LCCBA model and DER business case study based on energy cost savings only
For the first part of the discussion, results of the dynamic LCCBA DER model based on energy cost saving CF only are discussed.
Despite positive cumulated CFs of the case study, the business case appears not to be attractive to investors. Appraised solely by the economic and financial KPIs of DER energy cost savings CF, it will be difficult to attract private sector investments. This is due to negative NPVs, long payback periods, low IRRs of P-CF and E-CF, project risks, and liquidity shortfalls in early project years.
Also, the Levelized Cost of Heat Savings of 100 EUR/MWh, which can be used as a comparison with alternative heat generation costs, does not indicate an economic saving potential when compared to typical average
11 cost of heat supply. In conclusion, building DER is typically not a stand-alone business case if based on future energy cost savings alone, even with a long-term investment horizon of 25 years.
The above KPIs are not sufficiently reflected in standard economic appraisals like simple payback or annuity calculations (often with residual book values for individual assets, which typically consider averaged values instead of CFs and do not reflect “time value of money”). The differences in approach explain why assessment of economic viability of DER with different economic models may come to dissenting results. For long-term DER investment and financing decisions, as well as enabling policy design, a dynamic life cycle cost and benefits appraisal is needed, as proposed with the LCCBA model. Dynamic modeling is also required, because of the high sensitivity
12 of price and cost development scenarios (c.f. Fig.
4), which underlines the risks of compounded interest effects due to long project durations.
From a different angle, future energy cost saving CF may be viewed as a highly potent source for co-financing DER investments. As can be seen from the sensitivity analysis of the case study, 88% of CAPEX could be refinanced if an NPV of 0 is chosen as a goal of the P-CF. The opportunity to substantially co-finance DER investments with future savings CFs deserves much more attention. This would require a multi-year project cycle perspective across CAPEX and OPEX budgets, and adjustment of respective accounting guidelines and procedures, which in return would require enabling policy guidelines and their implementation. To reduce CAPEX, imputable investment cost for DER can be deducted by so-called “anyway” cost of building maintenance (or other cost items) through a “differential cost approach,”
Opportunity cost of delaying investments in saving opportunities is substantial (28,000 EUR/year for the case study), which is often not discussed nor factored into the timing of EE investment decisions. Instead of waiting for CAPEX budgets to be available, it would often be cheaper to pay for debt capital or other third-party financiers like ESCos and be able to invest and profit from savings sooner. Unfortunately, this way of thinking is not common practice for many public or private sector building owners.
The DER life cycle cost structure is characterized by high capital and low operating cost portions: the share of CAPEX is 70% of total project cost, with interest accounting for another 15%, and just 15% for OPEX. This cost structure is an indicator of the societal benefits of DER, as there is a substitution of OPEX on (imported) fossil fuels with CAPEX on (local) construction companies and labor (c.f. IEA
2014). Furthermore, the currently low interest rate favors comprehensive energy efficiency investments in buildings.
MPB classification, quantification, and relevance to different stakeholders
Before discussing integration of MPBs into the DER business case, a few considerations on classification and relevance of MPBs to different stakeholders are presented.
While the method of classification into four quadrants helps determine which MPBs should be quantified (see Fig.
2), it does not prescribe methods of quantification. As the industry shifts to a greater focus on the inclusion of MPBs in project economics, it is expected that new tools will be developed to aid in quantification of benefits in different applications. Industry experts should stay aware of these developments and actively seek new and better methods of quantification.
In our case study, the top half of the grid (MPBs that are “highly relevant to the business case”) mainly include MPBs that benefit the Participant. When evaluating “relevance to the business case” for a particular MPB, it may be helpful to develop an order-of-magnitude estimate of its impact relative to project costs and other benefits before investing time on more formal quantification.
As described in section “
Benefits not accounted for in the business case”, even those societal MPBs that initially seem to have little relevance to the project could potentially be investigated for outside funding opportunities or other types of strategic support. Therefore, the authors encourage tabulation and classification of all potential MPBs as a first step to their meaningful inclusion in project development.
In terms of laying the procedural groundwork for attainment of future savings, engineers and economists should work to move MPBs from right to left on the grid (i.e., develop new methods of quantification) while policy-makers should work to move MPBs from bottom to top on the grid (i.e., create financial conditions that value a wider range of impacts). As a policy example, raising the price on carbon emissions would gradually move “GHG emissions” from the bottom-left to the top-left quadrant by internalizing these social costs into the business case. In our case study, the financial value of avoided emissions was easily quantified and directly benefits the Participant, but was relatively insignificant in the context of total project costs and savings, so it was placed in the bottom-left quadrant.
Another benefit that may result from pursuing MPBs is a potential to engage with strategic partners or other funding sources that may be concerned with these benefits (or risks). Important drivers for the building refurbishment of the case study from section “
DER case study and LCCBA model” were noise protection from a busy street, ventilation, and fire protection due to changes in use and structure of the building. In the case of asbestos removal, the local health department would have a vested interest in providing support to the building owner to ensure effective and safe removal of the asbestos, and could potentially offer both financial and labor contributions to the project. Similarly, strategic allies may be identified for MPBs benefitting Utility or Society. For example, reduction of peak electricity loads may help the local distribution utility defer costly growth-related upgrades to distribution infrastructure. This cooperation perspective acknowledges the fact that energy cost savings from DER are often not high enough to build a stand-alone business case, which is proposed by other authors as well (BPIE 2011; RMI 2015). In many cases, DER will need strategic partners, with a vested interest in its MPBs, in order to move forward.
Approaching work productivity quantification
Section “
Higher work productivity” provides a concrete guideline to measure work productivity of DER program in office buildings. An Urge-Vorstaz et al. study (
2016) pointed out that it is not easy to quantify multiple benefits as it involves several issues such as proper identification of benefits, systematic methodologies to quantify, and data availability. This section contributes to the knowledge pool of productivity measurement of DER (and possibly other) programs by identifying the extent of the effect of DER on work productivity and also by proposing indicators to quantify these DER specific work productivity aspects.
Functionally, the change in productivity can be expressed as follows:
$$ \Delta \mathrm{Productivity}=f\left(\mathrm{active}\ \mathrm{days},\mathrm{workforce}\ \mathrm{performance}\right) $$
where
∆ Productivity is the change in labor output after DER in office buildings. Furthermore, active days can be functionally expressed as follows:
$$ \mathrm{Active}\ \mathrm{days}=f\left(\mathrm{sick}\ \mathrm{days},\mathrm{healthy}\ \mathrm{life}\ \mathrm{year}\right) $$
where sick days is a combination of absenteeism and presenteeism.
Thus, any change in these components will have an effect on overall labor productivity. For example, a greater number of active days and healthy life years would imply more labor output, hence an increase in productivity.
In this paper, MBs are monetized at the project level and from investor’s as well as tenant’s perspectives (c.f. 5.4). This implies that monetization of benefits should not include any societal value. If societal value of any benefits is included in cost-effectiveness analysis where the CBA is conducted to see participants’ gains/losses on project level, then it would lead to overestimation of result.
In addition, many of the aspects of a benefit cannot be quantified due to lack of appropriate data. For instance, the active day indicator could not be incorporated in our estimation due to the data unavailability. Monetization values of active days especially absenteeisms in existing literature (for example see Fisk
2002 study) include societal benefits. That is why in Table
1 section “
Integration of monetized MPBs into the DER business case and its relevance to different Stakeholders”, the productivity figure only includes the results of workforce performance ignoring the values of active day.
Table 1.
Monetary values of multiple project benefits of DER (in [EUR/m2]—annually and present values of project cash flows14)
1. Work productivity increase (0.57–1.14%) | Lower | 10,4 | 219 |
Upper | 20,8 | 439 |
2a. Rental income increase (1–5.3%) | Lower | 1,2 | 25 |
Upper | 6,4 | 134 |
2b. Building sales price increase (2.5–6.5%) | Lower | 100 |
Upper | 260 |
3. CO2 savings (6–79 EUR/t) | Lower | 0,3 | 6 |
Upper | 3,8 | 79 |
4. Maintenance cost savings (2.1–3 EUR/m2/y) | Lower | 2,1 | 44 |
Upper | 3,0 | 63 |
5a. Energy cost savings project term (25 years) | Lower | 16,8 | 354 |
Upper | 16,8 | 354 |
5b. Add. energy cost savings over techn. lifetime (40 years) | Lower | 16,8 | 157 |
Upper | 16,8 | 157 |
As can be seen in the next section, the effect of inclusion of workforce performance in our model is quite significant. However, we must note that the Comfortmeter also incorporates the comfort-related performance gain, and as discussed in section “
Workforce Performance”, there are several aspects (specifically related to mental well-being) to which performance can be enhanced. Comfortmeter does not incorporate any mental disorder improvement or concentration ability-related performance gains. Thus, even after inclusion of results related to work performance, our result shows a conservative value since there are many aspects which cannot be included due to data unavailability.
Integration of monetized MPBs into the DER business case and its relevance to different stakeholders
The goal of this subsection is to discuss values of different MPBs identified in section “
Multiple Project Benefits of Building DER” to the DER business case and their accountability to different groups of stakeholders.
To recap, financially quantified MPBs identified in the context of building DER are (numbers refer to Table
1): (1) work productivity increase; (2a) rental income increase; (2b) building sales price increase; (3) CO
2 emission reduction; (4) maintenance cost savings and (5a) energy cost savings during project term (already considered in base case scenario in section “
DER case study and LCCBA model”); and (5b) additional energy cost savings during technical lifetime (beyond project term).
A positive correlation of these MPBs to stakeholder benefits can be assumed to be consensus, however, quantification methods maybe subject to further discussion (Woodroof et al.
2012). The ranges of monetary values of the MPBs presented are a first attempt, to the best of our knowledge, based on case studies and literature (not on any broader empirical bases). In order to find a comparable metric to which readers can relate to more easily, MPB value ranges in Table
1 are presented in [EUR/m
2], both as annual values [EUR/m
2/year] as well as present values
13 (PV) of future savings cash flows over a 25-year period in [EUR/m
2].
The valuation of MPBs in Table
1 reveals relevant orders of magnitude of MPBs compared to energy cost savings, with the exception of CO
2 savings valued at current ETS prices. In particular, work productivity is in a similar range as energy cost savings. Additionally, it should be pointed out that quantifications for work productivity increases represent a conservative approach. From its two main indicators, just work performance improvements could be monetized through “Comfortmeter,” whereas the first indicator active days, e.g., through absenteeism and presenteeism could not be monetized yet.
The total MPBs value contribution needed to reach a minimum economic threshold level (P-CF = 0) is 12% of the CAPEX (as can also be seen from the sensitivity analysis in Fig.
4), which translates to 1.8 EUR/m
2/y, or an PV of about 38 EUR/m
2 (respectively 65,000 EUR for the entire building). Compared to a plausible range of MPBs contributions as outlined in Table
1, this appears to be in a reasonable, and even surpassable, range. These results generally support the approach to factor MPB values into DER business cases and should make DER more attractive to investors.
Table
2 reveals substantially different total benefit values for different groups of beneficiaries. This underlines the necessity to differentiate between different beneficiaries also for MPB analysis (c.f. section “
MPB classification, quantification, and relevance to different stakeholders”). Occupant-owners have the highest total benefit values of the different types of building owners, but tenants also have substantial net benefits.
Table 2.
Accountability of multiple project benefits of DER (in EUR/m2) to different groups of beneficiariesa
1. Work productivity increase | Lower | 219 | – | 219 | – | 219 |
Upper | 439 | 439 | 439 |
2a. Rental income increase | Lower | 25 | – | – | 25 | −25 |
Upper | 134 | 134 | −134 |
2b. Building sales price increase | Lower | 100 | 100 | [100] | [100] | – |
Upper | 260 | 260 | [260] | [260] |
3. CO2 savings | Lower | 6 | – | 6 | – | 6 |
Upper | 79 | 79 | 79 |
4. Maintenance cost savings | Lower | 44 | – | 44 | 44 | – |
Upper | 63 | 63 | 63 |
5a. Energy cost savings project | Lower | 354 | – | 354 | – | 354 |
Upper | 354 | 354 | 354 |
5b. Add. energy cost savings over techn. lifetime | Lower | 157 | – | 157 | – | [157] |
Upper | 157 | 157 | [157] |
Totals | Lower | | 100 | 780 | 69 | 554 |
Upper | 260 | 1092 | 197 | 738 |
When comparing differential DER investments of 330 EUR/m
2 to the MPB values, the occupant-owner’s benefits are greater than the cost by a factor of between 2.4 and 3.3; for tenants, values are between 1.7 and 2.2. This is a clear indication for a potentially interesting business case. By example of the occupant-owner case, the project IRR would go up to 8.8% and equity IRR to 21.4%, if the total of the lower MPB values in Table
1 could be realized over the 25-year project period (excluding 5b).
On the other hand, the lessor-owners appear to have very small benefits, because of low rental premiums (even smaller than sales premiums). The same applies to property developers, where price premiums for DER buildings are not sufficiently reflected in market prices, probably due to a lack of LCCBA assessments on the buyer side of the market. In both cases, the “split incentive”
14 dilemma is apparent, because investors do not capitalize from OPEX reductions of building occupants. From this perspective, it would be justified to allow building owners in regulated markets to charge higher rents in return for investments in tenant’s OPEX savings. In this context, guaranteed OPEX reductions, as applied in performance-based energy services, could be helpful. Based on the MPBs values, tenants should also have a vested interest to rent DER renovated “green” buildings. Alternatively, long-term tenants have grounds to invest their own money, provided they are aware of the benefits.
In any case, investors’ appetite for DER will still require low debt capital interest rates (as is currently the case), a long-term perspective of 20+ years investment horizon, and rather low expectations on its equity return. In return, investments must be structured with a very low risk profile (because of low returns). For the business model, this will require a stable savings CF scenario with low technical risks and simplified M&V (c.f Bleyl et al.
2014) for the verification of the savings CF, which is generally compatible with DER cases. Furthermore, business cases must be structured, guaranteed (e.g., through performance-based energy services), and reported in a standardized format, and aggregated in larger volumes to reduce transaction costs.
15