Life-cycle cost (LCC) analysis is a relatively straightforward way to evaluate energy and water conservation technologies that save money long into the future, but which may cost more initially. In other industries, LCC is called Total Cost of Ownership, which takes into account not only energy savings, but also future operating and maintenance costs. If you buy a cheap car or cheap appliance, generally you expect to spend more on its service than for an expensive car or appliance, or you expect that it will not last as long. Since mechanical building systems such as air conditioning last 20 to 25 years and other systems such as glazing and insulation can last the lifetime of the building, it makes sense, certainly for public agencies, non-profits, universities, schools and corporate building owners, to look at the long-term picture.
To complete an LCC for renewable energy systems, energy conservation technologies, more-efficient lighting designs, better glazing for buildings, higher levels of insulation and similar measures, you need to know these four items:
• Initial cost of baseline systems vs. more efficient technology.
• Annual operating costs of the baseline technology vs. the more efficient technology.
• Annual savings (for example, in energy and water) in today's dollars, or in future dollars.
• Some way to express future savings in present dollars (typically called the discount rate).
When these are known or can be reliably estimated, then the calculation is simple and can be expressed in one of two ways, the Net Present Value of Savings (NPV) or the Return on Investment (ROI). If the discount rate is not known, then a method known as the Internal Rate of Return can impute it.
Some engineers still like to use the phrase "payback period," meaning the time it takes to recover the initial increase in investment cost with savings. For example, if a technology costs $300,000 and saves $100,000 per year, then the payback period is three years. This approach helps with risk management (how long are you willing to wait to get your money back?), but it doesn't count savings beyond the payback period that can add significantly to the overall investment return. For instance, typically developers do not include callback frequencies and costs within the investment horizon analysis. (Callbacks include post-occupancy complaints or maintenance problems.) Yet often a green building project will have far fewer callbacks to which developers would need to respond, and these savings can have considerable economic value.
There's one further complication: many people believe that future gas and electric utility prices will increase faster than the rate of inflation. Therefore, a calculation based on energy savings at today's utility rates will underestimate the value of energy conservation investments. So, it may be realistic to examine the utility price trends in your state or local area to see what you think will be the future rates, especially for peak-period power demand (typically occurring on summer afternoons). With electricity demand growing at 5% to 7% per year and supply growing only 2% per year, utility price increases for peak-period electricity use appear to be inevitable.
Public agencies are beginning to require LCC for new projects. For example, the State of Washington requires it for all new public schools.94 You can encourage your school system to do the same, if you want to develop an approach that will result in more energy-efficiency investments.
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