Review of Cost Benefit Analysis of Code Measures

Transcription

1 Review of Cost Benefit Analysis of Code Measures Mark Halverson and Meredydd Evans Pacific Northwest National Laboratory Seminar on Analysis For Energy Code Development in Vietnam Hanoi Jan 12, 2016

2 Outline Cost Benefit Analysis Background The Importance of Cost Benefit Analysis Goals and Methods of Cost Benefit Analysis Relevant Financial Concepts Relevant Cost and Factors Methods Bottom Line

3 Cost Benefit Analysis Background Increasing the energy efficiency or stringency of a building typically incurs a first cost. The costs may in the form of more insulation, a better window, more efficient equipment, or additional controls. The improved efficiency of the building typically leads to lowered utility costs. The process of comparing the increased first costs to the expected savings is called cost benefit analysis.

4 Application of Cost Benefit Analysis to Code Revision or Development Current Status (no or old code requirement) Assess current cost of construction Assess current energy usage and energy cost Proposed Change Assess new cost of construction Assess new energy usage and energy cost Assess cost effectiveness of change using differential first costs and differential energy costs

5 Example Cost Benefit Scenario The VBEEC currently requires a thermal performance for flat roofs of 1.00 W/m 2.K Changing that requirement to 0.95 W/m 2.K would save energy and reduce energy costs, but would increase the first cost of construction Is this change cost-effective? Is this change acceptable to all parties?

6 Why is Cost Benefit Analysis Important? Many building owners and developers are focused on the cost of construction. If it were up to them, codes would never improve because improving codes usually lead to higher cost buildings. However, the purpose of the energy code is to save energy and governments typically want their codes to continually improve. Recognizing both the costs and the benefits is an important part of getting the code accepted.

7 Some Changes to Codes Don t Require Cost Benefit Analysis Changes to wording made to clarify a requirement do not typically have either first costs or energy cost benefits associated with them There may be intangible benefits associated with having a more understandable code, but this is very hard to quantify. Administrative changes to a code such as changes in how the code is administered do not typically have either first costs or energy cost benefits associated with them. Again, there may be intangible benefits associated with how the code is administered, but this is very hard to quantify.

8 Some Changes May Not Need Cost Benefit Analysis Changes such a change in a reference standard may not incur any costs or provide any benefits if industry is already using the new reference standard. Changes such as adding a new option to a code do not typically incur costs as the change is optional and not required. Users of the code do not have to use the option unless they want to. Users who do want to use the option typically see some sort of benefit to using the option, either in terms of design flexibility or lower first costs. These benefits can be very specific to particular users.

9 Many Changes Do Require Cost Benefit Analysis Increasing the stringency of a technical requirement For example, requiring more insulation in a roof Adding new technical requirements For example, adding a new requirement for cooking equipment or walk-in coolers. Making an optional or prescriptive requirement mandatory For example, making use of window fins or overhangs mandatory

10 Goal and Methods of Cost Benefit Analysis The goal of cost benefit analysis is to determine if a change is cost-effective and should therefore be made. There are five common ways of determining costeffectiveness Life cycle costs Net savings Savings to Investment Ratio Adjusted internal rate of return Estimated Simple payback Rough Estimate Only!

11 Financial Concepts - Time Value of Money All methods except the estimated simple payback rely on present value calculations, which in turn rely on the fact that money spent or saved in the future must be discounted back to today s value. For this reason, most of the methods except estimated simple payback are best done using software that calculates and keeps track of the assumptions used. Also for this reason, many users prefer the estimated simple payback even though it is not as accurate as other methods.

12 Financial Concepts NPV, IRR, PP Net present value: Internal rate of return: (Value of r to make NPV=0) Payback Period:

13 Relevant Costs Fuel costs electricity, natural gas, fuel oil, other fuels Non- Fuel Costs Investment costs Operation and maintenance costs Replacement costs Salvage value

14 Relevant Factors Fuel Escalation Rates How is price of fuel estimated to change over time? Discount Rates How is the value of money estimated to change over time? Interest Rates How much interest could money spent on improving a building earn otherwise? Tax Rates How much might the taxes be on any savings?

15 Life Cycle Costs Life cycle costs are the sum of the present values of (a) Investment costs, less salvage values at the end of the study period; (b) Non-fuel operation and maintenance costs; (c) Replacement costs less salvage costs of replaced building systems; and (d) Energy and/or water costs. The lower the life cycle cost the better.

16 Net Savings For a new building design, net savings is the difference between the life cycle costs of an alternative design and the life cycle costs of the basic design. For a retrofit project, net savings may be found by subtracting life cycle costs based on the proposed project from life cycle costs based on not having it. The higher the net savings the better.

17 Savings to Investment Ratio The savings-to-investment ratio (SIR) is the ratio of the present value savings to the present value costs of an energy or water conservation measure. The numerator of the ratio is the present value of net savings in energy or water and non-fuel or non-water operation and maintenance costs attributable to the proposed energy or water conservation measure. The denominator of the ratio is the present value of the net increase in investment and replacement costs less salvage value attributable to the proposed energy or water conservation measure. SIR greater than 1 is cost-effective

18 Internal Adjusted Rate of Return The adjusted internal rate of return (IRR) is the overall rate of return on an energy or water conservation measure. Calculated by subtracting 1 from the nth root of the ratio of the terminal value of savings to the present value of costs, where n is the number of years in the study period. The numerator of the ratio is calculated by using the discount rate to compound forward to the end of the study period the yearly net savings in energy or water and non-fuel or non-water operation and maintenance costs attributable to the proposed energy or water conservation measure. The denominator of the ratio is the present value of the net increase in investment and replacement costs less salvage value attributable to the proposed energy or water conservation measure. IRR greater than discount rate is cost-effective

19 Rough Estimate Only Estimated Simple Payback The estimated simple payback time is the number of years required for the cumulative value of energy or water cost savings less future non-fuel or non-water costs to equal the investment costs of the building energy or water system, without consideration of discount rates. An energy or water conservation measure alternative is likely to be cost-effective if estimated payback time is significantly less than the useful life of that system, and of the building in which it is to be installed.

20 Bottom Line Calculating cost-effectiveness can be a lot of work, but is necessary for some types of code changes. See next presentation on collecting the necessary information to do cost benefit analysis for energy code changes.

21 Questions and Discussion