A twofactor method for appraising building renovation and energy efficiency improvement projects

1
A two-factor method for appraising building
renovation and energy efficiency
improvement projects

• Prof., habil.dr. Vytautas Martinaitis,
• Vilnius Gediminas technical university
• Deptm. Heating and ventilation

2
Housing is a multifaceted phenomenon which is
expected to meet many requirements

• human (functionality in use, safety, health,
  comfort),
• Economic (economy of investment, construction and
  lifetime),
• Cultural (lifestyle, building traditions,
  business culture, aesthetics, architectural
  styles and trends, image),
• Ecological requirements (economy of raw
  materials, energy, environmental burdens and
  waste, also biodiversity).

Energy use in the building is only one of many
factors influenced to solution of investors and
owners
3
Lessons from Energy Efficiency Housing Pilot
Project (EEHPP,The World Bank, 2002) in Lithuania

• The main motivations of homeowners to take the
  loan for renovation were (in order of
  Importance)
• (i) to improve their own apartment (better indoor
  climate, new windows, etc.),
• (ii) to carry out urgent repairs of the building
  (leaking roofs, etc.) thus prolonging the life of
  their asset,
• (iii) to obtain energy (expenses for energy)
  savings.
• Energy saving is not main factor, owners of
  buildings are worried about integrated solution
  of problems

4
Best technical solutions
for building renovation

• Reduce expenses for energy resources
• Reduce expenses for building maintenance
• Improve value of building in the RE market
• Improve security and comfort
• Ameliorate aesthetic value ect.

Many owners look for this kind of solution, but
how consider all of this factors during project
evaluation?
5
Current building renovation assessment
methods

• Energetics assessment methods
• Simple payback time (PBT)
• Net present value (NPV)
• Internal rate of return (IRR)
• Cost of conserved energy (CCE)
• Economic benefit of project assessed only by
  savings of expenses for energy

• Multiple criteria analysis
• Benefit of project assessed under several
  criterions
• Like
• reduction of expenses for energy
• improved comfort
• improved public health
• expend workplace ect.
• Need human and technical resourses

6
Cost of Conserved Energy calculation
advantage

• Results of the CCE analysis coincide with results
  of the NPV and IRR analyses, however
• calculation of the CCE is simpler
• its interpretation is more understandable.
• it is independent of future energy prices,
  therefore
• Cost of Conserved Energy calculation
  will be used in the two-factors method

7
Cost of Conserved Energy CCE

• CCE I CRF / dE
• CCE cost of conserved energy, Euro/kWh
• I the investment cost (this may just be the
  capital cost, or may also include the present
  value of additional operation and maintenance
  costs due to the energy efficiency measure), Euro
• CRF the capital recovery factor to annualize
  the investment cost of the measure
• dE - the annual savings in physical units, e.g.
  kWh
• If the cost occurs at time zero and energy is
  saved at a constant rate of dE per year, the CRF
  can be calculated CRF d/(1-(1d)-n), where n is
  the lifetime of the measure (in number of years)
  and d the consumers annual discount rate.
• During assessment of project CCE is compared
  with Cost of energy resources. If save is
  cheaper good project!

8
Two-factors project appraising method

• In the building renovation and energy efficiency
  improvement projects two-factors are appraised
• Energy saving
• building improvement
• Ideally such method should
• include more criteria than just savings of
  energy or fuel,
• be simple and easy to use,
• require a minimum of vague assumptions,
• be as close as possible to methods currently
  used.

9
Building improvement and energy efficiency
measures can be divided into three groups
(E)

• energy efficiency measures,(E)
• so-called two-fold measures, i.e. both saving
  energy and improving building construction, (T)
• building improvement or renovation measures, (C).

(T)
(C)
10
Main steps of two-factors project assessment
method (1)

• Assessment of investment ceiling.
• Investments division and coupling into
• energy saving investments IE IECE and
• building quality improving investments IC IECC
• - investments of two-fold measures are
  divided into two components energy saving IECE
  and building quality improving IECC
• Assessment of cost efficiency
• The energy efficiency group of investments is
  assessed using the CCE criteria
• building quality improving group of investments
  is assessed be comparing with accumulated funds
  for building maintenance, repairing and
  renovation (MRR).

11
Main steps of two-factors
project assessment method (2)
(sum of investment)
Price of old building, KO (/m2)
Point of two-factors project assessment method is
investments dividing of in two groups and its
assessment using different criteria!
12
Assessment of investment ceiling

• I lt (KN KO)f
• I - sum of investment, Lt/m2
• KN price of new building, Lt/m2
• KO - price of old building, Lt/m2
• f the corrective factor taking into account
  building location, aesthetics and other
  additional amenities.

KN
f
I
KO
13
Investments division and coupling (1)

• Investments of two-fold measures (IEC), i.e.
  both saving energy and improving building
  construction are divided into two components
  energy saving (IECE) and building quality
  improving (IECC)
• IEC IECC IECE
• IECC k IEC
• IECE IEC - IECC
• k - building rehabilitation coefficient
• k t/tmax (linear coefficient)
• t actual age of the element
• tmax lifetime of the element in years
• Examples of nonlinear deterioration functions
  kf(t) can be found in the References 1,2.

14
Investments division and coupling (2)

• Homogeneous energy efficiency investments are
  then coupled with the energy efficiency component
  of investments of two-fold measures (IE
  IECE)
• Homogeneous building improvement or renovation
  investments are coupled with the renovation
  component of two-fold measures (IC IECC)
• - really in the formulas are sum of
  investments SIEiSIECEi and SICiSIECCi , but
  for simplification symbols of sum are omitted

15
Assessment of cost efficiency(1)

• The energy efficiency group of investments is
  assessed using the cost of conserved energy (CCE)
  criteria
• IE IECE ICCE (1)
• ICCE ?r?iPrdEi,r/CRFi
• Pr the price of r type conserved energy
  (district heat, natural gas, electricity,
  (Lt/kWh)
• dEi,r annual conserved energy amount of r type
  by implementation of the i th measure (kWh)
• CRFi capital recovery factor of the i th
  measure.
• If this condition (1) is not met, the composition
  of the energy efficiency and building renovation
  measures should be revised

16
Assessment of cost efficiency (2)

• The building renovation or improvement group of
  investments are assessed using accumulated funds
  for MRR . If the accumulated funds are not
  sufficient, then the NPV of planed regular
  payments for MRR are added
• IC IECC S NPVn (2)
• S the funds for MRR, accumulated by owners of
  building over the previous period
• NPVn net present value of regular payments for
  MRR over a certain
• n period of n years not exceeding the lifetime
  of the proposed measures .
• If this condition (2) is not met, the composition
  of the energy efficiency and building renovation
  measures should be revised

17
Assessment of cost efficiency (3)

• Project appraisers can also use their own
  standard methods for appraisal of MRR
  investments IC IECC (amount of gage or deposit,
  ability of owners and etc.)
• Main idea of the two-factor method is to appraise
  energy efficiency and building renovation
  components separately
• The energy efficiency group of investments is
  assessed using the CCE criteria
• The building quality improving group of
  investments is assessed using conventional
  methods for building maintenance, repairing,
  renovation or construction

18
Case (1)

• In this case the cost-effectiveness of an
  investment in modernizing a typical Lithuanian
  multifamily building constructed in 1985 is
  evaluated.
• heated area of the building - 1725m2
• annual heat consumption - 302MWh
• heat is supplied from the district heating system
  for 37 /MWh (in 2005)
• discount rate - 5
• evaluated time - 30 years
• price of new buildings - 730 /m2
• price of renovated buildings - 610 /m2
• price of old buildings - 440 /m2
• proposed investment 86,2 /m2

19
Case (2)

• Investment package of 86,2 /m2 consist of
• energy saving measures - (a) new heat substation
  (2,9 /m2), (b) renovation of heating (17,4
  /m2) and (c) hot water supply systems (4,4
  /m2), total 24,7 /m2
• twofold measures - insulation of (a) external
  walls (27,4 /m2), and (b) roof (7,6 /m2), and
  (c) replacement of windows (17,5 /m2), total
  52,4 /m2
• renovation measures - (a) replacement of
  external doors (1,3 /m2), (b) repair of
  balconies (3,5 /m2) and (c) renovation of the
  cold water supply system (4,3 /m2), total 9,1
  /m2

20
Case (3)

• Assessment of investment ceiling
• KN KO 730 440 290 /m2,
• Price of comparable renovated multifamily
  building in this region is about 615 /m2, so f
  (615 440)/(730 440) 0,6
• Investment package ceiling 86,2 /m2 lt 290
  /m2 0,6 174 /m2
• Total investment is below of investment ceiling,
  therefore project must pursue

21
Case (4)
22
Case (5)

• Energy efficiency group of investments is
  assessed using the CCE criteria
• energy saving measures group produces a total
  energy efficiency investment of 50,7 /m2
• investment limit from CCE is equal to 65,4 /m2.
• IE IECE 50,7 /m2 lt 65,4 /m2 ICCE
• This component of the investment would therefore
  be paid back via energy savings, and the project
  is feasible from this perspective.

23
Case (6)
Heat price 37 /MWh
24
Case (7)

• Assessement of the building quality improving
  group
• building quality improving group of investments
  is 35,5 /m2
• homeowners of this particular building had
  accumulated 15,9 /m2 for MRR,
• If the homeowners decide to take a commercial
  loan for 15 years keeping the same payments as
  previously for MRR, this loan would add an
  additional 11,6 /m2
• 15,9 11,6 /m2 lt 35,5 /m2 IC IECC
• These amounts together do not cover the total
  costs for renovation, so that homeowners would
  need either to cover these additional costs (9
  /m2) from their savings or to reconsider the
  composition of the proposed project by putting
  more emphasis on energy efficiency measures.

25
Case (8)
Conclusion project must be corrected or owners
could contribute 30 pct. (11,6 8,0 19,6
/m2) at own gage!
26
References

• Martinaitis, V., Rogoa, A., 2001. Technological
  model of building life cycle. Scientific Magazine
  of Vilnius Gediminas Technical University and
  Lithuanian Academy of Sciences Statyba (Civil
  Engineering) 7 (1), 7377.
• Martinaitis, V., Rogoa, A., Bikmaniene, I.,
  2004. Criterion to evaluate the twofold
  benefit of the renovation of buildings and
  their elements. Energy and Buildings 36 (1), 38.
• Martinaitis, V., Kazakevicius, E., Vitkauskas,
  A., 2005. A two-factor method for appraising
  building renovation and energy efficiency
  improvement projects. Energy Policy,
  (http//www.sciencedirect.com).

27
Thank you for your attention