8-i 

CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES

TABLE OF CONTENTS

8.1 INTRODUCTION .............................................................................................................. 8-3

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analyses .................. 8-3

8.1.2 Overview of Life-Cycle Cost and Payback Period Inputs ...................................... 8-5

8.2 LIFE-CYCLE COST INPUTS ........................................................................................... 8-8

8.2.1 Definition ................................................................................................................ 8-8

8.2.2 Total Installed Cost Inputs ...................................................................................... 8-9

8.2.2.1 Installation Costs .................................................................................... 8-10

8.2.3 Operating Cost Inputs ........................................................................................... 8-11

8.2.3.1 Operating Hours ..................................................................................... 8-12

8.2.3.2 Power Rating .......................................................................................... 8-13

8.2.3.3 Electricity Prices .................................................................................... 8-13

8.2.3.4 Electricity Price Trend ........................................................................... 8-14

8.2.4 Lifetime ................................................................................................................. 8-15

8.2.5 Replacement Cost ................................................................................................. 8-15

8.2.6 Analysis Period ..................................................................................................... 8-16

8.2.7 Discount Rate ........................................................................................................ 8-16

8.2.7.1 Commercial and Industrial Discount Rates ........................................... 8-17

8.2.7.2 Outdoor Stationary Discount Rate ......................................................... 8-19

8.2.8 Effective Date of Standard .................................................................................... 8-19

8.3 PAYBACK PERIOD INPUTS ......................................................................................... 8-20

8.3.1 Definition .............................................................................................................. 8-20

8.3.2 Rebuttable Presumption Payback Period .............................................................. 8-20

8.3.3 Inputs..................................................................................................................... 8-21

8.4 LIFE-CYCLE COST AND PAYBACK PERIOD RESULTS ......................................... 8-21

REFERENCES .......................................................................................................................... 8-24

LIST OF TABLES

Table 8.1.1 Summary Information of Inputs for the Life-Cycle Cost and Payback Period

Analyses ............................................................................................................... 8-8

Table 8.2.1 Pulse-Start Metal Halide Lamp Prices .................................................................... 8-10

Table 8.2.2 Percentage of Interior and Exterior fixtures by Equipment Class .......................... 8-11

Table 8.2.3 Metal Halide Lamp Fixture Installation/Replacement Labor Costs ....................... 8-11

Table 8.2.4 Metal Halide Lamp Fixture Ballast Replacement Labor Costs .............................. 8-11

Table 8.2.5 Metal Halide Lamp Fixture Lamp Replacement Labor Costs ................................ 8-11

Table 8.2.6 Average Operating Hours by Sector ....................................................................... 8-13

Table 8.2.7 Electricity Prices by Census Division, 2010 ........................................................... 8-13

Table 8.2.8 Variables Used to Estimate Company Discount Rates ........................................... 8-18

Table 8.2.9 Real Discount Rates by Fixture Ownership Category ............................................ 8-19

Table 8.2.10 Average Discount Rate by Sector ......................................................................... 8-19

Table 8.4.1 LCC and PBP Results for 70 Watt Metal Halide Lamp Fixtures ........................... 8-22
8-ii

Table 8.4.2 LCC and PBP Results for 250 Watt Metal Halide Lamp Fixtures ......................... 8-22

Table 8.4.3 LCC and PBP Results for 400 Watt Metal Halide Lamp Fixtures ......................... 8-22

Table 8.4.4 LCC and PBP Results for 1000 Watt Metal Halide Lamp Fixtures ....................... 8-23

LIST OF FIGURES

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP ........................... 8-7

Figure 8.2.1 Commercial Sector Electricity Price Trend ........................................................... 8-14

Figure 8.2.2 Industrial Sector Electricity Price Trend ............................................................... 8-14

Figure 8.2.3 Outdoor Stationary Sector Electricity Price Trend ................................................ 8-15
8-3 

CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES

8.1 INTRODUCTION

This chapter describes the analysis the U.S. Department of Energy (DOE) conducted to 

evaluate the economic impacts on individual consumers of proposed amended energy 

conservation standards for metal halide lamp fixtures (MHLF). Because fixtures are designed to 

operate metal halide ballasts and lamps, DOE chose the most common ballast and lamp used 

with each fixture to develop representative metal halide lamp fixtures. Metal halide lamps will 

not be regulated under the proposed amended energy conservation standards for fixtures; 

however, the characteristics of complete metal halide lamp fixtures (energy consumption, 

installed cost, etc.) must be considered for estimating economic impacts of analyzed fixture

designs. 

New and amended standards usually decrease operating costs and increase purchase costs 

for consumers. This chapter describes the three metrics used in this analysis to determine the 

impact of standards on individual consumers: 

• Life-cycle cost (LCC) is the total (discounted) consumer cost over the analysis period 

including purchase price, operating costs (including energy expenditures), and 

installation costs. 

• Payback period (PBP) is the number of years it takes a customer to recover the generally 

higher purchase price of more energy efficient equipment through the operating cost 

savings of using the more energy efficient equipment. The PBP is calculated as the 

change in first cost divided by the change in operating costs in the first year.

• Rebuttable payback period is a special case in which the PBP is calculated based on 

laboratory conditions, specifically DOE test procedure inputs. DOE calculated the 

aforementioned LCC and PBP using a range of inputs, which are designed to reflect 

actual conditions. 

Sections 8.2 and 8.3 discuss inputs to the LCC and PBP, respectively. Section 8.3

discusses the different purchasing events DOE analyzed, which affect consumer economics. 

Section 8.4 presents the results for the LCC and PBP calculations. Key variables and calculations 

are presented for each metric. DOE performed the calculations discussed here using a series of 

Microsoft Excel spreadsheets developed for this rulemaking. Stakeholders are invited to 

download and examine the spreadsheets, available at 

http://www1.eere.energy.gov/buildings/appliance_standards/commercial/metal_halide_lamp_fixt

ures.html . Appendix 8A presents details and instructions for using the spreadsheets. 

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analyses 

Recognizing that several inputs to the LCC and PBP analysis are either variable or 

uncertain, DOE will incorporate Monte Carlo simulation and probability distributions into its 

LCC and PBP model in the notice of proposed rulemaking stage of this fixtures rulemaking. 

DOE incorporates both Monte Carlo simulation and probability distributions by using Microsoft 

Excel spreadsheets combined with Crystal Ball, a commercially available add-in program. 
8-4 

The relationship between increasing selling price and increasing energy efficiency is the 

predominant influence on the LCC and PBP results. However, other factors related to the 

characteristics of the consumer using the equipment also affect the results. Based on the 

geographic region, sector, and application in which a consumer uses the fixtures, factors such as 

energy prices, sales tax, and energy usage can vary. DOE will account for this variability by 

using the Monte Carlo simulation and separate sensitivity runs. 

For the LCC and PBP analyses, DOE considered variability in the discount rate. DOE 

also modeled variability in operating hours by sector, fixture wattage, and building application. 

By developing samples by building type, DOE could perform the LCC and PBP calculations and 

account for the variability in operating hours, electricity price, and sales tax among a variety of 

buildings. DOE used the Energy Information Administration (EIA) 2003 Commercial Buildings 

Energy Consumption Survey (CBECS) 1 and 2006 Manufacturing Energy Consumption Survey 

(MECS)

2

 to develop samples by building type, as well as U.S. Lighting Market Characterization: 

Volume I (LMC)

3

 to develop the operating hour characteristics by application in those buildings. 

The LCC and PBP spreadsheets present the results of the analysis as average values, relative to 

the baseline conditions. (Appendix 8B presents more information on the distribution of results 

from the LCC and PBP analysis, including the average and median PBP values and the 

percentages of trials which result in positive or negative LCCs). 

DOE considered various scenarios that prompt consumers to buy a fixture in the base 

versus standards cases. Specifically, the “event” that prompts the purchase of a new fixture

(either a ballast failure or new construction/renovation) was assumed to influence the costeffectiveness of the consumer purchase decision. For example, DOE assumed that a consumer 

will replace a failed fixture with an identical fixture in the base case, or a new standardscompliant metal halide lamp fixture with comparable light output in the standards case. Section 

8.4 discusses the fixture purchasing events in more detail. The LCC and PBP analyses 

spreadsheet reports results per purchasing event. 

DOE conducted the LCC and PBP analyses on the baseline fixtures from the 

representative equipment classes identified in the fixture market and technology assessment 

(preliminary technical support document [TSD] chapter 3). The following list shows the

representative equipment classes that DOE evaluated in this analysis.

• 70 Watt Metal Halide Fixture

• 250 Watt Metal Halide Fixture

• 400 Watt Metal Halide Fixture

• 1000 Watt Metal Halide Fixture

The time periods used for the LCC and PBP analyses in this rulemaking are the service 

lives of the baseline fixtures, which vary by equipment class. The time periods are assumed as

21.3, 22.0, 22.5, and 24.5 years for the 70, 250, 400, and 1000 watt equipment classes, 

respectively. 
8-5 

8.1.2 Overview of Life-Cycle Cost and Payback Period Inputs

As mentioned previously, the LCC represents the total consumer expense over the 

lifetime of each fixture. Costs include purchase expenses, operating costs (including energy 

expenditures), and installation costs. DOE discounted future operating costs to the time of 

purchase and summed them over the analysis period. The PBP represents the number of years it 

takes customers to recover the purchase price of more energy efficient equipment through lower 

operating costs. The PBP is calculated as the change in first cost divided by the change in 

operating costs in the first year. 

DOE categorized inputs to the LCC and PBP analysis as follows: (1) inputs for 

establishing the purchase expense, otherwise known as the total installed cost; and (2) inputs for 

calculating the expenses incurred during operation of the metal halide lamp fixture otherwise 

known as the operating cost. 

The primary inputs for establishing the LCC and PBP are:

• End-User Equipment Price: The end-user equipment prices represent the consumer price 

before tax and installation. 

• Sales Tax: DOE then applied sales tax to convert the end-user equipment price to a final 

equipment price including sales tax. Chapter 7 describes the sales tax markup in detail.

• Installation Cost: This input represents the cost to customers of installing the metal halide 

lamp fixtures, and differs from “installed cost.” The installation cost represents all costs 

required to install the system but does not include the end-user equipment price. The 

installation cost includes labor and overhead. Thus, the total installed cost equals the enduser equipment price including sales tax, plus the installation cost. 

The primary inputs for calculating the operating cost include the following:

• Annual Operating Hours: The annual operating hours are the hours that a metal halide 

lamp fixture is estimated to be in use during 1 year. The energy use characterization 

(chapter 6) details how DOE determined the system operating hours as a function of enduser sector, end-user application, and building type. 

• Power Rating: The power draw is the site-energy usage rate associated with operating the 

metal halide lamp fixture. The energy use characterization (chapter 6) details how DOE 

determined the power ratings for the metal halide lamp fixtures considered in the 

analyses.

• Electricity Prices: DOE used the average price per kilowatt-hour (i.e., $/kWh) paid by 

customers. DOE determined electricity prices using national average commercial and 

industrial electricity prices for the sample calculation. For the Monte Carlo distribution, 

DOE will use average commercial and industrial values for 13 regions and large states. 

DOE develops all electricity price inputs using 2010 EIA data.
8-6 

• Electricity Price Trends: DOE used the EIA’s Annual Energy Outlook 2010 (AEO2010) 

to forecast electricity prices.

4

 For the results presented in this chapter, DOE used the 

October AEO2010 reference case.

• Lifetime: Lifetime is the total hours in operation after which the consumer retires the 

fixture from service. 

• Discount Rate: The discount rate is the rate at which DOE discounts future expenditures 

to establish their present value. 

• Analysis Period: Analysis period is the maximum time span over which DOE can

calculate the LCC for each fixture. 

Figure 8.1.1 depicts the relationships between the installed cost and operating cost inputs 

for the calculation of the LCC and PBP. In this figure, the rectangular boxes indicate the inputs, 

the six-sided polygons indicate intermediate calculated values, and the circles indicate the 

analysis outputs (LCCs and PBPs). 
8-7 

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP 

Table 8.1.1 summarizes the input values that DOE used to calculate the LCC and PBP for 

fixtures. DOE characterized all of the total cost inputs with single-point values, but will 

characterize several of the operating cost inputs with probability distributions that capture the 

input’s uncertainty and/or variability in the Monte Carlo analysis. Table 8.1.1 also lists the TSD 

chapter that details the inputs.
8-8 

Table 8.1.1 Summary Information of Inputs for the Life-Cycle Cost and Payback Period 

Analyses 

Factor Weighted-Average Value TSD Reference Section

Total Installed Cost Primary Inputs

End-User Equipment Price Varies with metal halide lamp fixture Chapters 5, 7

Sales Tax Varies by state Chapter 7

Installation Cost Varies by equipment class Chapter 8

Operating Cost Primary Inputs

Annual Operating Hours Vary by equipment class, sector, application, and 

building type

Chapter 6

Power Rating Varies with metal halide lamp fixture Chapter 6

Electricity Prices Vary by sector and state Chapter 8

Electricity Price Trends Vary with price forecast scenario Chapter 8

Discount Rate Varies with sector Chapter 8

Analysis Period Varies by equipment class Chapter 8

Replacement Cost Primary Inputs

Total Installed Cost Varies with metal halide lamp fixture, state, 

equipment installed and sector

Chapters 7, 8

Ballast Lifetime Varies with metal halide lamp fixture Chapters 5, 8

Discount Rate Varies with sector Chapter 8

Analysis Period Varies by equipment class Chapter 8

Sections 8.2 and 8.3 discuss the inputs depicted in this table of installed costs and 

operating costs.

8.2 LIFE-CYCLE COST INPUTS

8.2.1 Definition

LCC is the total customer cost over the life of the equipment, including total installed 

costs, operating costs, replacement costs, and residual value. Future operating costs and 

replacement costs are discounted to the analysis start year (2015) and summed over the analysis 

period. The LCC is defined by the following equation: 

∑=

















+

+

+=

N

t

t

tt

r

OC RC ICLCC

1 )1( Eq. 8.1 

Where:

LCC = life-cycle cost ($),

IC = total installed cost ($), 

N = fixture lifetime, 

∑ = sum over the fixture lifetime, from year 1 to year N, 

OC = operating cost ($),

RC = lamp and ballast replacement costs ($),

r = discount rate, and

t = year for which operating cost or replacement cost is determined. 

DOE expresses all the costs in its LCC and PBP analyses in 2010$. 
8-9 

8.2.2 Total Installed Cost Inputs

The total installed cost to the customer is defined by the following equation:

IC FPP += INST Eq. 8.2 

Where: 

FPP = final equipment price (i.e., customer price for the equipment only, including sales tax; $), 

and 

INST = installation cost or the customer price to install equipment (i.e., the cost for labor and 

materials; $). 

In the markups analysis (chapter 7), DOE developed end-user equipment prices and sales 

taxes to derive final equipment prices. DOE then applied installation costs where necessary to 

derive the total installed costs for use in the LCC. The inputs to determine total installed costs

are: 

• end-user equipment price ($)

• sales tax ($), and 

• installation cost ($). 

The end-user equipment price represents the average purchase price a consumer pays 

before sales tax for metal halide lamp fixture designs. The sales tax represents State and local 

sales taxes applied to the end-user equipment price. It is a multiplicative factor that increases the 

end-user equipment price. The installation cost represents all costs required to install the metal 

halide lamp fixtures but does not include the final equipment price. The installation cost includes 

labor and overhead. Thus, the total installed cost equals the final equipment price plus the 

installation cost. DOE calculated the total installed cost for the fixtures analyzed based on the 

following equation: 

PRICE MU INST

IC FPP INST

TAX +×=

+=

Eq. 8.3 

Where: 

IC = total installed cost,

FPP = final equipment price, 

INST = installation cost,

PRICE = end-user equipment price, and

MUTAX = sales tax mark up. 

Chapter 7 provides detail on the end-user equipment price and sales tax. Discussion about 

installation costs follows.
8-10

8.2.2.1 Installation Costs

Installation costs for metal halide lamp fixtures include the installation of the fixture, 

maintenance of the ballast, and replacement of the lamp. DOE used data gathered in the highintensity discharge (HID) lamps determination of 2010 as well as other research to estimate the 

installation costs5. 

During the January public meeting for the framework document for the metal halide lamp 

fixture energy conservation standard, a manufacturer commented:

As far as maintenance costs, we’d urge you to consider that, particularly in exterior 

environments; maintenance costs can be quite significant. It's difficult to get a bucket 

truck to a site to work on pole-mounted luminaires for less than a thousand dollars just to 

get it there and the average that our experience shows needs to be attributed somewhere 

between $150 and $300 per luminaire per servicing. So that is higher than you would 

traditionally think it would be for interior and just wanted to make that comment6. 

In the HID lamp determination, DOE estimated $225 for exterior lamp maintenance costs 

and $75 for interior maintenance costs. These maintenance costs factor in the equipment needed 

to reach the metal halide lamp fixture and provide necessary maintenance. More resolution of 

costs were needed for metal halide lamp fixtures than the HID lamp determination, so DOE 

estimated the portion of interior and exterior fixtures per equipment class and derived developed 

installation and maintenance costs accordingly.

For metal halide lamp fixtures, DOE derived labor rates for electricians from RS Means.

7

Labor rates are the sum of the wage rate, employer-paid fringe benefits (i.e., vacation pay, 

employer-paid health, and welfare costs), and any appropriate training and industry advancement 

funds costs. According to RS Means, an electrician’s average hourly rate with overhead and 

profit is typically $69.47 (in 2009$). 

Table 8.2.1 lists the estimated price of pulse-start lamps per equipment class. The prices 

were developed by examining available lamp prices and a formula for pulse-start lamps was 

derived as y = 5.4365x

0.456 where x is the lamp wattage and y is the lamp price. 

Table 8.2.1 Pulse-Start Metal Halide Lamp Prices

Rated Lamp Power Lamp Price (2010$)

70W 37.73

250W 67.42

400W 83.53

1000W 126.86

DOE estimated a portion of each equipment class to be either an interior or exterior 

fixture. This allows DOE to estimate costs related to fixture installations. One of the guiding 

principles of the estimate was that as power increases, the more fixtures are installed in the 

exterior. Table 8.2.2 lists the fixture mixture based on interior and exterior environments. 
8-11

Table 8.2.2 Percentage of Interior and Exterior fixtures by Equipment Class

Equipment Class % Interior % Exterior

70W 75 25

250W 60 40

400W 50 50

1000W 10 90

To estimate metal halide lamp fixture maintenance costs, DOE multiplied the baseline 

maintenance rate of $75 (interior) and $225 (exterior) times the percentage mix that equipment 

class is installed in and then added additional labor hours. 

DOE assumed that installation of a metal halide lamp fixture took two labor hours of an 

electrician’s time. Table 8.2.3 lists the metal halide lamp fixture installation/replacement costs 

DOE used in the LCC-PBP analysis.

Table 8.2.3 Metal Halide Lamp Fixture Installation/Replacement Labor Costs 

Equipment Class Cost (2010$)

70W 252.90

250W 275.40

400W 290.40

1000W 350.40

DOE assumed that installation of a metal halide fixture ballast took one labor hour of an 

electrician’s time. Table 8.2.4 lists the metal halide lamp fixture ballast installation/replacement 

costs DOE used in the LCC-PBP analysis.

Table 8.2.4 Metal Halide Lamp Fixture Ballast Replacement Labor Costs 

Equipment Class Cost (2010$)

70W 182.70

250W 205.20

400W 220.20

1000W 280.20

DOE assumed that installation of a metal halide lamp fixture lamp took 0.24 labor hours 

of an electrician’s time. Table 8.2.5 lists the metal halide lamp fixture lamp 

installation/replacement costs DOE used in the LCC-PBP analysis.

Table 8.2.5 Metal Halide Lamp Fixture Lamp Replacement Labor Costs

Equipment Class Cost (2010$)

70W 140.58

250W 163.08

400W 178.08

1000W 238.08

8.2.3 Operating Cost Inputs

The operating cost represents the costs incurred in the operation of metal halide lamp 

fixtures. The inputs for operating costs are: 

• annual operating hours 
8-12

• power rating (W) 

• electricity prices ($/kWh) 

• electricity price trends

• discount rate (%), and 

• analysis period (yrs). 

The analysis period, discount rate, and effective date of the amended standard are 

required for determining the operating cost and for establishing the operating cost present value. 

The electricity consumption for the baseline and other candidate standard levels (CSLs) 

examined enable comparison of standards’ operating costs. 

The annual operating hours are the estimated hours that a metal halide lamp fixture is in 

use during 1 year. Power rating refers to the rate of site energy usage associated with operating 

the metal halide lamp fixture. Both the annual operating hours and power rating are used to 

calculate the total annual energy consumption. Electricity prices used in the analysis are the price 

per kilowatt-hour in cents or dollars (e.g., $/kWh) paid by each customer for electricity. DOE 

used electricity price trends to forecast electricity prices for future year analysis. These trends 

with the electricity price and annual energy consumption were used to calculate the energy cost 

in each year. DOE defined energy cost by the following equation: 

(PWR OH ) EPTEP

OC Econs EPTEP

×××=

××=

Eq. 8.4 

Where:

OC = operating costs,

Econs = annual energy consumed, 

EP = electricity price,

EPT = electricity price trend factor relative to 2010 

PWR = power rating (rate of energy use, measured in watts), and

OH = annual operating hours. 

The remainder of this section provides information about each of the above input 

variables that DOE used to calculate the operating costs.

8.2.3.1 Operating Hours

The energy use characterization (chapter 6) details how DOE determined the annual 

energy consumption for baseline and standard-compliant equipment. An important input to 

determining the energy consumption is the total hours per year that the equipment is in operation. 

The operating hours are also used to calculate the fixture service life, which is ultimately used in 

calculating the total LCC and PBP. 
8-13

As described in chapter 6, DOE established operating hour distributions for metal halide 

lamp fixtures. In conjunction with data from LMC, DOE used data from EIA’s CBECS 2003 and 

MECS 2006. These EIA studies provide information on the distribution of buildings within the 

United States by building type and census division. DOE associated the LMC’s operating hour 

data by building type with the EIA’s data by application and building type. Table 8.2.3 presents 

the mean operating hours for metal halide lamp fixtures in each sector. 

Table 8.2.6 Average Operating Hours by Sector

Sector Average Annual Operating

hrs/yr

Commercial 3,721

Industrial 4,748

Outdoor Stationary 4,099

8.2.3.2 Power Rating

As described in the energy use and end load characterization (chapter 6), DOE used the 

power rating (in watts) with the annual operating hours (in hours) to calculate the annual energy 

usage (in kilowatt-hours) of the metal halide lamp fixture designs DOE considered. 

8.2.3.3 Electricity Prices

DOE estimated electricity prices for commercial, industrial, and outdoor stationary 

consumers in each of the 13 regions and large states by using EIA form 826 data. EIA form 826, 

Sales and Revenue Spreadsheets, contains average retail electricity prices for each sector. The 

spreadsheet contains average electricity prices for each state, by year, by sector. In the LCC and 

subsequent analyses, DOE used 2010 electricity prices from the 826 worksheet, current as of 

March 2011. Table 8.2.4 lists electricity prices by 13 census divisions and large states. 

Table 8.2.7 Electricity Prices by Census Division, 2010 

Census Division Electricity Prices

2010$/kWh

Commercial Industrial Outdoor Stationary

New England 0.149 0.129 0.149

Middle Atlantic 0.117 0.092 0.117

East North Central 0.094 0.066 0.094

West North Central 0.079 0.058 0.079

South Atlantic 0.090 0.068 0.090

East South Central 0.094 0.061 0.094

West South Central 0.078 0.055 0.078

Mountain 0.088 0.063 0.088

Pacific 0.097 0.069 0.097

New York State 0.160 0.097 0.160

California 0.140 0.109 0.140

Texas 0.092 0.063 0.092

Florida 0.098 0.089 0.098

U.S. Weighted Average 0.105 0.078 0.105 * DOE used average retail electricity prices for each of the sectors, across all months in 

2010.
8-14

8.2.3.4 Electricity Price Trend

The electricity price trend projects the future cost of electricity to 2035. DOE calculated 

the LCC and PBP using three separate projections from AEO2010: reference case, low economic 

growth, and high economic growth.8 These three cases reflect the uncertainty of economic 

growth in the forecast period. The high and low growth cases show the projected effects of 

alternative growth assumptions on energy markets. DOE normalized these three AEO2010

scenarios to the 2010 electricity price, and then used that electricity price factor to scale the 2010 

electricity prices. Figure 8.2.1 through Figure 8.2.3 show the commercial, industrial, and outdoor 

stationary electricity price trends, respectively, based on the three AEO2010 projections. DOE 

calculated uses average growth rates from the previous 10 years to predict electricity price trends 

from 2036−2044. The LCC results presented in this chapter are based on the AEO2010 reference 

case. 

Figure 8.2.1 Commercial Sector Electricity Price Trend

Figure 8.2.2 Industrial Sector Electricity Price Trend
8-15

Figure 8.2.3 Outdoor Stationary Sector Electricity Price Trend

In the LCC spreadsheet, these electricity price trends are used to project electricity prices 

into the future, which are then multiplied by the annual energy usage. The resulting operating 

costs are presented in both the LCC spreadsheets and the LCC results tables in this chapter. 

8.2.4 Lifetime

DOE defined lifetime as the age in hours in operation when a fixture, ballast, or lamp is 

retired from service. For fixtures in all equipment classes, DOE assumed lifetimes for interior 

and exterior fixtures as 20 and 25 years, respectively. The percentage of interior vs. exterior 

fixtures differs by equipment class. Table 8.2.2 gives the percentage of fixtures, by equipment 

class, that are interior vs. exterior fixtures.

Metal halide lamp fixtures are operated by either magnetic or electronic ballasts. 

Although electronic ballasts utilize the newest and most efficient technology, they do not last as 

long as magnetic ballasts. DOE assumed that magnetic ballasts last for 50,000 hours, and 

electronic ballasts last for 30,000 hours. Metal halide lamp lifetimes vary by equipment class. 

DOE assumed that lamps in the 70W, 250W, 400W, and 1000W equipment classes operate for 

12,000, 15,000, 20,000, and 12,000 hours, respectively. 

8.2.5 Replacement Cost

As stated previously, the lifetime is the age (total hours in operation) at which a fixture, 

ballast, or lamp is retired from service. The lifetime paired with the operating hours yields the 

service life of the fixture, ballast, or lamp in years. Because lamp lifetimes are typically shorter 

than ballast lifetimes and ballast lifetimes are shorter than fixture lifetimes, DOE must address 

ballast and lamp replacements within the analysis period for the metal halide lamp fixture

designs considered. Replacement costs include the labor and materials costs associated with 

replacing a lamp at the end of its lifetime. By using the service life and replacement cost, one can 

calculate the total replacement cost each year. 

Each year in which a ballast or lamp reaches the end of its life, a new ballast or lamp is 

purchased and installed at the beginning of that year, and the first cost and installation cost are 

discounted back to the base year of the analysis period. During years in which replacement is 
8-16

necessary, DOE based the replacement costs on the total installed cost inputs, as seen in the 

following equation: 

B TAX B L TAX L

B B L L

PRICE MU INST PRICE MU INST

FPPRC INST FPP INST

+×++×=

+++=

 Eq. 8.5 

 

Where:

RC = replacement cost, expressed in dollars, 

FPPB = final equipment price (price for the ballast only) expressed in dollars, 

INSTB = ballast installation cost,

PRICEB = end-user ballast equipment price expressed in dollars, and 

FPPL = final equipment price (price for the lamp only) expressed in dollars, 

INSTL = lamp installation cost,

PRICEL = end-user lamp equipment price expressed in dollars, and 

MUTAX = sales tax.

Replacement costs are annualized across the years preceding and including the actual

year in which equipment is replaced. That is, if a lamp lasts for 10 years, and costs $100 to 

replace, the 10 years leading up to (and including) the year of replacement will have a $10 lamp 

replacement cost. The replacement costs only include the end-user equipment price of the ballast 

or lamp and the installation cost of the ballast or lamp, rather than prices or costs associated with 

the entire metal halide lamp fixture. For the LCC and PBP analyses, the analysis period 

corresponds with the fixture lifetime; for this reason, ballast and lamp prices and labor costs are 

included in the calculation of total installed costs.

8.2.6 Analysis Period 

The analysis period is the time span over which the LCC is calculated. DOE based the 

analysis period on the baseline fixture lifetimes assumed for each equipment class. The analysis 

periods for the 70W, 250W, 400W, and 1000W fixtures classes are 21.3, 22, 22.5, and 24.5 

years, respectively.

8.2.7 Discount Rate

The discount rate is the rate at which DOE discounts future expenditures to establish their 

present values. DOE derived the discount rates for this rulemaking separately for commercial

and industrial consumers. The discount rate used for the Outdoor Stationary sector is assumed to 

be the same as the Commercial sector discount rate. For the all consumers, DOE estimated the 

cost of capital for commercial and industrial companies by examining both debt and equity 

capital, and developed an appropriately weighted average of the cost to the company of equity 

and debt financing. 
8-17

8.2.7.1 Commercial and Industrial Discount Rates 

Most companies use both debt and equity capital to fund investments; for most 

companies, therefore, the cost of capital is the weighted average of the cost to the firm of equity 

and debt financing.9

 

DOE estimated the cost of equity financing using the Capital Asset Pricing Model 

(CAPM). Among the most widely used models to estimate the cost of equity financing, the 

CAPM assumes that the cost of equity is proportional to the amount of systematic risk associated 

with a firm. For example, the cost of equity financing tends to be high when a firm faces a large 

degree of systematic risk, and the cost tends to be low when the firm faces a small degree of 

systematic risk. 

The degree of systematic risk facing a firm and the subsequent cost of equity financing 

are determined by several variables, including the risk coefficient of a firm (beta, β), the 

expected return on risk-free assets (Rf), and the additional return expected on assets facing 

average market risk (known as the equity risk premium, or ERP). The beta indicates the degree 

of risk associated with a given firm, relative to the level of risk (or price variability) in the

overall stock market. Betas usually vary between 0.5 and 2.0. A firm with a beta of 0.5 faces half 

the risk of other stocks in the market; a firm with a beta of 2.0 faces twice the overall stock 

market risk.

Following this approach, the cost of equity financing for a particular company is 

determined by the equation: 

Rk fe ( ) β ×+= ERP Eq. 8.6 

 

Where:

ke = the cost of equity for a company, expressed in dollars,

Rf = the expected return of the risk free asset, expressed in dollars,

β = the risk coefficient, and

ERP = the expected equity risk premium, expressed in dollars. 

The cost of debt financing (kd) is the yield or interest rate paid on money borrowed by a 

company (raised, for example, by selling bonds). As defined here, the cost of debt includes 

compensation for default risk and excludes deductions for taxes. 

DOE estimated the cost of debt for companies by adding a risk adjustment factor to the 

current yield on long-term corporate bonds (the risk-free rate). This procedure is used to estimate 

current and future company costs to obtain debt financing. The adjustment factor is based on 

indicators of company risk, such as credit rating or variability of stock returns. 

The discount rate of companies is the weighted average cost of debt and equity financing, 

less expected inflation. DOE estimated the discount rate using the equation: 

Eq. 8.7 e e d wd k = k × w + k ×
8-18

 

Where:

k = the (nominal) cost of capital, 

ke and kd = the expected rates of return on equity and debt, respectively, and 

we and wd = the proportion of equity and debt financing, respectively. 

The real discount rate deducts expected inflation from the nominal rate. 

The expected return on risk-free assets, or the risk-free rate, is defined by the current 

yield on long-term (20-year) government bonds, as suggested by Ibbotson’s Associates10 and 

Damodaran.11 The ERP represents the difference between the expected (average) stock market 

return and the risk-free rate. As Table 8.2.6 shows, DOE used an ERP estimate of 3.07 percent, 

which it took from the Damodaran Online site (a private website associated with New York 

University’s Stern School of Business, which aggregates information on corporate finance, 

investment, and valuation).12

Table 8.2.8 Variables Used to Estimate Company Discount Rates

Variable Symbol Average Value

%

Source

Risk-Free Asset Return Rf 6.9 Damodaran Online

Equity Risk Premium ERP 3.07 Damodaran Online

Expected Inflation R 1.9 U.S. Bureau of Economic Analysis

Cost of Debt (After Tax) kd 6.8 Damodaran Online

Percent Debt Financing wd 31.6 Damodaran Online

Systematic Firm Risk B 0.95 Damodaran Online

DOE calculated an expected inflation of 1.9 percent from the average of five quarters’ 

change in gross domestic product prices.13 DOE obtained the cost of debt, percent debt 

financing, and systematic firm risk from the Damodaran Online website. Table 8.2.6 shows 

average values across all private companies. However, the cost of debt, percent debt financing, 

and systematic firm risk vary by sector. 

In the commercial building sector, fixtures are purchased and owned by commercial 

building property owners, commercial companies, industrial companies and the government. 

DOE used a sample of 4,207 companies drawn from these owner categories to represent fixture

purchasers. It took the sample from the list of companies included in the Value Line investment 

survey14 and listed on the Damodaran Online website. DOE obtained the cost of debt, the firm 

beta, the percent of debt and equity financing, the risk-free return, and the equity risk premium 

from Damodaran Online. 

DOE estimated the cost of debt financing for these companies from the long-term 

government bond rate and the standard deviation of the stock price. For government-office-type 

owners, the discount rate represents an average of the Federal rate and the State and local bond 

rate. DOE drew the Federal rate directly from the U.S. Office of Management and Budget 

discount rate for investments in government building energy efficiency.15 DOE estimated the 

State and local discount rate from the interest rate on state and local bonds between 1977 and 
8-19

2001.16 DOE used this information to estimate the weighted-average cost of capital for the 

sample of companies included in the commercial and industrial company database. 

The cost of capital may be viewed as the discount rate that should be used to reduce the 

future value of typical company project cash flows. It is a nominal discount rate, since 

anticipated future inflation is included in both stock and bond expected returns. Deducting 

expected inflation from the cost of capital provides estimates of the real discount rate by 

ownership category (Table 8.2.7). The mean real discount rate for these companies varies 

between 2.3 percent (government offices) and 8.3 percent (commercial companies).

Table 8.2.9 Real Discount Rates by Fixture Ownership Category

Ownership Category Mean Real 

Discount Rate

% 

Standard 

Deviation

% 

Number of 

Observations

Industrial Companies 7.2 1.1 1925

Commercial Companies 6.9 1.2 2146

DOE’s approach for estimating the cost of capital provided a measure of the discount rate 

spread as well as the average discount rate. DOE inferred the discount rate spread by ownership 

category from the standard deviation, which ranges between 1.1 percent and 1.2 percent 

(Table 8.2.8). DOE defined Industrial and Commercial companies as companies with Standard 

Industrial Classification codes 2,000-3,999 and 5,000+, respectively. 

Table 8.2.10 Average Discount Rate by Sector

Sector Discount Rate

%

Commercial 6.9

Industrial 7.2

Outdoor Stationary 6.9

8.2.7.2 Outdoor Stationary Discount Rate

While metal halide lamp fixtures in the Outdoor Stationary sector are operated by many 

different types of institutions, the majority of fixtures in this sector are operated by commercial 

companies. Thus, DOE assumed that the discount rate for metal halide lamp fixtures in this 

sector is the same as the Commercial sector discount rate. DOE invites comment on the discount 

rate for metal halide lamp fixtures in the Outdoor Stationary sector.

8.2.8 Effective Date of Standard

The effective date is the date when an amended standard becomes operative (i.e., the date 

by which fixtures manufacturers must manufacture equipment that complies with the amended

standard). DOE’s publication of a final rule in this standards rulemaking is scheduled for 

completion by January 2012. For metal halide lamp fixtures not currently covered (i.e., fixtures 

with rated wattage below 150W and above 500W), the effective date of any new energy 

conservation standards for these metal halide lamp fixtures or amended energy conservations 

standards is January 2015 (42 U.S.C. 6295(hh)(2)(B)(ii). 
8-20

DOE calculated the LCCs for all consumers as if each would purchase new equipment in 

the year the amended standard takes effect. However, DOE based the cost of the equipment on 

the most recent available data; all dollar values are expressed in 2010$. 

8.3 PAYBACK PERIOD INPUTS 

8.3.1 Definition

The PBP is the amount of time it takes the consumer to recover the assumed higher 

purchase cost of more energy efficient equipment as a result of lower operating costs. 

Numerically, the PBP is the ratio of the increase in purchase cost (i.e., from a less efficient 

design to a more efficient design) to the decrease in annual operating expenditures. This type of 

calculation is known as a “simple” PBP, because it does not take into account changes in 

operating cost over time or the time value of money. That is, the calculation is done at an 

effective discount rate of 0 percent.

The equation for PBP is: 

OC

IC PBP

∆

∆ = Eq. 8.8 

Where:

PBP = payback period (years),

∆IC = difference in the total installed cost between the more efficient standard level; equipment 

(efficiency levels 1, 2, etc.) and baseline (efficiency level 0) equipment, and 

∆OC = difference in annual operating costs.

PBPs are expressed in years. PBPs greater than the life of the equipment mean that the 

increased total installed cost of the more efficient equipment is not recovered in reduced 

operating costs over the lifetime of that equipment. Because most MHLF designs in the LCC and 

PBP analyses save energy and thus yield a positive ∆OC, negative PBPs indicate that the total 

installed cost of the more efficient CSL equipment is less than that of the baseline. PBPs that are 

“N/A” indicate CSLs that actually have higher operating costs than the baseline fixtures, and 

thus are not economically viable. 

8.3.2 Rebuttable Presumption Payback Period

Section 325(o)(2)(B)(iii) of the Energy Policy and Conservation Act establishes a 

rebuttable presumption that an amended standard for fixtures is economically justified if the 

Secretary finds that “the additional cost to the consumer of purchasing equipment complying 

with an energy conservation standard level will be less than three times the value of the energy. . 

. savings during the first year that the consumer will receive as a result of the standard, as 

calculated under the applicable test procedure.” (42 U.S.C. 6295(o)(2)(B)(iii)) This rebuttable 

presumption test is an alternative path to establishing economic justification compared to 

consideration of the seven factors set forth in 42 U.S.C. 6295(o)(2)(B)(i)(I)–(VII).
8-21

The applicable fixture test procedure uses a lamp load and requires that the power to the 

lamp (known as power out (Pout) of the ballast) and the power into the ballast (known as power in 

(Pin) to the ballast) be measured. Ballast Efficiency is calculated by dividing Pout/Pin. Input 

power to the metal halide lamp fixture is measured rather than measure energy consumption 

(i.e., measured over a duration or operating time period). Therefore, to calculate energy savings 

for the rebuttable presumption payback period, one would need to multiply the input power of 

the metal halide lamp fixture by the usage profile (i.e., hours of operation) of that system. For the 

engineering analysis, DOE measured the input power of fixtures operating actual ballasts and 

lamps, essentially duplicating real-world operating conditions for these metal halide lamp 

fixtures. Energy savings calculations in the LCC and PBP analyses use both the real-world 

system power ratings as well as the applicable usage profiles. Because DOE calculated PBPs in a 

methodology consistent with the rebuttable presumption test in the LCC and PBP analyses, DOE 

did perform a stand-alone rebuttable presumption analysis, as it is already embodied in the LCC 

and PBP analyses. Because calculations of energy savings in the LCC are based under real-world 

conditions, DOE also relied on standard PBPs for this rulemaking. 

8.3.3 Inputs

The data inputs to PBP are the total installed cost of the equipment to the customer for 

each CSL and the annual (first year) operating costs for each CSL. The inputs to the total 

installed cost are the final equipment price and the installation cost. The inputs to the operating 

costs are the MHLF input power rating, annual operating hours, and electricity cost. The PBP 

uses the same inputs as the LCC calculation described in section 8.2, except that electricity price 

trends are not required. Since the PBP is a “simple” (undiscounted) PBP, the required electricity 

cost is only for the year in which an amended energy conservation standard is to take effect (e.g., 

2015). The electricity price DOE used in the PBP calculation for electricity cost is the price 

projected for 2015, expressed in 2010$. DOE did not use discount rates in the PBP calculation. 

8.4 LIFE-CYCLE COST AND PAYBACK PERIOD RESULTS

This section presents LCC results for each metal halide lamp fixture design DOE 

considered. This section uses the terms “positive LCC savings” and “negative LCC savings.” 

When an amended standard results in “positive LCC savings,” the LCC of the standardscompliant system is less than the LCC of the baseline system and the consumer benefits. A 

consumer is adversely affected when an amended standard results in “negative LCC savings” 

(i.e., when the LCC of the standards-compliant system is higher than the LCC of the baseline 

system). 

A consumer is also adversely affected when an amended standard results in “N/A” PBP 

values. In this situation, more efficient fixtures are not only more expensive to install, but they 

are also more expensive to operate. In general, switching from magnetic to electronic ballasts 

causes “N/A” PBP values, since the increased maintenance costs acquired during replacement of 

the shorter-lived electronic ballasts are costly. 

As stated earlier, DOE conducted a series of LCC calculations for each baseline metal 

halide lamp fixture. Key inputs consisted of using historical electricity prices from electricity 

price projections from the AEO2010 reference case, and an analysis period of 30 years. Table 
8-22

8.4.1 through Table 8.4.4 give LCC and PBP values from the LCC model, assuming weighted 

average operating hours for each equipment class. 

DOE analyzed four representative equipment classes for fixtures, as discussed in section 

8.1.1. Table 8.4.1 through Table 8.4.4 present the results for each of these representative 

equipment classes by fixture purchasing event, which influenced the LCC and PBP results. DOE 

also presented the installed prices of the metal halide lamp fixtures in order to compare the up-front 

costs that consumers must bear when purchasing baseline or standards-case systems.

In general, the results show higher installed prices and lower operating costs at higher 

efficiency levels. However, this is not always the case. For example, fixtures operating electronic 

ballasts in any equipment class have higher operating costs at higher efficiency levels than fixtures 

in the base case and some lower efficiency levels, which operate magnetic ballasts. This is because 

electronic ballasts have significantly shorter lifetimes than magnetic ballasts. The costs associated 

with routine maintenance on fixtures are annualized; for example, costs occurring every 10 years 

are divided across the 10 years leading up to the maintenance. Due to the high cost of electronic 

ballasts and the labor costs associated with replacing failed ballasts, fixtures with electronic 

ballasts have significantly greater annual maintenance costs than magnetic fixtures. These 

additional maintenance costs far outweigh the monetary savings achieved from the efficiency gains 

in electronic ballasts. 

Table 8.4.1 LCC and PBP Results for 70 Watt Metal Halide Lamp Fixtures 

CSL System 

Input 

Power 

watts

Fixture 

Price

$ 

LCC

$ 

LCC 

Savings

$ 

Installed 

Price

$ 

Operating 

Cost 

Savings 

$

PBP

yrs 

Baseline 96.8 76.82 2070.25 510.77

1 92.0 77.72 2046.48 23.72 511.67 1.73 0.52

2 78.4 80.85 2143.30 -73.05 514.81 -5.63 N/A

3 76.8 89.06 2157.99 -87.74 523.01 -6.15 N/A

Table 8.4.2 LCC and PBP Results for 250 Watt Metal Halide Lamp Fixtures

CSL System 

Input 

Power

watts

Fixture 

Price

$ 

LCC

$ 

LCC 

Savings

$ 

Installed 

Price

$ 

Operating 

Cost 

Savings 

$

PBP

yrs 

Baseline 284.1 158.59 3357.43 669.39

1 276.2 166.39 3331.39 26.04 677.19 2.34 3.33

2 273.2 174.92 3332.92 24.51 685.71 2.79 5.86

3 268.1 198.80 3585.17 -227.74 709.59 -14.48 N/A

4 267.1 194.37 3567.17 -209.85 705.16 -13.49 N/A

Table 8.4.3 LCC and PBP Results for 400 Watt Metal Halide Lamp Fixtures

CSL System 

Input 

Power 

watts

Fixture 

Price

$ 

LCC

$ 

LCC 

Savings

$ 

Installed 

Price

$ 

Operating 

Cost 

Savings 

$

PBP

yrs 

Baseline 454.5 202.33 4253.90 760.41

1 444.4 218.30 4232.80 21.10 776.39 2.53 6.33

2 436.2 229.14 4210.97 42.93 787.21 4.77 5.62
8-23

3 431.5 264.76 4514.02 -260.12 822.83 -15.42 N/A

4 426.0 290.04 4555.46 -301.56 848.11 -16.77 N/A

Table 8.4.4 LCC and PBP Results for 1000 Watt Metal Halide Lamp Fixtures 

CSL System 

Input 

Power 

watts

Fixture 

Price

$ 

LCC

$ 

LCC 

Savings

$ 

Installed 

Price

$ 

Operating 

Cost 

Savings 

$

PBP

yrs 

Baseline 1088.1 378.67 9345.72 1103.21

1 1079.9 390.38 9324.73 20.99 1114.93 2.23 5.26

2 1071.8 396.13 9291.73 53.98 1120.67 4.91 3.56
8-24

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