An Overview of Life-Cycle Cost Analysis

Transcription

1 Maturity and Value of Energy Efficiency PNNL-SA An Overview of Life-Cycle Cost Analysis Doug Elliott Pacific Northwest National Laboratory August 17, 2017 Tampa Convention Center Tampa, Florida

2 What is Life-Cycle Cost Analysis (LCCA)? method of project evaluation in which all costs arising from owning, operating, maintaining, and ultimately disposing of a project are considered. (NIST Handbook 135) Used to compare and select from competing alternatives Retrofit: existing situation vs. more efficient scenario(s) New construction: two or more options 2

3 What is Life-Cycle Cost Analysis (LCCA) (cont.)? Streams of costs for each alternative captured over an analysis period, and discounted to present values (PVs) Can be used to prioritize projects when resources are limited Federal life-cycle costing methodology for energy, water, and renewable energy projects described in 10 CFR 436A 3

4 Why should we care? Two common methods to select from alternatives 1) Focus on up-front costs only 2) Simple payback Pros Easy to calculate, understand Cons Lack of discounting (not taking account of time value of money, and timing of costs) (Possible) failure to include price escalations (e.g. energy, water) No accounting for differences in equipment lives No accounting for anything beyond payback period Easy to make sub-optimal choice! 4

5 How is LCCA better? Takes account of: Full array of costs Timing of costs, and time value of money Changes in costs over the analysis period $250 $200 $150 $100 $50 $0 ($50) ($100) Installed Costs Energy Costs Water Costs O&M Costs Residual Value 5

6 Typical components of LCCA cost streams Installed costs (first costs, or up-front costs) Annual energy, water and sewer costs Energy and water use Energy, water, and sewer prices Periodic costs, such as O&M (annual or otherwise) Replacement costs (if any, during analysis period) Residual values (if any) LCC = IC + PV(E/W/S) + PV(O&M) + PV(REP) - PV(RESID) 6

7 Typical components of LCCA example $250 $200 $150 $100 $50 $0 ($50) ($100) Installed Costs Energy Costs Water Costs O&M Costs Residual Value 7

8 Annual cost comparison base and alt. cases $250 Base Alt. Base Alt. Base Alt. Base Alt. Base Alt. $200 $150 $100 $50 $0 ($50) ($100) Installed Costs Energy Costs Water Costs O&M Costs Residual Value 8

9 Present values, discounting Discount rates used to convert future costs to present values Nominal or real (excluding inflation) discount rates Federal energy and water projects: NIST provides discount rates each year Currently 2.4% nominal and 3.0% real Real rate has floor of 3.0%, as specified by 10 CFR 436A Private-sector projects: may use cost of funds (e.g. cost of debt, cost of equity) 9

10 Other key elements or inputs Analysis period Price escalations Other inputs include: Expected life of new equipment Estimated time to failure of existing equipment 10

11 Analysis period As long as residual value is considered, choice of analysis period length isn t (usually) critical Must be the same within each set of mutuallyexclusive alternatives examined Reasonable, simplifying analysis period options: Life of new/retrofit equipment Remaining life (time to fail) of existing equipment 11

12 Price escalations Energy, water and sewer prices can fluctuate much differently than general inflation Energy: 1) utility forecast 2) annually-revised rates from NIST/EIA for Federal projects Water/sewer: much more difficult to come by 1) utility forecast 2) historical data for utility (forthcoming PNNL report) 3) water/sewerage CPI component from BLS (4.71%/yr, ) 4) CPI (2.15%/year, , likely to be conservative) Equipment For mature technologies, prices often assumed to move in sync with general inflation (e.g. no real price escalation) 12

13 The importance of price escalations Image provided by Janice Beecher of the Institute of Public Utilities at Michigan State University 13

14 Tip re: analysis scope Usually do not need full base-case and alternative-case energy/water/sewer costs Can typically focus on impacted increment, sometimes reducing data requirements Example: Savings of project specified as base-case consumption Alternative-case consumption specified as zero 14

15 Scope example $1,200 $1,000 $800 $600 $400 $200 $0 Analysis includes all energy or water use Base Case Retrofit Net Energy or Water Savings $1,200 $1,000 $800 $600 $400 $200 $0 Analysis limited to impacted increment Base Case Retrofit Net Energy or Water Savings 15

16 Project evaluation metrics Net Savings (sometimes referred to as Net Present Value, or NPV) LCC base - LCC alternative = Net Savings If project cost-effective, Net Savings > 0 Savings-to-Investment Ratio (SIR) (PV of operational savings)/(pv of incremental investment costs) = SIR If project cost-effective, SIR > 1.0 Useful to prioritize cost-effective projects when funding insufficient for all Do NOT use to choose among mutually-exclusive options (use Net Savings instead) 16

17 PV cost comparison base and alt. cases $700 Base Case PVs Alt. Case PVs Net Savings $600 $500 $400 $300 $200 $100 $0 ($100) Installed Costs Energy Costs Water Costs O&M Costs Residual Value Net Savings 17

18 Examples of Net Savings and SIR Scenario Installed Cost PV Energy Costs PV O&M Costs PV Residual LCC Base Case $0.00 $ $ $0.00 $ Net Savings Alt1 $ $ $60.00 $78.35 $ $ Alt2 $ $ $60.00 $61.70 $ $ SIR Base Case $0.00 $ $ $0.00 $ Alt1 $ $ $ $25.58 $ $ Alt2 $ $ $ $12.28 $ $ Within the two sets of mutually-exclusive options, choose the option with the lowest LCC, and thus this highest net savings. To prioritize scarce funds among the two "winners, use the SIR. The second example's "winner" provides about 82% of the energy and O&M savings for about 3/4 of the required investment. 18

19 Tools BLCC Windows and macos Allows analyst to quickly begin LCCA with relatively little learning curve Follows FEMP LCCA methodology Includes following modules/analysis types FEMP Analysis, Energy Project Federal Analysis, Financed Project OMB Analysis, Non-Energy Project MILCON Analysis, Energy Project MILCON Analysis, Energy Conservation Investment Program (ECIP) Project MILCON Analysis, Non-Energy Project 19

20 Tools (cont.) Spreadsheet-based analysis Provides flexibility Potentially provides greater transparency Requires substantially greater knowledge of methodology, with sometimes complex formulas Possibly more labor-intensive, depending on task and experience 20

21 Resources NIST Handbook 135 Life-cycle costing manual for FEMP; a fantastic reference Annual Supplement to Handbook 135 Provides annual revisions to energy price escalations and Federal discount rates BLCC Energy Escalation Rate Calculator (EERC) ENCOST17.txt energy escalation rate data file (for use with spreadsheet analyses) 21