Federal agencies are required to evaluate energy-related investments on the basis of minimum life-cycle costs (10 CFR Part 436). A life-cycle cost evaluation computes the total long-run costs of a number of potential actions, and selects the action that minimizes the long-run costs. When considering retrofits, sticking with the existing equipment is one potential action, often called the baseline condition. The life-cycle cost (LCC) of a potential investment is the present value of all of the costs associated with the investment over time.
The first step in calculating the LCC is the identification of the costs. Installed Cost includes cost of materials purchased and the labor required to install them (for example, the price of an energy-efficient lighting fixture, plus cost of labor to install it). Energy Cost includes annual expenditures on energy to operate equipment. (For example, a lighting fixture that draws 100 watts and operates 2,000 hours annually requires 200,000 watt-hours (200 kWh) annually. At an electricity price of $0.10 per kWh, this fixture has an annual energy cost of $20.) Nonfuel Operations and Maintenance includes annual expenditures on parts and activities required to operate equipment (for example, replacing burned out light bulbs). Replacement Costs include expenditures to replace equipment upon failure (for example, replacing an oil furnace when it is no longer usable).
Because LCC includes the cost of money, periodic and aperiodic maintenance (O&M) and equipment replacement costs, energy escalation rates, and salvage value, it is usually expressed as a present value, which is evaluated by
where
PV(x) denotes "present value of cost stream x,"
IC is the
installed cost,
EC is the annual energy cost,
OM is the annual nonenergy
O&M cost, and
REP is the future replacement cost.
Net present value (NPV) is the difference between the LCCs of two investment alternatives, e.g., the LCC of an energy-saving or energy-cost-reducing alternative and the LCC of the existing, or baseline, equipment. If the alternative's LCC is less than the baseline's LCC, the alternative is said to have a positive NPV, i.e., it is cost-effective. NPV is thus given by
or
where
subscript 0 denotes the existing or baseline condition,
subscript 1 denotes the energy cost saving measure,
IC is the
installation cost of the alternative (note that the IC of the baseline is
assumed zero),
ECS is the annual energy cost savings,
OMS is the annual
nonenergy O&M savings, and
REPS is the future replacement savings.
Levelized energy cost (LEC) is the breakeven energy price (blended) at which a conservation, efficiency, renewable, or fuel-switching measure becomes cost-effective (NPV >= 0). Thus, a project's LEC is given by
where EUS is the annual energy use savings (energy units/yr). Savings-to-investment ratio (SIR) is the total (PV) savings of a measure divided by its installation cost:
Some of the tedious effort of life-cycle cost calculations can be avoided by using the Building Life-Cycle Cost software, BLCC, developed by NIST. For copies of BLCC, call the FEMP Help Desk at (800) 363-3732.