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Analysis of cost systems
6 Analysis of Cost Systems
6.1 COST V A R I A T I O N S 6.1.1 National currency
Nowadays, the currency of most countries is divided into one hundred parts, such as the cent is to a dollar. This is compatible with decimal measurement in science but it is not consistent with the thousandfold steps of the SI system prefixes. Thus the fundamental unit of monetary exchange should be used, for example the dollar. Denominations of monetary and British units should be written as multiples of the powers often, in groups of a thousand. The prefixes of SI units should never be mixed with those of British units, because the British-German denominations are in 6n powers of ten whereas the A m e r i c a n - F r e n c h are in 3n powers. In commerce the remanents of the R o m a n cardinal numbers make an 'm' ambiguous since here m = M = 1000 = mille. The international value of currency varies from day to day. Presently, the monetary exchange is based on a gold standard, but from our viewpoint it depends on what the rate of exchange is that a bank might offer at the time of a transaction. Where a design relies on imported equipment or materials the capital cost estimate can be very tenuous. The vagaries of world economics and shipping have meant that orders in foreign countries have often been made before the completion of a bid document. Cost estimates involving foreign currency are risky. It is important to reduce the time between the design and procurement, perhaps through packaged, modular, interchangeable or plug-in components or construction. These contingencies 165
166
Design integration for minimal energy and cost
support the need for a thorough feasibility analysis to arrive at a viable conceptual design that is unlikely to change during working drawings (Fig. 1.2). This volume is based on dollars for 1984 in the USA ($84 US) to show the trends of all the influences that can be involved in evaluating an energyconserving design. Each user can insert their own values for their own currency. Most capital costs will vary according to the international monetary exchange and to the degree of industrialization of the components in the design. For instance, costs for labor-intensive construction using indigenous materials may be traded with mass-produced, synthesized and factory-assembled materials. Two key evaluative parameters are the payback period and the benefit for resource ratio. These depend on a ratio of costs, which means that they are independent of the monetary units. Thus dollar values in this volume will indicate the appropriate trends in the cost analysis, wherever the design may be.
6.1.2 Local costs
The price of components and materials in the USA generally follows the national trend.18,19,64 This is because of the broad competitive distribution of items of the large manufacturers. Markets follow a supply to meet the demand trend with seasonal inventories. Local labor costs can vary the installed price considerably. Unskilled labor settles about the minimum wage, but skilled trades depend on the extent of union activity. However, the variations in price are in the main less than the variations in climate. Finance costs depend on the individual lending institution. First mortgage interest for new construction is often 13%/y, rising to 21%/y for short-term notes in the USA. This interest is tax deductible for taxpayers, which reduces the rate by about 25%. Tax credits have been available but government policy is moving to phase out those programs. Borrowing money for conservation makes a scenario very difficult to justify in terms of life cycle cost. As an investment, borrowing is also hard to justify because of the depreciation of the energy components in time. The annual utility costs are regionally dependent on the economic availability of resources, and on the government regulation of commerce and industry. There is no parity between the costs for the different energy modes for electricity, gas, oil and coal. Each utility has its separate regional resources, distribution and demand. Dry steam geothermal is perhaps the lowest-cost renewable resource, followed by hydroelectricity and lowtemperature solar heating. Nuclear fission that is not nationalized may be the least socially acceptable and costly direction, because of the high risk
Analysis of cost systems
167
hazards with corporate operation and with the disposal of radioactive waste. The trend will be towards the highest cost per unit of energy, since that is the case for justifying other utility alternatives such as coal conversion, refusederived fuels and perhaps fusion. The local energy costs for each each energy mode should be inserted in Table 6.1b, c. Without specific data a reader could assume proportional values in their currency in order to analyze the trends between scenarios.
6.1.3 Escalation Money loses its purchasing power over time. To compensate for this devaluation the monetary cost is inflated. Also, the production costs fluctuate depending on the influences of climate, the availability of resources, a shift in demand, labor contracts or changes in processing. The combined effect is an escalation in the costs at an annual rate of k w. Capital costs generally escalate with inflation kvs, but occasionally improved production techniques lower the cost, such as in the development ofphotovoltaic cells. Utility costs escalate at a higher rate due to inflationary overheads plus rising prices for the resources. Fuel, for instance, fluctuates with availability, seasonal demand, market competition and regulatory constraint. Utility energy costs have frequently escalated at about 1.5-2 times the monetary inflation rate. Industrial output for a technology often follows a bell-shaped curve, first expanding with competitive markets then declining with lessening raw resources at non-competitive prices. Prices are first comparable with the existing obsolescent technology, maintain themselves during the expansion, then escalate rapidly. Oil is in this latter phase, with global expansion and prices threatening some national economies. Synthetic fuels from coal and organic waste will probably follow. Conservation buys time but it does not solve the resource problem. Escalation rates are found from tracing the trends of prices over the preceding years. Equipment, materials and inflation have been rising at about 8 %/y in the USA, and utility bills at about 12%/y. With international devaluation some countries have experienced 30%/y escalations, which exceed the variation of the other parameters. The effect of escalation on an account cost in a set year is stated in Section 3.2.7. This occurs in step 13B of the strategy for integration (Section 1.5.1 and 1.5.2). It is a simple procedure through the schedule to multiply the original cost by 1 + kv~l to obtain the first year figure, then multiply the first year figure by 1 + kw2 to obtain the second, and so on. In this way, a changing rate can be accommodated instead of only a uniform series:
168
Design integration for minimal energy and cost
Cet : C o . [ l + k y e I t
...
for
a uniform
: Ct_l.[l+kyet]
,,.
for
any s e r i e s
= C .e t ' l ° g e [ l + k Y e ] o
series
kye. t = Co.e = Co.[l+kye.t + ...] . . , e x p o n e n t i a l form u n i f o r m s e r i e s
Cumulative escalated costs are found by adding the account costs from year to year.
6.1.4 Discount An investment makes money in time. Fundamentally, what is the present worth of an investment that will return a certain amount in a future year? The final amount is discounted to ascertain the present-day investment. The annual discount rate, kvo, to return a certain amount in so many years, is as though it was a compounded annual interest on the present investment. An appropriate discount rate is determined from the opportunities for investment by the interested party. Venture investors could consider shortterm loans with 22-30% /y discount. Economists may favor 16-20%/y, based on second mortgages and government investment. Home owners could consider lower risk opportunities with 5-8%/y discount, based on savings accounts and certificates of deposit. It is a question of risk and an expected return on the investment. Energy is a low-risk long-term investment associated with a first mortgage rate for new construction and a second mortage rate in retrofit. Thus a banker might see a discount as the mortgage interest plus a 1%/y servicing charge. The author considers the problem differently. Energy conservation should be conceived as an opportunity to avoid a future expense and not to make money. The investment here is to provide capital to avoid annual costs in the future. Consequently, for an owner a useful discount rate would be the current monetary inflation rate, kv$, plus a service rate of 1%/y. Risk, then, is when the escalation in energy costs is less than the inflation. The effect of discounting on an investment cost for a set year is summarized in Section 3.2.8 and is applied in step 13C of the integration. It is a simple procedure through the schedule to multiply the original account cost by 1/(1 + kvd~) to obtain the first year figure, then multiply the first year figure by 1/(1 + kyd2) for the second, and so on: Cdt = CO / [ l + k y d ] t = Ct_ 1 / [ l + k y d t ] - t . log e [ l + k Y d ] = Co , e
... = Ct_l.[l
for
a uniform
series
-kyd t + ..,]
-kyd,t = Co .e = Co . [ l - k y d . t + ...] . . . e x p o n e n t i a l form u n i f o r m s e r i e s
169
Analysis of cost systems
Cumulative discounted costs are found by adding the discounted costs from year to year.
6.2 CAPITAL COST ESTIMATE Capital is the accumulation of goods at a specified time through private, corporate or vested ownership. The purpose of capital is to accumulate
0
=
÷
Cp
"
Cost capital ICost for power iriginal for now Iat peak load l$1W l$.h/Btu IEquipment L~ab4.10c IMaterial ~onstruction + C L "
I
PM
IPower l~aximum IBtu/h LFig4.2 Equipment L
$/m l$/ft LDesign runs
ft
LDfucts. piping, tracks
"I" I~oCAsfor t area A T of surface iArea I$/m2
+
LTab4,6m
[Envelope, collector, illuminance, floor
Cv
V
"
Cost for volume IXolume $/I $/ft 3 Ift 3 /gal Igal L~ank. pond, storage, materials Cm
•
rn
I
Cost for mass IMass of component $/kg Ikg L~/lb lb Storage. materials
rn :W / W,. IEnergy ILatent heat IkJ/kg LBtu/Ib
=w / w~ II
.Ae
IEnergy ISpec.heat ITemp.diff. Ika IkJ/kg. °C I°C l~tu
l~tu/Ib.°F L°F
170
Design integration for minimal energy and cost
Icos< cao
~ xisting building
U/ 'y
goods for the production of other goods. A building is one such capital investment. Significantly, capital investment is justified through future productivity. Capital costs are frequently referred to as first, original or initial costs as they are the prelude to activity. Capital costs include the equipment, materials and construction to provide an operational facility. The procurement includes manufacture, assembly, delivery, storage, installation, startup, taxes, labor, royalties, overhead and profit. Capital for production equipment is separate from the facilities in terms of procurement, taxes and management. Design costs are not included in the capital because they are not part of the bid or tender document for construction (Section 6.4). Estimates of capital costs can be obtained directly from the manufacturer or distributor by requesting a price quotation for both the product and the installed price, and then specifying that product in the design. Costestimating handbooks are readily available 18'19'41 and provide an annual update of typical catalogue prices and installed costs for the components. Installation costs can be in the order of 10-20% of the product cost for offthe-shelf items, 20-50% for heavy site labor or custom-made items, and 70-100% for retrofit or reconstruction and low cost materials such as films. Waste for site construction can amount to 5%, and this has been included in the roofing, framing and masonry estimates. A designer selects equipment and materials according to the required performance and budget. Many designers do not realize that energy-related decisions can involve over half the capital cost of a building. Thus capital cost data are provided in this volume alongside of the power distribution data in Tables 4.14.12 to indicate the trends. Readers should insert their local data from time to time. The units of measurement depend on the power transfer through equipment, a length, an area, a volume or a mass, as formulated above. Where electrical generators or motors are involved the power rating stamped on the equipment should be about 20% higher than the peak load to allow for the starting overloads. This is included in the data. In the design of central plant, equipment is generally duplicated and oversized by about 20% so that while one component is being repaired the other can take 78% of the full demand. Existing building components have capital value for investment and priority purposes only. As a building ages it depreciates in value; thus, if it was built now there would be no depreciation and the value would be a
Analysis of cost systems
171
replacement cost at today's prices. Depreciation is formulated above in a way that is analogous to discounting. A component can be considered to retain half its value at the end of its useful life. Depreciation rates, kvDep, of 3-7%/y can be expected.
6.3 A N N U A L E N E R G Y COST ESTIMATE
Cyu
zY =
o
"
Sum over [Cost energy for IEnergy supplied by months | u t i l i t y over t | u t i l i t y during month for year |$/10 6kJ = $/GJ |10 6kJ/mth |$/10 6 Btu |10 6 Btu/mth |Tab6, Id |Monthly energy consumption L U t i l i t y energy rate
Cost over year for u t i l i t y
$/y $/y
Annual tility
C,u
bill
An annual utility energy cost estimate is found from the sum of the energy consumed times the unit cost of energy for that period of time. Essentially it is the monthly utility bill summed over a year. An energy rate comprises a fuel rate, a repayment of capital for plant and distribution, and a variety of taxes including environmental surcharges and consumption. A utility rate can vary seasonally according to the availability of resources, daily with peak power demands, and monthly with the total energy use. For instance, hydroelectricity depends on a water catchment, oil on a balance of refinery products, coal on transportation, and electricity on a peak generation capacity. Utilities used to lower their bulk rates for industrial consumption but this has changed to a higher rate for excessive power surges. Peak power rates and time-of-day pricing are incentives for electrical energy conservation.
Cyscr --" ~Yser
"
Cco
Cost annual IRatio yearly ICost capital service |serv.to o r i g . c a p . | o r i g i n a l
/y
12/$.y
12
Annual service costs stem from the building plant operation, maintenance, repair, security and insurance. They relate to the size of the plant and to the risk of failure to support the activities. A service cost ratio of 0.025/$. y could be expected. A central plant, compared with dispersed equipment, is generally more efficient and serviceable. With separate tenancies there is little incentive for conserving the demand. An alternative is to submeter the demand of each
172
Design integration for minimal energy and cost
mg/nlg "f/f
@
"~
~ ~
(gP6"O=) nl~901/$
( f ~ / $ ~-01 x fP'6 = ) u~.~a?.z/i
(.tal!l/$ ~ Ol
x ~'.ff : )
eljT$
(.tal!l/$ ~ -01 x p9?= ) lng.vfl/$
0a#I/$~-0l x g?'9 = ) (Jal!l/$ ~ Ol
o
x fZ~z.O = )
lqq/$
pJoa/~
(g?/~ ~ - 0 I x 0I.I = ) uo~Ls/~ e. o
(rl/~ gZ~=) qm~/$
[,.
~a~!l/~
o
CD~ O. O.
e~
(910.0 = ) ¢~f/ql
(~I.0 = ) Ivg/ql
l
®
(ff.z = )
S~
~
O0
.~ o
~
ql/nJg ~0I
6
Liquid
18.6 21.7 20 19.8 18-8 12 8.6
50 21.5 51 21.7 142 61
43 51 47 46 44 28 20
V = Wu/W,,t,. Dvu
Storage volume
methane propane hydrogen
petroleum Ip gas gasoline kerosene fuel oil # 2 ethylmethyl-
Geothermal Hydroelectricity Coal Oil, Gas Nuclear
Electricity
Natural
Gas
Alcohol
Crude 7.4 4.4 6-1 6.8 7.9 6.6 6-6
Dvuo = Ovl..
Po
P
0
.--
Oo
0-047 0.126 0-006
Density gas
0.000 72 0.002 0.00009
0-89 0.53 0-73 0.82 0-95 0.79 0.79
0"05 0"06 0'07 0'08 0"09
1.1 1.8
0.29 0.48
Cwt' = DvuWmU
C u u - UU
Cost energy supply by utility
0.000 17
1.3
40
0.34
0.25
0"0048
14 17 20 22 25
4-7
Ct: = W U . Cwu
Cost utility
0'5
6.9 22
10
6.6
15 18 21 24 27
5"0
7.4 23
10-6
7.0
HJR = H "t, ; KR t
Fesource
Energy
0"33
0"96
0-90
,...,a
~4
Design integration for minimal energy and cost
174
tenant and to charge for what they use. Another prospect is to lease independent packaged plants with a service and replacement agreement.
6.4 FINANCE COST ESTIMATE The finance and design costs are traditionally neglected in the evaluation of energy-conserving scenarios. Regulators are mainly interested in providing tax incentives to owners and manufacturers for fostering a new industry. Market penetration studies are generally less favorable when all the costs are included. An economist often compensates by applying a high discount rate which is not consistent with the true account costs that an owner or CyFt : 4. CcDowo :
CC O _
CCLOdO
rcost capital rCost
o DOWNPAYMENT
Tcost
during year|downpayment |capital |loan t financing|original year|orig.year J~riginal year
/S/y
/s
1$
~ost|Finance ~ownpayment [~apital
= 4" CyLoat CosL year
•rincipal
: C¢~LolT °~¥i
ICo~t of
'
1
[[1 +hyl ] LOANREPAYMENT LL" tr]T-1 o
|capital in t years loan |of repayments repayment over T $/y |$ Repayment |Principal+Interest Capital ~resent worth recovery factor Sinking fund deposit factor :
|Ratio| |year interest |$/$,y Llnterest rate |Period loan
CcLodOe[I +lRyi] r ° " Y i
I
° [[| + . y i ] T _ | ]
[~rincipal of loan
:
~" CcLodO,[~yi
4" T]
: 0
~ > T
when
'm~YTdx • Cyiht 1, o INTEREST TAX DEDUCTION 'IIRatio yearly J$IC°st annual interest |tax to income|year t I$I$'Y $ LTax rate ~ate of return on investment eduction [ t-I n=t>2 t-n ] = -kyTax. kyi • LCCLoao.[ l+ky i ] -CyLoaT'Z [l+kyi ] J Remaining principal n=2 =-kyTax.kyi,CCLoao.[ l+kyi[t-1]-CyLonT[t-1] ] =-kyTax.kyi,CCLoao,[ 1 - [t-1]/T ]
l
Analysis of cost systems
c..,] I ITax rate
IFunction period|Cost capitalICost capital Idepreciation Ioriginal ,salvage I i n time Ireceipt Ireceipt
I
| ~/sy k/y
12
L~eduction
= 2 [I
-t/II+TDe p] } / TDep t-I = [I -I/TDe p ] / TDep = kCDep . . . Rate in set year F , .I C c~o . D t, ~ ,
tC
:
--,limit
rEuncti°n °f capital [ Rati° credit t° investment
rate
• Straight line Uniform . Sum of d i g i t s • Declining balance • Accelerated cost recovery system o TAX CREDIT energy investment
L~t time t
.[c,:,,,, - Cc,,.,u] ax rRatiooo lCostcapitalgainonenergy
L
o
CAPITAL GAIN TAX
Icapital gainlPortion from selling property
/$.y LS/S
=
:
redit~nvested time t
o DEPRECIATION TAX DEDUCTION for business
L~
fn[TDep, t ] = 1 /TDe p
=__
175
+l~,YTax
¢I6rofit from sale o IMPROVEMENT PROPERTY TAX
* Cclmp
roost
Rate annual assessed property tax Iproperty improvement
$/$iy
Is
Property tax llmprovements ate
:
+ Rcs~
•
o SETTLEMENT COSTS seller buyer
Ccs=t
Ratio settlementTCost property sold costs to price ,related to energy
$I$
L$
Realtor commission.title transfer.mortgage transfer. oints.escrow fee.transfer tax . . . .
=
-- P~csal
o SALVAGE
" CcoBIg
I IRatio salvageICost capital value | | o r recycle | e x i s t i n g building as depreciated
I LF$ Lell =
I$ ~ec6.2
"PCypLe d
.
[Cost annual for
p
4-
IPowerof
power equip.to leaseJequipment
L*/wy =
+ Rco..
•
Cco
capital IRatio for BCost °nstructi°n |design fee to capital
~/$
o LEASE
Cins
ICostoriginal
~
nstal
lation
o DESIGN FEE architect engineer consultant lawyer
176
Design integration for minimal energy and cost
purchaser is interested in. For a designer, finance costs are beyond their control and responsibility. Loan and lease costs are not escalated since they are fixed by contract at the time of signing. However, they customarily increase with refinancing. It is a complicated process to trade one financing item with another because of the independent interests of the parties involved. Government incentives in the USA did provide tax credits and deductions, particularly with renewable resources of solar, cogeneration, wind and geothermal energy. Unfortunately, there have been cases of unscrupulous sales distributors who have raised the basic price by 50% and enticed an owner with low interest loans, 50% tax credits and interest deductions. Oil and gas deregulation in the USA promises a similar situation and a windfall profits tax is intended to stem the undue gains. It is a trade-off of incentives to foster conservation. The book provides a comprehensive coverage of costs so that a policy maker may analyze the separate or overall influences. Finance costs replace capital costs in the life cycle cost analysis. This ensures that there is no double-counting. Usually, a high downpayment lowers the annual repayment. But a transferable low interest loan is more appealing when the property is about to be sold, since it lowers the selling price without a loss in value. Downpayments are usually about 10% of the price or an amount sufficient to cover the loan processing and, say, three months of interest. A fixed annual repayment is first applied to the interest on the remaining principal, and then to reducing the outstanding principal over a set period of time. Roughly, a 20%/y interest short-term loan for 5 y would equate with a 10%/y interest for 10 y. In essence, this interest is paid by the annual cost escalations, which leaves little to justify the principal repayment. Interest is important in tax deductions of life cycle costing. Most of the mortgage repayment is interest in the initial years. At any time, the amount of interest depends on the remaining portion of the loan. +9 What one finally recovers is clouded by other deductions and whether a minimum deductible is reached. Taxes in a democratic society are based on personal income, corporate profit, property ownership and retail sales. It is quite complicated in the USA since taxes are levied at federal, state and local levels of government. Some cost-estimating firms have special divisions for this very purpose. Variations between states, localities and other countries influence the location and form of incorporation in business ventures. An annual tax rate is applied to all the taxable income or profit for a year. On personal income it could be in the range 20-30-50%/y and on corporate income 50%/y. Here it is important to differentiate between a tax deduction and a tax credit. A deduction is taken from the income, and thus the a m o u n t is reduced
Analysis of cost systems
177
according to the tax rate. A credit provides the full amount. Property taxes depend on the annual valuation of the property by the local county or city council. A range of 0.5-1-1.5%/y of the valuation could be expected. Sales tax applies to the retail price of an item and may be in the range 0-7% depending on the state. Government revenues become a trade-off between these sources. Traditionally, property taxes have sustained communities, but with increased demands for social services and unemployment the tide has turned towards the industrial and commercial sectors for support. Recessions have brought difficulties here too. This is an ominous signal for our dwindling economic resources. Many states have now realized that the tax revenues must also be applied to the resource sectors, as otherwise an economic growth cannot be sustained. Tax deductions, credits and exemptions for energy conservation have resulted. Economic revival woukt mean a backward swing in energy incentives. A good example of this was the creation of the Federal Energy Administration by the US Congress, which had a finite two-year life to deal with an immediate crisis imposed by the 1973-74 Arab oil embargo. The author played a part in the strategic drive for US independence from imported oil within a decade. 42 Depreciation is the loss in value of a product that produces income over a period of time. Supplies, materials and disposable items have no value after they are used and are therefore fully deductible in the first year. Equipment and construction are useful over many years but depreciates in value according to an elected formula for tax purposes. 36 More rapid functions have been introduced recently to encourage business investment. Tax credits in the USA, based on the installed price of renewable resources and conservation construction, have been as high as 40% on federal and 10% on state returns. Investment has also been available for small businesses. These programs are being phased out as the rapid escalations in annual energy costs justify the capital outlay. Again there is a growing need for account life cycle costing to verify the trend. Ownership of property carries an additional cost burden. When a property is sold the profit can be taxed as a capital gain and the settlement costs can involve realtor fees of about 6% of the selling price and finance expenses of about 1%. Property improvement increases the value of a building and is consequently taxed annually, often at about 1-2%/y of the improved value. Some states have excluded energy-related investments from property tax. Salvage may be through recycling or scrapping materials. Recovery of copper, brass, stainless steel, lead, ceramic tile and brick are possible. Plastics, glass fiber, aluminum, timber and glass are chosen for their lower original cost rather than for their durability or salvage. Leasing is a new alternative, particularly with high-cost, reliable
Design integration for minimal energy and
178
cost
equipment such as solar water heaters, wind generators and cogeneration plant. Already, water softeners, control relays, automobiles, wood splitters, telephones, toilets, dryers, pumps, generators, etc. are leased. There are many advantages in leasing. There are no owning costs nor any need for capital investment. Many owners, such as non-profit institutions, retirees or those on minimum incomes, have no tax-reducing opportunities. Essentially, the lessor has the tax advantages as a business and he can pass them on through a competitive service. For a business a lease can be a tax deduction or an overhead. Further, packaged equipment can be installed, removed, replaced, factory repaired and regularly maintained as a complete contract. A designer would integrate the package as a component module with a specified performance and access. Design fees are frequently neglected in life cycle costing because they are not part of the owner's construction contract. They are not capital costs. Design is related to a financing cost since the service provides a cost estimate which then determines the opportunities for financing. Commission fees for professional services are generally based on a minimum scale from a percentage of the cost for construction. A 10% figure could be used as a guide, lowering to 4% for large repetitive projects. Local energy codes must be satisfied but compliance will not guarantee cost savings. A full energy and cost analysis has not been a part of the traditional design services and fees should be negotiated separately with the owner to establish their concern for reducing their annual costs. A contract could be based on the time required to perform the required service. Some energy consultants contracted for 7% of the estimated savings in the first year. Other firms are now taking more risk by providing package deals which involve installing the conserving equipment then sharing the savings with the owner over a specified time. This is somewhat like a lease.
Example 6
Pre- and post-1970s offices: life cycle costs
The schedule (1.5.2 calls for an estimate of the capital and annual costs, steps 6 to 13. Finance costs are not considered because we are interested in comparing scenarios as designers in this case. Suggested costs are in Tab 4.6,4.10,Tab 6.1. Many designers do not realize that the annual utility cost for operating an office amounts to about 10% of the initial capital cost. It is difficult for owners and renters to afford their building loan because their annual profits would have to exceed 40% and utilities.
of the capital to pay for principal, 20%/y interest
T A B L E 6ab.l Capital Costs for Pre- and Post-1970s Offices
Power distribution events Room-hvac plant Concrete spand.
Scenario a - Pre 70's office Cap.rate Size Capital cost density PCaM PPaM CCCa +CcPa
Cp
$/"
*
4005/m2
.045 -
*
$/m2($/ft 2)
18.0(1.67)
Scenario b - Post 70's office Size Capital cost denMty PlbN PPbM CCIb *CcPb * $/m2($/ft 2)
.o15 . 0 1 5
-
.55/ 2
6.0(0.56) 6.0(0.56) 6.9(0.64)
.27x51
m~. m
overhang Glass
•5
.29x127
"
5351
o
,6xl
6mm.m~
Insul.ureth.rool 165/ 38mm. m2 ureth.spand. 18.55/ 2 51mm. m glass.fbr.cel 3.55/ i76mm.m 2 Chiller centrif .3051W 170 159 Tower cooling .125/W 227 196 Boiler gas .025/W 60 65 Air handler .335/W 170 Fan coil .235/W i~6 Fan terminal .Z6$/W Fan return .0?$/W 1 7 0 Precooler .10$/W Duct runs ,075/W 770x2: M$/m~ mixing box i Pumps .O0~$/W 457 566 Piping .0351W 457 566 Transformer .0351W 16i 30 LumAnaire-gener. .605/W 44 task .7o$/w Wiring,control .035/W ~88 79 Control hvae • hm/m~ 1 lumlnaire .~/m ~
18.4(1.71)
.33xlx2
31.8(2.94)
ix1
ixl
35.0(3.24) 16,0(1.48) 16,0(1,48)
.27x1 LxL
ixl
51.0(4.72) 27.2(2.52)
47.7(4.42) 89 23.5(2.18) 111
3.5(0.32)
115 1L~4
1.3(0.12) 56. I( 5.19
5.0(0.46) 3.5(0.32)
26.7(2.47) 34.5(3.19)
13.3(1.23) 17.3(1.60)
o,5(o.o4)
24
-
33.6(3.11) 89 ii.9(I,10)
80
8.o(o.?~) -2.3(0.2i i7.0(1.57 0.9(0.08
35.2(3.26)
301 9O 5.7 8
5.6(0.~2)-2.4(0.22 0.5(0.05)
301
-
9O i
1.2(0.n I ,.2(0.!i)
i2
12
6.8(2.2o)
1.8(0.i7) 13.1(1.27) 4,8(o.45)
23.i(2.14) 29.9(2.77)
/15
-
%6(0.52 ) 7.0(0.6 ~)
iO0
1.2(0.11)
~io ,'+i0 82 20
2.7(0.25) 2.5(0.23) 4.6(0.42) 16.o(1.4~)
5.6(0.52)
82
2.7(0.25) 0.5(0.05)
t
-
Total capital cost density.. . [ %260(24) + Ap16O(15) when AC = 2;~ = Ap680(63)
AI = Ap
1.6(0.15)
9.0(0.88) i 2 . 3 ( I . 1 4 )
2.5(0.23) 0.5(0.05) o.p(o.os)
L AIL20(ll)+ Ap220(20) Ap340(31)
T A B L E 6ab.2 Annual Costs--Pre- and Post-1970s Offices IScenario a - Pre 70's office EnergyRat~ Energy use Annual cost +C YPa CW WyCa WyPa R~YCa 2 $/TJ ~ ,I Gj/m2"y ($/10°Btu)l Electricity Sum day Sum night Wln day Win night
t9.1(2o.3)IO.iO o.o5 1.9(0.18) Total annual electricity.., I AC24(3"2)
Gas
Su-~day
4.7(5.0)
<7(5.o)
0
Win day
4.7(5.0)
4.7(5.0)
0.54 0.28
0.08 0.69
Sum night Win night
Total annual gas... Service Cent.+fan a 0.025/
Soap
Cent.+termin. b 0.0255/
$Cap
_.24
-
2.5(0.24)
0.4(0.03) |
I
Total annual service...
-
CyIb
CJlm~.y
5/I03m .y($/103ft'.~,)
~.3(o.4o)
o.2o o.18
~.s(o.4e) 4.3(o.~o)
1.o(o.o9)
0,09
-
2 +CyPb
2
1o7(0,16)
[ A~,3(I,2)%12(I.~)
+*p~6(~.5) 1
1. i(0.10)
[ a C 4(0.4) ~260 160
WyIb~WyPb
5/I0% .y(5/10Oft2.y)
23.8~25.3)10.50 0.i8 1~.9(I.10) t9.i(20.3)122.6(24.0)10,90 0~46 20.3/1.88 )
Scenario b - Pest 70's office Energy use Annual cost
5.2(0.48)
1.3to.12)
-
3,2(0.30)
0-.09
+AP 5(0"4) 1
0,2(0.02) 0°6(0.06)
[ AI I(0°i)+AP i(0'l)l
3°2(0.30)
-
120
I AC 5(0.5)
;.o6 o.qo.oq 0.3(0.03)
10.05 0,13
+Ap 3(0.3) 1
220
3.0(0,28) 5.5(0,51)
I AI 3(0.3)+Ap 6(0.5) I
180
Design integration for minimal energy and cost
TABLE 6ab.3 Life Cycle Costs for Pre- and Post-1970s Offices
Ap
Sidle Costs! $/m2 a.Pre Capital Ann. Elect. Gas Service Total Cumulat. Life Cycle .....
I ILI AC AI
33
',60 160 293
Ap
24
Ap
AC AI
Ap
AC AI
Ap
AC AI
J3 24 33 24 33 2& 33 24 66 48 99 72 132 96 165 120 326 208 159 232 392 256 425 280
20 220[ b.Post Capital Ann, Elect. Gas Service Total ~ | 17 19 17 19 17 19 17 19 17 19 Cumulat. I I 17 19 34 38 51 57 68 76 85 95 Life Cycle ..... 120 220 137 239 154 258 71 277 188 296 205 315 Account_ Costs: $/m 2 ~Ye Est. Des. Construction Occupancy a.Pre
Capital ~.08 260 1601281 17~303 Ann,Elect 1.15 24 16 28 18i 32 Gas 1.10 4 5 4 6 5 Service |.08 5 _~ _~ 3 6 Total 33 24 37 27 ~ Cumulat. • . . . . . . . . Life Cycle,.. 303 b.Post Capital Io08 120 220 130 23~ 140 Ann,Elect. 1'15 13 12 15 14 17 Service .08 Total Cumulat, Life Cycle°.. Capital |.13 Annual costs|.16 Cumulato Life Cycle...
AC AI
... Ap
.~
33 24 330 240 590 400
...
17 19 170 190 290 410
187 I 21 37 2&l 42 28 48 32 6 5 7 6 7 6 8 _~ --6 4 _~ 4 7 4 30 48 35 55 3-9 ~ i~ 48 35 03 74 164 118 187 151 2221406 261 467 305 257 i6 20 181 23 21 26 24
10 11
il-~ ~UI 628 450 931 637 ..,
I
24
32
9 3-0 32 35 ~5 56 85 91 65 283|193 313 225 348 Occupancy
10
52
_.] 6 ._~ 6 _/ 7 17 I--9 1~ 2-~ 21 2-4 ~
Inve____~stmen__~t Cost____~s: Ikyd Est. Des. Construction a.Pre
...
Ap
231 32 22 31 -I - 31 . . . . 237 1L~6 268 boPoet Capital 1.13 120 220 11,5 211 110 201 Annual costs|.16 17 17 16 18 16 i8 16 Cumulat. 16 Life Cycle... 126
I
,.
327 467 6011
~,~
230 467 311
~,.
14 14 1 119 127 229 3281
I
22 30 22 29 21 22] 61 L~ I 90 65 1681298 1901327 211 171 15 171 15 17 171 31 341 46 51 2181141 235]156 252
27 .,,
6.1 COST V A R I A T I O N S 6.1.1 National currency
Nowadays, the currency of most countries is divided into one hundred parts, such as the cent is to a dollar. This is compatible with decimal measurement in science but it is not consistent with the thousandfold steps of the SI system prefixes. Thus the fundamental unit of monetary exchange should be used, for example the dollar. Denominations of monetary and British units should be written as multiples of the powers often, in groups of a thousand. The prefixes of SI units should never be mixed with those of British units, because the British-German denominations are in 6n powers of ten whereas the A m e r i c a n - F r e n c h are in 3n powers. In commerce the remanents of the R o m a n cardinal numbers make an 'm' ambiguous since here m = M = 1000 = mille. The international value of currency varies from day to day. Presently, the monetary exchange is based on a gold standard, but from our viewpoint it depends on what the rate of exchange is that a bank might offer at the time of a transaction. Where a design relies on imported equipment or materials the capital cost estimate can be very tenuous. The vagaries of world economics and shipping have meant that orders in foreign countries have often been made before the completion of a bid document. Cost estimates involving foreign currency are risky. It is important to reduce the time between the design and procurement, perhaps through packaged, modular, interchangeable or plug-in components or construction. These contingencies 165
166
Design integration for minimal energy and cost
support the need for a thorough feasibility analysis to arrive at a viable conceptual design that is unlikely to change during working drawings (Fig. 1.2). This volume is based on dollars for 1984 in the USA ($84 US) to show the trends of all the influences that can be involved in evaluating an energyconserving design. Each user can insert their own values for their own currency. Most capital costs will vary according to the international monetary exchange and to the degree of industrialization of the components in the design. For instance, costs for labor-intensive construction using indigenous materials may be traded with mass-produced, synthesized and factory-assembled materials. Two key evaluative parameters are the payback period and the benefit for resource ratio. These depend on a ratio of costs, which means that they are independent of the monetary units. Thus dollar values in this volume will indicate the appropriate trends in the cost analysis, wherever the design may be.
6.1.2 Local costs
The price of components and materials in the USA generally follows the national trend.18,19,64 This is because of the broad competitive distribution of items of the large manufacturers. Markets follow a supply to meet the demand trend with seasonal inventories. Local labor costs can vary the installed price considerably. Unskilled labor settles about the minimum wage, but skilled trades depend on the extent of union activity. However, the variations in price are in the main less than the variations in climate. Finance costs depend on the individual lending institution. First mortgage interest for new construction is often 13%/y, rising to 21%/y for short-term notes in the USA. This interest is tax deductible for taxpayers, which reduces the rate by about 25%. Tax credits have been available but government policy is moving to phase out those programs. Borrowing money for conservation makes a scenario very difficult to justify in terms of life cycle cost. As an investment, borrowing is also hard to justify because of the depreciation of the energy components in time. The annual utility costs are regionally dependent on the economic availability of resources, and on the government regulation of commerce and industry. There is no parity between the costs for the different energy modes for electricity, gas, oil and coal. Each utility has its separate regional resources, distribution and demand. Dry steam geothermal is perhaps the lowest-cost renewable resource, followed by hydroelectricity and lowtemperature solar heating. Nuclear fission that is not nationalized may be the least socially acceptable and costly direction, because of the high risk
Analysis of cost systems
167
hazards with corporate operation and with the disposal of radioactive waste. The trend will be towards the highest cost per unit of energy, since that is the case for justifying other utility alternatives such as coal conversion, refusederived fuels and perhaps fusion. The local energy costs for each each energy mode should be inserted in Table 6.1b, c. Without specific data a reader could assume proportional values in their currency in order to analyze the trends between scenarios.
6.1.3 Escalation Money loses its purchasing power over time. To compensate for this devaluation the monetary cost is inflated. Also, the production costs fluctuate depending on the influences of climate, the availability of resources, a shift in demand, labor contracts or changes in processing. The combined effect is an escalation in the costs at an annual rate of k w. Capital costs generally escalate with inflation kvs, but occasionally improved production techniques lower the cost, such as in the development ofphotovoltaic cells. Utility costs escalate at a higher rate due to inflationary overheads plus rising prices for the resources. Fuel, for instance, fluctuates with availability, seasonal demand, market competition and regulatory constraint. Utility energy costs have frequently escalated at about 1.5-2 times the monetary inflation rate. Industrial output for a technology often follows a bell-shaped curve, first expanding with competitive markets then declining with lessening raw resources at non-competitive prices. Prices are first comparable with the existing obsolescent technology, maintain themselves during the expansion, then escalate rapidly. Oil is in this latter phase, with global expansion and prices threatening some national economies. Synthetic fuels from coal and organic waste will probably follow. Conservation buys time but it does not solve the resource problem. Escalation rates are found from tracing the trends of prices over the preceding years. Equipment, materials and inflation have been rising at about 8 %/y in the USA, and utility bills at about 12%/y. With international devaluation some countries have experienced 30%/y escalations, which exceed the variation of the other parameters. The effect of escalation on an account cost in a set year is stated in Section 3.2.7. This occurs in step 13B of the strategy for integration (Section 1.5.1 and 1.5.2). It is a simple procedure through the schedule to multiply the original cost by 1 + kv~l to obtain the first year figure, then multiply the first year figure by 1 + kw2 to obtain the second, and so on. In this way, a changing rate can be accommodated instead of only a uniform series:
168
Design integration for minimal energy and cost
Cet : C o . [ l + k y e I t
...
for
a uniform
: Ct_l.[l+kyet]
,,.
for
any s e r i e s
= C .e t ' l ° g e [ l + k Y e ] o
series
kye. t = Co.e = Co.[l+kye.t + ...] . . , e x p o n e n t i a l form u n i f o r m s e r i e s
Cumulative escalated costs are found by adding the account costs from year to year.
6.1.4 Discount An investment makes money in time. Fundamentally, what is the present worth of an investment that will return a certain amount in a future year? The final amount is discounted to ascertain the present-day investment. The annual discount rate, kvo, to return a certain amount in so many years, is as though it was a compounded annual interest on the present investment. An appropriate discount rate is determined from the opportunities for investment by the interested party. Venture investors could consider shortterm loans with 22-30% /y discount. Economists may favor 16-20%/y, based on second mortgages and government investment. Home owners could consider lower risk opportunities with 5-8%/y discount, based on savings accounts and certificates of deposit. It is a question of risk and an expected return on the investment. Energy is a low-risk long-term investment associated with a first mortgage rate for new construction and a second mortage rate in retrofit. Thus a banker might see a discount as the mortgage interest plus a 1%/y servicing charge. The author considers the problem differently. Energy conservation should be conceived as an opportunity to avoid a future expense and not to make money. The investment here is to provide capital to avoid annual costs in the future. Consequently, for an owner a useful discount rate would be the current monetary inflation rate, kv$, plus a service rate of 1%/y. Risk, then, is when the escalation in energy costs is less than the inflation. The effect of discounting on an investment cost for a set year is summarized in Section 3.2.8 and is applied in step 13C of the integration. It is a simple procedure through the schedule to multiply the original account cost by 1/(1 + kvd~) to obtain the first year figure, then multiply the first year figure by 1/(1 + kyd2) for the second, and so on: Cdt = CO / [ l + k y d ] t = Ct_ 1 / [ l + k y d t ] - t . log e [ l + k Y d ] = Co , e
... = Ct_l.[l
for
a uniform
series
-kyd t + ..,]
-kyd,t = Co .e = Co . [ l - k y d . t + ...] . . . e x p o n e n t i a l form u n i f o r m s e r i e s
169
Analysis of cost systems
Cumulative discounted costs are found by adding the discounted costs from year to year.
6.2 CAPITAL COST ESTIMATE Capital is the accumulation of goods at a specified time through private, corporate or vested ownership. The purpose of capital is to accumulate
0
=
÷
Cp
"
Cost capital ICost for power iriginal for now Iat peak load l$1W l$.h/Btu IEquipment L~ab4.10c IMaterial ~onstruction + C L "
I
PM
IPower l~aximum IBtu/h LFig4.2 Equipment L
$/m l$/ft LDesign runs
ft
LDfucts. piping, tracks
"I" I~oCAsfor t area A T of surface iArea I$/m2
+
LTab4,6m
[Envelope, collector, illuminance, floor
Cv
V
"
Cost for volume IXolume $/I $/ft 3 Ift 3 /gal Igal L~ank. pond, storage, materials Cm
•
rn
I
Cost for mass IMass of component $/kg Ikg L~/lb lb Storage. materials
rn :W / W,. IEnergy ILatent heat IkJ/kg LBtu/Ib
=w / w~ II
.Ae
IEnergy ISpec.heat ITemp.diff. Ika IkJ/kg. °C I°C l~tu
l~tu/Ib.°F L°F
170
Design integration for minimal energy and cost
Icos< cao
~ xisting building
U/ 'y
goods for the production of other goods. A building is one such capital investment. Significantly, capital investment is justified through future productivity. Capital costs are frequently referred to as first, original or initial costs as they are the prelude to activity. Capital costs include the equipment, materials and construction to provide an operational facility. The procurement includes manufacture, assembly, delivery, storage, installation, startup, taxes, labor, royalties, overhead and profit. Capital for production equipment is separate from the facilities in terms of procurement, taxes and management. Design costs are not included in the capital because they are not part of the bid or tender document for construction (Section 6.4). Estimates of capital costs can be obtained directly from the manufacturer or distributor by requesting a price quotation for both the product and the installed price, and then specifying that product in the design. Costestimating handbooks are readily available 18'19'41 and provide an annual update of typical catalogue prices and installed costs for the components. Installation costs can be in the order of 10-20% of the product cost for offthe-shelf items, 20-50% for heavy site labor or custom-made items, and 70-100% for retrofit or reconstruction and low cost materials such as films. Waste for site construction can amount to 5%, and this has been included in the roofing, framing and masonry estimates. A designer selects equipment and materials according to the required performance and budget. Many designers do not realize that energy-related decisions can involve over half the capital cost of a building. Thus capital cost data are provided in this volume alongside of the power distribution data in Tables 4.14.12 to indicate the trends. Readers should insert their local data from time to time. The units of measurement depend on the power transfer through equipment, a length, an area, a volume or a mass, as formulated above. Where electrical generators or motors are involved the power rating stamped on the equipment should be about 20% higher than the peak load to allow for the starting overloads. This is included in the data. In the design of central plant, equipment is generally duplicated and oversized by about 20% so that while one component is being repaired the other can take 78% of the full demand. Existing building components have capital value for investment and priority purposes only. As a building ages it depreciates in value; thus, if it was built now there would be no depreciation and the value would be a
Analysis of cost systems
171
replacement cost at today's prices. Depreciation is formulated above in a way that is analogous to discounting. A component can be considered to retain half its value at the end of its useful life. Depreciation rates, kvDep, of 3-7%/y can be expected.
6.3 A N N U A L E N E R G Y COST ESTIMATE
Cyu
zY =
o
"
Sum over [Cost energy for IEnergy supplied by months | u t i l i t y over t | u t i l i t y during month for year |$/10 6kJ = $/GJ |10 6kJ/mth |$/10 6 Btu |10 6 Btu/mth |Tab6, Id |Monthly energy consumption L U t i l i t y energy rate
Cost over year for u t i l i t y
$/y $/y
Annual tility
C,u
bill
An annual utility energy cost estimate is found from the sum of the energy consumed times the unit cost of energy for that period of time. Essentially it is the monthly utility bill summed over a year. An energy rate comprises a fuel rate, a repayment of capital for plant and distribution, and a variety of taxes including environmental surcharges and consumption. A utility rate can vary seasonally according to the availability of resources, daily with peak power demands, and monthly with the total energy use. For instance, hydroelectricity depends on a water catchment, oil on a balance of refinery products, coal on transportation, and electricity on a peak generation capacity. Utilities used to lower their bulk rates for industrial consumption but this has changed to a higher rate for excessive power surges. Peak power rates and time-of-day pricing are incentives for electrical energy conservation.
Cyscr --" ~Yser
"
Cco
Cost annual IRatio yearly ICost capital service |serv.to o r i g . c a p . | o r i g i n a l
/y
12/$.y
12
Annual service costs stem from the building plant operation, maintenance, repair, security and insurance. They relate to the size of the plant and to the risk of failure to support the activities. A service cost ratio of 0.025/$. y could be expected. A central plant, compared with dispersed equipment, is generally more efficient and serviceable. With separate tenancies there is little incentive for conserving the demand. An alternative is to submeter the demand of each
172
Design integration for minimal energy and cost
mg/nlg "f/f
@
"~
~ ~
(gP6"O=) nl~901/$
( f ~ / $ ~-01 x fP'6 = ) u~.~a?.z/i
(.tal!l/$ ~ Ol
x ~'.ff : )
eljT$
(.tal!l/$ ~ -01 x p9?= ) lng.vfl/$
0a#I/$~-0l x g?'9 = ) (Jal!l/$ ~ Ol
o
x fZ~z.O = )
lqq/$
pJoa/~
(g?/~ ~ - 0 I x 0I.I = ) uo~Ls/~ e. o
(rl/~ gZ~=) qm~/$
[,.
~a~!l/~
o
CD~ O. O.
e~
(910.0 = ) ¢~f/ql
(~I.0 = ) Ivg/ql
l
®
(ff.z = )
S~
~
O0
.~ o
~
ql/nJg ~0I
6
Liquid
18.6 21.7 20 19.8 18-8 12 8.6
50 21.5 51 21.7 142 61
43 51 47 46 44 28 20
V = Wu/W,,t,. Dvu
Storage volume
methane propane hydrogen
petroleum Ip gas gasoline kerosene fuel oil # 2 ethylmethyl-
Geothermal Hydroelectricity Coal Oil, Gas Nuclear
Electricity
Natural
Gas
Alcohol
Crude 7.4 4.4 6-1 6.8 7.9 6.6 6-6
Dvuo = Ovl..
Po
P
0
.--
Oo
0-047 0.126 0-006
Density gas
0.000 72 0.002 0.00009
0-89 0.53 0-73 0.82 0-95 0.79 0.79
0"05 0"06 0'07 0'08 0"09
1.1 1.8
0.29 0.48
Cwt' = DvuWmU
C u u - UU
Cost energy supply by utility
0.000 17
1.3
40
0.34
0.25
0"0048
14 17 20 22 25
4-7
Ct: = W U . Cwu
Cost utility
0'5
6.9 22
10
6.6
15 18 21 24 27
5"0
7.4 23
10-6
7.0
HJR = H "t, ; KR t
Fesource
Energy
0"33
0"96
0-90
,...,a
~4
Design integration for minimal energy and cost
174
tenant and to charge for what they use. Another prospect is to lease independent packaged plants with a service and replacement agreement.
6.4 FINANCE COST ESTIMATE The finance and design costs are traditionally neglected in the evaluation of energy-conserving scenarios. Regulators are mainly interested in providing tax incentives to owners and manufacturers for fostering a new industry. Market penetration studies are generally less favorable when all the costs are included. An economist often compensates by applying a high discount rate which is not consistent with the true account costs that an owner or CyFt : 4. CcDowo :
CC O _
CCLOdO
rcost capital rCost
o DOWNPAYMENT
Tcost
during year|downpayment |capital |loan t financing|original year|orig.year J~riginal year
/S/y
/s
1$
~ost|Finance ~ownpayment [~apital
= 4" CyLoat CosL year
•rincipal
: C¢~LolT °~¥i
ICo~t of
'
1
[[1 +hyl ] LOANREPAYMENT LL" tr]T-1 o
|capital in t years loan |of repayments repayment over T $/y |$ Repayment |Principal+Interest Capital ~resent worth recovery factor Sinking fund deposit factor :
|Ratio| |year interest |$/$,y Llnterest rate |Period loan
CcLodOe[I +lRyi] r ° " Y i
I
° [[| + . y i ] T _ | ]
[~rincipal of loan
:
~" CcLodO,[~yi
4" T]
: 0
~ > T
when
'm~YTdx • Cyiht 1, o INTEREST TAX DEDUCTION 'IIRatio yearly J$IC°st annual interest |tax to income|year t I$I$'Y $ LTax rate ~ate of return on investment eduction [ t-I n=t>2 t-n ] = -kyTax. kyi • LCCLoao.[ l+ky i ] -CyLoaT'Z [l+kyi ] J Remaining principal n=2 =-kyTax.kyi,CCLoao.[ l+kyi[t-1]-CyLonT[t-1] ] =-kyTax.kyi,CCLoao,[ 1 - [t-1]/T ]
l
Analysis of cost systems
c..,] I ITax rate
IFunction period|Cost capitalICost capital Idepreciation Ioriginal ,salvage I i n time Ireceipt Ireceipt
I
| ~/sy k/y
12
L~eduction
= 2 [I
-t/II+TDe p] } / TDep t-I = [I -I/TDe p ] / TDep = kCDep . . . Rate in set year F , .I C c~o . D t, ~ ,
tC
:
--,limit
rEuncti°n °f capital [ Rati° credit t° investment
rate
• Straight line Uniform . Sum of d i g i t s • Declining balance • Accelerated cost recovery system o TAX CREDIT energy investment
L~t time t
.[c,:,,,, - Cc,,.,u] ax rRatiooo lCostcapitalgainonenergy
L
o
CAPITAL GAIN TAX
Icapital gainlPortion from selling property
/$.y LS/S
=
:
redit~nvested time t
o DEPRECIATION TAX DEDUCTION for business
L~
fn[TDep, t ] = 1 /TDe p
=__
175
+l~,YTax
¢I6rofit from sale o IMPROVEMENT PROPERTY TAX
* Cclmp
roost
Rate annual assessed property tax Iproperty improvement
$/$iy
Is
Property tax llmprovements ate
:
+ Rcs~
•
o SETTLEMENT COSTS seller buyer
Ccs=t
Ratio settlementTCost property sold costs to price ,related to energy
$I$
L$
Realtor commission.title transfer.mortgage transfer. oints.escrow fee.transfer tax . . . .
=
-- P~csal
o SALVAGE
" CcoBIg
I IRatio salvageICost capital value | | o r recycle | e x i s t i n g building as depreciated
I LF$ Lell =
I$ ~ec6.2
"PCypLe d
.
[Cost annual for
p
4-
IPowerof
power equip.to leaseJequipment
L*/wy =
+ Rco..
•
Cco
capital IRatio for BCost °nstructi°n |design fee to capital
~/$
o LEASE
Cins
ICostoriginal
~
nstal
lation
o DESIGN FEE architect engineer consultant lawyer
176
Design integration for minimal energy and cost
purchaser is interested in. For a designer, finance costs are beyond their control and responsibility. Loan and lease costs are not escalated since they are fixed by contract at the time of signing. However, they customarily increase with refinancing. It is a complicated process to trade one financing item with another because of the independent interests of the parties involved. Government incentives in the USA did provide tax credits and deductions, particularly with renewable resources of solar, cogeneration, wind and geothermal energy. Unfortunately, there have been cases of unscrupulous sales distributors who have raised the basic price by 50% and enticed an owner with low interest loans, 50% tax credits and interest deductions. Oil and gas deregulation in the USA promises a similar situation and a windfall profits tax is intended to stem the undue gains. It is a trade-off of incentives to foster conservation. The book provides a comprehensive coverage of costs so that a policy maker may analyze the separate or overall influences. Finance costs replace capital costs in the life cycle cost analysis. This ensures that there is no double-counting. Usually, a high downpayment lowers the annual repayment. But a transferable low interest loan is more appealing when the property is about to be sold, since it lowers the selling price without a loss in value. Downpayments are usually about 10% of the price or an amount sufficient to cover the loan processing and, say, three months of interest. A fixed annual repayment is first applied to the interest on the remaining principal, and then to reducing the outstanding principal over a set period of time. Roughly, a 20%/y interest short-term loan for 5 y would equate with a 10%/y interest for 10 y. In essence, this interest is paid by the annual cost escalations, which leaves little to justify the principal repayment. Interest is important in tax deductions of life cycle costing. Most of the mortgage repayment is interest in the initial years. At any time, the amount of interest depends on the remaining portion of the loan. +9 What one finally recovers is clouded by other deductions and whether a minimum deductible is reached. Taxes in a democratic society are based on personal income, corporate profit, property ownership and retail sales. It is quite complicated in the USA since taxes are levied at federal, state and local levels of government. Some cost-estimating firms have special divisions for this very purpose. Variations between states, localities and other countries influence the location and form of incorporation in business ventures. An annual tax rate is applied to all the taxable income or profit for a year. On personal income it could be in the range 20-30-50%/y and on corporate income 50%/y. Here it is important to differentiate between a tax deduction and a tax credit. A deduction is taken from the income, and thus the a m o u n t is reduced
Analysis of cost systems
177
according to the tax rate. A credit provides the full amount. Property taxes depend on the annual valuation of the property by the local county or city council. A range of 0.5-1-1.5%/y of the valuation could be expected. Sales tax applies to the retail price of an item and may be in the range 0-7% depending on the state. Government revenues become a trade-off between these sources. Traditionally, property taxes have sustained communities, but with increased demands for social services and unemployment the tide has turned towards the industrial and commercial sectors for support. Recessions have brought difficulties here too. This is an ominous signal for our dwindling economic resources. Many states have now realized that the tax revenues must also be applied to the resource sectors, as otherwise an economic growth cannot be sustained. Tax deductions, credits and exemptions for energy conservation have resulted. Economic revival woukt mean a backward swing in energy incentives. A good example of this was the creation of the Federal Energy Administration by the US Congress, which had a finite two-year life to deal with an immediate crisis imposed by the 1973-74 Arab oil embargo. The author played a part in the strategic drive for US independence from imported oil within a decade. 42 Depreciation is the loss in value of a product that produces income over a period of time. Supplies, materials and disposable items have no value after they are used and are therefore fully deductible in the first year. Equipment and construction are useful over many years but depreciates in value according to an elected formula for tax purposes. 36 More rapid functions have been introduced recently to encourage business investment. Tax credits in the USA, based on the installed price of renewable resources and conservation construction, have been as high as 40% on federal and 10% on state returns. Investment has also been available for small businesses. These programs are being phased out as the rapid escalations in annual energy costs justify the capital outlay. Again there is a growing need for account life cycle costing to verify the trend. Ownership of property carries an additional cost burden. When a property is sold the profit can be taxed as a capital gain and the settlement costs can involve realtor fees of about 6% of the selling price and finance expenses of about 1%. Property improvement increases the value of a building and is consequently taxed annually, often at about 1-2%/y of the improved value. Some states have excluded energy-related investments from property tax. Salvage may be through recycling or scrapping materials. Recovery of copper, brass, stainless steel, lead, ceramic tile and brick are possible. Plastics, glass fiber, aluminum, timber and glass are chosen for their lower original cost rather than for their durability or salvage. Leasing is a new alternative, particularly with high-cost, reliable
Design integration for minimal energy and
178
cost
equipment such as solar water heaters, wind generators and cogeneration plant. Already, water softeners, control relays, automobiles, wood splitters, telephones, toilets, dryers, pumps, generators, etc. are leased. There are many advantages in leasing. There are no owning costs nor any need for capital investment. Many owners, such as non-profit institutions, retirees or those on minimum incomes, have no tax-reducing opportunities. Essentially, the lessor has the tax advantages as a business and he can pass them on through a competitive service. For a business a lease can be a tax deduction or an overhead. Further, packaged equipment can be installed, removed, replaced, factory repaired and regularly maintained as a complete contract. A designer would integrate the package as a component module with a specified performance and access. Design fees are frequently neglected in life cycle costing because they are not part of the owner's construction contract. They are not capital costs. Design is related to a financing cost since the service provides a cost estimate which then determines the opportunities for financing. Commission fees for professional services are generally based on a minimum scale from a percentage of the cost for construction. A 10% figure could be used as a guide, lowering to 4% for large repetitive projects. Local energy codes must be satisfied but compliance will not guarantee cost savings. A full energy and cost analysis has not been a part of the traditional design services and fees should be negotiated separately with the owner to establish their concern for reducing their annual costs. A contract could be based on the time required to perform the required service. Some energy consultants contracted for 7% of the estimated savings in the first year. Other firms are now taking more risk by providing package deals which involve installing the conserving equipment then sharing the savings with the owner over a specified time. This is somewhat like a lease.
Example 6
Pre- and post-1970s offices: life cycle costs
The schedule (1.5.2 calls for an estimate of the capital and annual costs, steps 6 to 13. Finance costs are not considered because we are interested in comparing scenarios as designers in this case. Suggested costs are in Tab 4.6,4.10,Tab 6.1. Many designers do not realize that the annual utility cost for operating an office amounts to about 10% of the initial capital cost. It is difficult for owners and renters to afford their building loan because their annual profits would have to exceed 40% and utilities.
of the capital to pay for principal, 20%/y interest
T A B L E 6ab.l Capital Costs for Pre- and Post-1970s Offices
Power distribution events Room-hvac plant Concrete spand.
Scenario a - Pre 70's office Cap.rate Size Capital cost density PCaM PPaM CCCa +CcPa
Cp
$/"
*
4005/m2
.045 -
*
$/m2($/ft 2)
18.0(1.67)
Scenario b - Post 70's office Size Capital cost denMty PlbN PPbM CCIb *CcPb * $/m2($/ft 2)
.o15 . 0 1 5
-
.55/ 2
6.0(0.56) 6.0(0.56) 6.9(0.64)
.27x51
m~. m
overhang Glass
•5
.29x127
"
5351
o
,6xl
6mm.m~
Insul.ureth.rool 165/ 38mm. m2 ureth.spand. 18.55/ 2 51mm. m glass.fbr.cel 3.55/ i76mm.m 2 Chiller centrif .3051W 170 159 Tower cooling .125/W 227 196 Boiler gas .025/W 60 65 Air handler .335/W 170 Fan coil .235/W i~6 Fan terminal .Z6$/W Fan return .0?$/W 1 7 0 Precooler .10$/W Duct runs ,075/W 770x2: M$/m~ mixing box i Pumps .O0~$/W 457 566 Piping .0351W 457 566 Transformer .0351W 16i 30 LumAnaire-gener. .605/W 44 task .7o$/w Wiring,control .035/W ~88 79 Control hvae • hm/m~ 1 lumlnaire .~/m ~
18.4(1.71)
.33xlx2
31.8(2.94)
ix1
ixl
35.0(3.24) 16,0(1.48) 16,0(1,48)
.27x1 LxL
ixl
51.0(4.72) 27.2(2.52)
47.7(4.42) 89 23.5(2.18) 111
3.5(0.32)
115 1L~4
1.3(0.12) 56. I( 5.19
5.0(0.46) 3.5(0.32)
26.7(2.47) 34.5(3.19)
13.3(1.23) 17.3(1.60)
o,5(o.o4)
24
-
33.6(3.11) 89 ii.9(I,10)
80
8.o(o.?~) -2.3(0.2i i7.0(1.57 0.9(0.08
35.2(3.26)
301 9O 5.7 8
5.6(0.~2)-2.4(0.22 0.5(0.05)
301
-
9O i
1.2(0.n I ,.2(0.!i)
i2
12
6.8(2.2o)
1.8(0.i7) 13.1(1.27) 4,8(o.45)
23.i(2.14) 29.9(2.77)
/15
-
%6(0.52 ) 7.0(0.6 ~)
iO0
1.2(0.11)
~io ,'+i0 82 20
2.7(0.25) 2.5(0.23) 4.6(0.42) 16.o(1.4~)
5.6(0.52)
82
2.7(0.25) 0.5(0.05)
t
-
Total capital cost density.. . [ %260(24) + Ap16O(15) when AC = 2;~ = Ap680(63)
AI = Ap
1.6(0.15)
9.0(0.88) i 2 . 3 ( I . 1 4 )
2.5(0.23) 0.5(0.05) o.p(o.os)
L AIL20(ll)+ Ap220(20) Ap340(31)
T A B L E 6ab.2 Annual Costs--Pre- and Post-1970s Offices IScenario a - Pre 70's office EnergyRat~ Energy use Annual cost +C YPa CW WyCa WyPa R~YCa 2 $/TJ ~ ,I Gj/m2"y ($/10°Btu)l Electricity Sum day Sum night Wln day Win night
t9.1(2o.3)IO.iO o.o5 1.9(0.18) Total annual electricity.., I AC24(3"2)
Gas
Su-~day
4.7(5.0)
<7(5.o)
0
Win day
4.7(5.0)
4.7(5.0)
0.54 0.28
0.08 0.69
Sum night Win night
Total annual gas... Service Cent.+fan a 0.025/
Soap
Cent.+termin. b 0.0255/
$Cap
_.24
-
2.5(0.24)
0.4(0.03) |
I
Total annual service...
-
CyIb
CJlm~.y
5/I03m .y($/103ft'.~,)
~.3(o.4o)
o.2o o.18
~.s(o.4e) 4.3(o.~o)
1.o(o.o9)
0,09
-
2 +CyPb
2
1o7(0,16)
[ A~,3(I,2)%12(I.~)
+*p~6(~.5) 1
1. i(0.10)
[ a C 4(0.4) ~260 160
WyIb~WyPb
5/I0% .y(5/10Oft2.y)
23.8~25.3)10.50 0.i8 1~.9(I.10) t9.i(20.3)122.6(24.0)10,90 0~46 20.3/1.88 )
Scenario b - Pest 70's office Energy use Annual cost
5.2(0.48)
1.3to.12)
-
3,2(0.30)
0-.09
+AP 5(0"4) 1
0,2(0.02) 0°6(0.06)
[ AI I(0°i)+AP i(0'l)l
3°2(0.30)
-
120
I AC 5(0.5)
;.o6 o.qo.oq 0.3(0.03)
10.05 0,13
+Ap 3(0.3) 1
220
3.0(0,28) 5.5(0,51)
I AI 3(0.3)+Ap 6(0.5) I
180
Design integration for minimal energy and cost
TABLE 6ab.3 Life Cycle Costs for Pre- and Post-1970s Offices
Ap
Sidle Costs! $/m2 a.Pre Capital Ann. Elect. Gas Service Total Cumulat. Life Cycle .....
I ILI AC AI
33
',60 160 293
Ap
24
Ap
AC AI
Ap
AC AI
Ap
AC AI
J3 24 33 24 33 2& 33 24 66 48 99 72 132 96 165 120 326 208 159 232 392 256 425 280
20 220[ b.Post Capital Ann, Elect. Gas Service Total ~ | 17 19 17 19 17 19 17 19 17 19 Cumulat. I I 17 19 34 38 51 57 68 76 85 95 Life Cycle ..... 120 220 137 239 154 258 71 277 188 296 205 315 Account_ Costs: $/m 2 ~Ye Est. Des. Construction Occupancy a.Pre
Capital ~.08 260 1601281 17~303 Ann,Elect 1.15 24 16 28 18i 32 Gas 1.10 4 5 4 6 5 Service |.08 5 _~ _~ 3 6 Total 33 24 37 27 ~ Cumulat. • . . . . . . . . Life Cycle,.. 303 b.Post Capital Io08 120 220 130 23~ 140 Ann,Elect. 1'15 13 12 15 14 17 Service .08 Total Cumulat, Life Cycle°.. Capital |.13 Annual costs|.16 Cumulato Life Cycle...
AC AI
... Ap
.~
33 24 330 240 590 400
...
17 19 170 190 290 410
187 I 21 37 2&l 42 28 48 32 6 5 7 6 7 6 8 _~ --6 4 _~ 4 7 4 30 48 35 55 3-9 ~ i~ 48 35 03 74 164 118 187 151 2221406 261 467 305 257 i6 20 181 23 21 26 24
10 11
il-~ ~UI 628 450 931 637 ..,
I
24
32
9 3-0 32 35 ~5 56 85 91 65 283|193 313 225 348 Occupancy
10
52
_.] 6 ._~ 6 _/ 7 17 I--9 1~ 2-~ 21 2-4 ~
Inve____~stmen__~t Cost____~s: Ikyd Est. Des. Construction a.Pre
...
Ap
231 32 22 31 -I - 31 . . . . 237 1L~6 268 boPoet Capital 1.13 120 220 11,5 211 110 201 Annual costs|.16 17 17 16 18 16 i8 16 Cumulat. 16 Life Cycle... 126
I
,.
327 467 6011
~,~
230 467 311
~,.
14 14 1 119 127 229 3281
I
22 30 22 29 21 22] 61 L~ I 90 65 1681298 1901327 211 171 15 171 15 17 171 31 341 46 51 2181141 235]156 252
27 .,,