Refine Projections and Make Recommendations
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The complete techno-economic analysis of the ECMs is developed by including the final energy modeling results – 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 costs, incentives, and any other costs/savings the team believes will be incurred. The team will need to use judgement, past experience, experienced advisors 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 identified 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 decarbonization. Along with the carbon reduction potential of the packages, these results will be evaluated against the project objectives. At the end of this exercise the project team should determine which package they will recommend to the client based on an optimization of cost, carbon reduction, and achieving the pre-established project objectives.
The steps in this section 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. Doing so will help focus the team on the largest impact measures and stimulate problem solving for those measures that could have a large potential impact, but are not currently NPV positive. For example, prioritizing measures that reduce load on HVAC systems, so that smaller HVAC systems can be utilized, improving the NPV.
Create ECM packages that are logically grouped by implementation sequence, subsystem co-dependencies (e.g. air-side improvements), cost savings (e.g. open a wall once) and the potential to increase CO2e reduction while still meeting financial targets (e.g. NPV >= 0).
Calculate the NPV of these packages and compare to the base case financial model and the carbon reductions.
Updated Energy Savings and Energy Cost Savings - Energy savings and energy cost savings for each measure and 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 “High Resolution Energy Modeling and CO2 Analysis”.
Note that the same ECM may have different energy savings associated with it in different packages depending on which ECMs are included within the package. The energy cost savings should be applied across the study period according to the implementation timeline and the project team should consider delaying the savings by six months to one year, taking care not to “claim” savings too early. Appropriate utility cost escalators should be applied to all cost savings.
Updated 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 team to ensure that all scope has been captured and that pricing components are not redundant. For example, while it is important to capture costs associated with general protection and clean up, these costs should be consolidated for all measures intended to be implemented at the same time, such as during tenant lease turnover. Any allowances and contingencies should be carefully reviewed for applicability. Current contracts with BMS companies should also be reviewed to determine whether controls or sequence of operations upgrades will be charged to the client or are already included in the contract.
While it is important to capture the full extent of the capital costs for each measure, inflated costs run the risk of distorting the final results. This could be the difference between implementing or foregoing a particular ECM. Capital costs for each ECM should 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 the end of the study period.
Repairs and Maintenance Costs - All impacts and adjustments to the current maintenance and repairs budget as a result of ECM implementation should be accounted for in the financial model. If an ECM is expected to reduce repairs or maintenance costs (e.g., upgrade and replacement of dilapidated equipment, automation of manual processes, etc.) then these incremental savings should be included in the financial calculations. Some ECMs may also increase maintenance costs if they 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-established incentives programs and rebates may also be considered in the financial model. Although these incremental savings are not guaranteed in the future, certain incentives are predictable and reliable enough that they can reasonably be included with low risk. For example, incentives for lighting upgrades are fairly predictable. Specialized incentives programs for new technologies with large carbon reduction potential should be considered as they may significantly improve the financial performance of the measure. For example, studying and pursuing incentives associated with heat pumps may reduce the payback time or improve the NPV of heating electrification measures.
Carbon Emissions Reductions - Carbon emissions reductions for each ECM under consideration should be included 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 cumulative carbon reduction impact of each package.
LL97 Emissions Limits and Other Project Benchmarks - The LL97 building emissions limits for the years 2024-2029, 2030-2034, and 2035 and beyond will be needed in order to assess projected compliance with the law, and project future fines/fine avoidance for 2024-2029 and beyond. Other significant project benchmarks and objectives should be brought into the review of the final results to compare the performance of each package against these metrics. For example, 40%, 50% and 80% reduction of carbon emissions from a 2005 baseline are common benchmarks.
Project Annual Carbon Emissions for All Packages - Annual carbon emissions are calculated by multiplying the annual energy consumption of the building by the associated carbon coefficient for the fuel source. Annual emissions should be calculated for the BAU baseline, as well as for each package under consideration so that these projections can be compared to the LL97 limits and other project objectives.
Calculate LL97 Fines and Fines Avoided - LL97 fines are calculated by determining the difference between the building’s annual emissions (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’s 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 the associated carbon coefficient for the fuel source. Fine avoidance can be calculated by using the projected future energy consumption for the building as the proposed ECMs are implemented.
Although building emissions 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 years 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 decarbonizes. Until these carbon coefficients are established by the legislation, only projections can be used in their stead.
Calculate NPV for ECMs and Packages - The NPV calculation for each ECM should be revised and expanded to include the updated energy cost savings and capital costs, as well as the maintenance costs, incentives, and the contribution of any LL97 fines avoided. Once the NPV for each measure is calculated, the NPV for each package can be calculated as the sum of all the NPVs of the ECMs included in the package.
Calculate Additional Financial Metrics - Simple payback for each ECM and package can also be calculated 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 repairs savings. It is important to note that this simple payback does not factor in the implementation timeline for the measures which may prolong the payback period if it takes several years for the measures to be completely executed. Also important to consider when evaluating the payback for an individual measure is how it compares to the useful life of the proposed ECM. Large paybacks for an ECM should not be discounted if they occur within the useful life of the system.
Another useful metric 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 as 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.
Annual Carbon 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 objectives (e.g., avoiding fines under LL97, 80% carbon emissions reduction from 2005 baseline, etc.) should be overlaid on these results to evaluate which packages achieve the stated goals. It may be the case that only some of the packages meet all the project’s carbon reduction objectives. This analysis is important to determine the level of technical intervention required at the building scale.
NPV vs. CO2 Reduction - The primary financial output of the model will be the NPV value for each package, which can be compared with the associated cumulative carbon emissions reduction over the study period.
Packages with a positive NPV appear to outperform the owner’s rate of return from other investments. Packages with a negative NPV appear to underperform the owner’s expectations for alternative uses of funds. It is important to note that packages with a negative NPV may still show simple payback well within the useful life for the associated investments.
Techno-Economic ECM Package Recommendation - Based on the above results, the project team should recommend a package for implementation by the client. The owner must decide how close to NPV neutral they want to get compared to maximizing NPV, which does not necessarily lead to CO2 minimization, and weigh these financial considerations with other relevant project goals.
Beyond the NPV for each 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 should investigate, and the owner consider financial engineering in their decision making. ESCOs or selling and leasing back an ECM can bring cost savings forward in time while reducing the overall cashflow benefits to the owner over a term.
IN PRACTICE - CASE STUDY EXAMPLES
Empire State Building
LESSONS 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, since some measures such as set points, bypass valves and energy management controls can be adjusted at little or no cost as soon as suboptimal performance is identified. Any energy savings associated with these low-to-no cost adjustments should be measured and tracked as they may help offset the cost of other ECMs in the final recommended package.
- Financing is an important piece of the puzzle - Providing the project ownership team with information about different financing options can increase the probability that a project will be implemented. Learn more about different financing mechanisms here.
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