May 22, 2020

Devil is in the Details: Energy Savings

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“What are the energy savings?” This is the most often asked but least understood question from building owners associated with high efficiency equipment installation. What’s worse, it often means different things to different people.  For example, a building owner may only be interested in the estimated utility cost savings and the impact on cash flow. On the other hand, a utility energy efficiency program manager evaluating potential incentives or rebates may only be interested in the equipment’s energy consumption savings.

So, to answer the question properly, more information is needed:

1. Does “energy savings” refer to energy cost savings or energy consumption savings or both?
2. Does “energy savings” include both consumption savings, e.g., kWh, and demand savings, e.g., kW?
3. Does “energy savings” refer to the savings in:
• whole building energy consumption, e.g., kBtu/year, OR
• primary energy source consumption, e.g., whole building electricity consumption, e.g., kWh/year, and/or whole building fuel consumption, e.g., CCF natural gas/year or gallons of oil/year? OR
• impacted building end-use energy consumption, e.g., savings in cooling energy, savings in heating energy, savings in ventilation energy, etc.? OR
• energy consumption of the new high efficiency equipment as compared to that of the existing inefficient equipment?
4. Are the energy savings estimated using actual weather conditions (in a particular year) or are they estimated using a typical meteorological year, i.e., weather-normalized to remove the influence of weather impacts?
5. Are the energy savings the estimated savings in the first year or are they the savings over the equipment’s useful lifetime? If lifetime savings, has energy cost escalation and/or potential equipment performance degradation (over time) and the time value of money been considered?

Providing a simple answer to “what are the energy savings” without qualifying the basis for the estimate is meaningless. At a minimum, “energy savings” should always be qualified as either an “energy consumption savings” or “energy cost savings.”

In our experience at SRS conducting technical due diligence for thousands of energy efficiency projects seeking third party financing approval, best practice to estimate “energy savings” associated with the replacement of existing inefficient equipment with new high efficiency equipment includes the following key steps:

1. Determine annual whole building energy consumption, e.g., kBtu/year. This may be done, for example, by collecting at least a year’s worth of utility bill data, or by referring to published energy use intensity (kBtu/ft²-yr) data for the building type, size and location, or by modeling.
   If utility bill data are relied upon, the data should be weather-normalized to adjust for unusual weather that might have existed during the baseline period, such as an abnormally cold summer or warm winter. Since modeling commonly relies on local weather in a typical meteorological year, it is not necessary to make a weather-normalization adjustment using this approach.
2. Estimate the energy consumption of each major building end-use (published data such as DOE’s Commercial Building Energy Consumption Survey (CBECS) or modeling should be able to provide this). Again, the data should be specific to the building type, its location, and be weather-normalized.
3. Estimate the energy efficiency metric(s) of the existing equipment being replaced considering that its initial design performance may have degraded with time, e.g., replacement of a 20-year old roof-top air conditioning unit. The original equipment specifications, knowledge of the local building energy code or the ASHRAE 90.1 standard that existed at the time the equipment was installed may be helpful in gaining insight into the energy efficiency metrics.
4. Identify the energy efficiency metric(s) of the new high efficiency equipment that will be replacing the existing inefficient equipment. These metrics can be obtained directly from the equipment manufacturer.

While there are several building energy modeling and performance simulation software tools, e.g., eQuest, EnergyPlus, TRACE, HAP, etc., available to assist with determining building energy consumption by end-use, they can typically require a considerable amount of existing building data inputs and the skills of experienced energy modeling professionals. This results in significant upfront “at risk” skilled labor cost. For this reason, it is rare that energy efficiency project developers and contractors will rely on building modeling at the preliminary project scoping and proposal stage prior to a financial commitment from the building owner.

At the project origination and proposal stage where the developer or contractor cannot justify allocating the at-risk labor cost associated with building energy modeling, the best practice next steps typically include:

1. Estimate the percent energy savings based upon comparison of the proposed new equipment energy efficiency metrics to the existing equipment performance metrics.
2. Identify the building energy consumption end-uses impacted by the proposed new equipment. For example, a new air conditioning unit will impact cooling end-use energy consumption. Or an LED lighting upgrade will impact lighting end-use energy consumption, as well as have an impact on both cooling and heating end-use energy consumption (due to interactive effects, e.g., reduced space cooling load in the summer and increased space heating load in the winter).
3. Calculate the energy consumption savings by multiplying the percent energy savings by the energy consumption of the impacted end-use. Assuming, for example, that a building’s complete air conditioning system is being replaced. If the EER/IEER associated with the new and existing air conditioning system results in a 25% savings in cooling energy consumption, the air conditioning system’s energy consumption savings (kWh/year) will be 0.25 times the cooling end-use energy consumption.
4. Estimate the peak energy demand (kW) savings, if applicable, based on the capacity of the equipment, the energy efficiency metrics, the coincidence factor used by the utility, and the months in which the demand savings would likely be realized.
5. Estimate the energy consumption cost savings in the first year by multiplying the energy consumption savings, e.g., kWh/year, by the average cost charged by the utility, e.g., $/kWh. Estimate energy peak demand savings, e.g., kW, by the average cost charged by the utility, e.g., $/kW. The energy cost savings would then be the sum of the energy consumption cost savings and energy demand cost savings.
6. If the building owner requests an estimate of the cash flow impact (and it is expected building owners, post Covid-19, will closely scrutinize project cash flow and ROI), annual energy consumption and cost savings over the equipment’s estimated useful life (EUL) must be calculated. This calculation will require multiple assumptions, including: (1) assuming an annual escalation rate (%) in utility energy cost, and (2) assuming, if appropriate, an annual equipment performance degradation rate (%). These metrics will enable an estimate of the annual and cumulative cash flows over the project’s lifetime. Moreover, financial metrics, such as the present value of future energy savings and the estimated increase in property valuation, may also need to be calculated to provide the property owner with the information needed to make a confident investment decision.

While contractors typically have little problem in preparing a turnkey installation cost proposal, they often have difficulty in estimating “energy cost savings” and the cash flow impact that can flow from today’s high efficiency equipment. The challenge they face is twofold:

1. Estimating the energy consumption of a building’s end-uses in order to estimate energy consumption savings from which energy cost savings may be determined can be a daunting task. However, owners or managers of buildings today evaluating a purchasing decision for new energy efficient equipment often need the energy cost savings in order to support their investment decision. The financial impact data is particularly critical to support the buyer’s comparison of energy code minimum versus higher energy efficiency equipment options.
2. The language of building owners and property managers is cash flow. If a contractor desires to install new more efficient equipment, providing a proposal limited to the equipment’s installed cost, or even including an estimate of the “percent energy savings,” will likely be insufficient for the owner or manager to make an informed purchase decision (especially if compared against a competitor’s proposal that includes estimated energy cost savings and cash flow information). Including such key financial analytics showing the up-front investment and annual energy cost savings and cash flow impacts will go a long way to accelerate the owner’s decision-making process. Moreover, such cash flow analysis can help transform a capital expense into a compelling investment opportunity.

Fortunately, a new generation of software, data and predictive analytic solutions are emerging specifically designed to empower energy efficiency contractors and project developers to better meet these market challenges.  

To learn more about how energy efficiency professionals are successfully meeting these challenges with SRS’s latest innovation: The Energy Performance Improvement Calculator (EPIC^TM), visit SRSworx.com.