NBS BUILDING SCIENCE SERIES 125

An Economic Model for Passive Solar

Designs in Commercial Environments

U.S. DEPARTMENT OF COMMERCE • NATIONAL BUREAU OF STANDARDS
NATIONAL BUREAU OF STANDARDS

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or BfAKDAXSa

JUN 5? 5 1981 NBS BUILDING SCIENCE SERIES 125 "I

An Economic Model for Passive Solar

Designs in Commercial Environments

Jeanne W. Powell

Building Economics and Regulatory Technology Division

Center for Building Technology

National Engineering Laboratory

National Bureau of Standards

Washington, D.C. 20234

Sponsored by: The Passive/Hybrid Systems Branch

Systems Development Division

Office of Solar Applications for Buildings Office of the Assistant Secretary for Conservation and Solar Energy

U.S. Department of Energy

Washington, D.C. 20585

U.S. DEPARTMENT OF COMMERCE, Philip M. Klutznick, Secretary

Luther H. Hodges, Jr., Deputy Secretary

Jordan J. Baruch, Assistant Secretary for Productivity, Technology and Innovation

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Director

Issued June 1980
Library of Congress Catalog Card Number: 80-600081

National Bureau of Standards Building Science Series 125

Nat. Bur. Stand. (U.S.), Bldg. Sci. Ser. 125, 146 pages (June 1980)

CODEN: BSSNBV

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON: 1980

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402

Washington, D.C. Price $4.75

(Add 25 percent additional for other than U.S. mailing)
PREFACE

This report was prepared by the Applied Economics Group, Building

Economics and Regulatory Technology Division, Center for Building

Technology, National Engineering Laboratory, National Bureau of

Standards (NBS) for the Department of Energy, Office of Solar

Applications for Buildings, under Interagency Agreement EA-77-A-01-6010

.

The work is in support of the Solar Cities Program, whose broad objective is to increase the application of solar technology in cities

and towns by developing methodologies, guidelines, and examples

specific to the urban environment. This report provides a method

for the economic evaluation of passive solar designs for commercial

buildings, as well as illustrative case examples. The case examples

are based on solar designs and thermal performance characteristics

described in "Design and Analysis of Passive Solar Heating Solutions

for Neighborhood Commercial Strip Settings" [1], a separate paper

by the Environmental Design Research Division, Center for Building

Technology, National Bureau of Standards.

A number of other NBS reports in support of the Solar Cities Program

also complement the economic research described in this publication.

These separate reports document research in the following areas:

the use of solar energy in commercial environments [2], computer

modeling of solar gain through various types of glazings in urban

environments [3], and the effects of climatological factors on window-shopping and other pedestrian behaviors in retail

environments [4, 5].

iii
ACKNOWLEDGMENTS

The author wishes to thank all those persons in the Applied Economics

Group and Architectural Research Group, Center for Building Technology,

National Bureau of Standards, who contributed to the preparation of

this report. Rosalie T. Ruegg provided direction to this economics

project and invaluable editorial and technical assistance. S. Robert

Hastings, project leader of the NBS component of the Solar Cities

Program, organized and managed the research effort at NBS. Kalev Ruberg

provided the solar designs and thermal analyses for the case examples

included in this report. Dr. Harold E. Marshall, Chief of the Applied

Economics Group, and Dr. Carol Chapman Rawie also deserve special thanks

for the time they spent in discussing and reviewing this report. Appreciation is extended to Colonel Denver Lovett, Center for Consumer

Product Technology, National Bureau of Standards, for assisting in the

identification and evaluation of real estate investment factors important to solar energy investment decisions for commercial buildings.

Thanks are also due to the other NBS reviewers, Heinz R. Trechsel,

Mark L. McKinstry, and Dr. Justin Kim, for their comments and suggestions. The author wishes to acknowledge Mr. Frank deSerio of the

Department of Energy, Program Manager of the Solar Cities Program, for

providing financial support and general guidance to this project.

Photograph Credits: Pages viii, 1/Kalev Ruberg and S. Robert Hastings;

page 5/Table Mountain Architects and Engineers; pages 10, 11, 45/

Kalev Ruberg; pages 17, 125/John Holton, page 97/Kalwall Corporation.

iv
ABSTRACT

This report presents an economic model for evaluating passive solar

designs in commercial environments. It discusses the literature on

this topic and draws upon this literature to develop a general methodo]ogical framework. The model incorporates a life-cycle costing

approach that focuses on the costs of purchase, installation, maintenance, repairs, replacement, and energy. It includes a detailed analysis

of tax laws affecting the use of solar energy in commercial buildings.

Possible methods of treating dif f icult- to-measure benefits and costs,

such as effects of the passive solar design on resale value of the

building and on lighting costs, rental income from the building, and

the use of commercial space, are presented. The model is illustrated

in two case examples of prototypical solar designs for low-rise commercial buildings in an urban setting. These designs were developed at

NBS under the Solar Cities Program. The two designs, a wall collector

system and a street canopy, are evaluated for a neighborhood in

Baltimore undergoing urban renewal. Results of the analyses indicate

these designs may be economically feasible under a realistic range of

economic conditions. Topics requiring further research are identified.

KEY WORDS: Benefit-cost analysis; building economics; commercial

buildings; investment analysis; life-cycle cost analysis;

passive solar energy; retrofit; revitalization; solar

energy systems.

v
TABLE OF CONTENTS

Page

PREFACE iii

ACKNOWLEDGMENTS iv

ABSTRACT • v

EXECUTIVE SUMMARY 1

1. INTRODUCTION 5

1 . 1 BACKGROUND 5

1.2 PURPOSE 7

1.3 ORGANIZATION AND APPROACH 8

2. SURVEY OF THE LITERATURE 11

2.1 THE LASL/UNM MODEL 12

2.2 RESULTS OF THE LASL/UNM ANALYSES 13

2.3 UNRESOLVED ISSUES 14

3. MODEL FOR EVALUATING THE ECONOMIC FEASIBILITY

OF PASSIVE SOLAR DESIGNS 17

3.1 MODEL SELECTION 18

3.2 OVERVIEW OF BENEFIT-COST PROCEDURES 19

3.2.1 Comparing Investment Alternatives 19

3.2.2 Discounting and Adjusting for Inflation 20

3.2.3 Determining Economic Feasibility 21

3.3 ELEMENTS OF THE ECONOMIC MODEL 21

3.3.1 Solar Energy Costs 21

3.3.2 Solar Energy Benefits 34

vi
TABLE OF CONTENTS (continued)

Page

3.4 ECONOMIC FEASIBILITY MEASURES 39

• 3.4.1 Net Benefits 40

3.4.2 Benefit-Cost Ratio (B/C) 40

3.4.3 Savings-to-Investment Ratio (SIR) 41

3.4.4 Internal Rate of Return (IRR) 42

4. ESTABLISHING DATA AND ASSUMPTIONS 45

4.1 ESTIMATING SOLAR ENERGY COSTS 46

4.1.1 Purchase Costs 46

4.1.2 Operation and Maintenance Costs 50

4.1.3 Repair and Replacement Costs 51

4.2 ESTIMATING SOLAR ENERGY BENEFITS 53

4.2.1 Savings in Heating Fuel Costs 53

4.2.2 Effects on Lighting Costs 67

4.2.3 Changes in Income from Commercial Space 70

4.2.4 Other Benefits 75

4.3 FINANCIAL VARIABLES 75

4.3.1 Discount Rate 76

4.3.2 Borrowing Rate 78

4.3.3 Study Period and Market Value 82

4.3.4 Taxes and Tax Incentives 86

4.3.5 Grant Programs 94

vii
Page

5. CASE EXAMPLES 97

5.1 WALL COLLECTOR FOR A NEIGHBORHOOD RETAIL STORE 98

5.1.1 Data and Assumptions 100

5.1.2 Results - Base Case 105

5.1.3 Sensitivity to Economic Assumptions 107

5.1.4 Conclusions of the Wall Collector Case Ill

5.2 SOLAR STREET CANOPY ... 112

5.2.1 Data and Assumptions 115

5.2.2 Results 121

5.3 IMPLICATIONS 123

6. CONCLUSIONS 125

REFERENCES 128

APPENDIX - SUMMARY OF KEY SYMBOLS AND DISCOUNT FORMULAS 134

viii
LIST OF FIGURES AND TABLES

Page

FIGURES

Figure 5.1 Solar Wall Collector 99

Figure 5.2 Breakdown of Costs and Benefits

for Wall Collector 108

Figure 5.3 Sensitivity of Net Benefits to Economic

Assumptions for Wall Collector 110

Figure 5.4 Solar Street Canopy 113

TABLES

Table 4.1 Load Adjustment Factor, G 58

Table 4.2 Solar Load Ratio Equation Coefficients 59

Table 4.3 Annual Rental Income - Two Classes of Shopping

Centers, Selected Tenants, 1978 72

Table 4.4 Annual Income - Enclosed vs. Non-enclosed Malls,

Median Values, 1978 74

Table 4.5 State Tax Incentives for Solar Energy 93

Table 5.1 Estimated Costs for Wall Collector 101

Table 5.2 Economic Assumptions for the Wall Collector

Base Case 103

Table 5.3 Results for the Wall Collector Base Case 106

Table 5.4 Economic Assumptions for Solar Street Canopy 119

Table 5.5 Economic Evaluation of the Solar Street Canopy.... 122

ix
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EXECUTIVE SUMMARY

Widespread use of passive solar energy systems In conimerclal buildings

depends upon the economic feasibility of such systems. Because active

and passive solar energy systems for commercial and residential buildings

have significantly different characteristics, they require separate

study. Different assumptions and data are required for the evaluation

of passive solar designs for commercial buildings than for the evaluation of active systems for commercial buildings or the evaluation of

residential passive systems. Corporate tax laws alone have a major

Impact on the economic feasibility of capital investments by

businesses. In addition, some passive solar designs for commercial

1
settings have significantly different cost and benefit profiles than

those typical of active systems or residential passive systems. Furthermore, commercial investors tend to use shorter investment study periods

than have been used typically in evaluating residential solar energy

systems, periods considerably shorter than the service lives of most

passive solar components. Consequently, passive system components of

commercial buildings can be expected to have significantly greater re- sale value at the end of the investment study period than is typically

assumed in evaluating residential passive systems, or even commercial

active systems.

The purpose of this report is to develop a model that provides a comprehensive assessment of an investment in passive solar energy for

a commercial building and that is sufficiently flexible to be useful

to a variety of types of commercial investors for evaluating different

kinds of buildings and passive systems. Using a benefit-cost approach,

the model presented in the report incorporates the costs of purchase,

installation, maintenance, replacement, and energy, including the

effects of income, property, and sales taxes and of tax incentives for

utilization of solar energy at the Federal, State, and local levels.

It evaluates effects of the investment on energy costs for both heating

and lighting, rental income, space utilization, and resale value of

the building. It allows for comparison of the passive solar design

with a conventional building design that differs substantially in

architectural and thermal characteristics from the passive solar design.

The model provides several measures of economic efficiency of passive

solar investments.

The report has six sections. Sections 1 and 2 provide background to

the issues in passive solar economics explored in the report. Section

3 describes the benefit-cost model in algebraic detail. Section 4

provides a verbal description and discussion of the variables included

in the economic model. It suggests different values for key variables

such as the discount rate, borrowing rate, investment study period,

2
and tax rates in different investment situations. It provides procedures for estimating values for purchase costs, annual repair and

replacement costs, annual operation and maintenance costs, annual energy

savings for heating and lighting, annual rental income attributable to

the passive solar energy system, and resale value of the system. It

also surveys tax incentives currently in effect at the State, local,

and Federal levels. By providing an overview of the key variables

affecting the economic feasibility of passive solar energy in commercial

buildings, this section of the report can be useful to investors and

policy makers in identifying situations where passive solar energy is

likely to be most cost effective given current conditions. Implications

can be drawn regarding the formulation of new policies to encourage

increased use of passive solar energy.

The two case examples presented in section 5 of the report evaluate

hypothetical designs for retrofitting passive systems to buildings

in a neighborhood in Baltimore undergoing urban renewal. These examples

serve to illustrate the application of the model. In addition, they

demonstrate that passive solar energy may be a promising approach to

building rehabilitation in urban areas. The analyses show that the

two passive solar designs may be economically feasible over a range

of economic conditions and assumptions representative of urban commercial

settings. The last section of the report summarizes the key features

of the economic model and conclusions of the case studies. Issues

requiring further research are identified.

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1. INTRODUCTION

1.1 BACKGROUND

Energy consumption has become a high priority concern to commercial

building owners [6], Energy is a major portion of the costs of

operating office buildings, industrial facilities, and shopping

centers, as well as individual shops and stores. Moreover, most

commercial buildings are strongly affected by short supplies as well

as the high cost of energy. In increasing numbers, commercial building

owners are looking for ways to improve the economic efficiency with

which they use energy, as well as the reliability of energy supplies.

5
Passive solar energy is one approach to alleviating the dependence on non-renewable energy sources for heating commercial buildings and

industrial facilities. Unlike active solar energy systems, passive

systems collect and transport heat by non-mechanical means and usually

are integral elements of a building structure. Passive solar energy

systems use south-facing glass or plastic for solar collection and

thermal mass for heat absorption, storage, and distribution.*

Passive solar energy systems can be incorporated into a new building

design, e.g., a building can be built with south-facing windows and

massive masonry walls and floors. They can be added (retrofitted) to an existing building, e.g., glazing panels can be added over the south

side of an existing wall. They can also be designed to function

outside of, but in conjunction with, a group of new or existing

buildings, e.g., the space adjacent to buildings along a city block

might be enclosed with a glazed canopy.

As is true of most energy technologies, however, the widespread use of

passive solar energy systems in commercial buildings is strongly

dependent on the economic feasibility of such systems. Experience

with commercial building systems as well as methods for evaluating

these systems have been limited. Most experience and research in

passive solar energy has been in houses, leaving unaddressed many

issues unique to commercial applications. Furthermore, because the

characteristics of active and passive solar energy systems differ,

existing studies of active solar energy systems in commercial environments are not substitutes for the specific economic analysis of

passive solar energy systems. Little about the economic feasibility

of passive systems can be deduced from the literature on active systems.

For a description of the fundamentals of solar energy, heat theory,

and basic types of passive systems, see Edward Mazria, The Passive

Solar Energy Book [7 ]

.

6
In a recent report of the American Institute of Architects (AIA) , the

following observation was made:

"While there is much activity underway throughout the

United States in passive solar heating and cooling,

these techniques are still not generally incorporated

into most new and existing buildings. This lack of

passive buildings may be generally traced to . . . [among other factors] ... a lack of quantitative

basis for evaluating design decisions such as estimating cost and performance."*

It is evident that, in order to facilitate the application of passive

solar technology in commercial buildings, there is a need for economic

procedures, assumptions, and data which comprehensively address both

the commercial real estate investment environment and the special

technical characteristics of passive solar energy systems.

1.2 PURPOSE

The purposes of this report are 1) to develop a comprehensive method

of economic evaluation for appraising the economic feasibility of

passive solar designs in commercial settings; 2) to examine the key

variables affecting the economic feasibility of passive solar investments in commercial environments; and 3) to determine the economic

feasibility of selected passive solar designs under specified conditions.

This report is primarily an analytical tool for the building community

and policy makers. It also is intended as a guide to financiers and

investors in evaluating the costs and benefits of passive solar energy

systems in commercial buildings.

* AIA Research Corporation, Passive Solar Design: A Short Bibliography

for Practioners [8]

.

7
1.3 ORGANIZATION AND APPROACH

The report is organized into six major sections. Section 1 is introductory. Section 2 describes major previous work in passive solar

economics. Section 3 describes algebraically a benefit-cost economic

evaluation model which provides for a comprehensive assessment of the

costs and benefits of passive solar designs over the "life-cycle" of

the investment. Costs and benefits are evaluated from the point of

view of the commercial real estate investor whose decisions are critical to the widespread use of passive solar energy. Several

alternative measures of economic performance are provided by the model

to establish a basis for comparison against various investment criteria.

Section 4 examines in detail the variables included in the economic

evaluation model. It provides suggestions for estimating values for

variables in the economic model and for making the appropriate economic

assumptions for a given investment situation. The variables considered

include 1) costs of passive solar energy systems; 2) benefits of

passive solar designs; 3) real estate investment management considerations; and 4) higher property values and extended property lives due

to the long service lives of many passive solar components. This

section provides guidance to investors and policy makers seeking to

understand the key factors affecting the economic feasibility of

passive solar designs for commercial buildings.

Section 5 provides case examples which illustrate the application of

the economic evaluation model to two specific passive solar designs in

realistic urban commercial settings and demonstrate the economic

feasibility of these particular designs.

The last section provides a brief summary of the report and descibes

future research required to make the proposed methodology a more

useful evaluation tool.

8
Present worth discount formulas and definitions of key symbols used

throughout the economic evaluation model are provided in an Appendix to

assist the user in applying the model.

9
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10
2. SURVEY OF THE LITERATURE

The major work in passive solar economics has been that conducted

jointly by the University of New Mexico's (UNM) Resource Economics Group

and the Los Alamos Scientific Laboratory's (LASL) Energy Systems and

Economic Analysis Group under sponsorship of the Department of Energy,

Office of Conservation and Solar Applications.* This work represents

the state-of-the-art in passive solar economic modeling and thus

* A series of related studies has resulted from this research effort.

Those released by LASL/UNM for citation are listed in [9-16]

.

i

11
provides an Important reference point for defining some unresolved

issues in passive solar economics and for expanding existing evaluation

methodologies.

A brief overview of the results of the LASL/UNM model and anlyses is

presented below, followed by a discussion of key unresolved issues.

2.1 THE LASL/UNM MODEL

Utilizing procedures for estimating the performance of passive solar

heating systems developed by solar engineering research groups at

LASL, LASL/UNM developed an economic model for evaluating the costs

and energy saving benefits of four passive designs for residential

buildings: thermal storage wall, thermal storage roof, direct gain,

and attached sunspace. The model allows for variation in the number

and type of glazings, storage type and volume, night insulation

options, glazing area, glazing to storage ratios, interior temperature

swings, and selective coatings.

Each of four passive designs has been integrated into a design specification for a prototypical conventional single-family, single-story,

2 2 135 m (1500 ft ) residence to facilitate consistent comparisons of

passive and conventional buildings and energy costs. For each design,

the model computes life-cycle energy savings and other measures of

economic feasibility for a given location and type of fuel.

The model's subroutines determine for the standard building in different

locations the various combinations and sizes of features which yield

identical solar contributions to heating the building as well as the

unique minimum-cost combination for each solar heating contribution.

The locus of all minimum-cost points for all solar heating contributions forms an expansion path for optimizing solar design. In a separate portion of the model, this locus of minimum-cost points is

12
considered in combination with conventional fuel costs. The output

portion of the model records the minimum-cost combination of passive

features and conventional fuel and thus the optimal solar design and

maximum life-cycle savings for a given set of assumptions and con- ditions. Budget constraints, maximum and minimum sizing constraints

such as required to maintain a minimum comfort level, and architectural

constraints can be added to the optimal sizing portions of the model.

The economic evaluation methodology can be used for conducting sensitivity studies such as evaluating the effects of various incentives

and for making regional comparisons. The number of prototype con- ventional designs used in the studies is currently being expanded to

include two-story homes with heated as well as unheated basements, in

addition to the single-story home with no basement [14].

2.2 RESULTS OF LASL/UNM ANALYSES

The LASL/UNM researchers have developed cost data and conducted

economic performance and optimization analyses for selected solar

energy designs, both active and passive, for their prototypical

single-family residential buildings in a number of locations and with

various back-up heat sources and incentive conditions.

Some of the major conclusions* of this work are the following:

a) passive system designs offer more economic promise than

the active systems considered;

b) night insulation improves economic performance significantly,

and the performance increases with the severity of the

climate;

These conclusions are taken primarily from [16], the most

comprehensive of the reports to date.

13
c) the passive designs currently offer net savings in all

but a few states when used to displace electric resistance

heating;

d) in cases where solar energy is cost effective, the

economically optimal solar contribution (i.e., solar

fraction) tends to be lower for passive systems than for

active systems, largely because the fixed part of system

costs is negligible for passive heating systems, but

large for active systems;*

e) low interest loans and tax credit incentives enhance the

economic feasibility of active and passive solar energy

systems and raise the optimal solar fraction.

2.3 UNRESOLVED ISSUES

The research efforts at LASL/UNM are notably confined to the analyses

of hypothetical suburban residential solar buildings. Economic

assumptions are not discussed in detail in the studies surveyed. Tax

considerations other than special tax incentives are not discussed and

do not appear to be included in the major studies [16].** Furthermore, the LASL/UNM methodology fails to encompass possible non-energy

benefits of the passive designs.

Although the economic analysis method developed by LASL/UNM can be

applied to other residential buildings, the LASL/UNM model is not

appropriate for commercial buildings. Tax laws alone have a major

For an explanation of this relationship, see Ruegg, Rosalie T.,

et al.. Economic Feasibility of Solar Space and Water Heating

Systems in Commercial Buildings [17].

The LASL/UNM model currently has the capability for including

taxes affecting residential systems. However, the computer

program contains a single set of tax parameters. The user of

the program must override the parameters specified by LASL/UNM

to use values appropriate to different investment situations [14].

14
impact on life-cycle economic feasibility, and they are significantly

different for business than for residential investments.* Moreover,

specialized passive solar designs are evolving for commercial buildings. These designs tend to have different performance and cost

profiles than those for extant residential systems. Furthermore,

commercial and non-commercial investors use different investment study

periods. Such differences make it necessary to develop a distinctly

different model, assumptions, and data base for evaluating commercial

passive solar applications.

* For discussion and illustration of the effects of corporate tax

laws on investment costs and energy savings, see Economic Feasibility

of Solar Space and Water Heating Systems in Commercial Buildings [17].

15
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16
3. MODEL FOR EVALUATING THE ECONOMIC FEASIBILITY

OF PASSIVE SOLAR DESIGNS

This section of the report presents a benefit-cost model for evaluating

the economic feasibility of passive solar designs for commercial buildings. It incorporates the costs of purchase, installation, maintenance,

repair, replacement, and energy over the life-cycle of the passive

solar investment project. It considers effects on energy costs for

heating and lighting and on rental income, space utilization, and resale

value of the building. The model includes income, property, and sales

taxes and tax incentives for utilization of solar energy at the Federal,

17
State, and local levels. It provides measures for determining the

economic efficiency of passive solar investments and for comparing

Investment alternatives.

3.1 MODEL SELECTION

Life-cycle benefit-cost analysis techniques consider all costs and

benefits to be derived from a project over its life.* Thus, they are particularly useful for evaluating solar and energy conservation

projects. In these types of projects, a large portion of investment

costs occur initially, while the benefits occur over the entire life

of the project. A life-cycle economic model for evaluating solar

energy projects can be expanded to include any number of costs,

different types of energy savings, and other effects of the investment. It enables detailed analysis of the effects of taxes, financing

projects with borrowed funds, and government incentives. Another

important feature of this type of model is that it can be used in

conjunction with systems analysis models which simulate the thermal

and lighting performance of the building.

The financial, commercial, and industrial communities have used certain

life-cycle cost approaches for years. The internal rate of return

measure is one life-cycle cost approach used frequently in evaluating

capital investments. It is becoming increasingly important in real

estate investment analysis [19]. Payback is another widely used

measure of feasibility that conceptualizes the flow of costs and

The project life is the time horizon, or study period, used by the

investor in evaluating the project. Depending upon the personal

perspective of the investor, the time horizon might be the depreciation period, the financing period, the period for maximum

speculative profits, the economic life, or the useful life of the

building or related system. See [18] and section 4.3.3.

18
benefits over time. (However, the payback measure is not a full lifecycle measure because it does not include costs and benefits that occur after the payback period.)

The benefit-cost model presented in this report provides for a number

of life-cycle measures of feasibility. While these measures enable

consideration of costs and benefits of the investment in passive solar

energy over the entire useful life of the project, a period somewhat

shorter than the useful life, the expected holding period of the

investment, is used as the study period. The value of solar components

at the end of the study period is estimated and deducted from the costs

of the system.

3.2 OVERVIEW OF BENEFIT-COST PROCEDURES

The basic steps in the benefit-cost evaluation are as follows: 1)

Expected cash flows, including costs, benefits, taxes, and special

government subsidies, are estimated based on a comparison of the

proposed investment with its alternative, and the approximate timing of

each cash flow is determined. 2) All cash flows are converted to a common time basis using discounting procedures. 3) The elements of

benefits and costs, in time equivalent form, are used to compute

various measures of economic feasibility.

3.2.1 Comparing Investment Alternatives

Each type of cost and benefit cash flow for a proposed passive solar

investment building must be compared with the counterpart cash flow

for a non-solar building alternative. Estimates of the differences in

cost and benefit cash flows for the two buildings are required before

applying the life-cycle evaluation model.'"' (Guidelines for estimating

* In determining which of two solar designs (active and/or passive)

is more cost effective, generally one should first determine the

economic feasibility of each solar building relative to the nonsolar building and then compare the economic feasibility results

for the two solar buildings.

19
these cost and benefit cash flows and for making the necessary com- parisons are provided in section 4.)

3.2.2 Discounting and Adjusting for Inflation

Discounting is the economic tool used in life-cycle economic analysis

to adjust for the time value of money. It involves the application of

interest, or discount, formulas to time-dependent cash flows to convert

them to a common point in time.* The time value of money, apart from

inflation, reflects an investor's preference for money in hand over

money expected in the future. This preference can be explained by the

ability of money in hand to earn a return through investment, i.e., by

the "opportunity cost of capital."

The discount formulas referred to in this report are provided in the

Appendix. The algebraic equation, notation, and intended use are given for each formula. Discount factors are constructed by evaluating

the formula appropriate to the type of cash flow, time period, and

assumptions about inflation. The economic model presented in this

report converts each cost and benefit to its present value.**

Expected inflation is included in all elements of the model representing future cash flows. Thus, the discount rate used in the model

represents a nominal discount rate, i.e., one that includes the ex- pected annual rate of inflation over the analysis period. This

Business analysts commonly use other terminology and slightly

different mechanisms for adjusting cash flows for the time value

of money, such as "capitalizing annual income." However, the

discounting procedures described in this report are widely used

and provide a comprehensive framework for evaluating many types

of investment projects.

An equally valid, alternative approach would be to convert all

cash flows to their annual values before combining them into

measures of economic feasibility.

20
procedure adjusts cash flows to constant dollars, in addition to

adjusting for the opportunity cost of capital over and above inflation.

The effects of income taxes are also specified for each element of the

model, i.e.., all costs and benefits are adjusted to an after-tax

basis. Thus, the discount rate represents an after-tax return on alternative uses of funds (see section 4.3.1).

3.2.3 Determining Economic Feasibility

Once adjusted to a common time basis, the cost and benefit elements of

the model can be combined in different ways to calculate a variety of

measures of economic feasibility. These measures enable comparison

of the benefits and costs of the solar investment. Three present value

measures of economic feasibility are included in this report : net

benefits; benefit-cost ratio; and savings-to-investment ratio. The

internal rate of return measure is also provided.

3.3 ELEMENTS OF THE ECONOMIC MODEL

This section defines the cost and benefit elements of the economic

model. The cost elements are specified in section 3.3.1, the benefit

elements in 3.3.2. A summary of key sjnnbols used throughout in the

model is provided in the Appendix.

3.3.1 Solar Energy Costs

The following general equation shows the elements of solar energy

costs that are estimated within the evaluation model and the relationships among costs, taxes owed, and tax deductions:

TC = C+ M + R- S- I- D- C + P- M - G + C + 0 , (1) r v g c ' '

21
where

TC = total present value cost of the solar energy system over

the investment analysis period;

C = present value of initial capital costs of the investment,

including design, materials, labor, sales tax, and

financing;

M = present value of operation and maintenance costs after

allowing for tax deductions at the State and Federal levels;

R = present value of repair and replacement costs incurred

during the study period;

S = present value of deduction from taxable income for

sales tax;

I = present value of deductions from taxable income for

interest;

D = present value of deductions from taxable income for

depreciation;

C = present value of tax credits against the State and Federal

r tax liability;

P = present value of property tax pa5nnents after allowing

for tax deductions at the State and Federal levels;

= present value of the estimated selling price at the end of

the investment analysis period;

G = any grant obtained for the solar energy system;

C = present value of capital gains and depreciation recapture

taxes due at the end of the holding period if the building

and solar energy system are sold; and

0^ = other costs indirectly related to the solar energy system.

Each element in the equation will be specified in turn.

Capital Cost . The capital cost of a passive solar energy system

financed with equity funds is the difference in initial purchase costs

for the solar building and a non-solar counterpart building. The

22
purchase costs represent the total purchase price for the passive

solar energy system, including design and engineering costs as well as installation and materials costs.* To determine the purchase costs of

the passive solar energy system, one should compare the total costs of

labor and materials for the proposed solar-equipped building with the

costs for a counterpart building without solar features. It is

advantageous to estimate labor and materials costs separately if sales

taxes are different for the two types of costs.** Items eligible for

tax credits and other incentives should be separate from those not

eligible.*** In the following equation, each purchase cost element

should represent the difference in cost for the two buildings, subtracting the cost for the non-solar building from the cost for the

passive solar building:

(1 + s) + . (1 + s) + • (1 + s) + C^^ • (1 + s), (2)

initial purchase costs of the passive solar energy system

(the difference in purchase costs for the solar and non- solar alternative buildings)

;

estimated initial purchase cost of materials not eligible

for special incentives;

sales tax rate/100 (s = 0 for cost elements not subject to

sales tax)

;

estimated initial purchase cost of labor not eligible

for special incentives;

estimated initial cost of materials eligible for special

incentives;

C = C a m

where

C

C

m

s =

Csm

Costs of financing the system with borrowed funds are discussed

in section 4.3.2.

The sales tax may not apply to both material and labor costs, or solar components may be exempt from sales tax (see section 4.3.4).

In sizing systems, a separate estimate of fixed and variable

costs of solar components is also advantageous (see [17]).

23
C = estimated initial labor cost eligible for special

s£

incentives.

Initial purchase costs, C , represent the present value of initial

Si capital costs, C, for an investment financed entirely with equity

funds

.

For investments financed with borrowed funds, capital costs include

the initial down payment, the mortgage payments over the study

period, and the principal of the loan remaining at the end of the

study period. In cases where a portion of the passive solar investment is financed with borrowed funds, the present value of

initial capital costs, exclusive of tax effects and special

incentives, is represented by the following general equation:

C = D + M + R , (3)

P P P

where

Dp = down payment;

for

% =

^d • ^a '

f^ = fraction of purchase cost paid as a down payment, and

C is as defined above. For a project totally

financed from equity funds, f , = 1.0.

d

Mp = present value of mortgage payments made as of the end

of the investment analysis period;

Mp . (1 - £^) . CRF " "'""d.h

"

• (5)

for

12

CRF ^ = capital recovery discount factor for monthly

12 payments at annual interest rate of i percent

over loan period of m years;

24
— (1 + —

)

CRF . 12 ^ 12^

1 , 12m =

12m

12

. 12m

(1 + ^) - 1

(6)

R =

UPW, , = uniform present worth factor for discount rate,

d , n

d, and investment analysis period, h, h <^ m

(for h > m, use UPW. ) ; and other terms are

d ,m as defined above,

remaining principal at the end of the investment

analysis period, for n < m;

R = (1 -

12CRF . - i

1 , 12m

12

12CRF . - i

1 , 12h

12

for

SPWd,h single present worth discount factor for discount

rate, d, and investment analysis period, h; and

other terms are as defined above.

Equations (3) to (7) allow the investment analysis period to be

different from the financing period. The analysis assumes that if

the investment analysis period is shorter than the loan term, i.e.,

the building is to be sold before the loan is paid off, the investor

pays the principal remaining on the loan out of proceeds from

liquidation of the investment. Otherwise, all initial capital costs are assumed to have been paid as of the end of the loan period.

Annually Recurring Operation and Maintenance Costs . The next element

in the total costs equation, M, represents annually recurring operation

and maintenance (O&M) costs of the passive solar energy system over

the investment analysis period, discounted to present value dollars.

These costs are represented by the following equation:

M = (1 - t ) • L • UPW^ ^ , (8)

c d,p,h

25
where

M = present value of annually recurring operation and

maintenance costs, after allowing for tax deductions;

t = combined State and Federal marginal income tax rate/100

c (see section 4.3.5);

L = annually recurring cost for operation and maintenance of

the passive solar system, defined as the difference

in annual non-fuel O&M costs for the solar and nonsolar buildings and expressed in base-year prices, i.e.,

prices in the year the building (system) is purchased;*

UPW = modified uniform present worth discount factor for

d,p ,h

discount rate, d, annual inflation rate, p, and

investment analysis period, h.

This equation models the recurring O&M costs of the solar energy

system as a constant amount, L. The modified uniform present worth

factor allows the future value of these costs to increase yearly

with expected inflation while discounting these future values to a single present value equivalent. (See section 4.1.2 for further

discussion of components of operation and maintenance costs.)

Repair and Replacement Costs . Future building costs which cannot be

represented with reasonable accuracy as annually recurring costs,

and are expected to differ for the proposed solar and non-solar

alternative buildings, should be estimated as to size and timing

and discounted separately (see section 4.1.3). For tax-deductible

repair and replacement costs of R^ anticipated in year t, the present

value of the net solar repair and replacement cost is represented by

the following:

h

R = (1 - t ) E = R . SPW^ , (9) c ^ t d,p,t ' ^''^

* See section 4.1.2. All fuel costs are excluded except for

electricity required to operate components of the passive

solar energy system.
where

R = present value of repair and replacement costs after

allowing for tax deductions;

= repair and replacement cost in year t, t=l, . . . ,h;

.defined as the difference in repair and replacement costs

in year t for the solar and non-solar buildings and expressed

in base-year prices;

SPW. = modified single present worth discount factor for discount d,p,t

rate, d, annual inflation rate, p, and time period, t,

t = 1, . . . , h; and other terms are as defined above.

The next four elements of the total cost equation, S, I, D, and C^,

represent deductions from taxable income.

Sales Tax Deduction . The value of the sales tax deduction is represented by the following equation:*

S = t • SPW, • s • (C + C„ + C + C „) , (10)

c d,l m a sm si

where

SPW, . = single present worth factor for discount rate, d, and d,l

period of 1 year, and other terms are as defined above.

This equation assumes sales taxes on material and labor are deducted

from gross taxable income for the tax year in which the purchase is

made, the value of this deduction being realized approximately one year after the purchase.

Mortgage Interest Deduction . The following equation represents the

value of the tax savings for the interest portion of mortgage or loan

payments for the solar energy system over the investment analysis

period:

Only costs subject to sales taxes should be included. Other cost

elements should be given a value of 0 in this equation.

27
where all terms are as defined above except for d^, a complex discount

factor used to determine the present value of the interest portion

of mortgage payments over the investment analysis period. The discount

formula is the following:

12 i

12t . 12(t-l)

h 12CRF + (1 - CRF i^) [(1 + yi) - (1 + yi)

] d = Z i

^ ^ , (12)

^ t=l (1 + d)^

where

h = investment analysis period and is less than or equal to

m (for an investment analysis period equal to or longer than

the loan term, h = m)

;

m = mortgage or loan term;

i = annual interest rate on loan;

d = discount rate;

CRF = capital recovery factor which determines monthly loan pajmient

based on annual interest rate, i, and loan term of m years

(see equation (6)).

Depreciation Deductions . The straight-line method of depreciation is

most generally applicable to solar energy components of commercial

properties (see section 4.3.4). The present value of taxes saved due

to depreciation deductions is expressed by the following equation:

"SL ' + ^ + C^^ - S^) • • 1 . UPW , (13)

N

'

where

Dgj^ = present value of tax savings from straight-line depreciation

deductions

;

= salvage value expected at end of depreciation period;

N = allowed depreciation period;

28
UPW, , = uniform present worth factor for discount rate, d, and

d,n

period of investment analysis, h;

h = investment analysis period and is less than or equal to

N (for an investment analysis period equal to or longer

than the depreciation period, h = N) ; and

t = combined State and Federal tax rate/100,

c

Note that the purchase costs in equation (13) are exclusive of sales

taxes. It is assumed that sales taxes are deducted in the year the

purchase is made and thus are not part of the depreciable base costs.

In cases where the solar energy system is an integral part of a new

building, and the declining balance method is used to depreciate

the entire building,* the appropriate equation to use in estimating

the value of depreciation deductions is the following:

\ = \' ^m ^ ^s. ^sm - ^a> ^\ ;777;^ ' ^''^ t=l (.1 + d;

where

b = declining balance rate, e.g., b = 1.5 for 150%;

h = investment analysis period; and other terms are as defined

above

.

In cases where depreciation rules differ at the State and Federal

levels, the depreciation equation of the appropriate type must

be applied separately for depreciation at the Federal and State

levels and the results summed. The present value of tax savings

due to depreciation deductions from taxable income at the Federal

level would be determined with either equation (13) or (14) , depending

upon whether the straight-line or declining balance method is used

at the Federal level. The Federal tax rate, t, would be used in

See section 4.3.4 for discussion of eligibility for depreciation.

29
place of the combined rate, t^. The present value of tax savings

at the State level would be determined separately with the straightline equation, letting t^ equal the State marginal tax rate and N,

the amortization period specified in the State legislation (see

section 4.3.4).

Tax Credits . A tax credit is a reduction in the actual tax liability

of the investor and is usually specified as a percentage of investment

costs. The present value of tax credits at the State and Federal level

is expressed by the following equation:

C =

r s (15)

where

C =

r present value of State and Federal tax credits;

Federal tax credits;

= (1 + s) (C + C „) • F • SPWj , , f sm sH c d,l (16)

for

F^ = tax credit rate as percentage of investment cost/100; and

SPW = single present worth factor for discount rate, d, and

C

s

1 year, and

effective state tax credit (see section 4.3.4);

(17)

for

S^ = State tax credit rate/100, as stated in legislation;

t^ = Federal marginal income tax rate/100;

UPW^

n uniform present worth factor for discount rate, d.

and period, n, where n equals the number of years

the tax credit is allowed (if n = 1, as is usually

the case, UPW = SPW, ,); and all other terms are a ,n a , ± as defined above.

30
It is assumed that the investment is made at the beginning of the

tax year but that the tax credits are not realized until the end of

the tax year in which the investment is made. It is also assumed

that tax credits at the State and Federal levels have the same eligibility requirements.

Property Tax Payments . This element in the solar energy cost equation

represents an increase in solar costs. In addition to the nominal

property tax rate and rate of assessment, the value of this tax payment depends on: 1) the portion of solar energy purchase costs

captured in the assessed market value of the building at any given

point in time (as measured by the difference in market value of the

solar and alternative buildings) ; and 2) the changes in market value

of the building over the analysis period.

The following equation for the present value of property tax payments allows the assumptions about market value to be tailored to

the specific case examined:

P = • t • (1 - t^) . [ E (^)' O'l . (1

^ t=J,

where

P = present value of property tax payments over the

investment analysis period;

tp = effective property tax rate on commercial buildings/100

(see section 4. 3. A);

t^ = combined Federal and State marginal income tax rate;

£ = year property tax begins (some States exempt solar energy

systems from property taxes for a specified number of years)

h = investment analysis period;

1

X = h(l - v) , where v is the fraction of the initial purchase

costs of the solar energy system that is reflected in the

market value of the building at the end of the investment

31
analysis period, appreciation excluded;*

Y

= expected annual rate of appreciation (including general

inflation) in the market value of the solar energy system

(the actual assessment level is incorporated in the

effective tax rate, t ); and other terms are as defined

P

above

.

h-x

In this equation, the factor ("~j^) is a decay factor such that the

value of the factor at time t = h is equal to v. The factor

(1 + y)'' allows the portion of the solar energy system that has not

decayed in each year to appreciate in market value at rate y which

which may be less than, equal to, or greater than the annual change

in market value of the rest of the building or general rate of

inflation. The factor (1 - t^) accounts for the fact that property

taxes are an allowed deduction from taxable income at the Federal

and State levels.

Resale Value . The estimated sales price or market value of the solar

energy system at the end of the investment analysis period is represented in the economic evaluation model as resale value. The resale

value in present value dollars is described by the following equation:

M =(C-+C +C.+C ) ' V ' SPW^ J , (19) V a m si sm h,Y,d

where

= present value of expected sales price of the solar energy

system (or, equivalently , the difference in sales price

This fraction, v, is represented best by the following ratio: v = AR /C , e a where AR^ is the estimated difference in resale value of the solar

and non-solar alternative buildings, appreciation excluded , and

is the purchase cost of the solar energy system (as defined

in equation (2)). The value of v should take into account decay

due to physical deterioration and any anticipated failure of the

real estate market to fully value the services of the system, or both factors (see section 4.3.3).

32
of the solar and alternative investment buildings) at

the end of the holding period; v = portion of initial solar energy purchase costs captured

in sales price of the solar building at the time of

resale (same as for property tax equation) , appreciation

excluded;

SPW, J = modified single present worth formula for investment

h,Y,d

analysis period, h, appreciation rate, Yj discount

rate, d; and other terms are as defined above.

Capital Gains and Depreciation Recapture Taxes . Sale proceeds in excess of undepreciated costs of the solar system are subject to a capital gains tax. Depreciation in excess of straight-line depreciation at the time of sale is subject to an additional depreciation

recapture tax (see section 4.3.4). The combined value of these taxes

is described by the following equation:

C = t • SPW, , [P - ^

(C.+C +C.+C -S)]+D , (20)

g eg d,h r N £. m si sm a r

'

where

t^g = combined State and Federal corporate capital gains tax

rate;

= expected sale price at end of investment period, i.e.,

P = v'(C. + C + C- +C )(1 + y)'^; r a m si sm D^ = present value of depreciation recapture tax. D^ = 0 if

straight-line depreciation is used or if declining

balance depreciation taken up to the time of resale

is less than or equal to straight-line depreciation.

Where declining balance depreciation exceeds the

straight-line amount, i.e., where

- > |:

D = t • SPW^ ^.(C„+C+C„ + C -S)[(l- (^) ) -h. (21) r c d,h I m si sm a N N

33
All terms are as defined for equations (13, 14, and 20).

Grants . Grants are assumed to occur at the time of purchase. Thus

the value of the grant is deducted directly from other system costs

in the total cost equation.

Other Costs . Other costs directly or indirectly attributable to the

solar energy system may arise with some passive designs and, if

sizable, should be added to the total cost equation. Some examples

are costs of obtaining solar access rights and solar easements, costs

of securing approval of "non-conventional" building designs from

community planning boards, costs of obtaining building rights for

solar canopies, and costs for interior design of the passive solar

building in excess of interior design costs for the non-solar building.

These "other costs" are generally design specific and are not included

in the mathematical model presented in this report.

Consideration of the alternatives to the passive solar design will

determine which costs should be attributed to the solar energy

investment. Costs that are unchanged by the solar investment are usually not relevant to the investment decision and can be omitted

from the cost comparison since they would cancel out of the equation.

3.3.2 Solar Energy Benefits

Most economic studies of solar energy have considered only savings

in conventional heating costs in evaluating the benefits of the

solar investment. Many passive solar designs offer additional

benefits that may significantly improve the economic feasibility

of the investment in solar energy. Included in the economic evaluation model presented in this report are: 1) reduced energy costs

for heating, 2) reduced energy costs for lighting, and 3) increases

in rental income from commercial space due to the passive solar design.

34
It is possible, of course, that the passive solar design will adversely affect lighting costs or the income-producing quality of

commercial space. Consideration of these "negative benefits" may

show the investment should not be undertaken even if the passive

solar energy system appears to be cost effective when evaluated

on the basis of energy savings for heating alone.

The benefits of the solar energy system are represented by the

following equation:

TB = + + , (22)

where

TB = present value of total benefits attributable to the

solar energy system;

B = present value of savings in heating costs;

n

B = present value of savings in lighting costs; and

Li Bj = present value of increased (decreased) net rental

income due to the passive solar energy system.

An algebraic model will be specified for each element in the equation.

Savings in Heating . Using estimates of the quantity of fuel saved

annually and energy price data,* the total present value savings in

heating costs over the investment analysis period is determined as follows

:

B„ = (1 + s) (1 - t ) [P- • F • - P. • F • ] , (23) H c fc c fc fs s fs

where

B = present value of conventional fuel savings; H

s = sales tax rate for fuel/100;

* An overview of procedures available for estimating the thermal

performance of a passive solar building and for estimating the

quantity of heating fuel saved is provided in section 4.2.1.

35
t = combined State and Federal marginal income tax rate/100;

c P- = price per sales unit of fuel used in the non-solar building

f c alternative

;

F = quantity of fuel required annually in the non-solar building,

in sales units (see equation (40));

Dj. = compound discount factor that accounts for expected price

r c escalation for fuel used in the non-solar building over

the investment period;

P^^ = price per sales unit of fuel used in the solar building;

F^ = quantity of fuel required annually in the solar building

(see equation (40)); and

D^^ = a compound discount factor that accounts for expected price

escalation for fuel used in the solar building.

When there are three escalation rates, the following algebraic formula

can be used to calculate and D„ :*

f s f c

+

d - e.

+

1 -

1 -

1 -

1 + d

'1 + e.

1 + d

1 + e,

1 + d

(24)

1 + e.

1 + d

where e^, e.^, and e^ are expected fuel price escalation rates, including

inflation, that hold for n^ , vi^, and n^ years respectively;

(n^ + n^ + n^) is the investment analysis period; and d, the nominal

discount rate.

* For the period of 1980-95, the Energy Information Administration,

Department of Energy, has published three projected escalation

rates for each of three use sectors - residential, commercial,

and industrial - ten regions, and four types of fuel (see

Energy Costs , section 4.2.1). The equation for D can, of course,

be extended to allow for additional time periods and escalation

rates

.

36
Savings in Lighting . Artifical lighting costs average about 25 percent

of the total energy costs for conventional commercial buildings [20], as compared with about 45 percent for residential buildings [21]. In

office buildings, artificial lighting costs average about 48 percent

of total energy costs [22]. The use of daylighting as a substitute

for artificial lighting can have a major impact on energy costs in

office buildings and other buildings with a high proportion of

lighting costs.

A passive solar building may enable more or less use of daylighting

than an alternative non-solar design. For example, it may provide

greater window area than would otherwise be used, or it may use less

and/or concentrate the window area in the south-facing portion of the

building, thereby reducing daylighting in the remainder of the building.

Furthermore, mass storage walls of the trombe type may block a large

portion of the light from south-facing windows. Large direct gain

systems with substantial glazing areas may cause substantial glare

in work areas of office buildings during major portions of the workday, necessitating moving work areas away from windows. Installing

shading devices to reduce glare may decrease the thermal performance

of the passive solar heating system, thereby reducing savings in

heating costs. The importance of artificial lighting relative to

total energy use in commercial buildings makes daylighting an important area of passive solar architectural research and an important

factor to consider in determining the economic feasibility of passive

solar energy for commercial buildings.

The present value of the change in lighting costs due to increased

(decreased) use of daylighting, B , is determined using the same

J-i discounting formula, D^, used for evaluating heating costs, as follows

:

B = P • Q • (1 + s) (1 - t )

• Lee , (25)

c r

37
where

B = present value of savings in lighting costs;

Li P = price of electricity/sales unit;

e = quantity of electric power saved annually, in

sales unit, calculated by subtracting power

usage in the solar building from usage in the

non-solar building; and all other terms are as defined above.

Differences in Space Rental Income . The last type of benefit included

in the economic evaluation model represents a difference in the incomeproducing potential of the proposed solar building and the alternative

non-solar building. It requires estimates of the differences in

rental rates* for space in the passive solar building and the

counterpart non-solar building and of the quantity of space to which

these differences apply.

Differences in rental income could result from adding passive solar

components such as an attached sunspace or mass storage wall to an otherwise conventional building or from fundamental differences in

architectural design for the two buildings which change the use of

the space and its ability to earn income. Market preferences for

commercial space in the passive solar building could cause differences

in rental rates. For example, anticipated shortages of conventional

energy supplies might increase demand for space in solar buildings

relative to non-solar buildings. Furthermore, sales revenue per

square meter of leased space might be higher or lower in the passive

solar building than the conventional building depending on its

attractiveness to shoppers in terms of design, convenience of shopping,

This effect is discussed in terms of rental income because rental

income is most generally useful in valuing commercial space. For

guidelines in using this and other measures such as sales revenue,

see section 4.2.3.

38
and comfort. If this effect is anticipated, rental rates may be

higher or lower for the solar building.

The present value of a change in net rental income from commercial

space due to the passive solar design may be described by the

following equation:

= (1 - t )

• I 'A • UPW, ^ , (26)

I c c e d,p,h

where

t = combined Federal and State marginal income tax rate/100;

c

I = estimated difference in annual income, after all expenses,

^ 2

per m of commercial space in the passive solar building

compared with the alternative non-solar building (may be

positive of negative)

;

2 A = m of commercial space to which the difference in net

e income rate (per m^) applies;

UPW, , = modified uniform present worth factor for investment h,p,d

analysis period, h, expected annual inflation rate,

p, and nominal discount rate, d.

If rental rates in various sections of the building are affected

differently by the passive solar design, the annual change in income,

I , for each affected area, A ,i=l, ....,q, can be determined

c , e , » 1'

1 1 and results over all areas summed:

q

B = (1 - t^) • ( S I^ • A ) • UPW (27)

i=l i i d,p,h

3.4 ECONOMIC FEASIBILITY MEASURES

The economic feasibility measures provided by the economic model and

utilized in the case studies are: 1) net benefits, 2) benefit-cost

ratio (B/C), 3) savings-to-investment ratio (SIR), and 4) internal

rate of return (IRR). Once each cost and benefit element has been

identified and evaluated quantitatively using equations (1) through

39
(27), the first three measures can be calculated readily. The

fourth measure, the IRR, is calculated as an integral part of the

discounting process as is explained below.*

3.4.1 Net Benefits

The net benefits method computes the net present value of all costs

and benefits expected to occur over the life-cycle or investment

planning period; i.e..

where

NB = net benefits or net present value of investment; and TB

and TC are as defined in sections 3.3.1 and 3.3.2.

A net benefits value of 0 means that the investment just recovers

all costs, including the cost of money, but no more, while a value

above 0 means that the investment results in positive savings over

and above costs.

Determining the optimal design and size of an investment is generally

best accomplished with the net benefits measure. The project design

and size with the largest net benefits is the economically efficient

choice apart from budget limitations.

3.4.2 Benefit-Cost Ratio (B/C)

The benefit-cost ratio is represented by the following equation:

where all terms are as defined in sections 3.3.1 and 3.3.2.

The advantages and disadvantages of each method for particular

applications are discussed in further detail in Microeconomics

of Solar Energy [23].

NB = TB - TC (28)

B/C = II , (29)

40
The B/C describes the gross return on an Investment project, above

the cost of money, per average investment dollar. A B/C value of

1 means the project just recovers costs; a value greater than 1 means

the project more than recovers costs. This measure is particularly

good for ranking independent projects competing for a limited budget.

If projects are selected in descending order of their B/C, the net

savings from the total budget will be maximized.

In evaluating energy-related projects, where the major benefits are reductions in energy costs, the composition of "benefits" and "costs"

Is somewhat arbitrary. For example, tax savings are a type of cost

savings just as are energy savings. Furthermore, including all tax

savings in the denominator with investment capital costs and resale

value may cause the denominator to become negative, rendering the

B/C ratio meaningless.

3.4.3 Savlngs-to-Investment Ratio (SIR)

An alternative measure of the return per average investment dollar

that has been particularly useful for evaluating energy conservation

projects is the savings- to-investment ratio:

SIR = TB+S+I+D+C +G-M-R-P-C -0

r q c , (30)

C - M

V

where all terms are as defined in sections 3.3.1 and 3.3.2,

According to this measure all elements but initial capital costs and

resale value (or salvage value) are placed in the numerator. This

measure enables the investor to focus on total savings relative to

the capital investment minus resale value.

41
A further modification in the SIR measure is to include all costs

and savings except for the initial downpayment in the numerator.

Businesses sometimes prefer this version of the SIR since it focuses

on total savings relative to the original equity capital outlay.

A negative result is less likely with the savings-to- investment ratio

measure than with the B/C ratio. The SIR is subject to essentially

the same interpretation and use as the B/C ratio.

3.4.4 Internal Rate of Return (IRR)

The internal rate of return (IRR) is the calculated interest rate

which, when used in place of the discount rate in equations (1) to

(27), equates the discounted value of costs of an investment over

the analysis period with the discounted value of the benefits that occur over that time; i.e., the internal rate of return is the

solution rate for which

TB^ - TC^ = 0 , (31)

where i is the interest rate used to discount benefits and costs

according to equations (1) to (27). The investment is economically

efficient if this calculated rate of return is equal to or greater

than the rate of return required by the investor.

The IRR is important in evaluating solar energy systems in commercial

buildings for several reasons: 1) it is widely used in the business

and financial communities; 2) Investors with different discount rates

have flexibility in comparing calculated IRR's on projects against

their minimum acceptable rates of return, which may change over time;

and 3) it is a measure for ranking competing independent projects

on the basis of investment yield.

42
Unfortunately, the IRR is cumbersome to compute manually. It is

generally calculated by trial and error whereby different interest

rates are used to discount cost and benefit cash flows until a rate

is found that equates total costs and benefits.*

The procedure is to compute the net present value using a low interest

rate that gives a present value greater than zero, then with a high

discount rate that gives a present value less than zero. By interpolation between the low and high discount rates, one can determine

the approximate interest rate that equates savings and costs, i.e.,

the internal rate of return.

* There may be multiple solution interest rates in certain

circumstances depending on the direction of cash flows

in different periods.

43
Facing page: Tfu^ i,koppA,YiQ dtYVtoA i.n

Ton-onto, Canada, -ci (^ixlZij zndioi>2.d by

a 60Jta/L canopy. Note tht exteni>AjJZ

vdntlng 6y6tm.

44
4. ESTABLISHING DATA AND ASSUMPTIONS

This section examines in detail the data and assumptions required to

apply the economic evaluation model presented in section 3. The

following types of data and assumptions are described: 1) costs of

the passive solar energy system; 2) benefits of the passive solar

energy system, and 3) investment management considerations, such as discount rates, borrowing rates, investment study periods, taxes,

and government incentives.

45
Guidelines for determining values for the cost, benefit, and financial

variables in the economic model are provided. Accurate estimates of the

investment costs and energy savings attributable to the proposed project

are, of course, essential to the economic evaluation. In addition, the

following considerations should influence values assigned to variables

in the evaluation model:

1) What kind of building is involved (e.g., new, existing,

retail store, office building)?

2) In what type of commercial setting is the building

located (e.g., shopping center, central business

district of large city of small city, satellite

commercial neighborhood of large city, highway

commercial strip)?

3) What are the long-term investment objectives of the owner?

4) Who pays the utility costs?

5) Might a passive solar design offer the building owner additional benefits beyond savings in heating costs?

6) What rate of return is required by the owner on an investment in this building?

4.1 ESTIMATING SOLAR ENERGY COSTS

The costs of a passive solar energy system may be divided into three

major categories: 1) purchase costs; 2) annual costs for operation

and maintenance, and 3) replacement costs. The size and timing of

each cost affects the life-cycle cost of the investment. Both must

be determined before conducting a life-cycle economic evaluation of

the proposed investment.

4.1.1 Purchase Costs

New Construction . In evaluating a new passive solar building, it is

important that a comparison of the total costs of alternative buildings

be made. For one thing, architectural and construction costs, even

46
apart from specific solar components, may be different for the solar

than the alternative building. This is partly because there is little

standardization in the design and construction of components for

commercial building systems. The design of each passive solar component tends to be unique to the specific building. For example, most

mass storage walls must be built to the architect's specification on

the building site, using labor intensive types of construction such

as masonry and concrete. Most architects have very limited experience

in designing passive solar buildings, and there are very few existing

passive solar buildings to draw upon for guidance. Cost differences

attributable to these differences in design characteristics should be

included in the estimate of solar purchase costs.

Furthermore, it is likely that the passive solar features will be

structurally integrated with the rest of the building and thus multifunctional. For example, thermal storage walls, including extra-thick

masonry partition walls, may provide structural support to the building,

a thermal energy storage medium, and possibly even aesthetic value.

Glazing likewise may have architectural and aesthetic value as well as thermal qualities. Determining what portions of the costs of these

components should be attributed to the solar energy system would be

very difficult without a comparison of the total costs of two alternative

buildings. The key to the comparison of costs of the two buildings is

in defining solar and non-solar buildings that represent realistic

counterparts. Note that if the buildings differ in the type or quality

of space available for commercial use as well as in cost these differences should be measured if possible and included in the economic

evaluation along with differences in purchase costs (see section 4.2.3).

Systems Retrofit to Existing Buildings . In estimating the purchase

costs of a retrofit passive solar energy system, one need consider only

the building costs that will differ if the solar energy system is added

to the building. The estimate of purchase costs should include all

costs incurred in designing, purchasing, and installing the passive

47
solar energy system, as well as costs for modifications in the building

required to install the solar components. Any reduction in the capital

costs of conventional equipment or building components attributable to

the solar investment, and incurred at the time of the initial solar

investment, should be subtracted from the estimate of initial solar

costs. For example, if a back-up conventional furnace purchased at the

time of the solar installation is smaller than would be required without the solar energy system, the difference in the two furnace costs

would be subtracted from the initial costs of the solar energy

components

.

Retrofit passive solar systems frequently have higher initial costs than

new building systems because of the structural modifications required to

install them. This is particularly true of designs involving extensive

changes in the thermal mass and glazing characteristics of the building.

In addition, tax laws and financial arrangements are frequently less

favorable to retrofit systems. Where these conditions exist, retrofit

systems are less cost effective than systems in new buildings.

An investigation of incentives available for building improvements and

rehabilitation, however, showed that some special subsidies are applicable to retrofit projects, but not new buildings. These incentives

effectively lower the cost of retrofit heating systems relative to new building systems.* Furthermore, new retrofit designs are emerging,

such as those developed for the Solar Cities Program, which combine

hybrid and passive components in simple, low-cost modifications to

existing buildings.

Regional Variation . There is substantial regional variation in passive

solar energy costs. Although most components for active systems in

commercial buildings are produced by national firms, passive systems are generally constructed on the building site by local builders and

* A discussion of these programs appears in sections 4.3.4 and 4.3.5.

48
subcontractors from materials obtained locally. Costs of materials and

labor for these systems are closely tied to overall building construction costs in the region.* A few passive components are manufactured

by national firms, for example, special glazing materials and trademarked products for shading and night insulation.

Energy Conservation Features . Most passive solar buildings are being

built with thermally sound, well insulated envelopes. The question

arises as to whether these energy-conserving elements should be con- sidered part of the passive solar energy system. They can make a tremendous difference both in the amount of thermal energy required

for heating annually and in initial solar costs. The same issue arises

with draperies, awnings, shades, shutters, and other features that may

be found in any energy conserving building but may be more critical

to the thermal performance of the passive solar building.

The essential rule in evaluating these and other costs of solar energy

systems is consistency. If particular energy-conserving modifications

are to be made in any case, they should be considered sunk costs. In

this case, the costs of these modifications would not be included in

the estimates of initial solar costs, and energy savings due to solar

would exclude energy savings due to energy conservation. If the

energy-conserving modifications are to be made only in conjunction

with solar energy, both the modifications and their effects should

be included in the solar evaluation.

Other Acquisition Costs . Additional acquistion costs may arise with

particular solar designs and settings. For example, significant costs

may be incurred in obtaining solar access rights or solar easements

* The Dodge Manual , Means Building and Construction Cost Data , and

other cost-estimating manuals provide detailed regional price adjustment factors which can be applied to cost estimates based on national averages [24, 25].

49
in congested urban environments. In general, existing common laws do

not guarantee access to the sun. Since the owner of a solar building

must be concerned with preventing shading of certain portions of the

building over its entire life, it may be necessary to negotiate a legally binding, transferable easement over the solar access space,

with a clear description of the space and with title insurance. Where

applicable, the costs of obtaining the solar access, i.e., of obtaining

agreement among adjacent property owners and compensation for removing

vegetation or making structural changes, should be included with other

solar costs.''

4.1.2 Operation and Maintenance Costs

Costs for operating and maintaining a passive solar energy system

include costs related to the system that recur every year over the

investment analysis period. As with purchase costs, estimating operation and maintenance (O&M) costs is dependent upon a thorough comparison of costs for the proposed solar building and a counterpart non-solar

building. All significant recurring costs for either building that occur after installation and are expected to differ for the two buildings

should be identified. The estimated annual operation and maintenance

cost for the solar energy system is found by subtracting the sum of the

annual operation and maintenance costs for the non-solar building from

the sum of annual costs for the solar building.*''^ All costs should be

expressed in base-year prices, i.e., prices at the beginning of the

study period, before applying the model in section 3.

Several states have passed legislation guaranteeing solar access to

various degrees. As of late 1977 these states included Maryland,

New Mexico, Kansas, Colorado, and Oregon.

An annual operation and maintenance cost of one percent of initial

acquisition costs, plus adjustments for inflation, is sometimes

assumed in economic studies of passive solar energy systems [14, 17].

50
Recurring costs for cleaning south-facing windows, insuring the passive

solar components, and maintaining non-solar heating equipment should be

among the O&M costs considered. Insurance premiums for a building

reflect the replacement value of the building components. To the

extent that the solar-equipped building has a higher replacement cost

than the conventional building, insurance costs will be higher for the

solar building.*

Although fuel costs are a major recurring O&M cost for solar and nonsolar buildings, fuel costs for heating and lighting should not be

included among O&M costs in using the economic model in section 3.

These costs are accounted for in the benefits portion of the model.

Costs for electricity required to operate hybrid passive components

(e.g., mechanical fan systems, night insulation equipment, shades, and

other system components) can be included either in O&M costs or in

heating costs (in the benefits portion of the model)

.

4.1.3 Repair and Replacement Costs

Repair and replacement costs are costs that occur on an irregular basis

during the investment analysis period. All such costs that differ for

the solar and non-solar counterpart building affect the economic

feasibility of the passive solar investment.

* The National Solar Heating and Cooling Center has recently surveyed

major insurance companies and associations for the history of insurability of solar energy systems. It was found that the companies

do not differentiate between buildings with solar and those with

conventional heating systems for insurance purposes [26]. However,

most research related to the insurance issue has been limited to

residential properties. In commercial neighborhoods with high rates

of vandalism and other crimes, a building owner may have difficulty

obtaining insurance for a building with large glass windows or other

glazed areas. There are durable glazing materials that may be

acceptable to insurance companies.

51
Since repair and replacement costs vary In size from year to year, these

costs must be estimated for each year, subtracting the estimated cost

for the non-solar building from the cost for the solar building. The

resulting cost for each year Is entered Into the evaluation model.

All repair and replacement costs should be expressed In prices of the

base year.

Uninsured damage to solar energy components, uninsured damage caused

by these components (e.g., water damage from a water storage wall or roof pond) , and repair and replacement of solar and non-solar heating

system components should be among the costs Included. Keep In mind

that major repairs and replacements to non-solar heating equipment

may be expected to occur at different times In the solar and nonsolar buildings and to be more extensive for one building than the

other.

To simplify the analysis, frequently the future capital costs of the

alternative building are disregarded, and on].y solar-specific costs

for operating, maintaining, and replacing solar energy components are included in the analysis. This approach presumes other non-energy

costs are the same for the two buildings and is a reasonable approach

where the back-up heating system for the solar building is of the same

type and efficiency as the heating system in the alternative building.

In new passive solar construction this is likely not to be the case. Particularly in regions of the country where large fractions of the

annual energy requirement can be provided with passive solar heating,

the efficient back-up system is likely to differ substantially, in

non-energy as well as energy costs, from the energy system used- in

the non-solar building. These differences should, of course, be

reflected in the economic evaluation.

52
4.2 ESTIMATING SOLAR ENERGY BENEFITS

This section provides guidance in estimating the annual fuel savings

from an investment in passive solar energy for a commercial building

and identifies possible effects of passive solar designs on income

from rental of space in the building. The non-energy effects of passive

solar designs for commercial buildings, such as changes in space rental

income, are generally difficult to measure and specific to the building

design and use. This section suggests some possible sources of data

for estimating values for key variables in the economic model that

account for these effects.

4.2.1 Savings in Heating Fuel Costs

In this section, the procedures for estimating annual heating fuel

consumption for a solar and a non-solar building will be outlined

and the energy cost data required to perform the life-cycle evaluation

described. An overview of the solar load ratio method is provided.

This method is described in detail in the Passive Solar Design

Handbook [27]

.

Predicting the Solar Heating Contribution . Estimating physical energy

savings of passive solar buildings requires a measure of performance

of the solar energy components. Several simulation methods are currently being developed for passive systems. The most thoroughly

documented are a series of methods developed by Los Alamos Scientific

Laboratory. The PASOLE program developed at LASL provides a detailed,

hourlyi tihermal network analysis of a building with passive components

[28]. Two additional methods have been derived from results of PASOLE

simulations for a large number of cities: the load collector ratio

method, which provides a "quick and dirty" approximation of solar

performance suitable for the early phase of system design, and the

solar load ratio method, which provides a somewhat more detailed

analysis suitable for the final system design phase.

53
The solar load ratio method was developed by applying ordinary least

squares regression analysis to results for a large number of runs of

the PASOLE program. LASL estimated functions that relate solar performance (actual contribution of solar energy in meeting the building

energy requirement expressed as a percentage of the total reference

energy load) to the solar load ratio (solar radiation absorbed/total

reference energy requirement) . These estimated equations are considerably easier to use than the PASOLE program or other computer Simula

tion programs.

Researchers at Los Alamos have recently modified their solar load

ratio method of estimating the performance of passive solar buildings

The revised method (that adopted in this report) is to relate the

non-solar heating fraction (NSHF) , i.e., the actual quantity of

auxiliary energy required divided by the total reference energy

requirement of the building, to the solar load ratio and to a load

modifier, K. Comparing the solar building with a building that is

thermally identical except for passive components, the net solar

savings fraction (SSF) is then defined as follows:

SSF = 1 - NSHF , where NSHF is a function of the solar load ratio and load modifier

(as specified in equations (36) and (37)).

Based on extensive testing at LASL, it is believed that the SSF

provides an improved estimate of the actual energy savings due to

solar. This is to be compared with past approaches used by LASL

and others which defined solar performance and energy savings in

terms of the solar heating fraction, i.e., the gross solar contribution in providing energy to the building relative to the total

reference energy requirement. By separating out the solar energy

actually used from the gross solar contribution, the SSF approach

removes a bias (generally upward) inherent in the earlier solar

heating fraction (SHF) approaches.

54
Since the LASL model is based on a comparison of the solar building

envelope with a building envelope physically identical to it except

for south-facing walls, the procedures recommended by LASL have been

extended somewhat in this report to allow comprehensive assessment

of the energy savings for a proposed solar building which differs in

architectural design from the alternative building investment. A

passive solar building may differ substantially in construction, in

insulation quality, in architectural design, and in type and

efficiency of the conventional or back-up heating system from an alternative conventional commercial building. Differences in heating

costs caused by these different characteristics or other factors

should be included in the economic evaluation. It is proposed that

the investor consider the total fuel consumption annually in both

the solar and alternative buildings and perform a life-cycle

evaluation of energy costs for each.

It should be recognized that passive solar simulation programs for

commercial building systems are in a very early stage of development.

Substantial research is required to validate existing analysis tools

for small commercial buildings and to develop new tools for large

commercial buildings with interior heating zones and complex

ventilation systems.

/

Energy Consumption in the Solar Building . Adopting the LASL procedures

for calculating energy consumption in the solar building, a three-step

approach is used: 1) estimation of the monthly reference energy

requirement (energy required annually to maintain the designated

thermal comfort level in a reference non-solar building which is

thermally 'identical to the passive solar building except for solar

components) ; 2) calculation of solar radiation absorbed by the

building; and 3) calculation of monthly auxiliary (non-solar) heating

profiles for the solar building.

55
Step 1. Compute the monthly reference energy requirement for space

heating using the following equation*:

n

HL = DD • ( S U.A. + L.) , (32)

J

where

Building Load Coefficient

HL = reference energy requirement;

DD = number of degree days, Celsius (Fahrenheit), in month;

U = i = rate of heat loss through building component, ^2 2 kJ/m • degree day, C (Btu/ft • degree day, F)

;

2 2 A = m (ft ) of conducting surface, excluding south-facing

solar wall;

n = number of conducting surfaces;

L_j^ = infiltration component. This is based on an estimate of the

number of air changes in the building each hour:

3

L. = 1.207 • 24 • a • r"' • a, , (33)

1 c d

where

1.207 = specific heat of air, kJ/m • "C;

24 = hours/day;

a^ = air changes/hr;

3 3 r = m of building space; and

a, = air density ratio,

d

As defined in equation (32) , the reference energy load is the thermal

energy required to maintain a designated comfort level in a nor\-solar

reference building. The reference building envelope is assumed to be

identical to that of the passive solar building except for the south-

* This is based on the method of heat-loss calculations suggested

by ASHRAE. For a more detailed description of this method, see ASHRAE Handbook of Fundamentals [29].

56
facing wall. By excluding the south-facing wall from the thermal

analysis, one assumes this wall is perfectly "neutral," i.e., it has no monthly net gains or losses or is perfectly insulated.* The

gains and losses through the south glazing of the solar building

are accounted for in the next step.

Step 2. Determine the solar radiation absorbed by the building by

first obtaining monthly data for solar energy incident on a horizontal surface in the given location and then multiplying these

values by a series of factors that account for the building

orientation, window tilt, ground reflectivity, reflectors, overhangs

or shading (if any) , absorptance characteristics of the solar storage

walls, and collector area:*

1=1. Alt't 'r'S'trbc - a, 'A , (34)

where

I. = solar radiation absorbed/rao.

;

A

I. = solar radiation on a horizontal surface in a given

2 2

location, kJ/m • mo. (Btu/ft • mo.);

t^ = correction for tilt and orientation of solar aperture;

r = ground reflectance factor (generally about .3);

s = window reflector, overhang, and shading factor;

t = window transmittance factor;

ra^ = absorptance of solar wall (generally .85-. 95 for trombe

and water walls, .9 to 1.0 for direct gain walls); and

2 2 A = solar window area, m (ft ).

c

* See [27]. LASL states that these simplifying assumptions have a negligible effect on the results. The reference building here is

a hypothetical building used to determine the performance of a solar building. It is expected to differ from the actual

"alternative to solar" building investment.

** For procedures for calculating these factors, see [27]. Note that

data for solar radiation incident on a vertical south-facing surface

for 219 cities appear in Appendix C of [27],

57
Step 3. Compute the solar load ratio (SLR) by dividing solar radiation

absorbed monthly (computed in step 2) by the monthly reference energy

requirement (computed in step 1) . Then modify the calculated SLR with a factor 1/K:

K = 1 + (A • G) /BLC , (35)

c where

= solar glazing area;

G is determined from table 4.1; and

BLC = Building Load Coefficient (see equation (32)).

TABLE 4.1: LOAD ADJUSTMENT FACTOR, G^

System DG DGNI TW TWNI WW WWNI

G 10.6 2.4 3.6 0.5 5.0 0.7

Source: Passive Solar Design Handbook [27].

^G = direct gain system; DGNI = direct gain system with

night insulation;

TW = trombe wall system; TWNI = trombe wall system with

night insulation;

WW = water wall system; WWNI = water wall system with

night insulation.

Calculate the value of the modified non-solar heating fraction, NHSF/K,

by substituting both the calculated SLR/K values and the values of

constants in table 4.2 corresponding to the appropriate solar design

type into equation (36) or (37) [27].

For SLR/K < R NSHF/K = 1 - A SLR/K , (36)

For SLR/K > R NSHF/K = B + C exp (-D SLR/K) , (37)

where R, A, B, C, and D are constants defined in table 4.2.

58
TABLE 4.2: SOLAR LOAD RATIO EQUATION COEFFICIENTS^

System R A B C D

DC 0. 5 0 . 5213 -0 . 0133 1 . 0642 r\ / n O "7 0 . 6927

DGNI 0 7 0 5420 0 01 34 1 1 479 0 9097

TW U . o

r\ o ^ n o U . 3690 -0 . 040o 1 A "7 n "7 1.0/9/ 0 . 460/

TWNI 1.0 0.4556 0.0231 1.2159 0.8469

WW 1.3 0.4025 0.0128 1.5053 0.9054

WWNI 1.2 0.4846 0.0201 1.8495 1.2795

Source: Passive Solar Design Handbook [27]

A, B, C, and D are coefficients relating the non-solar

heating fraction to the solar load ratio.

To obtain the non-solar heating fraction, NSHF, multiply the calculated

NSHF

—Ti— by the calculated K. Then, to determine the non-solar monthly

heating requirement, multiply the NSHF by the reference energy requirement found in step 1. The resulting value is the non-solar energy

required monthly, Q_j^, to maintain the solar building at the designated

comfort level:

= NSHF • HL , (38)

where all terms are as defined above.

The annual non-solar energy requirement is, of course, the sum of the

monthly requirements:

Q = I Q. . (39)

s i=l ^

59
where

Q = total annual non-solar energy requirement; and

s = monthly non-solar energy requirement, for

i = 1, January,

i = 2, February, etc.

The quantity of fuel actually consumed depends additionally on the type

and efficiency of the furnace or other non-solar heating plant. The

following equation converts the quantity of energy to the equivalent

quantity of fuel:

q

F = V (^0)

s e • b

s s where

F^ = quantity of conventional fuel required annually, in

sales unit (e.g., gal, or liters of oil);

= annual non-solar energy requirement, kJ (Btu)

;

e = combustion efficiency of furnace, generally .6 to .75

s for natural gas and oil, 1.0 for electricity; and

b^ = energy content per sales unit of fuel, kJ/liter

(Btu/gal.)

.

Energy Consumption in the Non-Solar Building . The procedures described

in step 1 for determining the monthly reference energy requirement of

the solar building should be reapplied to the non-solar alternative

building (the actual non-solar building alternative, which may be

different from the "reference" building), again excluding the southfacing wall. The calculated monthly energy requirements for this

building are then summed and converted to the equivalent quantity of

fuel by the procedures given in equation (39), i.e..

F = — c e

c (41)

where

F^ = quantity of fuel required annually for non-solar building,

in sales unit;

60
= quantity of energy required to maintain the building at

the designated comfort level, calculated using equation (32)

and summing over all months;

e^ = combustion efficiency of furnace In non-solar building

(see equation (40)); and

b^ = energy content per sales unit of fuel.

Extensions to the General Procedures . A few extensions of the procedures

described above should be noted:*

1) The energy savings of mixed systems (for example, a building

combining a trombe wall and direct gain) can be calculated by

a) determining the absorption of solar radiation for the two

systems separately, b) calculating the non-solar heating

fraction for each, and c) finding a weighted average of the

performance of the two systems, using the glazing area for

each as the weighting factor.

2) According to LASL, the trombe wall estimating equations should be

used in evaluating attached sunspace designs. This procedure

presumably is predicated upon the building wall adjacent to the

sunspace serving as a mass thermal storage medium, i.e., it is

comparable to a trombe wall. If the adjacent wall lacks sufficient mass for thermal storage, a more suitable approach might

be to treat the sunspace merely as a thermal buffer to the

adjacent building in computing the energy requirement of the

solar building. This procedure is followed in the solar canopy

case example examined in section 5 of this report.

* All are described in greater detail in the Passive Solar Design

Handbook [27]

.

61
3) The solar load ratio estimating equations have been tested for

changes in underlying design assumptions, such as wall thickness,

types and layers of glazing, interior mass, and the addition of

rock storage beds. Sensitivity results appear in the Passive

Solar Design Handbook , and the calculation of energy savings can be modified to account for these design differences.

4) Both internal energy gains from people, appliances, and artificial

lighting and solar gains through windows not in south-facing

walls have been disregarded in the procedures outlined above.

Frequently, these energy gains can be expected to be approximately

the same for the solar and alternative buildings and can be disregarded without affecting the comparison of energy costs of the

two buildings. This greatly reduces the computational burden.

Keep in mind, however, that if either the fuels used in the

alternative buildings differ, or_ furnace efficiencies differ, the

dollar value of energy gains from these sources will also differ.

If the differences in energy gains, or in the price or efficiency

of usage of fuel in the alternative buildings are major, ''^ both

internal gains and solar gains should be calculated for both

buildings and subtracted from the energy requirements of both

buildings. For the solar building, LASL suggests that this be

done after calculating the non-solar heating fraction, i.e.,

internal gains would be subtracted from the calculated values of

and (see equations (33), (39), and (41)).

The equations for estimating the solar savings fraction were developed

primarily from calculations involving standard passive solar designs

for residential buildings. Tests of small commercial buildings show

the equations to be equally satisfactory for estimating solar performance in these buildings. Performance results have been relatively

insensitive to differences in load usage profiles over a daily period.

Substantially different use of daylighting in the two buildings

could cause a major difference in internal energy gains.

62
The LASL solar load ratio method is comparable in analytic detail and

accuracy to alternative computer-based passive solar performance models

currently available, providing assumptions used in the LASL analyses

correspond to the operation of the proposed building. LASL notes that

a thermostat setting of 65°F (in the absence of internal heat) and a maximum air temperature of 75°F (at which point heat is presumed to be

vented to maintain this temperature) are particularly important assumptions. The solar load ratio method has the advantage of greater

simplicity of calculation. LASL is preparing detailed instructions

and worksheets enabling calculation by simple hand methods. A computer

or programmable calculator and printer is not required. The method

is limited in application to buildings whose energy requirements are dominated by thermal losses through the building envelope and

infiltration. '

Buildings of substantial size, including most commercial buildings,

depend directly on mechanical air handling systems, not infiltration,

for inflow of outside air and air circulation. Much of the heat

required is generated internally, and cooling is the major comfort

consideration. A static thermal analysis method such as that described

in step 1 does not provide adequate estimates of the energy requirements of these buildings. It is necessary to use a computer simulation

program that models the thermal dynamics of the building to perform

a thermal analysis. A number of these programs exist, including

DoE-2 developed by DoE and the University of California, BLAST

developed by the Construction Engineering and Research Laboratory

(CERL), and NBSLD developed by NBS.

Some of these transient load models have been used successfully to

estimate energy requirements in the evaluation of active systems,*

but there are substantial difficulties in using these models to

* See [17] for a discussion of the use of BLAST in evaluating commercial

building solar energy systems.

63
analyze large, multi-zone passive solar buildings with complex HVAC

systems. The energy requirements of these buildings cannot be

calculated in isolation of the solar components. The thermal characteristics of mass storage walls must be represented in the computer

model along with those of conventional walls. Existing thermal

analysis programs for large commercial buildings do not allow for

thermal storage walls.

Work is underway at LASL, NBS, and LBL (Lawrence Berkeley Laboratories)

to adapt DoE-2 to passive solar buildings. The resulting program will

be applicable to multi-zone commercial buildings.

A number of other computer-based methods for evaluating the performance

of passive solar energy systems are available. Like the solar load

ratio method, these methods are limited to relatively small buildings,

but, unlike the solar load ratio method, they provide for an hourly

thermal analysis. DEROB and TEANET are computer simulation models

developed by the University of Texas and by Total Environmental Action

(Harrisville, N.H.) specifically for passive solar energy systems.

TEANET can be used on a hand-held programmable calculator. As part of

the Solar Cities Program, NBS also is developing single-zone, dynamic

analysis methods for analyzing passive solar buildings [3].

Energy Costs . The dollar value of the quantity of fuel consumed

annually in each building is evaluated first for the base year and

then for the life-cycle of the investment period. The life-cycle

evaluation requires that values be specified for both present and

future fuel prices. Establishing values to use for future energy

costs mean projecting prices in an uncertain future.

64
The Energy Information Administration (EIA) , Department of Energy,

has developed a comprehensive computer model, the Mid-Term Energy

Forecasting System (MEFS) ,* for generating fuel price projections.

The DoE fuel price model divides the nation into 10 geographical

regions. Fuel prices are provided by fuel type, by building type,

and also by region, for three future periods - to mid 1985; to mid

1990; and to mid 1995 - and for three price scenarios—"low;"

"medium;" and "high." Escalation rates for each time interval can

be derived from the bench-mark price projections. EIA updates baseyear fuel prices and projected future prices periodically and is in

the process of developing marginal price projections in order to

provide an improved measure of the benefits to society of saving fuel.

The most recent published MEFS forecasts are based on actual 1979

prices expressed in 1980 dollars and real escalation rates.** For

the case studies in this report, EIA projections based on actual 1978

prices, the "high" price scenario, were used.*** Projected real

escalation rates were adjusted for an annual expected inflation rate

of 6 percent over the investment analysis period.****

Combined discount-escalation factors for converting annual energy

costs for the base year to present value life-cycle costs can be

constructed for each set of escalation rates and a given discount

MEFS is a later version of a model called the Project

Independence Evaluation System, published originally in

September 1976. All Federal agencies are required to use these EIA prices in evaluating energy conservation

and solar projects in Federal buildings.

The prices and escalation rates for the "high" price

scenario appear in [30].

These prices and escalation rates appear in [31].

This estimate of annual inflation is based on econometric

forecasts for the next 20 years published in late 1978 by

Data Resources, Inc.

65
rate. The formula for constructing these factors appears in

equation (24)

.

Who Pays Utility Costs . Implicit in the procedures for estimating

energy savings described in this section is that the investor in

solar energy, generally the building owner, obtains all the benefits

in fuel savings. Either the building owner pays all the fuel bills

for the solar building, or, if the tenant does, the tenant pays a higher rental rate that offsets his or her lower utility costs.

This is apart from higher rent related to non-energy effects of the

passive solar building design described in section 4.2.3. The

tenant is assumed to be equally well off, and indifferent to, paying

fuel costs as part of rent or separately.

These are powerful and possibly optimistic assumptions considering

the trend to tenant-paid utility costs in recent years.* In some cases different assumptions may be merited, and estimates of energy

savings adjusted to reflect the portion actually obtained by the owner of the passive system.

Note, however, that the trend to charging tenants for utility costs

has been due in large part to the unpredictability of fuel prices

over the lease period. Interrupted supply and general shortages of

conventional fuel have been additional causes for concern. As solar

energy becomes widely used and understood, tenants should be willing

to pay a higher rent commensurate with their reduced utility costs.

As energy prices have escalated unpredictably in recent years,

it has become increasingly common for office building leases

to revert energy costs in excess of a certain monthly charge

per square foot of leased space to the tenant. Utility usage

in space leased for retail sales or warehousing or other light

industrial uses is usually metered and tenants charged for all

utilities

.

66
4.2.2 Effects on Lighting Costs

Typically, only the energy loss and solar gain characteristics and the

costs of windows are included in the analysis of window components

of solar buildings.* Windows frequently have the additional characteristics of providing daylighting for interior spaces and visual

communication with the outdoor environment. If designed and managed

effectively, windows can substitute daylighting for artificial

lighting and thereby serve to reduce electricity costs. Moreover,

studies have shown that daylighting, if properly utilized, can reduce

cooling loads generated by electric lighting [32] and be more effective

in illuminating tasks than equivalent artificial lighting [33]. On

the other hand, poorly designed windows can cause heating and cooling

loads to increase with increased use of daylighting. They can also

interfere with visual performance by providing uncontrolled brightness

and glare.

Since passive solar buildings depend upon windows for collecting solar

energy to heat the building, the effects of these windows on lighting

needs should be considered. Estimating the potential savings in

artificial lighting costs from use of daylighting requires: 1) an estimate of the daylighting available to each lighted area or workspace

in the proposed passive solar building as compared with that available

in the alternative non-solar building; 2) an estimate of the actual

minimum requirements for lighting in each area; 3) an estimate of

the artificial lighting used in the non-solar building; and 4) the

price schedule for electricity, including seasonal variations and

time-of-day charges

.

* An exception is [34]. Ruegg and Chapman include an evaluation

of daylighting in their economic analysis of windows. However,

their study examined windows in a conventional building with

no provision for thermal storage.

67
Daylightins Potential . To determine the quantity of dayllghtlng

available, It Is necessary to develop detailed specifications of the

architectural and interior design of the proposed building, including

the size, position, and physical characteristics of the windows; the

size of rooms; the layout and surface characteristics of workspaces;

the shading characteristics of nearby buildings and landscaping; and

the use of shades, draperies, and shutters.

In addition, it is necessary to make assumptions about the behavior

of building occupants, for example, their willingness to reduce

artificial lighting and to manage window shading features effectively.

Once these characteristics and assumptions have been specified, a dayllghtlng analysis can be conducted. A number of methods have

been developed for estimating available dayllghtlng. The most com- prehensive tools are complex hourly simulation computer models.

Simpler and less costly methods, involving short computer algorithms,

exist for making rough estimates. One is the daylight factor method

used by Kusuda and Collins [32]. As defined by these NBS researchers,

the daylight factor is the "ratio between illumination on a horizontal

plane at a reference point in the room and illumination on a horizontal

plane under the open sky, both without direct sun."*

Lighting Needs . It is necessary to establish a minimum level of

illumination for each room or work area. By comparing the minimum

required level with the dayllghtlng available, one can establish

the quantity of artificial lighting required for the space.**

The daylight factor calculation procedures are provided in detail

in [32]. In [35], Kusuda and Bean compare the results of using the

daylight factor method with those obtained with a rigorous interreflection model GLIM (General Light Interref lection Model) for a sample office module.

In their economic evaluation of windows, researchers at NBS assumed

a minimum illumination level of 6.7 fc for residential buildings

and 50 fc for commercial buildings [32, 34].

68
Obviously, the greatest savings In electricity occurs when artificial

lighting Is reduced to the minimum required for the specific daylight

conditions and for the activity occurring within the space.*

Savings In Electric Power . To determine the annual power savings,

first, subtract the quantity of dayllghtlng available to the Investment building over the year from the minimum requirement over the

yearly period. The difference is the quantity of artificial lighting

required for the Investment building. Second, determine the amount

of artificial lighting required in the non-solar building. (This can be done in either of two ways: 1) repeat the calculations

used for the proposed passive solar building, with appropriate

assumptions as to the use of dayllghtlng in the non-solar building

or 2) assume a constant hourly electric power usage during occupied

periods throughout the year.) Lastly, find the differences in

artificial lighting required for the two buildings, subtracting

the quantity for the proposed investment building from the quantity

for the non-solar building. A positive value reflects a savings in

electricity ^or the passive solar building, a negative value, an increase in the electricity requirement for the passive solar building.

The dollar value of the savings in electric power, considered over

the study period, is then found by applying the same procedures used

in- evaluating savings in heating costs. Note that if a significant

portion of savings in electric power occurs during peak load periods,

where electricity is subject to extra demand charges, the peak load

price should be used in evaluating energy savings that occur during

those periods.

* Automatic sensor controls can be Installed to dim lights to the

minimum required level and to shut off lights during periods when

daylight illumination Is sufficient or the room is not occupied.

If such systems are to be included in the proposed investment

building but not the alternative non-solar building, the costs as well as energy savings from use of these controls should be included in the analysis.

69
4.2.3 Changes in Income from Commercial Space

Passive solar designs for commercial buildings may significantly

affect the quality of life and use of space in commercial settings.

These changes should be considered and valued if possible along with

other costs and benefits of the solar investment.

The economic model evaluates these effects by defining them in terms

of changes in net rental income. The general procedures for estimating

the change in income due to the passive solar design are as follows:

1) Compare the quantity of space available for commercial use in the

proposed solar building with that in the non-solar building;

2) Establish ownership of the space. (Some of the passive solar

designs developed for the Solar Cities Program affect space

beyond the standard building lot, i.e., they enclose pedestrian sidewalks and/or the street, or a vacant lot adjacent

to a building. In evaluating these designs, it must be determined whether rights to build over the space and subsequently

to use or rent the space can be acquired and if so at what

costs .

)

3) Examine the alternative uses for all the space included in the

proposed solar design and a counterpart, non-solar alternative

design.

4) Estimate the difference in net income per square meter of affected

area for the solar and non-solar buildings. If various areas of

the building are affected differently, find the difference in

net income for each separate affected area. (In some cases,

income from one portion of a building may be lower than for

a counterpart non-solar building and income from other portions

higher. Each portion of the building should be treated

separately if variations occur throughout the building.)

70
Values for the quantity of space affected and for the expected income

from each unit of space, net of all operating costs, are entered into

the life-cycle evaluation model, equation (26) or (27).

Income from rent, net of income taxes and operation and maintenance

expenses, is a comprehensive measure of income from commercial space.

For an owner-occupied space or building, income may be computed from

estimated sales revenue net of all operating, personnel, and merchandise costs. Since the variables affecting net sales revenue are numerous and consistent data difficult to obtain, it is often useful

to impute a rental value proxy for net income when analyzing owner- occupied properties.

The Urban Land Institute publication Dollars and Cents of Shopping

Centers [36] and the 1978 Experience Report for Downtown and

Suburban Office Buildings [37] provide extensive data for rental

and sales income and operation expenses for a large number of

commercial retail and office building classes and for diverse tenant

classifications. These sources provide broad data bases for

estimating the benefits and costs of changing the use of commercial

space. Table 4.3 provides some examples of this data for selected

tenant classes in two types of shopping centers: neighborhood and

regional. These examples provide a range of possible rents that can be imputed to commercial space.

In using rental income data such as that in table 4.3 to estimate

the net income from commercial space, expected operation and maintenance costs per square meter of area should be subtracted from

gross rental receipts. In retail or light industrial leased buildings,

these costs (exclusive of utility costs) are generally expected to

be 20-25 percent of rental income. The net income is taxable at

the ordinary income tax rate applicable to the leasor.

71
TABLE 4.3: ANNUAL RENTAL INCOME—TWO CLASSES OF

SHOPPING CENTERS, SELECTED TENANTS, 1978

Tenant Rent

Neighborhood

,2 ,2 $/m^($/ft^)

Regional

$/m^($/ft^)

Supermarket 25.62 (2.38) 22.82 (2.12)

Doughnut Shop 52.74 (4.90) 98.81 (9.18)

Ladies' Apparel 43.06 (4.00) 58.56 (5.44)

Family Shoe Store 32.30 (3.00) 63.62 (5.91)

Ice Cream Parlor 50.60 (4.71) 86.11 (8.00)

Plant Store 48.98 (4.55) 103.55 (9.62)

Flower Shop 44.90 (4.17) 107.64(10.00)

Source: Dollars and Cents of Shopping Centers , 1978 [30].

Another type of information that may be useful in evaluating passive

solar designs for retail stores and shopping centers is data describing

the difference in income for enclosed and non-enclosed retailing

areas. For example, enclosing pedestrian areas with a solar canopy

may improve the profitability of adjacent retailing operations relative

to the situation with no enclosure.*

Unfortunately, estimating the improved income potential of a shopping

center due to enclosure is a task filled with uncertainties. Ideally,

one wishes to obtain data on the preferences and habits of shoppers

in different commercial environments. However, behavioral research

in these issues is in an early stage, and existing research provides

This effect is considered further in the solar street canopy

case example in section 5.

72
little data directly useful in assessing the impacts of climatological

factors on shopping habits and on pedestrian traffic*

The income data on enclosed versus non-enclosed malls gathered by

the shopping center industry provides an alternative measure of

these effects. Data on sales revenue, expenses, and rental receipts

for existing enclosed versus non-enclosed malls is available for

two classes of shopping areas: super-regional and regional. A

portion of this data appears in table 4.4.

The table shows that both operating receipts and net operating

income per square meter of leased area are substantially higher for

enclosed than non-enclosed malls in both types of centers. The

difference in net operating income for enclosed versus non-enclosed

malls, subtracting the value for the non-enclosed mall from the

value for the enclosed mall, provides an estimate of the increased

annual income per square meter of affected area from enclosing a shopping mall. However, these data can be considered only very

rough measures of the effects of enclosing malls. Income results

vary substantially with the age of shopping centers and with other

factors besides enclosure. The Urban Land Institute is currently

collecting data on the results of enclosing non-enclosed malls that

should give additional insight to the profitability of enclosure.

* Two recent studies examined climatological effects on pedestrian

behavior in shopping areas. A study conducted jointly by the

Institute for Man and Environment at the University of Massachusetts

and Weather Dynamics, Inc., showed high winds affect pedestrian

behavior. Cash register receipt data was found to be negatively

correlated with average wind speeds in the most severe wind

sites [38]

.

A separate study conducted at NBS as part of the Solar Cities

Program considered window-shopping behavior on retail streets in

different sun/shade and temperature conditions. The results of the

NBS study failed to show a significant relationship between sun and shade conditions and pedestrian behavior in shopping areas. However, the study was limited to temperate conditions and to two

locations [4, 5]

.

73
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4. 2. A Other Benefits

The possibility that passive solar designs will affect the quality

of life of occupants of the building should also be considered.

Depending on the specific architectural design, passive features can potentially: 1) increase or reduce noise levels by changing

acoustical isolation from street noise; 2) provide a more or less

aesthetically appealing environment than conventional commercial

building designs; 3) increase the use of interior landscaping, with

effects on comfort and health; and 4) increase or decrease the thermal

comfort of occupants. The measurement of acoustical, aesthetic,

comfort, and health effects of passive solar designs and interior

landscaping is an important area for further passive solar research.

4.3 FINANCIAL VARIABLES^

A number of financial variables in addition to the direct costs and

income potential of an investment in solar energy for a commercial

building affect its economic feasibility. These variables include:

1) the discount rate which reflects the investor's opportunity cost

of receiving and spending money over time; 2) the interest rate and

other terms for financing a system with borrowed funds; 3) the length

of time the investment is "held" before resale or other disposal; 4)

the value of the property at the time of resale or disposal, net of

disposal or resale costs; 5) the rate of taxation on property, sales,

and income; 6) depreciation and other expense allowances against

taxable income; and 7) tax credits, grants, and other governmental

incentives. Following is a discussion of each of these variables,

including guidelines for determining their appropriate values in

different investment situations. A number of special subsidy programs

are described.

* This section is based on interviews with actual investors in

commercial real estate and an extensive survey of existing

legislation and programs of public assistance which affect

the use of passive solar energy in commercial buildings.

75
4.3.1 Discount Rate

The discount rate Is a key variable In the Interest, or discount,

formulas used In life-cycle economic analysis to adjust for the time

value of money. The selection of an appropriate discount rate to be

used in the discount formulas Is critical to describing accurately

the value of costs and benefits that occur at different times over

the life-cycle of a proposed investment. Ideally, this discount

rate should represent the best return available on alternative uses

of funds by the investing firm. It may also be expressed as a minimum acceptable rate of return on an Investment. In using an

economic evaluation model that specifies costs and benefits in

terms of after-income- tax discounted values (as this report does),

one should use a discount rate that represents after-tax rates

of return.

In the model presented in this report, inflation is included in

estimates of future cash amounts, and the effects of inflation are removed by including the expected rate of inflation in the discount

rate used to adjust for time differences, i.e., a "nominal" rate

is used. Alternatively, all cash amounts may be expressed in constant dollars (without inflation) before being discounted. In

this case, a "real" discount rate, one that does not include inflation, should be used for discounting.

The relationship between a real and nominal discount or interest

rate is the following:

d^ = (1 + d^) (1 + p) - 1 = d^ + p + d^p (42)

where

d = nominal discount rate

n

d = real discount rate, and

r

'

p = expected rate of inflation.

76
Although the portion of a market interest rate that is attributable

to expected inflation is seldom specified, some expectation about

inflation is generally built into these rates, and higher rates are associated with periods of expected higher inflation.

In addition to components for inflation and compensation to investors

for postponing consumption, discount rates may reflect a compensation

for risk. There is some dispute 1) whether this risk compensation

should be reflected in the discount rate or handled separately in the

estimation of expected costs and benefits, and 2) whether the compensation for risk should vary with the overall riskiness of the firm

or with expectations about a particular investment.

Frequently, there is an element of both situations. Stockholders in

firms with poor stock ratings will demand higher rates of return,

and firms will require higher returns on more risky investments than

less risky investments.

A wide range of discount rates are used in actual practice depending

on the type of investment, the type of firm, prevailing economic

conditions, and the method chosen for treating inflation and taxes.

Some investors focus on the long-term potential of their projects

and are satisfied with a good but not exceptional annual return

over a large number of years. A representative example of this

type of investor is an institutional investor such as a bank or insurance company with a large quantity of internal company funds

available for financing investment projects. Such investors tend

to seek a moderate annual return on a few large building projects

and to use a moderate discount rate, such as an after-tax rate of

5-7 percent plus annual inflation.

Speculative investors, on the other hand, will typically finance

an investment with borrowed funds at a market rate and seek investment projects which earn a high rate of return on a small

77
amount of equity in each of numerous projects. These investors

will tend to use a high discount rate in evaluating a high-risk

building investment, as high as 15 percent above expected inflation.*

Small, non-speculative investors who plan to occupy the investment

buildings may use lower discount rates in evaluating a solar building,

for example, 3-5 percent above expected annual inflation, depending

on their alternative investment opportunities.

Using a high discount rate in evaluating an investment in solar

energy reduces the value of future benefits and costs relative to

the initial investment cost. Since the benefits of a passive solar

energy system occur over the entire life of the project while a large portion of the costs tend to occur initially, solar energy

systems will generally not be as attractive to investors who use high discount rates as to those who use lower rates. An important

exception is situations where investors obtain loans at low interest

rates to finance a major portion of the passive solar project.

4.3.2 Borrowing Rate

Financing a portion of a solar energy system with borrowed funds has

two major impacts: 1) It defers payment of the financed portion of

the capital costs of the system. Equity funds not invested in the

solar energy system can be used for additional projects. 2) It adds

to the capital costs of the investment, but because financing costs

are tax deductible, the effective interest rate is lower than the

borrowing rate upon which loan payments are based. Moreover, the

The treatment of taxes, inflation, and risk in evaluating real

estate investments varies considerably among actual investors.

The discount rates cited serve to illustrate the range of discount rates used in actual practice. They are not intended as recommended values

.

78
effective cost of the system may be reduced still further by

financing it with borrowed funds if the projected rate of inflation

reflected in the loan interest rate fails to cover the actual rate

of inflation in the income of the borrower.

Heavy use of financing leverage is more typical of some types of

investors than others. Large institutional firms with a large

supply of internal funds may prefer to use equity funds for nearly

all capital investments, while smaller, more speculative firms may

continually seek the leverage advantages of borrowing.

Conventional Loans . Financing arrangements for solar buildings, as for conventional buildings, are determined by individual lenders

operating within the prevailing conditions of local and national

money markets. However, conditions vary with the credit worthiness

of the firm. Long-term mortgage financing of a new solar-heated

commercial building would generally be obtained from large nationwide insurance companies at interest rates somewhat lower than the

prime rate, depending on the relationships between the lender and

borrower. Although lenders are sometimes willing to make a 30-year

mortgage loan for new construction, they often require that the

loan be paid off or refinanced after 15 years.

For solar retrofit or rehabilitation projects, financing terms are usually less favorable than for new construction. Unless the

borrower is eligible for a special government subsidized loan or grant, he or she usually must obtain a commercial bank loan.

These loans generally are 3-5 year uncollateralized loans with

interest rates somewhat above the prime rate. Downpayment requirements are typically 25 percent for large mortgage loans, possibly

less for a small commercial bank loan.

79
Many passive solar retrofit projects undertaken in combination with

other building improvements should be eligible for government insured

and subsidized building improvement loans. These loan programs provide more favorable financing arrangements than are typically

available from commercial banks.

HUD loan programs of interest to solar investors are the Title 1

Property Improvement Loans and Section 312 Rehabilitation Loans.

Title 1 Property Improvement Loans .* Title 1 loans are obtained from

private FHA-approved financial institutions. HUD provides loan

insurance to the lender and specifies major loan conditions and

eligibility requirements. Currently, the maximum loan is $15,000

for a non-residential structure. The structure to be improved

must be a completed building occupied for a minimum of 90 days

before application for the loan. ("Shell houses" are excluded

as "not completed.") The current maximum interest rate allowed

of 13 percent is somewhat below current market rates for business

loans, and the maximum loan term of 15 years substantially longer

than the term of a standard commercial bank loan, which is typically

3-5 years. The FHA loan insurance premium, 1/2 percent per annum

of loan proceeds, is paid by the lender.

Heating systems are specifically eligible for these loans. Thus,

most passive and active system components are eligible. This

government-insured loan program is particularly important to

small firms and to firms undertaking projects in neighborhoods

where property insurance is difficult to obtain.

This loan program is described in detail in [39].

80
Section 312 Loans .* Through the Section 312 program, HUD makes

available to private building owners government loan funds. These

funds may be used to rehabilitate, improve, or repair property, but

are limited to buildings either in Federally funded urban renewal

areas or part of a Community Development Block Grant project.

The funds are disbursed through city and county governments and

public agencies. "Shell buildings," such as those obtained by

cities under tax sales and then sold to private individuals for a nominal sum, are eligible. The maximum loan for one building is

$100,000; the current interest rate, 3 percent; and the maximum

loan term, 20 years. Rehabilitation undertaken with the loan

funds must bring the property into compliance with minimum

standards of local building codes.

Although these low-cost loans have strict eligibility requirements,

they are of considerable importance to major urban revitalization

projects. Either in combination with, or as an alternative to re- development grants and tax credits for building rehabilitation and

energy conservation, they substantially reduce the cost barriers

to using solar designs in urban rehabilitation projects.

Other Loan Programs . Some local governments have sponsored special

loan programs for building rehabilitation to supplement funds from

the Federal programs. In many cities, these funds are widely

available, typically at interest rates below market rates. As of

January 1978, Massachusetts, Minnesota, and Oregon had passed

legislation relating to loans for solar energy systems, but these

programs were limited.

* This section is based primarily on telephone interviews with

officials at HUD and the Department of Housing and Community

Development, Baltimore, MD. For further information, contact

HUD, local community development associations, and the Catalogue

for Federal Domestic Assistance [40].

81
4.3.3 Study Period and Market Value

The study period is the length of time over which an investment

is evaluated. Obviously, the cumulative economic benefits over

the study period will be greater the longer the period of expected

service, and the proposed investment will appear more cost effective

with a longer study period, providing other conditions are the same.

In analyzing solar energy systems, a typical approach has been to use a study period equal to the expected service life of the

system, for example, 20-25 years for an active system [17], or 30

years for a passive system [14] . By using this approach, energy

savings and other economic benefits occurring over the entire useful

life of the project are included in the economic evaluation. In

addition, an expected salvage value of the solar components for

scrap, net of disposal costs, can be specified.

An alternative approach is to use a study period shorter than the

anticipated service life of the project but to include an estimate

of the market value of the investment at the end of the study

period in the investment analysis. The market value at the end

of the study period represents the potential resale value of the

system at the time of resale. By including the resale value in

the analysis, the service life of the investment beyond the study

period is accounted for.

It is proposed in this report that the latter approach to selecting

investment analysis periods be used in evaluating passive solar

commercial buildings. Although passive solar energy systems tend

to be durable, structural components of the building with service

lives comparable to the building as a whole (building lives of 30-

50 years are assumed for depreciation purposes) , investors in

commercial real estate typically use relatively short investment

analysis periods. Some investors plan to sell or refinance their

82
properties after a period considerably shorter than the mortgage

term or service life. These Investors tend to select investment

analysis periods corresponding to the anticipated holding period

of the investment.

Estimating Holding Periods . The tax shelter concept is frequently

cited in real estate Investment literature as a major criterion

for setting holding periods [41, 42]. According to the tax shelter

concept, a project should be sold when the annual payment on the

principal of a loan becomes larger than annual depreciation [42].

By selling or refinancing and using cash received to start new

projects, the investor can often return to a position of greater

return on equity. For an investment financed at market lending

rates of 10-12 percent, and depreciated according to the declining

balance method, annual principal payments become equal to annual

depreciation in 12-15 years. This criterion is likely to be

particularly important to a cash-poor young firm seeking rapid

expansion and ta speculative Investors seeking rapid recovery

of Investment costs and subsequent reinvestment in new projects.

Another firm may select a holding period that maximizes the return

on an investment according to a more comprehensive set of criteria.

For example, the Investor might wish to compare the net present

value of all cash flows from the Investment, or, alternatively,

its Internal rate of return, for different holding periods and

to select the holding period for which the rate of return or net

present value is greatest.*

* Cooper and Pyhrr discuss a rate of return model for evaluating

real estate investments and selecting optimal holding

periods [19]

.

83
To a firm using equity financing, the tax shelter criterion tends

not to be relevant to establishing a holding period. Large institutional firms which fund projects entirely from equity appear

commonly to use 15-20 year investment analysis periods, although

they do not necessarily sell or replace the investment at the

end of this period. For many investors, including lenders, the

future beyond 15 years is too uncertain to be represented in

investment planning.

Estimating Resale Value . Passive solar energy systems should have

considerable remaining service life at the end of a short holding

period. Thus, many investors should expect to recover a significant

portion of their original capital investment at the time of sale of

the building. Increases in conventional fuel prices and shortages

of conventional energy supplies over the study period should contribute

to high resale values for passive solar buildings. It is important

to the assessment of feasibility of the system that this resale value

be included in the economic evaluation.

Unfortunately, estimating the market value of a passive solar energy

system at the future time of resale is a difficult task. Ideally, one wishes to predict the difference in selling price for the passive

solar building and an alternative, comparable conventional building.

In order to derive an estimate of resale value, these questions must

be addressed: 1) What proportion of the total building value is reflected

in the solar energy investment at the time the solar investment is made?

(Does the solar investment over-improve the building?) 2) How will

buyers, financiers, and appraisers respond to solar-heated buildings

at the time of resale? 3) What is the history of commercial property

values in the neighborhood of the solar building? 4) What is the

expected service life of the solar components of the building? Of the

building itself? and 5) Apart from energy savings, what economic

benefits from the solar energy system might affect its resale value?

84
The approach for determining resale market value suggested in this

report is to estimate the fraction of the original passive solar energy

system in service at the end of the study period (measured as a fraction

of the original purchase and installation costs) . This can be done by

estimating the fraction of initial investment costs that covers durable,

long-lived building components with service lives commensurate with

the building as a whole. One then assumes that the remaining portion

of the system deteriorates over the study period and has no economic

value at the end of the study period. In addition, the system components that do not deteriorate may be assumed to appreciate in market

value at a specified annual rate, which may be equal to, less than, or greater than the general rate of inflation assumed in the analysis,

depending on an overall assessment of the real estate market conditions

for passive solar buildings and the anticipated economic benefits of

the system. This annual appreciation rate should cover both the effects

of general inflation and trends in real estate market evaluation of

passive solar buildings relative to conventional buildings.*

An alternative approach to determining resale value is to estimate the

economic benefits from the passive solar energy system during the

remainder of its service life beyond the study period. This approach

requires not only an estimate of energy prices and non-energy benefits

Some mechanical "hybrid solar" components, for example, fan systems,

might have a service life equal to or less than the study period.

On the other hand, south-facing windows and structural components

like thermal storage walls might be expected to have long service

lives and to increase in market value over some portion of their

service lives due to inflation in general or to other market

supply and demand and replacement cost factors. Note that if the

resale price of the passive solar building is expected to be the same as the resale price of an alternative non-solar building,

the resale value of the solar energy system must be assumed to

be zero.

85
during the period beyond the study period but also an assessment of the

cost and efficiency characteristics of alternative, conventional heating

systems during that period.*

Given the degree of uncertainty about economic and technological

conditions beyond the study period, this alternative approach is

not recommended. Estimating resale value as a function of the

original purchase costs, the procedure suggested in this report,

tends to represent more closely the operation of the actual real

estate market and does not require economic data for the remainder

of the building life beyond the study period. This procedure

could be extended to allow some passive solar energy components

to deteriorate at different rates and others to appreciate at different

rates depending on the particular system design and the market conditions assumed.

4.3.4 Taxes and Tax Incentives

Government tax policies can be expected to have a major influence on

the economic feasibility of commercial Investments in solar energy.

The combination of high corporate marginal tax rates and of tax

deductions for business expenses, plus the special Incentives provided by the Federal government and local governments for solar

energy through the tax mechanism, effectively reduce the investment

costs of commercial building systems to a small fraction of what

they would be otherwise.** Property taxes, sales taxes, and capital

gains taxes raise the effective capital costs of the solar investment.

Presumably, the conventional heating systems in the solar and

alternative buildings would be replaced one or more times during

the service life of the solar energy system.

See figure 5.2 in this report and the results reported in The

Economic Feasibility of Solar Space and Water Heating Systems

in Commercial Buildings [17].

86
but since the first two are allowed tax deductions, and the third occurs only in the distant future, if at all, the effect of these

taxes is generally small relative to the tax deductions for interest

and depreciation and the tax credits. Since conventional fuel costs are also tax deductible, the effective savings in fuel costs due to

the solar energy system are also reduced.

Income Tax Rates . Because the value of a tax deduction is directly

related to the rate at which the investor's income is taxed, it is

important to select a tax rate to use in the economic evaluation of

these tax effects appropriate to the particular investor. The

appropriate rate to use in evaluating the solar investment is generally the marginal rate at which the last dollar of taxable income

is taxed. The specific rate used will depend upon assumptions as

to the total taxable income characteristics of the particular

investor.

Starting with the 1979 tax year, a new schedule of Federal corporate

tax rates went into effect. The 1978 Revenue Act reduced the maximum

tax rate from 48 percent to 46 percent, cut the lowest rates to 17

percent and 22 percent, and added two new tax brackets. The resulting

corporate income tax rate schedule is as follows:**

For income -not greater than $25,000 17%

greater than $25,000 but not exceeding $50,000 22%

greater than $50,000 but not exceeding $75,000 30%

greater than $75,000 but not exceeding $100,000 40%

greater than $100,000 46%

* See figure 5.2 in this report and the results reported in The

Economic Feasibility of Solar Space and Water Heating Systems

in Commercial Buildings [17].

** Revenue Act of 1978, PL 95-600, Sec. 301 [43].

87
In order to account simultaneously for the State and Federal laws in

evaluating deductions allowed by both tax authorities, a combined

State and Federal income tax rate can be applied within the economic

evaluation model. The following equation describes this combined

rate:*

t = t + (1 - t_^)t. , (43)

c s s r where

t = combined Federal and State tax rate/100;

c

t = State corporate income tax rate/100; and

st^ = Federal corporate tax rate/100.

Captial Gains and Depreciation Recapture Taxes . If the solar

energy system has a market value above the undepreciated costs remaining

at the time of sale of the building, the seller must pay a capital gains

tax** on the difference between the selling price of the system and its

undepreciated costs.*** If the seller has used a depreciation method

other than straight line, he must pay, in addition, depreciation

* This equation assumes that State income taxes are an allowed tax

deduction at the Federal level but Federal taxes are not deductible in computing State taxes, the assumption made throughout the

report. A few States allow a tax deduction for Federal taxes.

In those cases, the appropriate equation for the combined tax

rate is the following:

= H- — ^~ . (44)

1 - t^t

f s See Engineering Economics, A Manager's Guide to Economic Decision

Making [44]

.

** Beginning with the 1979 tax year, the Federal corporate capital

gains tax rate was reduced from 30 percent to 28 percent. State

governments also tax capital gains, often at the ordinary income

rate. Non-corporate investors are subject to different capital

gains laws. Only 40 percent of the capital gains of individuals

is taxed, but at the ordinary incom.e tax rate.

The undepreciated value consists of the remaining depreciable

base plus salvage value.

88
recapture taxes on depreciation taken in excess of the straight-line

amount at the time of sale. Depreciation recapture is taxed at the

ordinary income tax rate.

The combined State and Federal corporate capital gains tax rate is

described by the following equation:*

t = t + (1 - t )t. , (45)

eg sc sc fc

where

t^g = combined capital gains tax rate/100;

tg^ = State capital gains tax rate/100; and

tj^ = Federal capital gains tax rate/100.

Sales Taxes . Unless exempted by special legislation, solar energy

systems are subject to State and local sales taxes. As of late 1977,

the following States had passed special legislation exempting solar

energy systems from sales taxes: Arizona, Connecticut, Georgia, Maine,

Michigan, and Texas [46].

Property Taxes . A solar-equipped building may have a higher market or assessed value than a similar building without solar equipment if the

initial cost of the solar building is higher. Property taxes owed on

the portion of the assessed value attributable to the solar energy

system are an added cost of the solar energy system. The effective tax

rate equals the overall assessment rate used by the taxing authority

(generally a fraction of the market value) times the official property

tax rate. A number of States have passed legislation exempting solar

energy systems from property taxes (see table 4.5 and [45]).

* This assumes State taxes are deductible in determining the Federal

tax liability, but Federal taxes are not deductible in determining

the State tax liability. See Income Tax Rates above.

89
Depreciation . Passive solar building components may be depreciated

either in composite with the commercial building envelope or separately.

If component depreciation is taken, the solar energy system may be

depreciated over a shorter period than the rest of the building, a period of 15-20 years being typical for mechanical heating system

components. The Internal Revenue Service (IRS) will require that a longer period be used for durable, non-mechanical passive features

integral to the building, unless conditions suggest otherwise. In a new building, the period might be 30-50 years; in an existing building,

20 years.*

The depreciation method allowed for heating and cooling system com- ponents depends on whether the building is new or existing when purchased and whether it is a residential building. The straight-line

method of depreciation must be used for existing non-residential

buildings and their components, while either a declining balance (150

percent maximum) £r straight-line method may be used for an existing

residential or new building.**

The entire initial purchase costs of the system, including design work,

engineering, and installation, minus the expected salvage value of

materials for scrap, are depreciated. Sales taxes most likely would

be deducted in the tax year the system was purchased and thus would

not be included in depreciation expenses.

In accordance with section 167 of the Internal Revenue Code of

1954 [46], the IRS defines the useful lives of real estate properties on the basis of individual "facts and circumstances."

According to the IRS, periods of 30-50 years are typically

used for depreciating structural components of new buildings,

20 years, for existing buildings.

* Currently component depreciation is not allowed on a retrofit

solar energy system if the building owner previously used com- posite depreciation. In that case, the retrofit system must be

depreciated over the depreciation period used for the building

as a whole.

90
The investor selects a depreciation period and salvage value based on general nationwide IRS standards and criteria. At any given time,

the actual market value of the investment property may differ substantially from the undepreciated system costs. However, if the

investment is sold, the resale value in excess of undepreciated system

costs is taxed at the capital gains or ordinary income rate.*

Some states allow a short period amortization of all or a portion of

solar energy costs in lieu of a tax credit or normal depreciation.

These deductions are equivalent to straight-line depreciation of the

system over the period specified.**

Operation and Maintenance Costs . Costs for operation and maintenance

of a passive solar energy system or conventional system for a commercial

building are allowable tax deductions. This includes the cost of fuel

used in the back-up conventional heating system. The tax deduction for

fuel costs greatly reduces conventional energy costs for those in high

income brackets and thereby greatly reduces after-tax fuel savings,

i.e., the benefits, of solar energy systems.

Interest Payments . Tax deductions for interest payments are a major

source of tax savings to firms in high marginal tax brackets which

use debt financing for a significant portion of a capital investment.

These tax effects are discussed further in section 4.3.2.

Tax Incentives . Two Federal tax laws provide important incentives

for the utilization of passive solar energy in commercial buildings.

* See Capital Gains and Depreciation Recapture Taxes above.

** See Depreciation Deductions in section 3.3.1.

91
1) The Energy Tax Act of 1978 provides a business investment tax

credit of 10 percent for energy conservation, solar, or wind property

acquired after September 30, 1978 [47]. It is limited to depreciable

equipment with a useful life of 3 years or more. The eligibility

rules for this tax credit have not been firmly established. At the

current time, the definition of solar energy systems in commercial

or other business property appears to be broader than for residential

systems, in that it includes passive components with structural as well as heating functions. Components with significant structural

characteristics are currently not eligible for the residential tax

credit. The Internal Revenue Service is expected to publish further

definitions and eligibility rules for the business investment credit

for energy conservation.

2) The Revenue Act of 1978 provides a 10 percent investment tax

credit to encourage the rehabilitation of older commercial buildings.

To be eligible, the building must have been in use for 20 years,

and 75 percent or more of the existing external walls must remain

in place after the rehabilitation [48]. Many passive solar energy

systems installed at the time of other rehabilitation improvements

in commercial buildings should be eligible for both the energy tax

credit and rehabilitation tax credit.

Existing State tax incentives include exemptions of solar energy

systems from property taxes and sales taxes and reductions in State

income taxes. Table 4.5 shows the State tax incentives in effect

as of January 1978.*

Tax credits are generally expressed as a percentage of investment

costs and deducted directly from the tax liability. Like a Federal

tax credit, a State tax credit for solar energy is deducted directly

For further information as to the provisions of the State

legislation, the reader is referred to the State energy offices.

92
TABLE 4.5: STATE TAX INCENTIVES FOR SOLAR ENERGY

Real Property Income Sales

Alabama

Alaska

Arizona

Arkansas * * California

Colorado * Connecticut it * Delaware

Florida

Georgia * * Hawaii * Idaho

Illinois

Indiana

Iowa

Kansas * * Kentucky

Louisiana

Maine * Maryland * Massachusetts * Michigan

Minnesota

Mississippi

Missouri

Montana A Nebraska

Nevada i< New Hampshire >V New Jersey

New Mexico

New York * North Carolina

North Dakota

Ohio

Oklahoma

Oregon •k Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas k Utah

Vermont

Virginia * Washington

West Virginia

Wisconsin k Wyoming

Totals 27 16 6

Source: State Solar Energy Legislation of 1977: A Review of Statutes

Related to Buildings [46]

.

93
from State income taxes owed. However, a State income tax credit

for solar energy is not equivalent to a Federal tax credit of the same percentage of system cost, because State taxes are an allowed

tax deduction in determining taxable income for Federal tax

purposes .*

4.3.5 Grant Programs

The one Federal grant program directed specifically at commercial

building solar energy systems is the National Solar Heating and

Cooling Commercial Demonstration Program.** Under this program,

the Department of Energy provides grants for systems selected by

the agency on a case-by-case basis. Demonstration projects must

meet specific requirements for solar energy system design as well

as for operation and data collection.*** These grants are not

included in the economic evaluations of solar energy designs con- ducted for this report because eligibility is limited to a relatively small number of buildings.

Grant programs for community assistance are possible additional

sources of government grant funds for solar energy systems. The

Block Grant and Action Grant programs sponsored by HUD provide

funds for urban redevelopment projects. Energy conservation

measures and solar designs utilized in conjunction with these

projects are covered by these grants.

See Income Tax Rates above, equation (17).

Project reports are issued by the National Solar Data Program.

These reports detailing project descriptions and costs are a good source of data for estimating costs of solar investments.

For further information about the commercial building demonstration

program, contact the National Solar Heating and Cooling Information Center, P.O. Box 1607, Rockville, MD. 20840, (800) 523-2929.

94
The objective of these HUD programs is to support projects that

address the problems of distressed urban areas by expanding job

and business opportunities and by improving housing. Only public

entities, at the State, county, or local level, are eligible for

Block Grant assistance funds. The Action Grants generally involve

cost sharing among private investors and local and Federal governments.

Because these grants are generally substantial in size,* they have

a potentially important impact on the economic feasibility of using

solar energy in rehabilitation projects.

* In 1978, Action Grants ranged from $77,700 (for a small-city

project) to $14 million (for a large-city revitalization

project) [40],

95
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Manck2^t2A, N.H., IndUidzd KeJxo {fitting

poui>i>i\jz i>ot(VL znoAgy ^y6tm.

96
5. CASE EXAMPLES

In the case examples selected for study in this report, the economic

evaluation model described in section 3 is applied to designs for

retrofitting passive systems to buildings in a neighborhood of com- mercial establishments designated for urban renewal in South Baltimore,

Maryland. The case examples were developed at the National Bureau of

Standards to investigate the passive use of solar energy in urban

commercial environments. They represent "laboratory studies" of

hypothetical designs for buildings in Baltimore's Cross Street

revitalization area. This neighborhood was selected as prototypical

of two types of "neighborhood commercial strip" environments: small
areas of grocery stores, drug stores, restaurants, and other retail

stores distributed throughout the residential zones of large cities,

and the downtown area of small cities and towns [2].

The buildings in the neighborhood are similar in that most have one attached exterior wall and alleys bordering the other side wall and

the rear wall. The buildings range in height from one to three

stories, with a commercial area located on the ground floor. Typica

the upper stories are unoccupied storage areas. In areas already

renovated, residential use of the upper stories is increasing.

Public subsidy programs for improvements in individual buildings as well as for large-scale community revitalization projects provide

major incentives for solar as well as conventional rehabilitation.

These programs are taken into account in the case examples.

5.1 WALL COLLECTOR FOR A NEIGHBORHOOD RETAIL STORE

The first solar design examined was a wall air collector system for

a three-story south-facing building. The ground floor is currently

occupied by a shoe store, and the upper floors are vacant. The

occupied area comprises 73.2 square meters: 57.1 square meters of

sales area and 16.1 square meters of office and stockroom space.

The proposed solar wall collector is illustrated in figure 5.1 The

solar collector covers the south-facing wall of the upper stories.

It is composed of a sheet of corrugated tin roofing overlaid with a double glazing of Kalwall acrylic. A simple hot air circulation

system and a rock bed for thermal storage are included in the design

The wall collector could be mounted on either the street or rear facade of similar buildings on parallel streets, depending on the

building orientation.

98
FIGURE 5,1 : SOLAR WALL COLLECTOR
The economic feasibility of the solar wall collector was assessed

first for the "most likely" set of conditions, assuming the investor

takes advantage of tax incentives and loan programs available.

5.1.1 Data and Assumptions

Costs . The breakdown of component costs of the solar wall collector

system appears in table 5.1. Estimated costs of labor and materials

for this system in the Baltimore area, including overhead, profit,

and sales taxes, were $4873. Modifications to the existing structure

preparatory to retrofitting the solar energy components were expected

to be insignificant. An annual operation and maintenance cost of 1

percent of the original purchase price, plus inflation, was assumed

to cover insurance premiums, cleaning, repair, and replacement of

worn parts over the investment analysis period. System costs were

based on U.S. average data obtained from Means Building Construction

Cost Data 1978 and were converted to an estimated 1979 price in

Baltimore by applying an inflation factor and location cost modifier.

Current energy prices and future escalation rates were based on DoE

data published in the Federal Register , April 30, 1979 (see Energy

Costs , section 4.2.1). A Maryland sales tax of 5 percent was added

to fuel and materials costs.

Economic Assumptions . In the base-case scenario, the building owner was assumed to be a small corporate investor who would use the building

for his own business and would finance 75 percent of the solar energy

system with borrowed funds at the most favorable financing terms

available. Currently the best financing arrangements are available

under the HUD Section 312 Program, which provides 3 percent loans for

20 years. A nominal discount rate of 12 percent, including inflation,

a 30 percent Federal marginal Income tax bracket (combined State and

Federal tax rate of 34.9 percent), and a 15-year investment analysis

period represented "middle-of-the-road" assumptions about the annual

income and required rate of return for this investor.

100
TABLE 5.1: ESTIMATED COSTS FOR WALL COLLECTOR

Item Materials Labor

Kalwall-Sunwall 1 $2329. 60 $998 .40

Tin sheathing 242. 76 46 .24

Variable Volume Damper 151. 36 20 .64

Thermostat 30. 55 16 .45

Air extractor 30. 60 5 .40

Insulated ducting 116. 60 95 .40

Fan, 1/4 HP 252. 00 98 .00

uravej. ana treatment 7 oU 1 . £.V Rock bed insulation 21. 45 9 .19

Rock bed lining 141. 75 173 .25

3324. 46 1464 .26

Adjustment for inflation. X 1. 10 X 1 .10

mid-1978 - mid-1979 3325. 56 1610 .68

Regional adjustment factors X 97 X .92

(Baltimore) 3232. 44 1478 .60

Sales tax X 1. 05 X 1 .00

$3394. 06 $1478 .60

Total, Materials and Labor $4872 .66

Source: Means Building and Construction Cost Data 1978 [25]

Cost estimates for gravel and treatment are based on the

unit cost (per ton), including delivery. The estimates

are lower than typical minimum charges for gravel and

hauling. It is assumed for the purposes of analysis

that the collector system will be installed in a number

of buildings in the neighborhood. The total cost of

gravel and hauling for the group of neighboring buildings

will exceed the minimum charge.

The property tax rate was set at zero because solar energy systems in

Maryland are exempt from local property taxes. The solar investment was assumed to be eligible for both the Federal solar energy business

tax credit of 10 percent and the building rehabilitation tax credit

(see section 4.3.4), an additional 10 percent.

101
Special grant funds were not included in the analysis. Although

Baltimore has received Block Grant funds for urban renewal projects,

these funds are currently being used only for large commercial

revitalization projects.

The base-case scenario also presumed the entire neighborhood undergoes extensive revitalization during the investment analysis period,

with the solar investment a part of larger improvements. It was further assumed that the real estate resale market fully values

solar heated buildings; more specifically, it was assumed that the

resale price of the solar energy system at the end of the 15-year

holding period recovered 90 percent of the initial purchase costs

plus 9 percent annual inflation. This is based on the expectation

that 90 percent of the passive system will have considerable remaining

service life at the end of the holding period. (Experience in similar

neighborhoods has often been that commercial activity increased and

property values rose faster than the rate of general price inflation

following revitalization efforts.) Since the market valuation

assumptions were the most tenuous, they were examined most extensively

in the sensitivity analysis.

A summary of all economic assumptions used in the base case appears

in table 5.2 Sensitivity of results to these assumptions is examined

in section 5.1.3.

Benefits . The economic benefits of the wall collector solar energy

system were assumed to be limited to savings in fuel costs. (The

appreciation in market value is treated in the cost portion of the

evaluation.) Estimates of the quantity of energy saved by the wall

102
TABLE 5.2: ECONOMIC ASSUMPTIONS FOR THE WALL COLLECTOR BASE CASE

Item

Solar materials cost, 1979 Prices $3232

Solar labor cost, 1979 Prices $1479

Sales tax, materials and fuel 5%

Total system cost $4873

1979 price of fuel/GJ

Oil $3.56

Electricity - $13.65

Fuel escalation rates (nominal)

Oil

1979-1985 11.1%

1985-1990 8%

1990-1994 11.2%

Electricity

1979-1985 6.7%

1985-1990 6.8%

1990-1994 8.6%

Discount rate (nominal) 12%

Expected annual rate of inflation 6%

Loan interest rate 3%

Down payment 25%

Years financed 20

Investment analysis period, years 15

Depreciation Straight line - 20 years

Recurring cost, % of purchase cost 1%

Property tax rate 0

Value of system at end of investment period,

% of purchase cost 90%

Annual rate of appreciation including general inflation 9%

Combined Federal and State income tax rate 34.9%

Tax credits

Energy 10%

Rehabilitation 10%

Combined State and Federal capital gains tax rate 33%

Grant 0

3.03
collector design were derived using thermal analysis and solar performance data generated by Ruberg at the National Bureau of Standards.*

The annual total energy requirement of the building prior to installation of the Kalwall was estimated to be 65.4 x 10 kJ, and after the

Kalwall, 62.88 x 10 kJ.** The wall collector solar design was assumed

to function comparably to an active system. Solar performance was computed with the solar load ratio procedure for active systems,

using the following equation:***

. - , -0.0609SLR

f = 1 - 1.173e , (45)

s where

f ^ = monthly fraction of energy requirement, HL, that can be

provided by the solar energy system;

H^A

B c SLR = solar load ratio, :

H„ = monthly insolation per unit area on a collector tilted

B

at angle B from horizontal;

A = collector area; and

c HL = monthly energy requirement.

* For detailed thermal and solar analysis, see reference [1].

The thermal analysis of the building with and without the

solar components was performed using a model developed at

NBS from existing static thermal analysis programs, primarily

TEANET, with BIN weather data, and with solar data reported

by Kusuda and Ishii [49].

** By installing the wall collector, thermal energy Josses through

the upper-story windows were reduced by 2.53 x 10 kJ annually.

*** A number of solar load ratio estimation equations were tested.

Solar fraction results were not very sensitive to the equation

used. The equation used for this case example was developed

for active systems and appears in the DoE Facilities Solar

Design Handbook [50]. The solar load ratio method for active

systems is parallel to that for passive systems described in

section 4.2.1. Of course, the equations and assumptions are entirely different from those developed for passive systems.

104
The quantity of energy savings consisted of two components: 1) re- duction In the total energy requirements of the building for space

heating by 2.53 x 10 kJ due to reducing energy losses through the

south-facing wall; and 2) the solar contribution to meeting the

energy requirement, amounting to 24.6 percent of the total after

installing the Kalwall, or 15.47 x 10 kJ. The total benefits of

the solar energy system were the sum of these two effects, each

evaluated over the analysis period; and the net benefits, the

difference between total benefits and total costs. An oil furnace

efficiency of 60 percent was assumed in calculating energy savings

for the oil case. Electric resistance heating was assumed to be

100 percent efficient.

5.1.2 Results - Base Case

Given the estimated costs and base-case assumptions, the solar wall

collector appears very cost effective. The results summarized in

table 5.3 show that net life-cycle savings were $1,262 when the

alternative to solar was an oil-fired furnace and $2,037 when

electric resistance was the alternative. Internal rates of return

were 21 percent and 29 percent, respectively, depending on whether

the fuel was oil or electricity. The benefit-cost ratios could not

be computed because total life-cycle costs were negative. The

savings- to-investment ratios proved to be 10 and 16 for the oil and

electricity cases, respectively. The substantial difference in re- sults for the two alternative fuels is explained by the vastly

different current prices per GJ (10^ kJ) of the two types of energy.*

* The MEFS estimates of oil prices were prepared before the huge

OPEC increases in the summer of 1979. As oil prices increase,

the solar feasibility results for oil will approach those for

electricity.

105
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106
Note that positive net benefits resulted from a reduction in total

costs as well as from energy savings. Life-cycle costs were negative

because of the high estimated resale value of the solar property at

the end of the investment analysis period and the substantial tax

credits and tax deductions. Of course, it must be assumed that the

resale value reflects energy savings anticipated by the purchaser

of the resale property.

Figure 5.2 illustrates for the oil case the breakdoxim of financing,

resale value, and tax effects on total life-cycle costs and savings.

The first and second columns illustrate costs, the third column,

benefits (fuel savings) . The height of the first column represents

the total purchase costs of the solar energy system. The impact of

discounting mortgage payments, of tax deductions, and of resale value

is represented in the first column by successive reductions in total

costs. Increases in the total costs due to annually recurring costs

and capital gains taxes are shown in the second column (see upward

pointing arrows) . These costs are not sufficient to bring total costs

above zero. The dark shaded portion, representing -$295, is the total

life-cycle costs after all taxes, deductions, tax credits, and liquidation of the investment at the end of the analysis period.

The benefits (fuel savings) column shows the effects of the tax

deductions for energy costs, the dark shaded portion being total fuel

savings after the tax deductions. The sum of the two dark shaded areas in columns two and three is the net benefits from the investment.*

5.1.3 Sensitivity to Economic Assumptions

The sensitivity of net benefits to changes in the following assumptions was tested: borrowing rate; percent market valuation at the time of

* If total costs were positive, these costs would, of course, be

subtracted from total savings in determining net savings.

107
108
resale; annual appreciation of solar property value; investment analysis

period; discount rate; and tax credits. Oil was assumed to be the

energy alternative to solar in all the sensitivity analyses. Since

oil currently costs considerably less than electricity, but more

than natural gas, the solar feasibility and sensitivity results for

oil can be interpreted as a "middle" energy case.

Results of the sensitivity analysis are summarized in figure 5.3

and explained below.

Interest on Borrowed Funds . Borrowing rates of 7, 10, and 12 percent

-were considered in addition to the base-case assumption of 3 percent,

keeping all other assumptions as for the base case. The rate of 7 percent represents rates available from the City of Baltimore for

building improvement loans; 10 percent, a minimum commercial mortgage

loan rate at the current time; and 12 percent, the maximum rate

allowed on HUD Title 1 government insured building improvement loans

in mid 1979 (see section 4.3.2). In all cases, net life-cycle

savings (benefits) were positive.

Resale Value . Resale values of 25, 50, 75, and 90 percent of initial

system costs (plus 9 percent annual appreciation, the base-case

appreciation assumption) , were tested in conjunction with borrowing

rates of 3 percent and 12 percent, keeping all other assumptions

the same as for the base case. Given the 3 percent loan, the wall

collector system was cost effective for all resale values tested

above 25 percent of initial system cost. When a 12 percent borrowing

rate was used, however, the wall collector was cost effective only

for the 90 percent market valuation case. Results appeared to be

more sensitive to the market value assumption than to other

assumptions tested.

109

Appreciation . Annual appreciation rates of 6 and 7 percent, as well

as the 9 percent rate used In the base case, were considered, keeping

all other assumptions the same as for the base case. Net benefits

were positive In all cases, but were reduced by more than 50 percent

by changing the appreciation rate from 9 to 6 percent.

Investment Analysis Period . Holding periods of 20 and 10 years were

examined. In addition to the base-case 15-year period. Net savings

were positive In all cases, and results appeared to be less sensitive

to holding period than to other assumptions. The notable result was

that net benefits (savings) were higher the shorter the holding period

for those periods examined.

Discount Rate . Discount rates higher and lower than the 12 percent

rate used in the base case example were examined. Net savings

(benefits) were positive in all cases; the lower the rate, the

higher the net savings.

Tax Credit . In the base case, it was assumed the solar energy system

was eligible for a 10 percent rehabilitation tax credit as well as for the 10 percent Federal energy credit. Net savings were reduced

by 30 percent when the rehabilitation credit was left out of the

analysis. Tax credits and grants that directly offset investment

costs were thus shown to be extremely important investment incentives.

5.1.4 Conclusions of the Wall Collector Case

In conclusion, the wall collector was cost effective given the

assumptions considered to be most realistic for the Baltimore

neighborhood under study. It also was cost effective for a con- siderable range of values for the borrowing rate, study period,

discount rate, tax credits, and resale value. However, results

were highly sensitive to resale value given the other conditions

assumed. Since the resale price of a building or building com111
ponent is one of the most difficult values to estimate, as well

as a key factor in the cost effectiveness of the project, tests

of sensitivity of results to this variable proved to be an important consideration when using a relatively short study period

relative to the useful life of the project.

5.2 SOLAR STREET CANOPY

The second case example was a glazed canopy for enclosing the

street and pedestrian areas among 48 buildings located along a street running north to south in South Baltimore (see figure

5.4). By providing a thermal buffer to the street-facing walls

of the adjacent buildings, the canopy would reduce thermal energy

losses through the street-facing walls of the buildings and thus

reduce the annual thermal energy requirements for space heating.

Temperature swings within the large "attached sunspace" enclosed

by the canopy would be modified sufficiently* for the space to be

used year-round for a wide variety of income-producing activities,

for example, a roller skating rink, restaurants, garden shops, and

other small retailing activities.** Agriculture also merits mention

as a possible use for this space because it is becoming important

in some urban neighborhoods similar to that described in this case

example. Food crops are becoming familiar in unlikely urban locations,

for example, vacant lots in urban renewal areas [51]. Although this

urban movement is unlikely to make a dent in the overall food supply

in cities (and may be expected to occur only in situations unsuited

According to Ruberg, temperature swings would be bounded to

the range 12° to 20° C.

Some of these activities would be suitable for many types of

commercial settings, downtown business districts, satellite

commercial centers, large or small cities, and office as well

as retailing areas.

112
FIGURE 5.4: SOLAR STREET CANOPY

Collector-Double-glazed

Fiberglass, 700

Covered Street Area-1780 6

113
to higher income-yield activities) , Olkowski and Olkowski report that

a substantial amount of food can be produced in a small urban area with very low costs for capital, fossil fuels, and transportation,

compared with rural large-scale agriculture [52]. The semi-conditioned

greenhouse atmosphere provided by a solar canopy would increase significantly the quantity and diversity of food crops that could be grown

annually [52, 53].

In order to realize this economic benefit from agriculture, the

investors responsible for the solar canopy would presumably rent

the enclosed area, perhaps to an independent urban farmer who

wished to grow crops and sell directly to consumers, or even to a group of tenants of nearby buildings (perhaps a group of senior

citizens) who wished to establish an agricultural cooperative,

or possibly to an educational facility for horticultural use. The agriculture would then provide sales and rental income to the

owner and operators, respectively. The consumer would benefit

in lower food cost, in less exposure to dangerous pesticides, and

possibly in a greater variety of food year-round.*

Some of these agricultural and retailing activities could occur whether

or not the solar canopy exists. However, each activity might be

limited to a portion of the year and then limited further by weather

conditions.

An additional consideration in evaluating the solar street canopy is

the impact of enclosing window-shopping and pedestrian areas on rental

rates for space in adjacent retail stores. This potential change in

income to building owners is parallel to changes which might be

Olkowski and Olkowski [52] note the possibilities of recycling

urban food wastes for low-cost, "healthful" fertilizer in urban

agriculture. Additionally, they note pest control should be

more effective at considerably lower expense than in large

agri-business farming.

114
expected from enclosing a conventional shopping mall. Presumably the

dramatic increase in the percentage of conventional enclosed malls

during the last 10 years is due in part to the anticipation of higher

profits throughout the retailing areas of the mall from improving the

comfort and aesthetic quality of the pedestrian areas and windowshopping environment. Since the solar enclosure should be able to

provide an improved shopping environment similar to that of the conven- tional enclosed mall, the potentially higher profits to be obtained

by adjacent retailing operations should be considered in evaluating

the solar canopy investment, just as with a conventional shopping

mall investment. This income benefit is apart from income obtained

from leasing portions of the area enclosed by the canopy, and from

reducing the heating bills for the adjacent buildings.

5.2.1 Data and Assumptions

Ownership . The solar street canopy is a large project which extends

beyond existing building lots to sidewalks and streets. Presumably,

the city owns the space enclosed by the canopy initially. The city

might install the canopy itself or grant building privileges to a group of private investors. Alternatively, private investors might

purchase the land directly, lease it, or merely obtain formal permission to build over the space and to lease enclosed space out to

others. For the purpose of this case study evaluation the solar

canopy was assumed to be a private investment undertaken by an individual developer or group of building owners, possibly in conjunction

with redeveloping the entire neighborhood of buildings. This assumption is in keeping with the focus of public assistance programs on private investment for revitalizing urban areas and with current

requirements of both local and Federal . grant programs. These programs

often require substantial private funding as a condition for public

aid (see section 4.3.4).

115
Note that evaluations of public investments differ in key respects

from evaluations of private investments, such as in the treatment of

taxes, grants, and externalities (e.g., social costs and benefits

of these projects that are not reflected in market prices)

.

A further important assumption to the economic evaluation of the solar

canopy was that the owners of the solar canopy had rights to income

produced in the space enclosed by the canopy. If these rights did not

exist, owners of the solar canopy could not reap the benefits of the

solar investment and, hence, would have less incentive to make the

investment. In order to illustrate the effect of the solar canopy on income from this space and to include this effect among the benefits of

the investment, it was assumed that the owners of the canopy had ac- quired the right to income from the enclosed space through purchase of

the land or other formal agreement and that this right existed whether

or not the solar canopy was constructed over the space. The investment

decision was whether to construct the solar canopy or to have an open

"street mall."* Costs of acquiring the land or rights to use it for

income-producing purposes were sunk costs, i.e., they were inherent in

both investment alternatives and therefore could be disregarded in the

economic evaluation of the solar canopy.

* Although the alternative to the solar canopy considered in the case study in this report was an open street mall, the economic

model can also be used to compare a solar canopy with a conventional shopping mall enclosure. This comparison would require

detailed cost and energy analyses for both shopping mall designs

in addition to the analysis of income differences. Costs for the

solar canopy would reflect the differences in cost for the solar

and conventional enclosure, and the benefits, the differences

in energy costs and income for the two types of enclosures. If

non-energy benefits were expected to be approximately the same

for the solar as for the conventional enclosure, the solar

enclosure could be expected to have the higher benefits when

energy benefits were included, and could be assumed to be the

more cost effective choice provided it did not entail higher

construction and other costs.

116
Solar Canopy Costs . The cost In Baltimore in 1979 for materials and

installation costs, including overhead and profit, was estimated to be

$472,000. This estimate was based on Means Building Construction Cost

Data 1978 and adjusted for regional pricing factors, inflation, and

sales taxes on materials. Annual operation and maintenance costs were

assumed to be 2 percent of initial purchase costs, plus inflation. This

is a somewhat higher rate than that assumed for the wall collector

system because cleaning costs are expected to be higher for this type of

collector system.*

Financial Variables . Most financial variables and energy price variables were given the same values as in the wall collector base case. The

following were noteworthy exceptions. The minimum borrowing rate was assumed to be 7-12 percent, instead of 3 percent. (HUD 312 loans are unlikely to be available for this type of project. The investors are more likely to obtain a subsidized loan from the city at a minimum of 7 percent annually, a group of Title 1 building improvement loans at 12

percent interest,** or conventional financing at a rate comparable to

the Title 1 loans or slightly higher.)

Rather than the 30 percent tax rate used in the first example, a Federal

marginal tax rate of 40 percent was assumed. This 40 percent rate would

presumably fit more closely that of a group of somewhat larger corporate

investors required of this project as compared with the wall collector.

Furthermore, the street canopy was assumed eligible for the 10 percent

energy tax credit, but not the 10 percent rehabilitation tax credit.

(The solar canopy would presumably be considered an "enlargement" of

* The architectural design includes walkways in the canopy structure

for access to glazing for maintenance and repairs.

** These are limited to $15,000 per building. A group of investors

(corporate or non-corporate) could obtain separate loans. Section

4.3.2 describes eligibility requirements for these loans. (In

late 1979, after the analysis was completed, the interest rate on Title 1 loans was raised to 13 percent.)

117
existing buildings. "Enlargements" are specifically excluded from

eligibility for the rehabilitation investment tax credit.)* Table 5.4

summarizes the economic data and assumptions used in the economic analysis of the street canopy.

The solar canopy project would be a possible candidate for Block Grant

funds (see section 4.3.5). Grant funds were not specifically included

in the analysis, but, as is noted among the results of the case example,

their impact can be inferred.

Energy and Other Benefits . Three economic benefits were examined for

the solar canopy system: 1) savings in fuel costs for heating adjacent

buildings; 2) increased Income from the enclosed mall area; and 3)

increased income from the 48 adjacent buildings.

The analyses of thermal performance showed the annual heating requirement of the adjacent 48 buildings could be reduced by 57 percent by

installing the attached sunspace solar energy system, i.e., from an

6 6

average of 65.4 x 10 kJ per building to an average of 28.1 x 10 kJ

per building, for a saving on the average of 37.3 x 10 kJ per building

[1]. This was due largely to the reduced temperature gradient through

the street-facing walls of the 48 buildings. To avoid over-heating,

heat gains would be vented when the air temperature of the canopy en- closed area exceeded 20°C. The brick walls of the buildings and street

and sidewalks would provide some thermal mass. As for the wall collector

case, an oil furnace efficiency of 60 percent was assumed in estimating

energy savings due to the canopy.

To estimate the increased income generated by the solar canopy, rental

income values net of all operating expenses were imputed to the street

mall areas and to the adjacent buildings. These values were based on

* See [48] and section 4.3.4.

118
TABLE 5.4: ECONOMIC ASSUMPTIONS FOR SOLAR STREET CANOPY

Item

Solar materials cost, 1979 prices $312,985

Solar labor cost, 1979 prices $159,168

Sales tax rate, materials and fuel 5%

Total cost of canopy $472,000

1979 price of oil, per GJ $3.56

Fuel escalation rates (nominal)

1979-1985 11.1%

1985-1990 8%

1990-1994 11.2%

Discount rate (nominal) 13%

Expected annual rate of inflation 6%

Loan interest rate 7%, 12%

Down payment 25%

Years financed 20

Investment analysis period, years 15

Depreciation Straight line, 20 years

Recurring cost, % of purchase cost 2%

Property tax rate 0 Value of system at end of investment analysis period,

% of purchase cost 90%

Annual rate of appreciation, including

general inflation 9%

Combined Federal and State income tax rate 44.2%

Tax credits: energy 10%

Combined State and Federal capital gains tax rate 33%

Grant

Space enclosed by canopy

Net annual income, before taxes,

from leasable space enclosed by canopy

from leasable portion of open street mall

Increased income, before taxes,

attached buildings, with canopy

1722.6 m^(ll,484 ft^)

$18.80/m^($1.75/ft^)

$4.73/m^($0.44/ft^)

$2.70/m^($0.25/ft^)

119
data published by the Urban Land Institute [36].* In evaluating income

from the mall area, it was assumed that with the solar canopy 60 percent of the area was leasable year around for garden shops and other

retailing activities and for growing plants, and that an annual rental

2 2 income of $18.80 per m ($1.75 per ft ) of leased area, net of operating expenses and before taxes,** could be obtained from this area. This resulted in a net rental income of $20,097 annually from this

space. It was assumed that without the canopy, rental income would

be only 25 percent of that with the canopy, or $5,024, due to seasonal

limitations and periodic inclement weather. The difference of $15,073

represented the. increase in annual income due to the canopy.

To estimate the value of increased rental income from the 48 adjacent

buildings, it was assumed that sales revenue would increase for these

buildings due to improvement in the window-shopping environment and

that the building owners would capture this benefit in higher rent.

(The weather-controlled atmosphere would attract a greater number of

shoppers to the area, and doors to individual stores could remain open

without substantial heat loss as an invitation to shoppers.) An

2 2 increase in net rental income of $2.70 per m ($0.25 per ft ) of

leased area, before taxes, was assumed. This value was intended to

See section 4.2.3 regarding the use of rental income versus net

income from sales as a measure of income from commercial space.

This estimate is based on reported average rental income for

food markets in neighborhood shopping centers. (See table 4.3,

section 4.2.3. Note that food markets are a low-rent tenant

class compared with other candidates for this space and thus

the rental values used in the evaluation represent a low estimate

of potential income from commercial space.) An expense ratio

of 1 to 4, i.e., 25 percent, was applied to estimated gross

rental income of $25.00/m to determine net income. This

expense ratio was cited by actual investors as typical for

shopping centers.

120
represent the increase in rental income per m of leased area for the

buildings adjacent to the solar canopy.* This increase of $2.70 per

2

m results in a total difference in annual net income of $9,456, or $197 for each building.**

5.2.2 Results

The economic feasibility results for the closed canopy design are summarized in table 5.5. Two cases were considered: 1) the financing

of 75 percent of the investment with a 7 percent loan, and 2) the

financing of 75 percent of the investment with a 12 percent loan.

Other assumptions were the same for both cases. The back-up fuel was assumed to be oil.

The results show that net benefits (column 6) were positive in both

cases. The internal rate of return was 23 percent and 20 percent,

respectively, for the 7 percent and 12 percent loan cases.

* This value is considerably lower than differences in rental

rates for enclosed versus non-enclosed malls reported by the

Urban Land Institute for regional and super-regional centers.

It is intended to provide a conservative estimate of differences

that could be expected from enclosing a neighborhood shopping

center. The Urban Land Institute data (reported in table 4.5,

section 4.2.3) showed net income (before debt service) per

m of leased area was $24.65 higher for enclosed super-regional

centers than for non-enclosed centers of that class, and net

income (before debt service) per m was $12.50 higher for enclosed

regional centers than for non-enclosed regional centers. The

Urban Land Institute does not report data for other types of

centers. See section 4.2.3 for further discussion of the

data limitations in valuing effects of enclosing a shopping

center.

** Possible effects of the solar canopy on lighting costs and

cooling costs were not considered in the evaluation because

the two effects were expected to offset one another. The

canopy should serve to reduce cooling costs for the adjacent

buildings by reducing the temperature gradient through streetfacing walls of the buildings. On the other hand, lighting

costs might increase for the adjacent buildings due to the

shading provided by the canopy. The net effect was assumed

to be relatively small.

121
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122
Note that fuel savings alone were sufficient to offset costs in the

7 percent loan case (net benefits would be approximately $15,000

considering only fuel savings benefits) but not in the 12 percent

loan case. Supplementary benefits from increased use of the enclosed

space and increased income from the attached buildings (columns 3 and 4) of about $30,000 were required in the 12 percent loan case

for the passive solar canopy to be cost effective according to the

net benefits measure. Alternatively, a HUD Block Grant of $30,000

would be sufficient for the solar canopy to be cost effective in the

12 percent loan case. Given a 7 percent loan, the solar canopy is

cost effective without considering non-fuel benefits or potential

grant funds.

5.3 IMPLICATIONS

The two case examples in this study show that the selected passive

solar designs for retrofit to commercial buildings may be economically

feasible under a realistic range of assumptions. The resale value

of the solar energy system was shown to be a major factor in the cost

effectiveness of the solar designs considered when the investment

analysis period corresponds to the relatively short holding period

that business investors tend to adopt.

The importance of variables affecting the resale value suggests that

the promising results obtained in the base-case analyses are dependent on a general rehabilitation of the entire community and on a real estate resale market that is fully responsive to the benefits

of solar-equipped buildings. This further suggests that an independent building owner considering the use of solar energy in reno- vating an individual building in a neighborhood where property

values are low and expected to remain so should evaluate the

cost effectiveness of the project based on energy savings alone.

In these cases, the length of the investment study period may be

a decisive factor in the economic feasibility of the investment.

123
Since resale values are always difficult to predict, the sensitivity

of economic feasibility results to different resale values should be

examined in conducting an economic evaluation of an investment in

solar.

Even under relatively conservative assumptions, the potential nonenergy benefits of a large street-scale passive solar project were

shown to be comparable in size to the energy benefits. Where

measurable, and particularly in the absence of subsidized loans and

other substantial incentives, non-energy benefits of passive solar

designs may be critical to the investment decision.

The special tax incentives and loan programs available to investors

in solar energy and building rehabilitation also were shown to have

a major impact on the feasibility of solar energy systems eligible

for these programs. The special public subsidy programs available

in urban renewal areas, combined with the multi-faceted benefits of

solar energy, make solar designs a promising approach to real estate

investors planning revitalization projects in designated urban

renewal areas

.

The solar designs examined in this report did not require that portions

of the original building structure be torn down in order to retrofit

the passive solar components. Passive solar designs which require

major changes in the wall structure or window area in order to obtain

the same energy savings as those examined are likely to be less cost

effective. An important exception is situations where the existing

walls are being demolished and rebuilt whether or not solar energy

is used.

Facing page: PKopoAty du^gnzd venting

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124
6. CONCLUSIONS

In this report, a comprehensive life-cycle costing model for evaluating

passive solar designs for commercial buildings has been developed and

applied to two case examples of specific solar designs for a neighborhood commercial strip setting. Although the use of life-cycle investment analysis is relatively new to the commercial real estate investment

community, it is becoming more widely recognized as a necessary tool

for evaluating certain kinds of investments. By accounting more fully

for possible energy and non-energy benefits of passive solar designs

than has been typical in existing methodologies, and by incorporating

investment variables and criteria of specific interest to the commercial

125
real estate community, the life-cycle costing model proposed in this

report should be useful both to the solar research community and to

actual real estate investors and financiers.

The report has examined in detail the key variables affecting the eco- nomic feasibility of passive solar designs for commercial buildings.

It has provided substantial guidelines for estimating values for the

variables in the economic model according to different investment

situations and a survey of major government incentives for which passive

solar components of commercial buildings are eligible. This analysis

should aid potential investors and policy makers in identifying where

use of passive solar energy is likely to be most cost effective.

Anticipated furture research includes evaluation of additional passive

solar designs for neighborhood commercial strip settings and for other

commercial environments designated by the Solar Cities Program. In

addition, it is anticipated that the proposed investments in solar

energy for different types of buildings and locations will be compared

with alternative kinds of investments in energy conservation for the same buildings.

Improved and expanded data bases are critical to the full assessment

of benefits of solar energy in commercial buildings. Existing thermal

analysis procedures suitable for estimating the energy requirements

of large buildings, solar or conventional, are difficult to use at

best and inadequate for many situations, making energy savings from

solar designs for commercial buildings difficult to estimate. Behavioral research into real estate market valuation of solar buildings and user response issues is also in a preliminary stage. Issues identified

in this report as requiring further research include real estate market

preferences for solar versus conventional buildings, shoppers' preferences for enclosed versus non-enclosed malls; the willingness of

building occupants to substitute daylighting for artificial lighting;

the valuation of conditioned space in commercial areas, and the

effects of solar designs on building acoustics and human comfort.

126
Given existing data and tools of analysis, rough estimates of energy

and non-energy benefits can be derived and compared with solar energy

costs, and the sensitivity of the economic feasibility results to

particular assumptions and conditions can be tested. With expanded

and more reliable data, more comprehensive and accurate economic

evaluations should be possible. These improvements should lead to

better energy decisions among investors and to improved decision

making on energy-related spending in both the public and private

sectors

.

127
REFERENCES

1. Ruberg, Kalev, "Design and Analysis of Passive Solar Heating

Solutions for Neighborhood Commercial Strip Settings,"

Proceedings of the Fourth National Passive Solar Conference

(Newark, Del.: American Section of the International Solar

Energy Society, 1979).

2. Hastings, S. Robert, "Passive Solar Design for Urban Commercial

Environments," Proceedings of the Fourth National Passive Solar

Conference (Newark, Del.: American Section of the International

Solar Energy Society, 1979).

3. Ruberg, Kalev, A Computer Model for Quantifying Solar Gain Through

Various Types of Glazings In Any Given Urban Geometry and Climate

(Washington, D.C.: National Bureau of Standards, 1980), NBS

Interagency Report, In Press.

4. Stahl, Fred I.; Conway, Don; and Goglla, Margaret R.; "Human

Behavioral Considerations In the Planning and Design of Passive

Solar Systems for Commercial Facilities: An Exploratory Study

of the Effects of Sun and Shade," Proceedings of the Fourth

National Passive Solar Conference (Newark, Del.: American

Section of the International Solar Energy Society, 1979).

5. Conway, Don; Goglla, Margaret R. ; and Stahl, Fred I.; A Pilot

Study to Predict the Effects of Shadows from Passive Solar

Configurations on Pedestrians' Behavior (Washington, D.C.:

National Bureau of Standards), In Press.

6. International Council of Shopping Centers, "Shopping Centers and

the Energy Crisis," Shopping Center Report (New York:

International Council of Shopping Centers, 1977).

7. Mazria, Edward, The Passive Solar Energy Book (Emmaus, Pa.: Rodale

Press, 1979).

8. AIA Research Corporation, Passive Solar Design: A Short Bibliography For Practitioners (prepared for the U.S. Department of

Energy under Contract No. EG-77-C-01-4113 , October 1978, p. ill).

128
9. Noll, Scott A., "Economics and the Design Process," Proceedings

of the Third National Passive Solar Energy Conference, San

Jose, California, Jan. 11-13, 1979 (Newark, Del.: American

Section of the International Solar Energy Society, 1979)

.

10. Noll, Scott A.; Roach, J. Fred; and Ben-David, Shaul; "Trombe

Walls and Direct Gain: Patterns of Nationwide Applicability,"

Proceedings of the Third National Passive Solar Energy

Conference, San Jose, California, Jan. 11-13, 1979 (Newark,

Del.: American Section of the International Solar Energy

Society, 1979)

.

11. Noll, Scott A., "Thermal Mass Storage and Glazings Show Effectiveness in New Modeling," Solar Engineering Magazine (January,

1979).

12. Noll, Scott A., and Thayer, Mark A., "Trombe Wall vs. Direct Gain:

A Microeconomic Analysis for Albuquerque and Madison,"

Proceedings of the Third National Passive Solar Energy Conference, San Jose, California, Jan. 11-13, 1979 (Newark, Del.:

American Section of the International Solar Energy Society, 1979)

.

13. Noll, Scott A., and Wray, William 0., "A Microeconomic Approach to

Passive Solar Design: Performance, Cost, Optimal Sizing, and

Comfort Analysis," Energy The International Journal (London:

Pergamon Press, August, 1979).

14. Roach, Fred; Ben-David, Shaul; and Kirchner, Christina^ "The LASL/

UNM Solar Performance Code: A Basic Primer," Proceedings of the

Fourth National Passive Solar Energy Conference, October 3-5,

1979 (Newark, Del.: American Section of the International Solar

Energy Society, 1979).

15. Roach, Fred; Noll, Scott; and Ben-David, Shaul; "The Comparative

Economics of Passive and Active Systems: Residential Space

Heating Applications," Proceedings of the 1978 Annual Meeting

of the International Solar Energy Society, August 28-31, Denver,

Colorado (Newark, Del.: American Section of the International

Solar Energy Society, 1978).

129
16. Roach, Fred; Noll, Scott; and Ben-David, Shaul, "Passive and Active

Residential Solar Heating: A Comparative Economic Analysis of

Select Designs," Energy. The International Journal (London: The

Pergamon Press, August, 1979).

17. Ruegg, Rosalie T.; Sav, G. Thomas; Powell, Jeanne W. ; and Pierce,

E. Thomas; Economic Evaluation of Solar Space and Water Heating

Systems in Commercial Buildings (Washington, D.C.: National

Bureau of Standards, 1980), In Press.

18. Ruegg, Rosalie T.; Petersen, Stephen R.^ and Marshall, Harold E.;

Recommended Practice for Measuring Life-Cycle Costs of Buildings

and Building Systems (Washington, D.C.: National Bureau of

Standards, 1980), In Press.

19. Cooper, James R. , and Pyhrr, Stephen A., "Forecasting the Rates of

Return on an Apartment Investment: A Case Study," Readings in

Real Estate Investment Analysis , Vol. 1 (Cambridge, MA.:

Ballinger Publishing Company, 1977)

.

20. Isakson, H. R. , Making the Most of Energy in Real Estate , (Washington, D.C.: U.S. Department of Energy, 1978).

21. Clark, Roy E., and Hastings, S. Robert, Quantified Occupant-Use

Factors Affecting Energy Consumption in Residences (Washington,

D.C.: National Bureau of Standards, 1979), NBS Interagency

Report 78-1501.

22. Pike, Tyrone, and Golubov, Michael, "Daylight Design Options - Cost-Benefit Analysis," Proceedings of the Fourth National Passive

Solar Conference (Newark, Del. : American Section of the International Solar Energy Society, 1979)

.

23. Ruegg, Rosalie T., and Sav, G. Thomas, Microeconomics of Solar

Energy (Washington, D.C.: National Bureau of Standards, 1980),

In Press.

24. McGraw-Hill's 1980 Dodge Manual (New York: McGraw-Hill Cost

Information Systems Company, 1979)

.

130
25. Means Building Construction Cost Data, 1979 (Kingston, Mass.:

Robert Snow Means Company, 1978)

.

26. National Solar Heating and Cooling Information Center, "Solar

Accepted by Nation's Insurers," Solar Status (Washington, D.C.:

U.S. Department of Housing and Urban Development, 1979).

27. Balcomb, J. Douglas, and Anderson, Bruce, Passive Solar Design

Handbook , Draft Report, April 6, 1979, DOE/CS-0090-D

.

28. McFarland, Robert D., "PASOLE A General Simulation Program for

Passive Solar Energy," October 1978. LASL Informal Report,

LA-7433-MS.

29. American Society of Heating, Refrigeration, and Air-Conditioning

Engineers, ASHRAE Handbook & Product Directory: 1977

Fundamentals (New York: American Society of Heating, Refrigeration, and Air-Conditioning Engineers, 1977)

.

30. Federal Register , Monday, April 30, 1979, Vol. 44, No. 84.

31. Federal Register , Wednesday, January 23, 1980, Vol. 45, No. 16.

32. Kusuda, Tamami, and Collins, Belinda L., Simplified Analyses of

Thermal and Lighting Characteristics of Windows: Two Case

Studies (Washington, D.C.: National Bureau of Standards, 1978),

NBS Building Science Series 109.

33. Griffith, James W. , "Benefits of Daylighting—Cost and Energy

Savings," ASHRAE Journal (New York: American Society of

Heating, Refrigeration, and Air Conditioning Engineers, January

1978), pp. 53-56.

34. Ruegg, Rosalie T., and Chapman, Robert E., Economic Evaluation of

Windows in Buildings: Methodology (Washington, D.C.: National

Bureau of Standards, 1979), NBS Building Science Series 119.

35. Kusuda, Tamami, and Bean, J.W., "Comparison Between a Simplified

Daylighting Calculation Procedure and a Comprehensive Interreflection Model Calculation Procedure," Proceedings of the

3rd International Symposium on Use of Computers for Environmental

Engineering Related to Buildings, Banff, Alberta, Canada, May

10-12, 1978 (Ottawa: National Research Council).

131
36. Urban Land Institute, Dollars and Cents of Shopping Centers

(Washington, D.C.: Urban Land Institute, 1975, 1978).

37. Building Owners and Managers Association International, The 1978

Experience Exchange Report for Downtown and Suburban Office

Buildings (Washington, D.C.: Building Owners and Managers

Association International, 1979)

.

38. Cohen, Howard; McLaren, T. Ian; Moss, Stanley M. ; Petyk, Roman;

and Zuke, Ervin H.; Pedestrians and Wind in the Urban Environment

(Massachusetts: Institute for Man and Environment and

Weather Dynamics, Inc., December 1977).

39. U.S. Department of Housing and Urban Development, Title 1 Property

Improvement Loan Operating Handbook (Washington, D.C.: U.S.

Department of Housing and Urban Development, June 1973) . 40. Executive Office of the President, Office of Management and Budget,

1979 Catalogue of Federal Domestic Assistance . Available from

the Superintendent of Documents, Government Printing Office,

Washington, D.C. 20402.

41. Stauss, George, "The Effect of Tax on Yield and Value," Readings

in Real Estate Investment Analysis , Volume I (Cambridge, Mass.:

Ballinger Publishing Company, 1977)

.

42. Thorne, Oakleigh J., "Real Estate Financial Analysis," Readings

in Real Estate Investment Analysis , Volume I (Cambridge, Mass.:

Ballinger Publishing Company, 1977)

.

43. Revenue Act of 1978, Sec. 301, Public Law 95-600, 95th Cong.,

92 Stat. 2820.

44. American Telephone and Telegraph Company, Engineering Economics , A Manager's Guide to Economic Decision Making , Third Edition

(New York: McGraw-Hill Book Company, 1977).

45. Eisenhard, Robert M. , State Solar Energy Legislation of 1977:

A Review of Statutes Relating to Buildings (Washington, D.C:

National Bureau of Standards, 1979), NBS Interagency Report

79-1705.

46. Internal Revenue Code of 1954, U.S. Code, Title 26, Sec 167 (d)

.

132
47. Energy Tax Act of 1978, Public Law 95-618, 95th Cong., 92

Stat. 3194.

48. Revenue Act of 1978, Sec. 315, Public Law 95-600, 95th Cong.,

92 Stat. 2824.

49. Kusuda, T., and Ishii, K., "Hourly Solar Radiation Data for

Vertical and Horizontal Surfaces on Average Days in the United

States and Canada" (Washington, D.C.: National Bureau of

Standards, 1977), NBS Building Science Series 96.

50. U.S. Department of Energy, DOE Facilities Solar Design Handbook , (Washington, D.C.: U.S. Department of Energy, 1978). DOE/AD0006/1.

51. Pierce, Neal R., "Gardens in the City," The Washington Post , August 28, 1979.

52. Olkowski, Helga, and Olkowski, William, "Bio-Solar Systems in Urban

Areas," Proceedings of the Second National Passive Solar Conference, Passive Solar State of the Art , Volume 3 (Newark, Del.

:

American Section of the International Solar Energy Society,

1978).

53. Kolstad, Charles D., "The Economics of the Attached Solar Greenhouse for Home Heating—A Preliminary Assessment," Proceedings

of the Second National Passive Solar Conference, Passive Solar

State of the Art , Volume 3 (Newark, Del. : American Section of

the International Solar Energy Society, 1978)

.

54. Yanda, William F., "Solar Sustenance Project, Phase II, Final

Report," (Santa Fe, New Mexico: New Mexico Energy Resources

Board, 1977).

133
APPENDIX

SUMMARY OF KEY SYMBOLS AND DISCOUNT FORMULAS

A. KEY SYMBOLS*

C = initial purchase costs of the passive solar energy system,

3. including labor, materials, and sales taxes;

C = estimated initial cost of labor required to install the

X* passive solar energy system, including only those labor

costs not eligible for special solar incentives;

= estimated initial purchase cost of materials, including

only those materials not eligible for special incentives;

m

C p = estimated initial labor cost eligible for special solar

incentives;

C = estimated initial cost of materials eligible for special

sm b f

incentives;

d = nominal (including inflation), after- tax discount rate;

Y = annual rate of appreciation in market value of solar energy

system, including general inflation;

h = investment analysis period (study period)

;

p = annual rate of general price inflation;

s = sales tax rate/100;

t = combined State and Federal corporate income tax rate;

* All other symbols are defined with each use.

134
CO t3

• A

CJ •H S Q_

•rl 5 >^

M-l CO (U

(U T3 c CU

(U O CD 4J O o 4-» CO CO c •H B O CO CO (U 0) »^ •H 5-1 0) CO (U ^-^ 5^

CO a <u o CU tH a X >-l 1 a- CO

i< cu a 1 3

O M-l CU iH CO 1 CO O C

O >^ 1 CO o

-CJ 0) c u e a c (U C c d

o o •H CU (U CO M-l

>-l g M-l CO o

CO >^ .H (U iH 4-) OJ M-l O CO 5-4 CO CO O c O 4-» 3 Q- 3 3 o C d bO CO s

%

CO

CO CO CO •H 4-J CO CO 5-1 4-J o CO Pi e CO 0)

cu <u r-l •H 5-1 rH CO

M-l B 5-1 rH o M-l O CO 0) 3 3 O M-l "4-1 a 5-1 JJ CO 4J T3 •H O •H CO Pi- 3 4-J c 0) iw c •u >4-l 5-1 3 3 co

(U C CO

cC >-( 0) CO 0) (U CO 4-1 CO u T3

!-i CO C c C P! C 3 <u C 1 o C (U cu •H a OJ cu e 0) CU ^

M-l > a- > CO > >

•H •H CO u-i •H CO CO O

o •H CO C^ ,Q o o a O 4-1

o

o

o

pq

4-1 3

C 0) <U CO

CO 4-t (U

4-) cu 5-1 ^

5-1 J-l O 3

O 3 12

:s e Ci

cu (U Cl 4-1 5-1

5-1 4J iH 3 O

3 C30 -a 0) M-l +J (U P! PJ 12 CO 3 •H PL, CO CO •H P-i (U n 3

iH (U to CO 5-1 -3 ^

O 5-1 :s PL^ c PL. PL| Xi

<u CO cu ^ 6 (U u

0) •H 4-1 5-1 •H u

o iH M-l 5-1 O »+-i o

60 •H O M-l •H

P! t3 rs •H •3

•H O c O

CD s

135

42

4J (U •H

13 4-1

CO mh

(U 0

•H

0)

CO CO > 3

a 0

•rl COCU

is x:

4J

CO •H

CO

(U

<U •H

M-l mh o •H

d) <Un CO "i

CO •H

CO

cO

I—

1

CU o tj

M-l 0

g

4JP- c

CU 0 o •H

rN(U cO

#t CO

•>

<U T3

(3 •H

<U g

Pi 0

p, f-Q

(U

<u

<U 4J

f3 •H

M-l •H D

CO 4J

CO

CO (U6

<u <u

5-1 rH

CO (U

CO 4J3

(U CO <u 5-1 i-H

4-J OJ 3

M-4

i-H M-l 5-1 rH •H 0

< Td M-l

« U. S. GOVERNMENT PRINTING OFFICE : 1980 311-046/132
U.S. DEPT. OF COMM. BIBLIOGRAPHIC DATA

SHEET

1. PUBLICATION OR REPORT NO. NBS BSS 125

2.Gev*f Jiiicmsifflj Now Z. feciptenl' s Accfes&ion No,

4. TITLE AND SUBTITLE 5. Public An Economic Model for Passive Solar Designs in Commercial June

Environments $. Pertw

ation Date

; 1980

miag Orient zation Code

7. AUTHOR(S) 8. Perfor Jeanne W. Powell

ming Organ. Report No.

9. PERFORMING ORGANIZATION NAME AND ADDRESS 18. Proje<

NATIONAL BUREAU OF STANDARDS P

DEPARTMENT OF COMMERCE

' WASHINGTON, DC 20234

:t/fasik/Worh dnit No.

act/Grant No.

12. SPONSORING ORGANIZATION NAME AND COMPLETE ADDRESS (Street. City. st,,te, ZIP) 13. Type

Dep?irtment of Energv

Washington, D.C. l*.Sf>ens

of Report & Period Covered

Final

erJng AgeRcy Cotle

15. SUPPLEMENTARY NOTES

Library of Congress Catalog Card Number: 80-600081

I ] Document describes a computer program; SF-185, FIPS Software Summary, is attached.

16. ABSTRACT (A 200-word or less factual summary of most significant information. If document includes a significant bibliography or

literature survey, mention it here,}

This report presents an economic model for evaluating passive solar designs in

commercial environments. It discusses the literature on this topic and draws upon

this literature to develop a general methodological framework. The model incorporates a life-cycle costing approach that focuses on the costs of purchase, installation,

maintenance, repairs, replacement, and energy. It includes a detailed analysis of

tax laws affecting the use of solar energy in commercial buildings. Possible methods

of treating dif f icult-to-measure benefits and costs, such as effects of the passive

solar design on resale value of the building and on lighting costs, rental income

from the building, and on the use of commercial space are presented. The model is

illustrated in two case examples of prototypical solar designs for low-rise commercial

buildings in an urban setting. These designs were developed at NBS under the Solar

Cities project. Th'^ two designs, a wall collector system and a street canopy, are evaluated for a neighborhood in Baltimore undergoing urban renewal. Results of the

analyses indicate these designs may be economically feasible under a realistic range

of economic conditions. Topics requiring further research are identified.

17. KEY WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper name;

separated by semicolons) Benefit-cost analysis; building economics; commercial buildings; investment analysis;

life-cycle cost analysis; passive solar energy; retrofit; revitalization; solar

energy systems

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