High-performance and sustainability facilities are no longer something simply strived for by the most environmentally conscious companies. They are what your competition is doing and what your customers expect.
An important aspect of any high-performance and sustainability effort is clean energy technologies, which reduce the use of energy from conventional sources such as fossil fuels and encompass both energy-efficient and renewable energy technologies.
Clean energy technologies that fall into the energy-efficiency category include combined heat and power (CHP) systems, efficient refrigeration technologies, efficient lighting systems, ventilation heat recovery systems, variable-speed motors for compressors and ventilation fans, improved insulation, high-performance building envelopes and windows, and other existing and emerging measures. Rather than reducing energy consumption altogether, however, renewable energy technologies lower conventional energy usage by transforming a renewable energy resource into useful heating, cooling, electricity, or mechanical energy.
Despite the shared objective of reducing conventional energy usage, important differences exist between renewable energy and energy-efficiency technologies. These frequently subtle and nuanced differences are reflected in the barriers to deploying renewable energy technologies for onsite power, the business models for overcoming these market barriers to deployment, and the policies and programs to promote deployment.
For some customers, the focus is on obtaining zero net energy. This is achieved when a customer’s annual electricity consumption and generation yield a result of zero or less through the use of any combination of renewable generation, energy-efficiency measures, and distributed resources.
Customers can meet this goal of zero net energy through the use of distributed energy resources (DER) or distributed generation (DG).
DERs consist of demand- and supply-side resources deployed in an electric distribution system to meet the energy and reliability needs of the system’s customers. It includes generation, managed loads, energy storage, and technologies that can provide energy, load management, and ancillary services.
DGs encompass any electricity generation device connected to the electric distribution grid and installed on the customer’s side of the meter.
Renewable Energy Technology Cost Structure
Although different stakeholders use a range of metrics for assessing the economic strengths and weaknesses of a renewable energy project, the most commonly used metrics include:
- Net Present Value (NPV)
The sum of all years’ discounted after-tax cash flows. The NPV method is valuable because it recognizes the time value of money. Projects with returns showing positive NPVs are attractive.
- Internal Rate of Return (IRR)
The discount rate at which the after-tax NPV is zero. The calculated IRR is examined to determine if it exceeds a minimally acceptable return, often called the hurdle rate. Unlike NPV, the IRR metric’s percentage results allow for comparisons of projects of different sizes.
- Levelized Cost of Electricity (LCOE)
Energy policy and project analysts use this metric to develop first-order assessments of a project’s economic attractiveness. LCOE defines the stream of revenues that minimally meets the requirements for equity return and minimum debt coverage ratio. The revenue stream of an energy project is discounted using a standard rate (or possibly the project’s IRR) to yield an NPV. This NPV is levelized to an annual payment and then divided by the project’s annual energy output to yield a value in cents per kilowatt-hour (kWh).
- Payback Period
This calculation compares revenues with costs and determines the length of time required to recoup the initial investment. End users frequently calculate a simple payback period to analyze retrofit opportunities offering incremental benefits without regard to the time value of money.
Regardless of which metric is used to evaluate a renewable energy project’s economics, the analysis typically begins by estimating the project’s capital cost, projected power output, and annual revenues, expenses, and deductions. These estimates provide a basis for developing a pro forma earnings statement, debt redemption schedule, and statement of after-tax cash flows.
The Levelized Cost of Electricity
The cost of producing electricity from renewable energy technologies depends on a range of variables, including the construction time, electrical output, lifetime and different cost for investment, and operation and maintenance (O&M). These costs fall into one of two categories: fixed costs and variable costs.
Fixed costs are those incurred independent of operating hours, such as staffing, overhead, equipment (including leasing), and regulatory compliance. Variable costs depend on operating parameters and include fuel O&M costs and nonfuel O&M costs.
Note that fuel O&M costs are calculated as dollars per megawatt-hour ($/MWh), except in thermal plants, which use the heat rate formula (Btu/kWh) multiplied by the cost of fuel ($/MMBtu). Nonfuel O&M costs include outages, repairs, yearly maintenance, and annual environmental costs. Operational expenses and maintenance fees vary widely depending on the technology involved.
Meaningful economic comparisons of competing energy-generation technologies must capture all of these variables. The energy industry uses the LCOE methodology to capture all these variables for comparing energy technology economics.
Levelized cost is defined as the NPV of all direct costs (capital, fuel, and O&M) over the expected lifetime of the system divided by the system’s total lifetime output of electricity. The LCOE is a measure of the marginal cost (the cost of producing one extra unit) of electricity over an extended period and is sometimes referred to as long-run marginal cost. The LCOE allocates the costs of an electric-generating system over its useful life, which provides an effective price per each unit or kWh of electric energy. In other words, the LCOE allows for averaging up-front costs across production over a long period of time.
The primary advantage of the LCOE metric is it capacity to compare the entire spectrum of electric power technologies, from renewable energy projects that have high initial capital costs and low operating costs with a natural gas plant where capital costs are lower but fuel costs are higher. In addition, by setting a summary measure of the average cost of electricity per kWh expressed in current dollars, the LCOE metric allows comparison of distributed generation technologies with one another, as well as with utility costs and residential prices. The LCOE of renewable energy technologies varies by technology, location, and project based on the renewable energy resource, available capital, operating costs, and the efficiency and performance of the technology.
Economics of Combined Heat and Power
Unlike renewable energy technologies, the economics of the electricity generated by combined heat and power (CHP) plants is highly dependent on the use and value of the coproduct (heat), which is site specific. A practical approach for estimating the electricity generation costs for these plants is to postulate the value of the produced heat that can be subtracted from total construction and operating costs. The remaining costs are the net costs needed for electricity generation.
The costs of acquiring and installing a generating unit vary widely depending on technology, capacity, and other factors. The direct costs of a CHP system include the installed cost of the equipment, fuel costs, nonfuel operation and maintenance expenses, and other charges imposed by power utilities on customers who decide to install onsite generation systems.
The installed capital costs for DG technologies ranges from less than $1,000 per kilowatt for a combustion turbine to almost $7,000 per kilowatt for a solar PV system. Among small-capacity technologies, internal combustion engines (fueled by diesel and gasoline) have the lowest capital costs and highest operating costs.
This article is adapted from BOMI International’s course High-Performance Sustainable Building Investments, part of the new High-Performance Program. More information regarding the new High-Performance Program courses or any of BOMI International’s other courses is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.