Energy Manager/Energy Management System Co-Funded by Implemented by European Union Co-Funded by Implemented by European Union Contents 1. Economic evaluation 2. Cost-benefit analysis 3. Weighted average capital cost 4. Net present value 5. The project internal rate of return 6. Dynamic payback period 7. The cost of repayment of debt 8. Energy cost/ depreciation ratio 9. Least life cycle cost of EMOS 10. General cost calculation 11. Cost of electricity supplied versus cost of electricity saved 12. Energy service contracts - Energy service contract models Case Examples 08.08.2021 Nigerian Energy Support Programme Slide 2 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Economic evaluation: Tool kits for financial and economic analysis of energy savings measures. Energy Manager and Energy Auditor must have knowledge of financial appraisal for EMOs, with or without incentives, putting into consideration return on investment based on cost of EMO implementation. Few key financial indicators to appraise EMOs, are described below: Cost benefits analysis: EMOs generates many benefits including energy cost savings. This is defined as the ratio of all the financial benefits of a project cost expanded on the project throughout its life time. The ratio result should be more than 1 for a project to be attractive or viable. Benefit-Cost ratio is usually done from the perspective of energy customer to assess profitability of an energy savings investments. B/C = Sum of all benefits throughout operation life The sum of all costs 08.08.2021 Nigerian Energy Support Programme Slide 3 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Payback Period As EMOs usually require investment and operational cost, calculating simple and discounted payback time as the time needed to recover all these costs from accrued savings and other non- energy benefits It is simply ratio of cost to savings with result in number of years. Most organisations have specific expected payback time based on policy. Generating Cost of Energy Saved An organization can be left with either to save energy by avoiding generating or procuring the amount of energy. Example: if 1kWh savings will cost 2 cents and procuring 1kWh at rate of 6 cents. A better choice may be to save the 1kWh and avoid generating 1kWh at the rate of 6 cents, then 4 cents is cost saved per kWh. 08.08.2021 Nigerian Energy Support Programme Slide 4 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Net Present Cost Assess the increase in wealth of an organization implementing EMO or company financing EMO. A negative NPV means the EMO Investment will not result into profit after cost, based on time value of money. NPV is viable when it’s positive. Internal rate of return: • This is the interest earned on the outstanding balance of total project Investment, not interest earned on total investment. • IRR is a by product of NPV calculation, it is the discount rate of which NPV =0, this can occur several times in a project lifetime. • Energy Auditor and Energy Manager should always appraise EMO projects on NPV and IRR. 08.08.2021 Nigerian Energy Support Programme Slide 5 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Least life cycle cost (LLCC): Here EMO project is evaluated based on the life cycle cost of the project, and the project with the least life cycle cost is most viable. Good for assessing high investment project. Economic Evaluation • Financial analysis focus on benefits and costs to the firm while economic evaluation focuses on benefits and costs to the whole economy. • Not all EMOs result in energy savings but can be cost savings i.e fuel switching. • An EMO may lead to whole economic benefit i.e. reducing cost will reduce government subsidy burden on electricity. If there’s a subsidy from the government. • Government subsidy can also be in form of awareness creation or other incentives on EMO. 08.08.2021 Nigerian Energy Support Programme Slide 6 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Energy Production Cost Calculation This is also called levelized cost of energy: It is the sum up of all monthly or yearly discounted costs for EPC and operation of a power plant throughout its operational life divided by the sum of monthly discounted energy outputs throughout its operating life. The result is in cost per unit of electricity i.e. Naira/kWh. • WACC (weighted average Capital cost): is associated with expense incurred in raising additional capital. It is the minimum rate of return at which a company produces value. • The lower the WACC, the cheaper it is for a company to fund new projects. 08.08.2021 Nigerian Energy Support Programme Slide 7 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Energy Saved Production Cost Calculation LCOE saved will be the focus. A choice between paying for kWh supplied or pay with energy savings. Energy Auditors and Managers should rate EMOs considering static and discounted payback time. A short payback time signifies low risk and high return. Example 1: what is the payback time for switching off 60W incandescent bulb for 1,825 hours annually, when not needed? If electricity cost per kWh is 53 Naira. SPP = 08.08.2021 Investment Savings = 0 (0.060 X 53 X1825) = 0 years Nigerian Energy Support Programme Slide 8 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Example 2 60W Incandescent, life span 2000hrs, Project life 5 years, operation time 6000hrs per year 12W LED, life span 30000hrs, Project life 5 years, operation time 6000hrs per year • Tariff: 53 Naira/kWh Cost of Incandescent = 60 Naira, i. Cost of LED = 2000 Naira Calculate annual energy cost savings kWh savings= (60 X 2) – (12 X 2) = 96kWh yearly 08.08.2021 Nigerian Energy Support Programme Slide 9 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Example 2 ii. Calculate annual energy cost savings = 96 X 53 = 5,088 Naira iii. Calculate SPP = Investment savings iv. = 2000 5000 = 0.4 years or 4.8 months Consider the non-energy benefit to calculate new SPP. • Within a year, incandescent bulb will be replaced 3 times • Therefore, cost of replacement of (3 X 60 Naira) is saved by LED bulb. New SPP= 2000 5000 + 180 08.08.2021 = 2000 = 0.38 years or 4.6 months 5180 Nigerian Energy Support Programme Slide 10 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings SPP method does not consider measure profitability and time value of money. Despite most organisations find it very useful in appraising EMO viability. Benefit-Cost Ratio This is useful in judging EMO project viability from the angle of an energy customer. Example 3: From example 2; calculate the benefit-cost ratio. Total benefit-cost in 5 years = 5 X 5180 = 25,900 Naira B/C = 25900 = 12.95 > 1 (positive) 2000 08.08.2021 Nigerian Energy Support Programme Slide 11 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Considering time value of money based on inflation of tariff, i.e. 3% annually, the discounted cost of energy savings = (5000 X 1.031) + (5000 X 1.032) + (5000 X 1.033) + (5000 X 1.034) + (5000 X 1.035) = 27,342 Naira • Consider inflation of light bulb of 5% yearly = (60 X 1.051) + (60 X 1.052) + (60 X 1.053) + (60 X 1.054) + (60 X 1.055) = 348 Naira 08.08.2021 Nigerian Energy Support Programme Slide 12 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Therefore, New B/C = 27342+348 = 13.8 2000 • Assume about 100 numbers of this bulbs. A lot of savings can be found in lighting EMO. For longer years, a compact formular below should be used. Assuming the bulbs retrofit is financed by a bank: at interest rate of 20% and payback time of 5 years, with 60 equal monthly instalments. Calculate annuity. Calculate newest B/C? Therefore, refer to the table below, which can be found online (Compound Interest Table). 08.08.2021 Nigerian Energy Support Programme Slide 13 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings , Here, you have principal of 2000 Naira find annual repayment at n= 5 years, I = 20%. • With a Factor of 0.3344, • Annuity= 2000 X 0.3344 = 668 Naira per year and 11.14 Naira per month. B/C3 = 27342 + 348 11.14 X 60 X 5 08.08.2021 = 27690 3340 = 8.3 (lower) Nigerian Energy Support Programme Slide 14 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Note: borrowing will increase the price from 2000 Naira to 3340 Naira * B/C varies according to consideration of time value of money. WACC: EMOs require financing which can be company equity (quickest) which is the most expensive. • Organisations will weigh their options with other projects based on return rate. • High capital project will require both equity and debt financing. • Financing where there is high equity usually comes with less interest rates Example: Replacing boiler with 30% equity at 16% expected return and 70% debt at 9%. Calculate WACC. WACC = (0.30 X 0.16) + (0.7 X 0.09) = 11.1% 08.08.2021 Nigerian Energy Support Programme Slide 15 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Net Present Value (Energy Consumer Perspective) This represents increase in the wealth of a customer (investor) • NPV = Present worth savings – Present worth cost From example 2: If the discount rate is 15% calculate NPV. ➢ Savings is 5180 Naira annually, discounting to year zero. ➢ Savings, when annuity is known, factor from the table is 3.352 Therefore, discounted savings to present worth = 5,180 X 3.352 =17,363 Naira Therefore, NPV= 17,363 – 2,000 = 15,363 Naira • The customer is richer by 15,363 Naira over a period of 5 years. • More discount can be evaluated, like inflation and others. 08.08.2021 Nigerian Energy Support Programme Slide 16 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Internal Rate Of Return Interest earned on the outstanding balance on the project investment. It is the discount rate at which NPV = 0 at the end of operating life. This can be gotten from iteration and use of excel software i.e. NPV = PV savings - Present cost 0 = PV savings - Present Cost Therefore, PV savings = - Present Cost 2000 = 5180 (factor at n=5) Trace 0.3861 = 258.6% Dynamic Payback Period This is the month at which NPV becomes positive in the NPV graph, or using time value of money in the payback calculation. 08.08.2021 Nigerian Energy Support Programme Slide 17 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Power utility actually generated kWh saved by customer and there is need for them to factor it. If well planned can be beneficial to Utilities as energy saved is an energy resources that is avoided. i.e. avoided cost of generation, demand side management. B/C threshold should be 2 at least. Cost of Repayment of debts This describes how lending of debt repayment is done. It can be on repayment of different capital or replacement of different interest rate Example: A company borrowed $80,000 to implement EMO project at interest rate of 14%, repayment in six years. Calculate annual repayment and tabulate payment plan in the two different ways. 08.08.2021 Nigerian Energy Support Programme Slide 18 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings 08.08.2021 Nigerian Energy Support Programme Slide 19 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Energy Cost/Depreciation cost ratio As auditing a large organization can be complex, a simple way to analyze good EMOs is to look at energy cost/depreciation cost ratio, by assessing equipment with good efficiency A high E/D ratio means good project, i.e. E/D of 100 means depreciation cost is just 1% of energy cost. ⚫ Refer to manual example E/D can be useful in determining which equipment needs retrofit even if an alternative is bought. Least life cycle cost of EMOs ⚫ Energy intensive equipment procurement should be assessed based on LLCC and not least capital investment. 08.08.2021 Nigerian Energy Support Programme Slide 20 Co-Funded by Implemented by European Union Basics of Financial and Economic Analysis of Energy Efficiency Savings Energy Service Contract Usually signed between ESCO and industry client. Also known as Performance Contracting. The risk is transferred to the ESCO, beneficial to the industry client. • Consideration should include: project scope, contract duration, pricing agreements, define technical aspects Models include: • Shared savings, • Guaranteed savings, • Lease rent, • Build-own-operate and transfer • Build-own-operate: usually a PPP model, recovery of fund through incentives. 08.08.2021 Nigerian Energy Support Programme Slide 21 Thank you! Contact: Owoeye Olakunle, GOPA. owoeye@ecowatt.com.ng Follow us on Social Media: @nesp_nigeria Nigerian Energy Support Programme Nigerian Energy Support Programme Co-Funded by Implemented by European Union
