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Energy Audits Techno-Economics & the Business Case Kathi

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Energy Audits Techno-Economics & the Business Case Kathi Futornick, URS Corporation PNWIS 2010 Energy Conservation and Green Initiatives November 4, 2010 – PowerPoint PPT presentation

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Title: Energy Audits Techno-Economics & the Business Case Kathi


1
Energy Audits Techno-Economics the Business
Case
  • Kathi Futornick, URS Corporation
  • PNWIS 2010
  • Energy Conservation and Green Initiatives
  • November 4, 2010
  • University of Montana, Missoula, Montana

2
Take Aways
  • Energy efficiency is an essential component of a
    carbon reduction future
  • The business case is demonstrated through
  • Verifiable operating cost reductions and payback
    analysis
  • Balance between financial return and carbon
    reduction
  • The business case is an integrated approach
  • Green building ? energy efficiency
  • Energy audit professionals need to understand
  • Technical aspects
  • Economics
  • Tax Incentive Programs

3
Global warming overthe past millennium
Near the end of the last century, we crossed a
critical threshold, and global warming from GHG
became a major, and increasingly dominant, factor
in climate change. Global mean surface
temperature is higher today than its been for at
least a millennium.
4
PRICE OF OIL
5
OUT OF GAS
6
Oil Gasoline Price History
7
Energy - Future
After dipping in 2007, energy prices commenced
their upward trend as the developing world
continued to industrialize, as supplies continued
to be restricted, as cheap gas diminished, and as
regulators plan for a reduced carbon future.
8
Buildings Share of Energy Consumption
9
How Do Green Building Programs Measure Up?
  • United Nations Study
  • Sustainable Buildings Climate Initiative Study
  • 36 case studies
  • 104 LEED buildings
  • 10 top AIA buildings
  • Other studies conducted by
  • NREL
  • Arizona State

10
Different Buildings Types, Locations
11
Ratings/Awards of 104 Case Studies
12
Annual Energy Consumption Best Practice Cases
13
Measured vs. Proposed Savings
14
Efficiencies in Buildings Vehicles
  • Green actions have a positive net present value
    while avoiding GHG emissions (/ton)
  • Brown actions have a negative net present value
    while avoiding GHG emissions (/ton)
  • Blue values describe how many GHGs are avoided in
    billions of tons per block

Source Natural Resource Defense Council (NRDC)
15
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16
Best Practices in Energy Efficiency
  • Pew Study (2010)
  • Identified best practices in corporate energy
    efficiency
  • Project funded by 3-year, 1.4 million grant from
    Toyota
  • Focus was on management approaches to improving
    efficiency throughout a company, including
  • Internal operations
  • Supply chains
  • Products services
  • Report published March 31, 2010
  • Web portal (www.pewclimate.org/energy-efficiency)
    contains additional resources and project-related
    materials

17
PEW Report
  • The Business Case for Energy Efficiency
  • Pew Center Survey Results
  • The 7-Habits of Highly Efficient Companies
  • Best Practices
  • Internal Operations
  • Supply Chains
  • Products Services
  • Case Studies

18
Motivations for EE Strategies
19
US Climate Change Legislation
  • Number of Companies Percent
  • Within Two Years
  • 27
    57.4
  • After Two Years, Before Four
  • 20
    42.6
  • Total
  • 47
    100.0

20
Meeting EE Resource Needs
  • Reassign Existing Staff
  • Engage External Consultants
  • Strategic Partnerships with Utilities
  • Engage Energy Service Companies
  • Hire New Staff
  • Strategic Partnerships with NGOs
  • Strategic Partnerships with Trade Associations

21
Who Are the EE Champions?
22
Greatest Barriers
23
Barriers to Energy Efficiencies
  • Energy costs are major portion of corporate
    expense
  • Often viewed as a fixed cost and paid for out of
    accounting coffers
  • Little incentive for engineers and managers to
    specify higher initial cost equipment with
    long-term savings potential.
  • Competing Projects
  • Any energy efficient project, and rate of return,
    would be compared to other projects vying for the
    same dollars.
  • And these internally competitive projects could
    possibly develop revenue, as opposed to manage
    expenses.
  • Best ally is CFO or accounting office
  • Research and apply various valuation techniques
  • Best technologies and strategies not well
    understood by facilities, EHS or corporate
    management

24
Supply Chain Energy Efficiency
25
Seven Habits of Highly Effective CompaniesPew
Study (cont.)
  • Efficiency is a core strategy
  • Leadership and organizational support is real and
    sustained
  • Company has energy efficiency goals
  • Strategy relies on a robust tracking and
    measurement system
  • Organization puts substantial resources into
    energy efficiency
  • Energy efficiency strategy shows results
  • Company effectively communicates results

26
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27
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28
Green vs. Energy Efficient Retrofits
  • ENERGY EFFICIENT
  • RETROFITS
  • Reduce loads
  • Reduce energy usage
  • Optimize systems efficiency
  • Provide controls
  • Integrated, lifecycle approach
  • Quantifiable metrics
  • Guaranteed savings
  • Measurable payback and
  • return on investment
  • GREEN BUILDING
  • PRACTICES
  • Renewable, recycled-content,
  • reused and locally produced
  • materials
  • Indoor air quality (voc-free
  • materials, DCV)
  • Green cleaning
  • Recycling programs
  • Energy conservation
  • Water reduction
  • Integrated pest management

29
Industry Drivers for Energy Efficient Retrofits
  • Converging Forces
  • Recognition of need to develop more sustainable
    and efficient business practices
  • Acceptance of energy supply constraints and
    national security issues posed by energy
    dependence
  • Emerging city/state initiatives
  • Corporate trend toward GRI reporting, self
    regulation and reduction in GHG emissions
  • Customer, employee and shareholder pressures
  • Business Opportunity
  • Growing pressure to alter appraisals, values for
    lending and purchasing based on
  • sustainability
  • Reduced operating costs through efficiency
  • Increased marketability, competitiveness
  • Improved work environments, productivity,
    recruitment and retention
  • Positive NPV and ROI
  • Fund improvements through energy savings
  • Maintain value

30
Create a Replicable Model
  • Identify Opportunities
  • Narrow ideas to implementable projects
  • Evaluate Measures
  • Assess NPV, GHG reductions, to metric ton of
    carbon reduced
  • Create Packages
  • Maximize NPV, balance NPV with carbon savings
  • Model Iteratively
  • Iterate energy and financial modeling to identify
    greatest benefits and recommendations

31
  • Designed to give an overview of all energy
    impacts on a site
  • To facilitate the development of ideas
  • All ideas are valid!

32
Technical Elements
  • OFFICE EQUIPMENT
  • DOMESTIC HOT WATER
  • INSULATION
  • AIR INFILTRATION
  • COMPRESSED AIR
  • DRYING PROCESS
  • MONITORING AND TARGETING,
  • DATA ANALYSIS AND BILLING
  • BEST PRACTICE DEVELOPMENT
  • GENERAL INFORMATION
  • BASICS
  • ENVIRONMENT
  • LIGHTING
  • LIGHTING OPERATION AND USE
  • CHILLERS
  • BOILERS
  • VENTILATION
  • AIR CONDITIONING

33
Capital Budget Basics
  • Net Income Bottom Line
  • Profitability
  • Profitability is measured by whether a projects
    internal rate of return passes the investment
    hurdle rate
  • Cash flow and liquidity are evaluated by first
    cost and payback.
  • Net Present Value
  • The present value of the expected net cash flows
    of a value investment, discounted at an
    appropriate percentage rate, minus the initial
    cost outlay of the project.

34
Capital Budgeting Glossary
  • Cost of capital The discount rate that is used
    in the capital budgeting process.
  • Discount rate The interest rate used to discount
    future revenue streams.
  • Hurdle rate The minimum acceptable internal rate
    of return for a project.
  • Internal rate The interest rate that equates the
    present value of expected of return future cash
    flows to the initial cost of the project.
  • Simple payback The number of years required to
    return the original investment from net cash
    flows.
  • Time value Money received today is valued more
    highly than money of money received at a future
    date.

35
Net Income Analysis
  • Simple Payback - not a good indicator of
    profitability
  • Does not consider returns on investment beyond
    the payback period
  • Does no take into account the time value of money
  • Most common tools used
  • Internal Rate of Return (IRR) compares projects
    return against a hurdle rate
  • Are financial criteria being met?
  • Is project worth pursuing?
  • Net Present Value (NPV) compares and prioritizes
    against competing projects
  • Used to demonstrate todays investment and future
    returns

36
Financial Evaluation Framework
  • Prepare cash flow analysis for each upgrade or
    new design option
  • Calculate IRR for each option. Determine each
    options profitability against the hurdle rate.
  • Compare competing options and prioritize options
    within a package using NPV.
  • Maximize energy efficiency by packaging upgrade
    options or carefully integrating systems where
    appropriate.

37
Business Analysis Process
  • Cash Flow Analysis
  • Evaluates profitability with IRR and NPV
    requires the preparation of a cash flow analysis.
  • Prepare a simple cash flow analysis for each
    potential energy-performance option suggested by
    an energy audit
  • Analysis lists costs and savings for
  • Implementation
  • Operation
  • Maintenance, and
  • Disposal costs, and
  • Energy and demand savings, over the life of the
    equipment or building
  • Each option generally has a first cost and a
    stream of cost savings

38
Project Energy Cost Savings
  • Purpose of an Energy Audit Report
  • Converts energy and demand savings into monetary
    savings based on current energy rates and
    operating schedules.
  • If energy price projections identify an change,
    adjust the amount of savings in future years.
  • Also, for a multiyear project, phase in the
    energy savings over the first few years as
    appropriate.
  • Be sure to document
  • Energy rates that are used for the calculation
    and
  • Planned operating schedules in the list of key
    assumptions including maintenance costs

39
Qualitative Measures
  • Provide qualitative guidance.
  • Additional savings or costs can be difficult to
    quantify.
  • Potential savings that are hard to measure
    include worker productivity gains, increased
    sales attributable to the upgrade, and enhanced
    corporate image.
  • Omitted savings/costs should simply be classified
    as having a negative, neutral, or positive
    influence on the net annual cash flow.

40
Cash Flow Assumptions
  • Estimating cash flow is the most difficult part
    of any financial analysis.
  • Estimates of energy savings, operation and
    maintenance costs savings are based on
    assumptions that may be affected by numerous
    variables.
  • Because future events may not occur as
    anticipated in your assumptions, the IRR realized
    for the project may vary considerably from your
    original estimate.
  • Recognizing this uncertainty, you should
    explicitly list the assumptions underlying your
    cash flow estimates,
  • At a minimum, assumptions that should be
    documented are the future prices of energy and
    your basic operating conditions.
  • Tax Implications depreciation

41
Profit and Priority
  • Profitability Test (IRR)
  • Calculate the IRR for each project
  • Compare it to hurdle rate.
  • If the option exceeds hurdle rate, project would
    be considered profitable and should be pursued.
  • IRR should be used to determine profitability for
    each project.
  • IRR should not be used to compare or prioritize
    projects
  • This approach can minimize first cost rather than
    maximizing energy performance and long-term
    savings.
  • Prioritize Options
  • NPV discounts the future total net cash flow over
    a projects life cycle, and tells what a
    projects future cash flow is worth in todays
    dollars.
  • Note that IRR and NPV are related
  • A negative NPV indicates that the option
    generates less than the established internal rate
    of return.
  • NPV can be used to prioritize rank the value of
    options

42
Other Key Factors
  • Bundling Upgrades
  • Including options that are considered marginally
    profitable or require a long term rate of return,
    but can still contribute to maximizing the energy
    efficiency of a project
  • Example, upgrading furnace may not meet required
    hurdle rate. However, when more profitable
    lighting and water heater are packaged together
    with furnace upgrades, the combined project IRR
    can exceed the hurdle rate.
  • Life Cycle Cost Analysis
  • Life-cycle costing (LCC) is an analysis of the
    total cost of a system, device, building or other
    capital equipment or facility over its
    anticipated useful life. LCC analyses allow a
    comprehensive assessment of anticipated costs
    associated with a design alternative. Factors
    commonly considered in LCC analyses are initial
    capital cost, operating costs, maintenance costs,
    financing costs, the expected useful life of
    equipment and future equipment salvage values.

43
The Intangibles
  • Improved employee productivity
  • Optimized operations
  • Regulatory compliance
  • Strategic maintenance planning
  • Reliability and reduced downtime
  • Public relations and shareholder value

44
Financing Assistance
  • Federal
  • State and
  • Local Tax Incentives

45
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46
Renewable Portfolio Standards
www.dsireusa.org / June 2010
ME 30 x 2000 New RE 10 x 2017
VT (1) RE meets any increase in retail sales x
2012 (2) 20 RE CHP x 2017
WA 15 x 2020
MN 25 x 2025 (Xcel 30 x 2020)
MT 15 x 2015
NH 23.8 x 2025
MI 10 1,100 MW x 2015
MA 22.1 x 2020 New RE 15 x 2020(1
annually thereafter)
ND 10 x 2015
  • OR 25 x 2025 (large utilities)
  • 5 - 10 x 2025 (smaller utilities)

SD 10 x 2015
WI Varies by utility 10 x 2015 statewide
RI 16 x 2020
NY 29 x 2015
CT 23 x 2020
NV 25 x 2025
IA 105 MW
OH 25 x 2025
PA 18 x 2021
  • CO 30 by 2020 (IOUs)
  • 10 by 2020 (co-ops large munis)

WV 25 x 2025
NJ 22.5 x 2021
IL 25 x 2025
CA 33 x 2020
KS 20 x 2020
UT 20 by 2025
VA 15 x 2025
MD 20 x 2022
MO 15 x 2021
DE 20 x 2020
AZ 15 x 2025
DC
OK 15 x 2015
  • NC 12.5 x 2021 (IOUs)
  • 10 x 2018 (co-ops munis)

DC 20 x 2020
NM 20 x 2020 (IOUs) 10 x 2020 (co-ops)
TX 5,880 MW x 2015
HI 40 x 2030
29 states DC have an RPS (7 states have goals)
State renewable portfolio standard
Minimum solar or customer-sited requirement

State renewable portfolio goal
Extra credit for solar or customer-sited
renewables

Solar water heating eligible
Includes non-renewable alternative resources
47
Federal Provisions
  • Other Programs
  • US Department of Agriculture
  • Biomass Crop Assistance Program
  • Renewable Energy Grants
  • Investment Tax Grant (ITG)
  • Bonds
  • Clean Renewable Energy Bond
  • Qualified Energy Conservation Bond
  • US DOE Loan Guarantees
  • Depreciation
  • Cellulosic Biomass Fuel Bonus Depreciation
    Deduction
  • Tax Credits
  • Renewable Electricity Production Tax Credit
  • Business Energy Investment Tax Credit
  • Biomass for Electricity Tax Credit (Sec. 38 45)
  • Cellulosic Biofuel
  • Ethanol Excise Tax Credit
  • Small Ethanol Producer Non-conventional Fuel
    Production Tax Credit
  • Biodiesel and Renewable Diesel Tax Credit
  • Alternative Fuel Mixture

48
Tax Credits
  • PTC (Production Tax Credit )
  • Eligible if placed in service by December 31,
    2013
  • Per-kilowatt-hour tax credit
  • Five-year credit duration
  • ITC (Investment Tax Credit)
  • 30 credit for certain property (10 for others)
  • Placed in service after October 3, 2008 before
    January 1, 2013
  • Must meet 60 energy efficiency

49
Summary
  • Energy Efficiency is necessary to GHG reduction
    and can improve profitability
  • Green building ? energy efficiency
  • An Energy Audit is more than just a technical
    stepped process
  • The business case is demonstrated through
  • Verifiable operating cost reductions and payback
    analysis
  • Balance between financial return and carbon
    reduction
  • The business case is an integrated approach
  • Energy audit professionals need to understand
  • Technical aspects
  • Economics
  • Tax Incentive Programs

50
Thank you
  • Questions
  • After November 15th kfutornick_at_lifeport.com
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