# Presentation: 161849

## Commercial Unitary Air Conditioner & Heat Pump Life-Cycle Cost Analysis:Inputs and Results

- Lawrence Berkeley National Laboratory
- July 2003

## Life-Cycle Cost Inputs

## Revisions to LCC inputs:September 2002 – December 2002

- Mechanical Contractor Markups
- Before: Disaggregated by size of contractor (large and small)
- Now: Disaggregated by size and market served
- Large Contractor, New Construction
- Large Contractor, Replacement
- Small Contractor, New Construction
- Small Contractor, Replacement
- Electricity Prices
- Annual energy expenses based on new building simulation data
- Equipment Lifetime
- Before: Shape of survival function based on residential heat pumps
- Now: Weibull probability distribution used
-  Maintenance Costs
- Before: Based on costs developed for residential central a/c
- Now: Based on RS Means data specific to commercial unitary a/c

## Revisions to LCC inputs since December 2002  

- Typical Distribution Channels
- Reordering of Mechanical and General Contractors – no impact to resulting markups
- Replacement of AEO 2002 electricity price forecasts with AEO 2003 price forecasts
- LCC analysis re-run with AEO 2003 price forecasts

## Two approaches to energy expenses

- _Tariff-Based Approach_

- _Hourly-Based Approach_

## Equipment Markups

## Markups depend on distribution channels and construction markets  

## Distribution Channel assumed to consist ofSeveral Parties

- _Distribution Channels 1 & 2_

- _Distribution Channel 3 (Nat’l Acct)_

- Manufacturer

- Wholesaler

- General Contractor
- (not present for
- replacement market)

- Large Mechanical Contractor

- Small Mechanical Contractor

- Customer

- Customer

- Manufacturer

- Customer

- General Contractor
- (not present for
- replacement market)

## Two types of Markups developed – Baseline and Incremental

- Markups relate customer price to cost of goods sold (CGS)
- Baseline markups relate price to cost prior to a change in efficiency
- Baseline markups indicate a customer price that covers _all_ of a Wholesaler’s or Contractor’s expenses plus profit
- Direct labor costs are included
- Incremental markups relate the incremental change in customer price to the incremental change in CGS
- Incremental markups cover only expenses that vary with CGS
- Direct labor costs do not vary with changes in CGS

## Wholesaler Markups

- Source: Source: Air-conditioning & Refrigeration Wholesalers Association (ARW), *1998 Wholesaler PROFIT Survey Report, Based on 1997 Wholesaler Operations*, 1998.

- Baseline Markup covers all expenses = 1.36
- Incremental Markup (no change in direct labor costs) = 1.11

## Mechanical Contractor Markups

- Source: Air Conditioning Contractors of America (ACCA),* Financial Analysis for the HVACR Contracting Industry, 1995 Edition*, 1995.

- Baseline Markup covers all expenses = 1.53
- Incremental Markup (no change in direct labor costs) = 1.28
- Baseline and Incremental Markups vary depending on Contractor Size (i.e., revenues) and Market Served (i.e., new construction and replacement)
- _Small Contractor (< $2 million), New Construction_:
-        Baseline Markup = 1.48
-        Incremental Markup = 1.26
- _Small Contractor (< $2 million), Replacement_:
-        Baseline Markup = 1.70
-        Incremental Markup = 1.37
- _Large Contractor (> $2 million), New Construction_:
-        Baseline Markup = 1.35
-        Incremental Markup = 1.18
- _Large Contractor (> $2 million), Replacement_:
-        Baseline Markup = 1.55
-        Incremental Markup = 1.29

## General Contractor Markups

- Source: U.S. Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau, *Commercial and Institutional Building Construction, 1997 Economic Census, Construction, Industry Series*, January, 2000, Washington, DC. Report No. EC97C-2333B.

- Baseline Markup covers all expenses = 1.24
- Incremental Markup (no change in direct labor costs) = 1.13

## National Accounts

- Large customers that are able to negotiate prices directly with the manufacturer
- “National Account” markup is expected to be lower than other markups because of fewer “middle men,” but how much less is uncertain.
- We take the “National Account” markup to be 1⁄2 of the product of the wholesaler, general contractor, and mechanical contractor markups.
- Comments providing additional information are welcome.

## Converting Baseline and Standard Level Manufacturer Prices to Customer Prices

## Total Installed Cost of Equipment

## Installation Costs

- Based on RS Means Mechanical Cost Data
- 7.5 ton baseline (10.1 EER) installation cost = $1585
- 15 ton baseline (9.5 EER) installation cost = $2142
-  Installation cost varies by State
- Assumed to increase in                                                 direct proportion to                                                 equipment weight
- Weight is a function of                                                        equipment efficiency

## Average Values:Manufacturer Price, Customer Equipment Price, Installation Cost, and Total Installed Cost

## Tariff-based Electricity Prices

## 17 Subdivisions based on Census Division, Climate Region, Grid Structure

- Tariffs have been collected at the subdivision level

**Notes:**
Subdivisions are based on census divisions, which have been further divided to take into account climate differences and differences in the electricity grid/market structure.

## Sample utilities selected on the basis of obtaining high coverage of U.S. sales and customers 

## Sample utilities have average Revenue/Sales values within range of Energy Information Administration (EIA) listed utilities 

## Utilities generally have several tariffs  

- Example: Commercial/Industrial Tariffs from     Boston Edison Company, Boston MA

## Each tariff is a combination of fixed, energy, and demand charges

- Example: Boston Edison Company, Boston MA     General Service Tariff G-2 w/ Demand

## Calculate annual electricity bill from the tariff and the building’s energy & demand characteristics

- Example: Boston Edison Company, Boston MA    General Service Tariff G-2 w/ Demand  Season – Summer;  Month – July          C&I Revenue/Sales = 9.63 cents/kWh

- Bill Calculator and Tariffs are available at: http://eetd.lbl.gov/ea/ees/tariffs/index.php

## Marginal electricity rates for package a/c customers are a function of building load factor

- Building load factor indicates the relative significance of peak demand use
- The higher the load factor the lower peak demand is to overall energy consumption
- Bldg load factor = Annual energy use (kWh) ÷ [Peak demand (kW) • 8760 hours]

- 92% of building sample has a load factor less than 50%.
- As a result, most of building sample has relatively high marginal electricity rates.

## Marginal electricity rates vary over a wide range of values

- Average = 10.0 cents/kWh

## Hourly-based Electricity Prices

## Motivation for Hourly Approach

- Restructuring of electricity markets may change pricing, creating a need for more precise analysis of system costs and benefits
- Loads and electricity costs vary hourly
- Strong correlation between high temperatures, air-conditioning use, high system loads and high marginal electricity prices
- Determine whether utility tariff structures accurately reflect the real costs of serving peaky loads

## Hourly electricity prices: Approach

-  *Why do we need a model?*
- Building simulations use Typical Meteorological Year (TMY) weather data, so we need to create corresponding “TMY prices” by modeling the relationship between actual prices and actual weather
-  *Step 1: Relate system load to temperature*
- Data sources: Hourly temperature data for 1999, 2000 and the TMY year from NCDC.  Hourly system loads for all utilities with peak loads > 200 MW from FERC Form 714.
*Step 2: Relate system marginal price to load*
- Data sources: Hourly “system lambda” (marginal production cost) data for every control area from FERC Form 714.  Hourly market clearing prices for 1999 and 2000 from NY, NE, CA and PJM.

## Load is a function of Temperature, Time of Day, and Day-Type

- Use historical data to establish Load-Temperature relationships in each of the 17 subdivisions
- First sort the data into bins, according to the hour of the day, the day type (weekday or weekend) and natural light (day or night).
- Within each bin, fit the load-temperature relationship to a polynomial
- Compute a frequency distribution for the difference between the actual load and the fitted value
- Use this model to construct TMY loads as a function of temperature, including random fluctuations

## Load as a function of temperature varies over a broad rangeExample: Subdivision 3

## Sorting on hour of day reduces the variability of the data Example: Subdivision 3

## Different hours of the day show different relationships to temperature Example: Subdivision 3

## Hourly Load-Temperature Model Output for TMY:Comparison to actual (1999) for Subdivision 3 

## Price is a function of Load, Season and Hour-Type

- In general, the price-load relationship is much more random than the load-temperature relationship
- Important variables are season (summer, winter) and hour-type (peak, off-peak)
- Volatility and price spikes occur primarily for summer, peak hours
- Model computes an average Price vs. Load relationship and adds random variations

## Price vs. Load varies over two ordersof magnitudeExample: Subdivision 3

## Price vs. Load for Summer/Winter Peak/Off-PeakExample: Subdivision 3

## Hourly Price-Load Model Output for TMY:Comparison to actual (1999) for Subdivision 3

## Customer Hourly Price Model

***Total Cost Savings = (Generation Cost Savings) + (Coincident Peak Load Reduction)*(Total Capacity Cost)***** **
***Generation Cost Savings*** = sum over all hours of marginal price times energy savings, multiplied by an additional *Cost Recovery Factor*
***Coincident Peak Load Reduction ***= reduction in a customer’s load during the hour of the system peak
***Total Capacity Cost*** includes generation, transmission and distribution capacity, reserve margins, and losses, expressed as $/kW.  Utility *Fixed Charge Rates* are used to convert these to the annual revenue stream required to cover all investment costs.

## Marginal Electricity Prices by Subdivision

- Tariff-based Average 10.0 ¢/kWh

- Hourly-based Average 9.9 ¢/kWh

## Marginal Electricity Prices by Subdivision

## Electricity Price Forecasts

## Future Trends: Average Electricity Price for U.S. Commercial Customers

- Source: Energy Information Administration, Annual Energy Outlook, 2003

## Discount Rates

## Discount Rates based on Cost of Capital  

- Discount rates are used to reduce the future value of cash flows to be derived from a typical company project or investment
- Discount rates are derived from estimates of the cost of capital of companies that purchase commercial air conditioners
- Costs of capital is calculated from the weighted-average cost to the firm (WACC) to obtain equity and debt financing
- Cost of equity financing (*k**e*) is estimated using the capital asset pricing model (CAPM)
- Cost of debt financing (*k**d*) is the yield or interest rate paid on money borrowed by a company

## Discount rates for LCC analysis based on WACC for various ownership categories

- Sample of companies drawn for each ownership category from Value Line investment survey and listed on the Damodaran Online site
- Ownership category shares based on Commercial Building Energy Consumption Survey (CBECS) 1999 cooled floor space area

## Distribution of real discount rates (WACC) for commercial air conditioner customers

## Other LCC Inputs

## Equipment Lifetime  

- Median age of 15 years based on 1999 ASHRAE HVAC Applications Handbook
- Survival function based on Weibull probability distribution
- 5% of population retired by 8th year
- 90% of population retired by 21st year

## Repair Costs

- Annual Cost for repairing or replacing component failures
- Baseline annual repair cost assumed to equal 1⁄2 equipment price divided by average equipment lifetime
- 7.5 ton baseline (10.1 EER) annual repair cost = $158
- 15 ton baseline (9.5 EER) annual repair cost = $291
- Assumed to increase in direct proportion to equipment manufacturing price
- 7.5 ton baseline (11 EER) annual repair cost = $169
- 15 ton baseline (11 EER) annual repair cost = $316

## Maintenance Costs

- Maintenance Cost is the cost for maintaining equipment operation (e.g., checking refrigerant charge, cleaning coils)
- Based on RS Means Facilities Maintenance & Repair Cost Data
- Specific to roof top air conditioners ranging in cooling capacity from 3 to 24 tons
- Stays constant as efficiency increases
- Annual maintenance cost equals $200
- Includes labor and materials with overhead and profit

## LCC Results:Tariff-based Electricity Prices

## Analysis generates a distribution of LCC results

- LCC calculation performed on the representative set of units to generate a distribution of LCC results
- LCC calculations performed using a spreadsheet with a commercially available “add-in” for statistical sampling
- The spreadsheet plus “add-in”* *uses a Monte Carlo simulation analysis to sample from the representative set of units and the other input distributions

## Baseline LCC varies over a widerange of valuesProduct Class: A/C, 65-134.9 kBtu/h

- Mean LCC = $20,514; Minimum LCC = $6667; Maximum LCC = $93,747
- Approximately 30% of LCC due to Total Installed Cost of Equipment (~$6400)
- Outliers due to units with high marginal elec prices (> 25 cents/kWh)

## At 11 EER, most users have LCC savings Product Class: A/C, 65-134.9 kBtu/h

- Mean impact is LCC savings of $533
- 93% of sample have net savings
- Range is from net savings of $5764 to net cost of $333

## Results: Mean LCC and Percent with Reduced LCCProduct Class: A/C, 65-134.9 kBtu/h

## Results: Mean LCC and Percent with Reduced LCCProduct Class: A/C, 135-239.9 kBtu/h

## LCC Results:Hourly-based Electricity Prices

## Results: Mean LCC and Percent with Reduced LCCProduct Class: A/C, 65-134.9 kBtu/h

- Mean LCC results are similar to tariff-based analysis
- Range of hourly-based electricity prices less than that of tariff-based prices – eliminates extremes resulting in greater percentage of units with reduced LCC

## Results: Mean LCC and Percent with Reduced LCCProduct Class: A/C, 135-239.9 kBtu/h