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The objective of the financial an= alysis is to evaluate the cost effectiveness of distinct decarbonization pa= thways and implementation timelines. This means finding the most cost-effec= tive or lowest cost pathway(s) to decarbonization, as opposed to evaluating= packages of ECMs for simple payback, or solely identifying cost-effective = energy efficiency improvements. The overall cost effectiveness of the decar= bonization plan will be determined by the technical approach, the alignment= with the broader capital plan and asset management approach, and the imple= mentation and phasing of measures and interventions.
This workstream brings together t= he technical and economic data on energy and carbon reduction measures to c= reate a holistic techno-economic evaluation of the CO2 reduc= tion opportunity that meets a building owner=E2=80=99s return on investment= criteria. It incorporates all costs and savings associated with individual= ECMs, and the bundling together of ECMs into =E2=80=9CECM packages=E2=80= =9D, as well as the developme= nt of a phasing or implementation plan to align with asset management oppor= tunities.
To develop this final analysis, t= he team follows a three step process outlined in this section.
A financial model is a decision-making tool to help the project team ide= ntify which ECMs should be packaged together in order to optimize carbon sa= vings and mitigate higher cost of some synergistic ECMs. A discounted cash = flow calculation can be used to aggregate the incremental cash flows associ= ated with each proposed ECM and calculate the net present value (NPV). Thes= e incremental cash flows include all positive and negative cash flows assoc= iated with the ECMs (e.g., capital costs, utility cost savings, repair and = maintenance savings, incentives, and avoided LL97 fines in the NYC context,= etc.) and are distributed over time according to when the cash flow will o= ccur. The NPV of each package of ECMs can then be calculated as the sum of = the NPVs of each individual ECM included in the package. NPV, along with ot= her important metrics like cumulative carbon emissions reductions, will be = used to determine the optimal retrofit solution.
INPUTS
Baseline Energy Consumption and Utility Costs - The adjusted baseline energy model and ass= ociated energy consumption should be utilized to determine the baseline uti= lity costs. This information can be obtained directly from the energy = model and is the reference point from which all energy savings for the prop= osed ECMs will be calculated.
Building Operational Expenses Budget- Defining what this budget would be un= der the business-as-usual scenario is necessary to understand the imp= act of a potential ECM on current operational expenses,. This budget= should cover expenses for any regular maintenance of the existing building= systems and be forecast through the duration of the financial analysis stu= dy period.
Building Capital Expenses Budget - Given the lifespan of current building equipment and co= mponents, there should be an existing budget for the replacement of equipme= nt reaching end of life. Reviewing this budget is beneficial to the project= team as it will highlight opportunities to synchronize the implementation = of ECMs with the existing budget and provide access to an additional pool of funding that may otherw= ise not be available.
Discount Rate- The building owner should provide the discount rate to be use in t= he financial model. This rate will be used to determine the net present val= ue (NPV) of future cash flows associated with the implementation of ECMs. B= ecause NPV calculations are highly sensitive to the assumed investment rate= of return on capital, this variable should not be assumed.
Utility Escalation Rate- Utility escalation rates should be applied to the baseline utilit=
y costs of the building in order to capture projected increases in utility =
rates throughout the study period. Typical electrical escalation rates can =
range from 3% to 5%, while fuel escalations can range from 1% to 2%. It may=
be beneficial to review historic annual energy bills to fine tune these es=
calators for your project.
=
p>
Construction Escalation Rate - = em>This rate typically rang= es between 2.5% - 3.0% but may vary depending on the duration of the study = period and the specific technologies and industries involved in the impleme= ntation. For example, a zoning change that fuels a construction boom could = increase this factor as could a recovery from a recession. &nbs= p;
Time Horizon for Financial Model - The project team and owner must establish a time horizo= n for the financial analysis. This will be informed by the expected payback= period for ECMs, the implementation timeline anticipated for certain ECMs = (i.e., those that would most economically be completed at the time of tenan= t lease renewal), as well as project objectives associated with meeting LL9= 7 emissions limits or other similar goals. A ten year time frame is a reaso= nable starting point, however a longer view often creates substantially mor= e carbon reduction.
ACTIVITIES
Incorporate Known Inputs into the Financial Model - = strong>Prior to the inclusion of ECM= s into the financial model, the financial base case can be constructed for = =E2=80=9Cbusiness as usual=E2=80=9D operations. Given the building=E2=80=99= s current energy consumption and associated energy cost, the operations and= maintenance budget, the capital expenses budget, and the anticipated fines= associated with LL97, it is possible to get a sense for what the building = will spend during the study period using and maintaining the existing syste= ms. This will be the baseline against which all ECMs and their associated i= ncremental cash flows are compared. The business-as-usual financial model s= hould be reviewed with the building=E2=80=99s financial and operations team= s to ensure that all inputs have been accurately interpreted and incorporat= ed.
OUTPUTS
Net Present Value (NPV) of the Business-as-Usual Case - Using all known informati= on about the building (utility costs, repairs and maintenance budget, capit= al expenditures budget, anticipated LL97 fines) it is possible to calc= ulate the NPV of business as usual operation. It is importan= t for the project team to highlight to the client the cost of =E2=80= =9Cdoing nothing=E2=80=9D or not implementing any ECMs as it relates to LL9= 7 fines. This will be the financial baseline against which all propose= d ECMs and ECM packages will be compared.
KEY CONSIDERATIONS<= /span>
Once pricing and energy cost saving= s are obtained for every ECM, a preliminary calculation of the net present = value (NPV) can be performed. This will give the project team immediate ins= ight into the economic viability of the proposed measures, although these v= alues should be used only as indicators at this point. The final NPV calcul= ation should also include maintenance implications, rebates, and LL97 fine = avoidance. Nonetheless, these preliminary NPV values along with the carbon = reduction impact of each measure can be used to assess and refine the final= list of recommended ECMs.
The steps in this section can be su= mmarized as:
Develop preliminary estimates of capital, operational, and mai= ntenance costs associated with each ECM identified in the technical analysi= s.
Using the same discount rate for the base case analysis,
Th= e financial baseline model is the point of reference for all subsequent ana= lysis of proposed ECMs. Any energy cost savings associated with an ECM will= be deducted from the baseline energy cost. <= /p>
Preliminary ECM Energy Savings a= nd Energy Cost Savings- Once each individual ECM has been run in the energy model, energy con= sumption and savings information will be available. Utility cost outpu= ts can be used to calculate the associated energy cost savings of each= measure. The energy consumption savings of each measure wil= l be deducted from the baseline to calculate the overall reduced energy con= sumption of the proposed model for every year of the study period.&nbs= p;The energy cost savings will be used as a critical in= put in the calculation of the NPV for each measure. <= span style=3D"letter-spacing: 0.0px;">
ACTIVITIES
Distribute Energy Cost Savings f= or All ECMs - Energy savings and associated energy cost savings should be distributed ac= ross the implementation timeline for each ECM. For example, if a measure is= intended to be implemented over the course of tenant lease roll, then the = anticipated savings would be distributed across those years as opposed to r= ealized all at once. Utility cost escalators should be applied to ensure th= at the savings associated with increasing utility rates are captured approp= riately. Accurate distribution of the energy cost savings across the study = timeline will impact the NPV calculation for each ECM. &nb= sp;
Determine Capital Costs for All = ECMs - The capital costs of= all ECMs will need to be captured in the financial model as it is a critic= al input into the net present value (NPV) calculation. Pricing quotes can b= e obtained directly from an equipment vendor, but should also capture costs= associated with controls and integration into the BMS, as well as associat= ed installation costs. =
For example, wh= ile a vendor may be able to easily calculate the cost for replacing insulat= ion on a piping riser, the true of cost of the measure may n= eed to include the cost of removing and replacing the shaft wall and a= ny potential asbestos abatement work. If the existing insulation is in= poor condition and needs repair soon, the ECM cost might simply be th= e cost differential between restoring the original insulation value and imp= roving it as well as the NPV impacts of an accelerated timeframe of th= e overall expenditure. For this reason, general contractors or cost co= nsultants should be involved in determining the full cost of an E= CM.
Pricing informa= tion can also help inform the details and development of the ECMs. The equi= pment vendors or cost consultants may have suggestions on how to reduc= e cost of ECMs while preserving the design&nb= sp;intent and performance of the measure. Cost consultants s= hould also provide input on which ECMs should be implemented together&= nbsp;to reduce costs associated with general conditions.
Calculate Preliminary NPVs for&n= bsp;All ECMs - Pricing= information and utility costs savings from the energy model = ;can be used to quickly calculate a preliminary NPV value for each ECM= . This will provide deeper insight into the financial perfor= mance of the ECM and allow for comparison between ECMs.
While this info= rmation is helpful for the further development of ECMs and the sequenc= ing and packaging exercise, the project team should remember that these are= not the final values. The complete NPV calculation should include mai= ntenance cost implications, potential rebates and incentives, and anti= cipated LL97 fine avoidance which may change the financial picture of = individual measures.
Necessary capit= al work that does not have an energy efficiency or carbon emissions benefit= and can be superseded by a proposed ECM should be included in the&nbs= p;BAU cashflow analysis in order to avoid underrating the potenti= al performance of proposed ECMs. This is another reason it is critical= to know of all planned or required major capital expenditures in the = BAU case.
OUTPUTS
Analysis of Capital Costs a=
nd Energy Cost Savings for All ECMs - The analysis of initial capital costs and energ=
y cost savings for all ECMs under evaluation can provide the project team w=
ith useful feedback about which measures provide standout savings and conve=
rsely, costs.
For ECMs with high capital costs, review the pricing est= imate in detail and ensure that costs are not being accounted for twice. Re= ach out to the cost consultant and see if there is any way to alter the imp= lementation of the ECMs to consolidate and reduce first costs. =
For ECMs with high energy cost savings, review the savings wit= h the energy modeler to ensure that assumptions are as accurate as possible= and not inadvertently inflating the cost savings results. Energy cost savi= ngs results should be reviewed in tandem with carbon emissions reduction va= lues to understand how these values are correlated.
<= /span>
Source: ESRT energy cost savings of each of the ECMs.
NPV for All ECMs = - Individu= al NPV results for all ECMs are beneficial for the quick assessment and com= parison between ECMs. The magnitude of the NPV and its sign (positive vs. n= egative) helps the project team understand the size of the prize and the ea= se of capture. These values will be used to inform the packaging process de= scribed in the Group, Sequence, an= d Package ECMs section.
<= /span>
Source: ESRT, the net present value of all the E= CMs
= IN PRACTICE - CASE STUDY EXAMPLES=
Playbook Partner | Deliverable |
---|---|
Empire State Building | Click here |
100 Avenue of the Americas | Click here |
= LESSONS LEARNED & KEY CONSIDERATIONS= p>
The complete techno-economic analysis of the ECMs is dev= eloped by including the final energy modeling results =E2=80=93 in the form= of energy, utility, and carbon savings - and revised estimates of costs to= update and expand the financial model. This includes revised energy = costs, maintenance costs, LL97 fines, refined capital and implementation co= sts, incentives, and any other costs/savings the team believes will be incu= rred. The team will need to use judgement, past experience, experienced adv= isors and those familiar with local labor, permitting and logistics costs. = These parameters will be used= to calculate the NPV of each ECM proposed, and as well as for each package= under consideration. Once all costs and benefits have been identifie= d the team can create final versions of the analysis charts for the ECM and= ECM packages that allow the team to evaluate the tradeoffs between greater= CO2e reduction and NPV impact, LL97 fines and the impact of grid decarboni= zation. Along with the carbon reduction potential of the packages, t= hese results will be evaluated against the project objectives. At the end o= f this exercise the project team should determine which package they will r= ecommend to the client based on an optimization of cost, carbon reduction, = and achieving the pre-established project objectives.
The steps in this se= ction to get to the final recommendations can be summarized as:
Segment the ECMs by using a simple matrix that differentiates = between the magnitude of the carbon reduction and the NPV impact. Doi= ng so will help focus the team on the largest impact measures and stimulate= problem solving for those measures that could have a large potential impac= t, but are not currently NPV positive. For example, prioritizing measures t= hat reduce load on HVAC systems, so that smaller HVAC systems can be utiliz= ed, improving the NPV.
Create ECM packages that are logically grouped by implementati= on sequence, subsystem co-dependencies (e.g. air-side improvements), cost s= avings (e.g. open a wall once) and the potential to increase CO2e reduction= while still meeting financial targets (e.g. NPV >=3D 0). <= /p>
Calculate the NPV of these packages and compare to the base ca= se financial model and the carbon reductions.
INPUTS<= /span>
Updated Ene= rgy Savings and Energy Cost Savings - Energy savings and energy cost savings for e= ach measure and = em> each package under consideration= should be updated and added to the financial model. These are direct = outputs from the final modeling results from Workstream 2 =E2=80=9CHigh Res= olution Energy Modeling and CO2 Analysis=E2=80=9D.
= Note that the same ECM may have different energy savings associated with it= in different packages depending on which ECMs are incl= uded within the package. The energy cost savings should be a= pplied across the study period according to the implementation timeline&nbs= p;and the project team should consider delaying the savings by six months t= o one year, taking care not to =E2=80=9Cclaim=E2=80=9D savings too ear= ly. Appropriate utility cost escalators should be applied to all = cost savings.
Updated&nbs= p;Capital Costs - = Capital costs for the final refined ECMs should be updated and added to the= financial model. These costs should be reviewed by the engineering te= am to ensure that all scope has been captured and that pricing compone= nts are not redundant. For example, while it is important to capture costs = associated with general protection and clean up, these costs shou= ld be consolidated for all measures intended to be implemented at the same = time, such as during tenant lease turnover. Any allowances and co= ntingencies should be carefully reviewed for applicability. Current co= ntracts with BMS companies should also be reviewed to determine w= hether controls or sequence of operations upgrades will be charge= d to the client or are already included in the contract.
= While it is important to capture the full extent of the capital costs for e= ach measure, inflated costs run the risk of distorting the final results. T= his could be the difference between implementing or foregoing a particular = ECM. Capital costs for each ECM shou= ld be distributed across the implementation timeline as is appropriate= . Construction escalators should be applied to all cost estimates= to capture the impact of implementing an ECM in the near term vs. toward t= he end of the study period.
Repairs and= Maintenance Costs - = All impacts and adjustments to the current maintenance and repairs bud= get as a result of ECM implementation should be accounted for in the f= inancial model. If an ECM is expected to reduce repairs or m= aintenance costs (e.g., upgrade and replacement of dilapidat= ed equipment, automation of manual processes, etc.) the= n these incremental savings should be included in the financial calcul= ations. Some ECMs may also increase maintenance costs if they&nbs= p;include the addition of new systems or components that require = maintenance. These costs and savings should be applied annually as is = appropriate.
Incentives = and Rebates - Well-establis= hed incentives programs and rebates may also be considered in the= financial model. Although these incremental savings are not guaranteed&nbs= p;in the future, certain incentives are predictable and reliable = enough that they can reasonably be included with low risk. For example, inc= entives for lighting upgrades are fairly predictable. Specialized incentive= s programs for new technologies with large carbon reduction potential&= nbsp;should be considered as they may significantly improve the financ= ial performance of the measure. For example, studying and pursuing inc= entives associated with heat pumps may reduce the payback time or impr= ove the NPV of heating electrification measures. =
Carbon Emis= sions Reductions - Car= bon emissions reductions for each ECM under consideration should be include= d in the financial model. These are direct outputs from the final modeling = results from the Energy & Carbon Modeling section. These reductions will be applied according= to the implementation timeline, in order to calculate the annual= carbon emissions, cost per ton of CO2, and cumula= tive carbon reduction impact of each package.
LL97 Emissio= ns Limits and Other Project Benchmarks - The LL97 building emissions limits for the years 202= 4-2029, 2030-2034, and 2035 and beyond will be needed in order to assess pr= ojected compliance with the law, and project future fines/fine avoidance fo= r 2024-2029 and beyond. Other significant project benchmarks and objectives should be br= ought into the review of the final results to compare the performance of ea= ch package against these metrics. For example, 40%, 50% and = 80% reduction of carbon emissions from a 2005 baseline are common benc= hmarks.
ACTIVITIES
Project&nbs= p;Annual Carbon Emissions for All Packages - Annual carbon emissions are calculated by multi= plying the annual energy consumption of the building by the associated carb= on coefficient for the fuel source. Annual emissions should be calculated f= or the BAU baseline, as well as for each package under consideration so tha= t these projections can be compared to the LL97 limits and other project ob= jectives.
Calculate LL= 97 Fines and Fines Avoided - = LL97 fines are calculated = by determining the difference between the building=E2=80=99s annual em= issions (tCO2e) and the calculated emissions limit for the building (tCO2e)= and multiplying the difference by the fee of $268. Therefore, one needs to= determine the building=E2=80=99s emissions limits for the applicable years= , as well as the projected annual carbon emissions. Annual carbon emissions= are calculated by multiplying the energy consumption of the building by th= e associated carbon coefficient for the fuel source. Fine avoidance can be = calculated by using the projected future energy consumption for the buildin= g as the proposed ECMs are implemented.
Although building em= issions limits can be calculated for the years 2024-2029 and 2030-2034, and= an ultimate limit has been included in the law for the time period between= 2035 and 2050, carbon coefficients are currently not available for the yea= rs 2030 and beyond. While carbon coefficients for fuel sources like natural= gas and steam may remain relatively stagnant throughout this time period, = the electrical grid coefficient is expected to change as the grid decarboni= zes. Until these carbon coefficients are established by the legislation, on= ly projections can be used in their stead.
Calculate NP= V for ECMs and Packages - T= he NPV calculation for each ECM should be revised and expanded&nb= sp;to include the updated energy cost savings and capital costs, = as well as the maintenance costs, incentives, and the contribution&nbs= p;of any LL97 fines avoided. Once the NPV for each measure i= s calculated, the NPV for each package can be calculated as = the sum of all the NPVs of the ECMs included in the package. = span>
Calcula= te Additional Financial Metrics - Simple payback for each ECM and package can also be c= alculated by taking the capital costs, subtracting = ;one-time deductions from incentives, and dividing by the total energy= cost savings and other annual savings like maintenance and repai= rs savings. It is important to note that this simple payback does not = factor in the implementation timeline for the measures which may prolong th= e payback period if it takes several years for the measures to be completel= y executed. Also important to consider when evaluating the&n= bsp;payback for an individual measure is how it co= mpares to the useful life of the proposed ECM. Large paybacks for an E= CM should not be discounted if they occur within the useful life of th= e system.
Another useful metri= c is the cost per ton of carbon dioxide equivalent reduced ($/tCO2e). This can be calculated for each ECM as well as for the each package a= s a whole. This is a helpful metric that can be used to identify which ECMs= are particularly effective at reducing carbon given their cost and can be = used to refine which ECMs are included in the different packages.
OUTPUTS
Annual Carb= on Emissions for All Packages - The projected annual carbon emissions for all packages should= be graphed for each year of the study period. Any relevant project objecti= ves (e.g., avoiding fines under LL97, 80% carbon emissions reduction from 2= 005 baseline, etc.) should be overlaid on these results to evaluate which p= ackages achieve the stated goals. It may be the case that only some of the packages meet = ;all the project=E2=80=99s carbon reduction objectives. This= analysis is important to determine the level of technical intervention req= uired at the building scale.
NPV vs. CO2 = Reduction - The primary&nbs= p;financial output of the model will be the NPV value for ea= ch package, which can be compared with the associated cumulative = carbon emissions reduction over the study period. <= /p>
Packages with a posi= tive NPV appear to outperform the owner=E2=80=99s rate of return from other= investments. Packages with a negative NPV appear to underperform the owner= =E2=80=99s expectations for alternative uses of funds. It is important to n= ote that packages with a negative NPV may still show simple payback well wi= thin the useful life for the associated investments.
Techno-Econo= mic ECM Package Recommendation - Based on the above results, the project team should recomme= nd a package for implementation by the client. The owner must decide h= ow close to NPV neutral they want to get compared to maximizing NPV, which = does not necessarily lead to CO2 minimization, and weigh these financial co= nsiderations with other relevant project goals.
Beyond the NPV for e= ach package, it may be necessary to extract the annual cash flows from the = financial model for presentation to the client (e.g., annual capital costs,= energy cost savings, incentives, etc.).
The project team sho= uld investigate, and the owner consider financial engineering in their deci= sion making. ESCOs or selling and leasing back an ECM can bring cost saving= s forward in time while reducing the overall cashflow benefits to the owner= over a term.
<= strong>IN PRACTICE - CASE STUDY EXAMPLES
Playbook Partner = ; |
Deliverables |
Empire State Building |
LESSON= S LEARNED & KEY CONSIDERATIONS
Energy savings of low cost measures can offset the cost of other= ECMs - In many buildings, improved efficiency, comfort and = cost savings can begin well before the final ECM packages are selected, sin= ce some measures such as set points, bypass valves and energy management co= ntrols can be adjusted at little or no cost as soon as suboptimal performan= ce is identified. Any energy savings associated with these low-to-no cost a= djustments should be measured and tracked as they may help offset the cost = of other ECMs in the final recommended package.