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 El ectricity Prices .................................................................................... 8-13 8.2.3.4 Electricity Price Trend ........................................................................... 8-14 8.2.4 Lifetime ................................................................................................................. 8-15 8.2.5 Replacemen t 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 INPUT S ......................................................................................... 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 Ra te by Sector ......................................................................... 8-19 Table 8.4.1 LCC and PBP Results for 70 Watt Metal Halide Lamp Fixtures ........................... 8-228- 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 ................................................ 8-158-3 CH APTER 8. LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSES

8.1 INTRODUCTION

This chapter describes the analysis the U.S. Department of Energy (DOE) conduct ed to evaluate the economic impacts on individual consumers of proposed amended energy conservation standards for metal halide lamp fixture s ( 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 fixture s. Metal halide lamps will not be regulated under the proposed amended energy conservation standards for fixtures ; however, the characteristics of complete metal halide lamp fixture s (energy consumption, installed cost, etc.) must be considered for estimating economic impacts of analyzed fixture designs.

New and a mended 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 tak es 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 oper ating 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 a nalyze d, 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 n otice 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 consider ed variability in the discount rate. DOE also model ed 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 consider ed 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 cost

effectiveness of the c onsumer purchase decision. For example, DOE assume d 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 fix t ure purchasing events in more detail. The LCC and PBP analyses spreadsheet reports results per purchasing event.

DOE conducted the L CC and PBP analyses on the baseline fixtures from the representative equipment classes identified in the fixture market and technology assessment ( preliminary t echnical 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 period s used for the LCC and PBP analyses in thi s 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, t he 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 discount ed future operating costs to the time of purchase and sum med 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 categorize d 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 PB P 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 fixture s, 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. Theinstallation 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 calcula ting 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 determine d the power ratings for the metal halide lamp fixtures considered in the analyses.

• Electricity Prices : DOE use d the average price per kilowatt

- hour ( i.e. , $/kWh) paid by customers. DOE determine d 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 s tates. DOE develops all el ectricity price inputs us ing 2010 EIA data.8-6 • Electricity Price Trends : DOE use d the EIA’s Annual Energy Outlook 2010 ( AEO20 10 ) to forecast electricity prices

. 4 For the results presented in this chapter, DOE used the October AEO20 10 reference case.

• Lifetime: Lifetime is the total hours in operation after which the consumer retires the fixture from service.

• Discount Rate : The d iscount rate is the rate at which DOE discounts future expenditures to establish their present value.

• Analysis Period: Analysis per iod 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 ind icate the analysis outputs ( LCC s 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 characterize d 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 Wei ghted

- 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 RC OC 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 ($), RC = lamp and ballast replacement cost s ($),

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 20 10$.8-9 8.2.2 Total Installed Cost Inputs

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



### INST FPP IC += Eq. 8.2

W here :

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 develop ed end

- user equipment prices and sales taxes to derive final equipment prices. DOE then applied installation costs where necessary to derive the total inst alled costs for use in the LCC. The inputs to d etermine total installed costs

are :

• end-u ser equipment p rice ($)

• s ales t ax ($) , and

• i nstallation cost ($).

The end

- user equipment price represents the average purchase price a consumer pays before sales tax for metal halide lamp fixture de signs. 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 calculate d the total inst alled cost for the fixtures analyzed based on the following equation:

INST MU PRICE INST FPP IC

TAX +×= +=
Eq. 8.3 W here :

IC = total installed cost, FPP = f inal equipment price

, INST = installation cost, PRICE = end

- user equipment price, and MU TAX = 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 costs 5

. 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 comment 6

. In the HID lamp determination, DOE estimated $225 for exterior lamp maintenance costs and $75 for interior mai ntenance 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
est imated the portion of interior and exterior fixtures per equipment class and derived developed installation and maintenance costs accordingly.

For metal halide lamp fixtures

, DOE derive d 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. A ccording 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 pu lse

- 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 = 5.4365 x 0.456 where x is the lamp wattage and y is the lamp price

.

Table 8.2.1 Pulse

- Start Metal Halide La mp Prices Rated Lamp Power Lamp Price (2010$) 70W 37.73 250W 67.42 400W 83.53 100 0 W 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 install ations. 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 1000 W 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 install ation of a metal halide lamp fixture took two labor hours of an el ectrician’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 1000 W 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 1000 W 280.20

DOE assumed that install ation 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 1000 W 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 hours8- 12 • power rating (W)

• electricity prices ($/k Wh)

• electricity price trends

• discount rate (%), and

• analysis period (yr s).

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 ot her candidate standard levels ( CS Ls) 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 w ere used to calculate the energy cost in each year. DOE define d energy cost by the following equation:



## ( ) EPTEP OH PWR EPTEP E OC

cons



### ×××= ××=
Eq. 8.4

Where:

OC = operating costs, E

cons = 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 fixture s. 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 Averag e Annual Operating hr

s /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 kilo watt -hours) of the metal halide lamp fixture designs DOE consider ed

.

8.2.3.3 Electricity Prices

DOE estimate d electricity prices for commercial, industrial , and outdoor stationary consumers in each of the 13 regions and large s tates by using EIA form 826 data. EIA form 826, Sales and Revenue Spreadsheets, contain s 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.

Ta ble 8.2.7 Electricity Prices by Census Division, 20 10
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 use d 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 203 5 . DOE calculate d the LCC and PBP using three separate projections from AEO20 10 : 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 AEO20 10 scenarios to the 2010 electricity price, and then use d 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 AEO20 10 projections. DOE calculate d 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 AEO20 10 reference

case.

Figure 8.2.1 Commercial Sector Electricity Price Trend

Figure 8.2.2 Industrial Sector Electricity Price Trend8- 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 Life time

DOE define d 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 assume d 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 assume d 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 assume d that lamps in the 70W, 250W, 400W, and 1000 W equipment classes operate for 12,000, 15,000, 20,000, and 12,000 hours, respectively.

8.2.5 Replacement Cost

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

, or lamp is retired from service. The life time 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 a nd 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 is8- 16 necessary, DOE based the repla cement costs on the total installed cost inputs, as seen in the following equation:

L TAX L B TAX B L L B B 

### INST MU PRICE INST MU PRICE INST FPP INST FPPRC

+×++×= +++=
Eq. 8.5

Where:

RC = replacement cost, expressed in dollars, FPP B = final equipment price (price for the ballast only) expressed in dollars, INST B = ballast installation cost, PRICE B = end

- user ballast equipment price expressed in dollars, and FPP L = final equipment price (price for the lamp only) expressed in dollars, INST L = lamp installation cost, PRICE L = end

- user lamp equipment price expressed in dollars, and MU TAX = 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 install ation 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; f or this reason, ballast and lamp price s 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 life times assumed for each equipment cla ss. 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 estimate d 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 Rate s

Most c ompanies 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 estimate d the cost of equity financing using the Capital Asset Pricing Model (CAPM) . A mong 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 f irm 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 ( R f ), 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 fin ancing for a particular company is determined by the equation: 

### ( ) ERP Rk

fe

×+= β Eq. 8.6

Where:

k

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

f = 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 (k d ) 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 estimate d the cost of debt for companies by adding a risk adjustment factor to the current yield on long-term corporate bonds (t he 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 comp anies is the weighted average cost of debt and equity financing, less expected inflation. DOE estimate d the discount rate using the equation:

Eq. 8.7 d d e e w k w k k × + × =8- 18 Where:

k = the ( nominal ) cost of capital, k

e and k d = the expected rates of return on equity and debt, respectively, and

w e and w d = 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 Associates 10 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 use d 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 R f 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) k d 6.8 Damodaran Online Percent Debt Financing w d 31.6 Damodaran Online Systematic Firm Risk B 0.95 Damodaran Online

DOE calculate d 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 use d 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
survey 14 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- fr ee return, and the equity risk premium from Damodaran Online.

DOE estimate d 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 discoun t 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 estimate d the State and local discount rate from the interest rate on state and local bonds between 1977 and8- 19 2001. 16 DOE use d this information to estimate the weighted

- average cost of capital for the sample of companies included in the commercial and industrial company d atabase

. 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 ). T he 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 Station ary 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 comm ent 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 compl ies 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 fixture s not currently covered ( i.e.
, fixture s with rated wattage below 1 50W and above 500W), t he effective date of any new energy conservation standards for these metal halide lamp fixture s or amended energy conservations standards is January 2015 (42 U.S.C. 6295(hh) (2)(B)(ii).8- 20 DOE calculate d the LCCs for all consumers as if each would purchase new equipment in the year the amended standard takes effect. However, DOE base d the cost of the equipment on the most recent available data; all dollar values are expressed in 2 010$.

8.3 PAYBACK PERIOD INPUT S

8.3.1 Definition

The PBP is the amoun t 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 i t 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 effic ient standard level; equipment ( efficienc y levels 1, 2, etc.) and baseline ( effic iency level 0) equipment, and 

### ∆ OC = difference in annual operating costs.

PBPs are expressed in years. PBPs greate r than the life of the equipment mean that the increased total installed cost of the more effic ient equipment is not recovered in reduced operating costs over the lifetime of that equipment . Because most MH LF 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 CSL s 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 a n 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 (P out ) of the ballast) and the power into the ballast (known as power in (P in ) to the ballast) be measured. Ballast Efficiency is calculated by dividing P out /P in . 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 fixture s. Energy savings calculations in the LCC and PBP analyses use both the real-world system power ratings as well as the applicable usage profile s. Because DOE calculate d PBP s in a methodology consistent with the rebuttable presumption test in the LCC and PBP a nalyses, 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 rel ied on standard PBP s 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 MH LF 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 use d in the PBP calculation for electricity cost is the price projected for 2015, expressed in 2010 $. DOE d id not use discount rates in the PBP calculation.

8.4 LIFE

- CYCLE COST AND PAYBA CK PER IOD RESULTS

This section presents LCC results for each metal halide lamp fixture design DOE consider ed . This section uses the terms “positive LCC savings” and “negative LCC savings.” When a n amended standard results in “positive LCC savings,” the LCC of th e standards

compliant system is less than the LCC of the baseline system and the consumer benefits. A consumer is adversely affected when a n 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 operat e. 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 conduct ed a series of LCC calculations for each baseline metal halide lamp fixture . Key inputs consist ed of using historical electricity prices from electricity price projections from the AEO20 10 reference case, and an analysis period of 3 0 years. Table8- 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 class es 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 represe ntative equipment class es by fixture purchasing event, which influence d the LCC and PBP results. DOE also presented the installed prices of the metal halide lamp fixture s 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 balla sts.

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
yr

s

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
yr

s

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
yr

s

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 5.628- 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
yr

s

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 3.568- 24 REFERENCES

1. U.S. Department of Energy–Energy Information Administration. Commercial Building Energy Consumption Survey: Micro- level Data, File 2 Building Activities, Special Measures of Size, and Multi- building Facilities . 2003. (Last accessed February 27, 20011.)

< www.eia.doe.gov/emeu/cbecs/public_use.html >

2. U.S. Department of Energy–Energy Information Administration. Manufacturing Energy Consumption Survey, Table 1.4: Number of Establishments by First Use of Energy for All Purpose . 2006. (Last accessed February 27, 2011.)

< www.eia.doe.gov/emeu/mecs /mecs2006/2006tables.html >

3. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy. Energy Conservation Program for Consumer Products: Final Report: U.S. Lighting Market Characterization, Volume I: National Lighting Inventory and Ener gy Consumption Estimate. September 2002.

< http://apps1.eere.energy.gov/buildings/publications/pdfs/ssl/lmc_vol1_final.pdf >

4. U.S. Department of Energy– Energy Information Administration. Annual Energy Outlook 2010 with Projections to 2035 . March 2010. (Last accessed March 21, 2011.)

< http://www.eia.doe.gov/oiaf/aeo/excel/aeotab_3.xls >

5. U.S. Dep artment of Energy

– Office of Energy Efficiency and Renewable Energy. Energy Conservation Program for Consumer Equipment: Preliminary Technical Support Document: High

- Intensity Discharge Lamps. 2010. Washington, D.C.

< http://www1.eere.energy.gov/buildings/appliance_standards/commercial/hid_lamps_final _tech_support_doc.html >

6. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy. Comments from the Public Meeting for Energy Conservation Program: Energy Conservation Standards for Metal Halide Lamp Fixtures: Public Meeting and Availability of the Framework Document. Transcript for Docket EERE-2009- BT

- STD -0018 Regulatory Identification Number (RIN) 1904- AC00

. 7. R.S. Means Company, Inc. 2009 RS Means Electrical Cost Data . 2009. Kingston, MA.

8. U.S. Department of Energy–Energy Information Administration. Annual Energy Outlook 2010

. May 2010. (Last accessed February 27, 2011. )

< http://www.eia.gov/oiaf/archive/aeo10/aeoref_tab.html >

9. Modigliani, F. and M. Miller. The Cost of Capital, Corporation Finance and the Theory of Investment

. American Economic Review . 1958. (June): pp. 261–297.

10. Ibbotson’s Associates. Stocks, Bonds, Bills, and Inflation , Valuation Edition, 2001 Yearbook. 2001.8- 25 11. Damodaran, A. Damodaran Online. Historical Returns on Stocks, Bonds and Bills – United States

. (Last accessed March 21, 2011.) < http://pages.stern.nyu.edu/~adamodar >

12. Damodaran, A. Damodaran Online. Current U.S. Data . (Last accessed March 21, 2011.)

< http://pages.stern.nyu.edu/~adamodar >

13. U.S. Department of Commerce–Bureau of Economic Analysis. Table 1.1.9 Implicit Price Deflators for Gross Domestic Product . 2008. (Last accessed March 21, 2011.)

< http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=N >

14. Value Line. Value Line Investment Survey . 2007. (Last accessed March 21, 2011.)

< http://www.valueline.com >

15. U.S. Office of M anagement and Budget. Circular No. A-94. Appendix C. 2008. (Last accessed March 21, 2011.) < http://www.whitehouse.gov/omb/circulars/a094/a94_appxc.html >

16. Federal Reserve Board. Statistics: Releases and Historical Data – Selected Interest Rates – State and Local Bonds . 2008. (Last accessed March 21, 2011.)

< http://www.federalreserve.gov/releases/h 15/data/Monthly/H15_SL_Y20.txt >