Financial analysis and utility rate structures

Timing is key. Economic analysis needs to be done early in design so that there is enough time to make changes to the design and drawings.

Economic analysis is a foundational tool in building design, shifting the focus from initial construction cost (first cost) to the total cost of ownership (life-cycle cost). Its primary uses in design decisions are to justify capital investment, compare alternatives, and ensure cost-effective sustainability.

Types of economic analysis

The following tables summarize several types of economic analysis that may be performed for a project. All these types of financial analysis are valuable to a certain exten; however, LCCA is the most holistic and provides the most valuable long-term (full life) accounting of costs. This makes it incredibly valuable for long-term ownership of a building (i.e., universities, etc.). If there will be short-term turnover of ownership (<10yrs) it might make more sense to report on simply payback or ROI.

Types of economic analysis. (Source: IBPSA-USA BEMP Training Workshop)

Life-Cycle Cost Analysis (LCCA)

Interpretation: A lower LCC indicates a more cost-effective project over the long term.

Net Present Value (NPV)

Interpretation: If NPV is positive, the project is considered financially viable; if negative, it may not be worth pursuing.

Internal Rate of Return (IRR)

Interpretation: A higher IRR indicates a more attractive project. IRR is compared to the required rate of return (or hurdle rate); if IRR exceeds this rate, the project is considered a good investment.

Simple Payback Period (SPP)

Interpretation: A shorter payback period indicates quicker recouping of costs. However, SPP ignores cash flows beyond the payback period and doesn’t consider the discount rate.

Return on Investment (ROI)

Interpretation:

• Positive ROI: A positive ROI indicates that the investment has generated a profit. The higher the ROI, the more profitable the investment.
• Negative ROI: A negative ROI suggests that the investment has incurred a loss, meaning the project did not recover its costs.
• Percentage Comparison: ROI is expressed as a percentage, allowing investors to compare the profitability of different projects or investments on a relative basis. For example, an ROI of 20% means the investment returns 20 cents for every dollar invested.

Understanding utility rates

Economic analysis may either use average utility rates or actual utility rates. Actual utility rates will provide a much more accurate economic analysis.

Choosing between average or actual utility rates

	Sources	Rate Structure	Pros	Cons
Actual Utility Rates	Utility Company that will serve the building	Includes all applicable components	Most accurately represents the time-dependent utility costs	Not always readily available
Regional Averages	Example: U.S. Energy Information Administration (eia)	Estimated average annual flat rates without specific time-of-use, seasonal or demand charges	Quick and easy to find if actual rates are unavailable	Inaccurately represents time-of-use, seasonal and demand charges

Components of actual utility rates

Energy Charges [$/kWh, $/therm, $/ton-hr, $/MMBtu]

• Based on energy consumed during each bill period
• Can be based on time-of-use
• Can vary seasonally

Demand Charges [$/kW, $/therm/month, $/ton, $/MMBtu/h]

• Based on maximum demand during each bill period

Fixed Charges ($)

• Fixed fees for each bill period
• Not based on consumption or demand

Design strategies based on utility rates

High Charges	Recommended Strategy
Energy consumption rates	Reduce overall consumption
Time-of-use or seasonal consumption rates	Shift usage from high- to low- cost periods (time of day or season)
Demand charges	Curtail usage during peak demand period and/or shift usage to different period