Apples to apples: comparing energy systems costs

Many decarbonization projects are born out of the need to replace a failing piece of equipment. In that situation, it may seem logical to compare the upfront cost of a simple fix or replace-in-kind approach to a major, decarbonized system upgrade. While that initially seems like an apt comparison, this approach is akin to comparing apples to oranges.

Making the right comparison

A major system upgrade comes with more initial costs, but also comes with additional value often left out of the conversation.

Let’s take a failing natural gas boiler as an example. Replacing this piece of equipment with a new natural gas boiler will deliver the benefit of reliable heat for a (relatively) low cost.

Alternatively, installing a new heat pump-based design to replace the old heating system will also deliver reliable heat. It would also add cooling to the space, improvement to the ventilation, and a comprehensive control system. To take this comparison from “apples to oranges” to “apples to apples,” the initial cost of a heat pump needs to be compared to not just replacing the boiler, but adding cooling, upgrading ventilation, and adding an energy management system. This comparison of first costs provides a more accurate look at the financial implications of the decision.

Let’s get technical about it

As nice as it would be for comparing energy systems costs to be that simple, first cost is not the only consideration.

To make a comprehensive evaluation of two (or more) options for approaching a decarbonization project, you must assess the total cost of ownership (TCO) under multiple scenarios, which can be done with a lifecycle cost analysis (LCCA). The total cost of ownership includes not just the upfront project cost, but also all future cash flows associated with owning and operating a building under different scenarios. “Cash flows” refers to the flow of cash to or from an institution, with costs denoting negative cash flow and incentives or energy savings denoting positive cash flow. A good LCCA will take into consideration the following factors:

• Time value of money. “Time value of money” assumes that money invested now will be worth more over time. Because of that, future spending is calculated by discounting the value of money at a future date. 
• Discount rate. When calculating the time value of money, a discount rate is applied to determine a rate of return. A higher discount rate signifies a higher perceived risk, leading to a lower present cash value.
• Net present value (NPV). When the cash flows for two scenarios vary differently over time, we need to account for that time value of money and discount future cash flows. This can be done by converting all cash flows into present-day dollars, or net present value.
• Capital cost (CapEx). This can refer to the initial capital cost of a project, but can also include future equipment replacement or other planned capital expenditures.
• Recurring operations and maintenance costs (OpEx). This includes the energy costs for operating the system, as well as service and maintenance.
• External factors. When forecasting future cash flows, external factors will play a significant role. Emissions regulations and compliance costs may change, depending on regulatory changes or building performance. And energy commodity pricing is subject to market volatility. These variables can change the way two options compare to one another with respect to total cost of ownership.

With so many variables and so many unknowns, it may seem difficult to make a firm comparison. While we can’t predict the future, GreenerU’s lifecycle cost model can simulate the probabilities of these variables and explore the range of likely outcomes. This gives decision-makers a foundational understanding of costs and benefits they can use to make an investment decision.

GreenerU is here to help you navigate the intricacies of decarbonization decisions, so please reach out to us with any questions you have!

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