[bldg-sim] life cycle costing assumptions for non-federal projects

[Steven Gates]

I certainly agree with Pat’s statement that “most engineers have a difficult
time even estimating what the price of energy will be 15 years from now, or
5 for that matter”.  I would expand this to fit the more general case:

 

1.	It is difficult for anyone to predict the future cost of energy.
2.	The effort required to calculate energy savings can range from
relatively simple to complicated, depending on the technology being
evaluated and the analysis procedure required.  But, given enough effort,
one can usually get a pretty good handle on the energy savings.
3.	Doing a life-cycle analysis on those savings to determine
present-value $$$ savings is a lot like pushing a rope – the longer the
analysis period (or rope), the more difficult it is to predict the outcome.
4.	The errors in the life cycle assumptions of energy escalation rate,
etc., when extrapolated out 20 years or more, can dwarf the errors in the
calculation procedure used to calculate the annual energy savings.
5.	Given #3, a life-cycle analysis can actually confuse the issue,
rather than clarify it.  (Hence the original question posted on this
subject.)

 

For these reasons, I question the validity of life-cycle analysis.  Since
the goal of most life-cycle analysis is to compute a discounted payback, and
most financial decision makers then arbitrarily select a maximum limit on
payback, which is typically much less than 20 years, why not just use simple
payback?

  _____  

From: BLDG-SIM at GARD.COM [mailto:BLDG-SIM at GARD.COM] On Behalf Of Pat Bailey
Sent: Friday, May 05, 2006 10:05 AM
To: BLDG-SIM at GARD.COM
Subject: [BLDG-SIM] life cycle costing assumptions for non-federal projects

 

The escalation assumptions that come from the Energy Information
Administration are, as Renee stated, negative for many years, and from our
perspective very conservative.  I think that people use the EIA numbers
because most engineers have a difficult time even estimating what the price
of energy will be 15 years from now, or 5 for that matter.

 

We have done a little research to try and find escalation factors that agree
more closely with recent experience.  For California have been using 2%
based on a look back at utility rates.  The difficulty is that EIA never
projects discontinuities (they can't), but a lot of the increases over the
past 30 years have been in the form of spikes.  For example, next year the
price of natural gas may drop, but it will drop from historic highs which
were not captured by any escalation assumptions in the recent past.

 

I would be curious to know if any large corporate entities have an energy
cost assumption built into their corporate budgeting process.  I have to
believe that energy intensive industries, certainly the airlines, and
probably others have economists or consultants dedicated to assessing this
issue/risk.

 

_____________________________________
Pat Bailey, PE
Green Building Studio, Inc.
444 Tenth Street, Suite 300
Santa Rosa, CA 95401

707-569-7373 x101 - voice
707-569-7313 - fax

 

 

 

  _____  

From: BLDG-SIM at GARD.COM [mailto:BLDG-SIM at GARD.COM] On Behalf Of Renee J.
Azerbegi
Sent: Thursday, May 04, 2006 7:29 PM
To: BLDG-SIM at GARD.COM
Subject: [BLDG-SIM] life cycle costing assumptions for non-federal projects

I was using BLCC for life cycle costing and the end life cycle cost results
were less than if I took the maintenance costs, energy costs, and first
costs and added them together over the 25 year study period I was examining!
Then I noticed the NIST/DOE fuel escalation factors which have negative
values for many of the years. This I believe contributed to this error. My
first question is, doesn’t this seem odd that the fuel escalation factors
are negative at a time like now?

 

Also, as this was a non-federal project, I used a default factor of 2%
instead. But my other questions are, for life cycle costing analysis, what
are the most commonly used sources you might have found for inflation rates,
real or nominal discount rates, or fuel escalation rates? I made some
assumptions based on doing some web research but is there an acceptable
method of choice other than using defaults in BLCC which are designed more
for federal projects?

 

Thanks in advance for your feedback!

 

Renée

 

 
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