Ready, Aim . . . Nothing
I lost another can’t miss opportunity the other day.
I don’t like losing – especially when it’s an interesting project that I priced to win. The worst part was that I lost the project to the fiercest competitor in the energy efficiency business . . . nothing. Yes, nothing won again so yet another energy savings project won’t be built. How can nothing keep winning?
“Nothing” is the word that I use to describe a project that does not get built because the customer doesn’t find the value of the energy savings sufficient to justify completing a given project. In other words, the client has decided to do nothing. Nothing is a very common competitor for energy savings contractors. Perfectly good projects that have multiple beneficial impacts and sound returns on investment don’t get approved due to a perceived poor payback.
Losing that project has me thinking about what is a payback. What are savings? How are they calculated? What should be included? What shouldn’t? What’s a “good” payback? I’ll treat these questions in this and a couple of future posts. As with many things, there’s no absolutely agreed method for determining the payback for an energy project. I will describe the generally acceptable practices and also discuss optional methods. In this first post, we’ll review the math used for calculating energy savings to estimate project payback.
At its core, any energy conservation measure is designed to reduce utility consumption and therefore save money. For most clients, the driver is saving money. Even though there may be other benefits, normally, the only benefit that is used to analyze a project is the financial return. Here’s the math:
Utility cost before – Utility cost afterwards = On-going savings.
Seems simple, but the devil is in the details. The simple example that’s regularly trotted out involves two light bulbs. A 60-watt incandescent is replaced with a 19-watt compact fluorescent (CFL), which saves 41 watts. Multiply the 41 watts by the cost of power and the number of hours and you get the amount of savings:
Annual Electricity Savings = (Daily hours x 365 days/year) x Watts saved x Cost
. 1000 kWh
There a couple of very important variables that go into our calculation that are critical. The biggest is daily hours (or burn hours) which is perhaps the single most important assumption. In our example, if the bulb is in an exit stair that is lit 24 / 7 and electricity cost $0.10 / kWh, then the project saves $36 per year. However, if the light’s in a closet that is only opened 5 times a year for an hour, those savings evaporate down to a measly 2 cents. As you can see getting burn hours correct is hugely important and often fudged.
Another critical variable is the estimated watts saved. In our example, the math is very simple, or is it? A CFL’s light output fades over its lifetime of 6000 – 15,000 hours. If the reduction in output causes occupants to turn a lamp, the watts saved is dramatically lower.
The other significant variable in the calculation is the cost of electricity. Often, paybacks are calculated assuming a flat cost for energy, which is fine in many cases. However, for a portfolio of buildings each one is likely to be on different rate. Using a blanket rate across a portfolio is likely to deliver misleading results. Also, is the customer on a flat rate or a time of use (TOU) tariff? If TOU and the lights are mainly on at night, the savings calculations should use the night time rate.
And that’s just the simple calculation. More robust analysis could include other factors such as maintenance costs, excess heat, environmental impact, and disposal costs. I’ll look at those cost in future posts.