Calculating Your Building’s True Energy Cost by Ted Stern & Kevin Poulsen, CEO – LittleFoot Energy Corporati

If a building owner pays $1.55 per Therm to their utility company for natural gas, what is the true “all in” cost to heat their building? Would you believe $3.95 per Therm – 155% higher than the price paid to the utility?!

Calculating Your Building’s True Energy Cost
by Ted Stern & Kevin Poulsen, CEO – LittleFoot Energy Corporation

An applied look at Levelised Energy Cost (LEC)

If a building owner pays $1.55 per Therm to their utility company for natural gas, what is the true “all in” cost to heat their building? Would you believe $3.95 per Therm – 155% higher than the price paid to the utility?!

LittleFoot Energy helps property owners implement more sophisticated methods for measuring and managing energy consumption, beginning with establishing a building’s true cost of energy. All too often, building owners and managers gravitate toward the assumption that the cost to heat, cool and electrify their buildings is simply that which is stated in their utility bill each month. This thinking is woefully deficient in accounting for all the true costs of energy, central amongst them include: initial investment in equipment and installation, ongoing operations and maintenance, fuel cost, and a firm’s cost and alternative uses of capital. This system of total lifecycle energy cost accounting is referred to as the Levelised Cost of Energy (LCOE) or Levelised Energy Costs (LEC), and provides a framework for how owners and managers should evaluate competing energy systems.

Levelised cost assessments become especially profound now that viable technologies exist whereby fuel costs are reduced or eliminated, and system life is significantly extended. Solar, wind, geothermal, and other renewable technologies use nature to the extent that the input costs to the system are zero. Levelised Energy Cost, in short, is the total “all in” cost per unit of energy delivered over the life of the system, including time value of money and alternative investment options for capital.

Why is this important? Until recently, energy production relied on some kind of fuel source, and managers were naturally beholden to price volatility as a major input cost. With the emergence of renewable energy technologies, the investment decision making process has changed dramatically as essentially renewable energy systems have no fuel input. This has a massive impact on the economics of a system, especially when combined with the long system life (25+ years), and reduced operations and maintenance costs characteristic of renewable systems, as is the case for technologies like solar. The longer the useful system life, the more energy produced, and the more upfront costs can be amortized.

By way of a real world example, in early 2009 a prominent university in Cambridge, Massachusetts engaged LittleFoot Energy to establish a business case and system solution for a hybrid energy system designed to provide heating to 5 dormitory buildings. In establishing the cost of energy for the incumbent system, energy analysts had to not only look at market cost for natural gas ($1.55 per Therm) but also the associated operational costs of 5 boilers, 5 storage tanks, and balance of system. The investment in the system was $32.5k per boiler and $5K per tank, installed. The expected life of each boiler and storage tank is 20 and 15 year respectively. The operations and maintenance cost is $1,625/year. The university’s discount rate is 6%. The boiler efficiency is 95%; for every unit of natural gas purchased from the utility, 0.95 Therms of useful energy is output from the boilers. According to the US Energy Information Administration, Massachusetts commercial natural gas prices have increased on average 7.5% year over year from 1999 thru 2009. Looking out over 25 years, the calculated Levelised Energy Cost is actually $3.95 per Therm, 155% higher than the price paid to the utility!

Alternatively LittleFoot Energy’s hybrid system, comprised of solar panels, centralized storage, and waste heat recovery does not require fuel. The bulk of the system’s cost, the solar panels, require little to no maintenance and thus have no associated maintenance cost. In calculating the levelized energy cost for the hybrid system we find that the cost of energy is a mere $0.89/Therm. Thus, the true energy cost of the incumbent system is an astounding 344% higher than the cost of the hybrid renewable system.

While fossil fuels prices continue to be forced upward due to declining global reserves coupled with the thirst from emerging economies that lack proven domestic supplies of their own, the variable input costs of renewable systems are stable, predictable and free. Providing the ability to reliably predict future costs, renewables should appeal to many managers as a savvy method for controlling costs over longer periods of time. This pro-active approach lends itself to sound management practices allowing margins to grow at a steady, almost predicable, rate.

For more detailed reading on this subject visit littlefootinc.com