing 2-4 yrs 3-5 yrs Lighting 4-3 yrs 10 yrs HVAC replacement 7-14 yrs 20 yrs Insulation 7-16 yrs 25 yrs Window Films 8-10 yrs 10 yrs Windows 8-21 yrs 25 yrs Renewable Energy yrs 25 yrs

13 Select Projects: Choosing Economic Indicators Meaning Example Simple Payback (SPB) # of years to recoup capital from annual savings 5 year simple payback Simple Cash Flow Annual Saving finance costs Net Present Value (NPV) Total value of project in today's dollars Net annual cost $1.5 million NPV 10% IRR Internal Rate of Return (IRR & ROI) Annual interest yield of project during its lifetime Criteria Payback < n years Positive cash flow vs negative Positive indicates profitable project IRR > discount rate Comment Misleading Ignores financing & long-term cash flows Use when cash is tight Real flow of money Looks at strategies in financing timeframe Good Measure User must specify discount rate Long time horizon Can be fooled when cash flow goes positivenegative-positive Shorter horizon

14 Select Projects: Set Criteria Common Thresholds on Economic Indicators: IRR> discount rate (maybe > finance rate) NPV>0 (Monetary value added to organization) Positive cash flow in X years Overrides for Essential Services (heating, lighting, comfort)

15 Select Projects: ID: Go/No-Go/Hold Annual Savings Measure Electricity (kwh) Electric Demand (kw) Natural Gas (therms) Building Energy (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) Lighting 274, % $28,524 $107,000 24% $72, Heat pump -4, ,320 30% $2,919 $148,515 2% ($88,000) 50.9 Boiler 0 0 6,729 16% $7,572 $45,000 14% $12, Window #1 7, ,539 21% $4,336 $244,530-8% ($207,618) 56.0 Window #2 46, ,022 11% $9,861 $123,750 5% ($819) 13.0 Roof Insulation 6, % $1,598 $20,136 17% $4, T-Stat % $1206 $ % 9, VSD 31, % $3,445 $20,000 15% $45,

16 Select Projects: Sample Options Selected (short list) Annual Savings Measure Electricity (kwh) Electric Demand (kw) Natural Gas (therms) Building Energy (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) Lighting 274, % $28,524 $107,000 24% $72, Boiler 0 0 6,729 16% $7,572 $45,000 14% $12, T-Stat % $1206 $ % 9, VSD 31, % $3,445 $20,000 15% $45,

17 Outline Start with option and impact table Select your projects Prioritize projects Justify projects

18 Prioritize Projects - Key Ideas Essential Needs come first (e.g. failed equipment) Incorporate efficiency into planned projects (insulate with new roof) Strategic Ordering for cost savings Max/min your Criteria

19 Prioritize Projects: Strategic ordering reduces long term costs -Seize the window of opportunity Start w/ orientation and envelope for new construction Start with end-use requirements for existing buildings Reduce loads & improve equipment efficiencies before renewables

20 Prioritize Projects: Sample Options Strategically Ordered Annual Savings Measure Electricity (kwh) Electric Demand (kw) Natural Gas (therms) Building Energy (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) 1. T-Stat % $1206 $ % 9, Lighting 274, % $28,524 $107,000 24% $72, VSD 31, % $3,445 $20,000 15% $45, Boiler 0 0 6,729 16% $7,572 $45,000 14% $12,

21 Prioritize Projects: Sample Options Ordered to Maximize Cost Savings Annual Savings Measure Electricity (kwh) Electric Demand (kw) Natural Gas (therms) Building Energy (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) 1. Lighting 274, % $28,524 $107,000 24% $72, Boiler 0 0 6,729 16% $7,572 $45,000 14% $12, VSD 31, % $3,445 $20,000 15% $45, T-Stat % $1206 $ % 9, Maximizing cost savings usually minimizes carbon footprint

22 Prioritize Projects: Sample Options Ordered by Impact (NPV) Annual Savings Measure Electricity (kwh) Electric Demand (kw) Natural Gas (therms) Building Energy (%) Cost Savings Installation Costs IRR (%) NPV Simple Payback (yrs) 1. Lighting 274, % $28,524 $107,000 24% $72, VSD 31, % $3,445 $20,000 15% $45, Boiler 0 0 6,729 16% $7,572 $45,000 14% $12, T-Stat % $1206 $ % 9,

23 Outline Start with option and impact table Select your projects Prioritize projects Justify projects

24 Justify Projects - Key Ideas Meet Economic Criteria by Bundling projects Accounting for additional factors (e.g. maintenance) Marginal cost analysis Incorporate incentives Establish Funding Stream Cash on hand Cash accumulated over time Other people s cash Guaranteed savings with performance contracting

25 Justify Projects Bundle projects to achieve desired economics Quick Returns Medium Returns Long Returns Tune up Thermostats Occupancy Sensors Timers Variable Speed Drive Insulation Lighting Insulation Boiler Windows

Justify Projects: Some factors add additional weight to efficiency projects Reduced Maintenance Usable Floor Space (near windows) Worker/student comfort and productivity Aesthetics (better

26 Justify Projects: Some factors add additional weight to efficiency projects Reduced Maintenance Usable Floor Space (near windows) Worker/student comfort and productivity Aesthetics (better appearances) Functionality (working systems) Controllability (dimming lighting) Reduced global warming Reduced vulnerability to markets Public relations The table of impacts is just one piece of the decision.

27 Justify Projects: w/ Marginal Cost Analysis Energy Cost Reduction Measure (ECRM) Natural Gas Savings Annual Cost Savings Energy Cost Savings Cost IRR NPV SPB (therms/yr) ($/yr) (%) (yrs) Boiler Upgrade (High Efficiency 95%) 9,669 $8,957 22% ($5,722 in fuel, $3,235 in Maintenance) of NG heating costs Full First Cost Net Cost after Incentive Incremental Cost (above standard 80% system) Net Incremental Cost after Incentive $161, % ($35,520) 18 $149, % ($23,520) 17 $80,880 10% $45,360 9 $68,880 12% $57,360 8

28 Justify Projects: by Incorporating Incentives Annual Facility Savings Financial Analysis Energy Cost Reduction Measure Electric kwh Electric Demand kw Natural Gas Therms $ Cost % Estimated Cost IRR (%) NPV Simple Payback (yrs) ECRM1: Upgrade Gym Lighting from MH to T8 Fluorescent With $1,350 in Incentives 2,318 3 (17) $ % $1,800 6% $ $450 12% $

30 Justify Projects: Cash Flow Techniques Upgrade Financing Monthly Utility Costs Savings Save for Long Term investments Time Use your own money, or other people s money Allow savings to pay for financing Roll quick savings into long term investments Purchase energy savings performance contracts

31 Cash Flow Techniques $45,000 Roll quick savings into long term investments $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $- Yr Yr Yr Yr Yr T-Stat Lighting VSD Boiler Accumulating Wealth

32 Key Ideas - Review 1. Identify Projects (for further consideration) a) Look at life cycle b) Set and screen for your criteria ( cash flow, MARR, planning horizon) c) Consider overriding criteria (comfort) 2. Prioritize Projects (order) a) Needs b) Strategic order c) Maximize impact over life cycle (typically NPV) 3. Justify a) Meet criteria by Bundling, Adding externalities, Marginal cost, with Incentives b) Identify a funding stream Cash on hand, Accumulated cash over time, Other people s cash, Allow savings to pay for financing, Get guaranteed svgs w/ ESPC

33 Presentations will be available at: presentations.sedac.org Web site: Contact:

Energy Efficiency Simple, Safe Investment. Tim Gasper, PE Brady Energy Services (919)

Energy Efficiency Simple, Safe Investment Tim Gasper, PE Brady Energy Services (919) 781-0458 TJGasper@Trane.com Energy Efficiency in Attractions and Accommodations Energy Costs On average, America s 47,000