The Role of Economic Analysis

in the Development of Energy

Standards for New Buildings

Stephen R. Petersen

Building Economics and Regulatory Technology Division

Center for Building Technology

National Engineering Laboratory

National Bureau of Standards

Washington, D.C. 20234

May 1978

„ Issued July 1 978

I

'

Prepared for The Department of Energy and

The Department of Housing and Urban Development

Washington, D.C.

100

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78-1471

^sflona! Bareati of Standards APR 1? 1873

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NBSIR 78-1471

4 < * THE ROLE OF ECONOMIC ANALYSIS

IN THE DEVELOPMENT OF ENERGY

STANDARDS FOR NEW BUILDINGS

Stephen R. Petersen

Building Economics and Regulatory Technology Division

Center for Building Technology

National Engineering Laboratory

National Bureau of Standards

Washington, D.C. 20234

May 1978

Issued July 1978

Prepared for The Department of Energy and

The Department of Housing and Urban Development

Washington, D.C.

U S. DEPARTMENT OF COMMERCE, Juanita M. Kreps, Secretary

Dr. Sidney Hannan. Under Secretary

Jordan J. Baruch. Assistant Secretary for Science and Technology

NATIONAL BUREAU OF STANDARDS. Emast Ambler, Director

FOREWORD

This is one of a series of reports planned to document NBS research

efforts in developing a methodology for the establishment of Building

Energy Conservation Criteria. This report was jointly supported by

the Department of Energy and the Department of Housing and Urban

Development.

The author would like to acknowledge the help of many individuals who

have reviewed this report at its many stages of preparation, in particular, Dr. Harold Marshall, Dr. Stephen Weber, and Dr. John McConnaughey

of the Applied Economics Program; Mr. Jim Heldenbrand of the Building

Energy Criteria Program; and Mr. Robert Kapsch and Mr. James Pielert

of the Codes and Standards Program; all of the Center for Building

Technology, National Bureau of Standards.

Executive Summary

Energy conservation standards for new buildings have become a high

priority element of an emerging Federal energy policy. The potential

energy savings due to increased energy efficiency in new buildings is

large, not only because energy consumption in individual buildings can

be reduced by 40 percent or more, but because approximately one-third

of the annual energy consumption in the U.S. is directly attributable

to building operations. Both the Energy Policy and Conservation Act

of 1975 (Title III, Part C) , and the Energy Conservation Standards for

New Buildings Act of 1976 (Title III of the Energy Conservation and

Production Act) were enacted by Congress in order to ensure that this

potential would be realized over time as new buildings make up a larger

and larger part of the total building stock.

The Energy Conservation Standards Act specifically requires the development of building performance standards which are aimed at achieving

"maximum practicable" improvements in the energy efficiency of new

buildings. This report suggests that the explicit consideration of

life-cycle benefits and costs related to energy use in buildings be

incorporated into the development of such standards or into their

future improvement as time allows. Energy consumption in buildings

can be varied to a very large extent through the use of energy conservation improvements in building design. However, the extent to which

energy use can be "practicably" reduced depends largely on the costs

and benefits incurred in doing so. Thus, while energy conservation

design is a technical problem, economic analysis is essential in

determining the extent to which additional conservation modifications

are cost justified, as well as the least costly means by which a given

conservation goal can be satisfied. Life-cycle benefit-cost analysis

can provide a systematic framework for decision-making in building

design. Higher energy costs and more severe climatic factors will

each result in greater cost justification for increased conservation

in building design. Higher conservation costs will have just the

opposite effect.

Economic decision-making criteria useful in the energy conservation

design of new buildings are discussed in this report. Both life-cyclecost minimization and the concept of economic balance among conservation

options are examined and the marginal cost and savings criteria for their

satisfaction are presented. The expansion of these criteria from application to the design of a single building to the design of all new

buildings is discussed in order to lay the groundwork for their possible

use in the development of standards for energy conservation in buildings.

Just as the energy-related life-cycle costs of an individual building

can be reduced at the design stage, so can the life-cycle costs implicit

in the specification of building standards be reduced or minimized

through use of economic analysis in their development. Due to the generalized nature of building standards, benefits and costs cannot be

i
ABSTRACT

The Federal Government and a number of States are currently developing

energy conservation standards for new buildings. This report suggests

that economic considerations be incorporated directly into this standards

development process. A life-cycle benefit-cost approach to standards

development can provide a systematic and objective framework for standards

specification. Differences in climate, building type, energy cost, and

operational requirements can be directly incorporated into the standard

as they impact energy related benefits and costs. It is shown that the

life-cycle costs associated with any given overall conservation goal can

be reduced by developing an economically balanced standard. In addition,

it suggests that a standard which has as its goal the minimization of

life-cycle costs will likely lead to greater effective energy savings

than alternative approaches. Specific suggestions for the incorporation

of economic analysis into the standards development process are made.

iv
SI CONVERSION

In view of present accepted practice in this country in this technological

area, common U.S. units of measurement have been used throughout this

paper. In recognition of the position of the USA as a signatory to the

General Conference on Weights and Measures, which gave official status

to the metric SI system of units in 1960, we assist readers interested

in making use of the coherent system of SI units by giving conversion

factors applicable to U.S. units used in this paper.

Length

1 ft = 0.3048 meter* (m)

Area

1 ft^ = 0.0929 square meter (m^)

Temperature

degree Celsius (°C) = 5/9 (°F - 32)

Quantity of Heat

1 Btu = 1055.87 joule (J)

Thermal Resistance

1 °F h ft^/Btu = 0.176 square meter degree Celsius/Watt (m^* °C/W)

* exactly

v
TABLE OF CONTENTS

PAGE

EXECUTIVE SUMMARY i

ABSTRACT iv

SI CONVERSION v

LIST OF FIGURES vii

LIST OF TABLES vii

1.0 INTRODUCTION 1

1.1 BACKGROUND 1

1.2 PURPOSE AND SCOPE 1

1.3 ORGANIZATION 2

2.0 THE STANDARDS ACT OF 1976. 3

2.1 POTENTIAL IMPACT 3

2.2 CRITERION FOR DETERMINING CONSERVATION GOALS 4

2.3 PERFORMANCE CONCEPT 4

3.0 ECONOMICS AND THE ENERGY PERFORMANCE OF BUILDINGS 6

3.1 TECHNICAL ASPECTS OF ENERGY PERFORMANCE 6

3.2 ECONOMIC ASPECTS OF ENERGY PERFORMANCE 9

3.2.1 ECONOMIC EFFICIENCY AND OPTIMAL BEP GOAL ... 10

3.2.2 ENERGY COSTS AND CLIMATIC FACTORS 14

3.2.3 ENERGY CONSERVATION COMBINATIONS 16

3.3 BEP AS AN INDEX FOR MULTIPLE ENERGY TYPES 22

3.4 ECONOMIC ASPECTS OF ENERGY CONSERVATION AT THE

NATIONAL LEVEL 23

4.0 IMPLICATIONS FOR STANDARDS DEVELOPMENT 24

4.1 ECONOMIC EFFICIENCY CONSIDERATIONS 24

4.2 DEVELOPMENT OF A COST-EFFECTIVE STANDARD 26

4.3 ADMINISTRATIVE COSTS 29

4.4 POTENTIAL ENERGY SAVINGS IN THE RESIDENTIAL SECTOR. . 31

5.0 REAL ENERGY COSTS VERSUS MARKET ENERGY PRICES 32

6.0 SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS FOR

FURTHER RESEARCH 35

6.1 SUMMARY AND CONCLUSIONS 35

6.2 RECOMMENDATIONS FOR FURTHER RESEARCH 37

vi
LIST OF FIGURES

PAGE

FIG. 1 TRADE-OFF RELATIONSHIP BETWEEN ENERGY

AND BUILDING ENERGY PERFORMANCE

CONSUMPTION

8

FIG. 2 OPTIMIZATION CRITERIA FOR BUILDING ENERGY PERFORMANCE

(BEP) DETERMINATION 11

FIG. 3 OPTIMAL BEP LEVEL SHIFTS AS A FUNCTION

SAVINGS

OF MARGINAL

15

LIST OF TABLES

PAGE

TABLE 1 HEATING-RELATED COSTS AS A FUNCTION OF

BASE CASE

BEP -

13

TABLE 2 HEATING-RELATED COSTS AS A FUNCTION OF

ENERGY PRICE INCREASES

BEP -

17

TABLE 3 HEATING-RELATED COSTS AS A FUNCTION OF

CLIMATIC FACTOR INCREASES

BEP - ANNUAL

18

TABLE 4 COST AND SAVINGS SCHEDULE FOR TWO VARIABLE ENERGY

CONSERVATION MEASURES 20

TABLE 5 ALTERNATIVE ALLOCATIONS OF CONSERVATION BUDGETS 21

TABLE 6 ALTERNATIVE BEP SPECIFICATIONS FOR TWO BUILDINGS 25

1.0 INTRODUCTION

1.1 BACKGROUND

Improved energy efficiency in buildings has been recognized for many

years as an important goal in formulating a Federal or State energy

policy. Even before the oil embargo of late 1973, the President's 1971

and 1972 Energy Messages to Congress addressed the need to reduce energy

losses from buildings by a substantial margin. Mandatory energy conservation standards for new building design have been proposed by the

Federal Government as well as some States and local governments. Thermal

efficiency standards for government-insured housing have been upgraded

several times in recent years, while some States and local governments

have promulgated similar standards for new construction subject to the

building regulatory process.

Several pieces of legislation at the Federal level are likely to expand

mandatory energy conservation standards to include all new residential

and commercial construction in the U.S. Both the Energy Policy and

Conservation Act of 1975"*" and the Energy Conservation Standards for New

Buildings Act of 19762 encourage the States and local governments to

adopt and enforce new energy conservation standards. Moreover, the

latter requires the development, at the Federal level, of performance

standards for new residential and commercial buildings which are designed

to achieve the "maximum practicable" improvements in energy efficiency

and increases in the use of nondepletable sources of energy. Thus it is

likely that such standards will be stricter than most standards existing

at that time, which generally did not exceed what was considered to be

good design practice even before the oil embargo.

1.2 PURPOSE AND SCOPE

The purpose of this report is to outline the potential role of economic

analysis in the development of economically efficient energy conservation

standards for buildings. In particular, economic efficiency criteria are

are suggested for the development or improvement over time of a national

energy conservation standard for new residential and commercial buildings.

It is shown that standards based on consistent economic criteria will

likely result in greater energy savings and ultimately result in less

cost to building users than alternative standards. More importantly,

it is shown that the resulting dollar-valued energy savings cannot be

achieved at less cost through any alternative standard. Finally, the

rationale for using economic efficiency criteria in the development of

a national standard is discussed as it relates to the legislative

requirement for "maximum practicable improvements in energy efficiency."

1 Public Law 94-163, Title III, Part C.

2 Public Law 94-385, Title III.

1
To clarify the scope of this report, a comment about what is not

attempted seems appropriate. The report does not include arguments for

or against the development or promulgation of energy conservation standards for new buildings, nor does it compare energy standards with

other mechanisms for improving the energy efficiency of new buildings.

It simply recognizes and describes the conditions that have led to an interest in such standards and proposes economic efficiency criteria

for use in their development.

1.3 ORGANIZATION

This report is divided into several sections, as follows. Those provisions of the Energy Conservation Standards for New Buildings Act of 1976

that are relevant to the standards development process and to the scope

of this report are discussed in Section 2. Section 3 presents a general

economic interpretation of the tradeoff between energy use and energy

conservation in buildings. Section 4 provides implications for the

development of economically efficient standards and specific problems

associated with such an undertaking. Section 5 briefly considers the

use of Resource Impact Factors (RIF's) in assigning real economic costs

to the energy that could potentially be conserved by an energy standard.

Finally, Section 6 summarizes the findings of this report, makes recom- mendations for the standards development process, and outlines some research requirements which must be undertaken to develop a standard

which reflects economic efficiency in building energy use.

2
2.0 THE STANDARDS ACT OF 1976

2.1 POTENTIAL IMPACT

The Energy Conservation Standards for New Buildings Act of 1976^ provides a good insight into the objectives of the Federal initiative in

developing national energy conservation standards. The resulting standards, if made mandatory, may result in considerably more investment

in the design and construction of new buildings than would otherwise

have been undertaken. At the same time, the benefits from this

increased investment, in terms of reduced energy use over the life

of new buildings, will likely be much larger than the costs incurred.

The impact of these reduced energy requirements on total U.S. energy

demand will be large. Currently, 32 percent of all energy used in the

U.S. is consumed in the Household and Commercial sectors, the vast

majority of which involves activities in buildings. Of this, 70 percent

is used by the Household sector and 30 percent in the Commercial sector.

Between 1975 and 1985 approximately 26 million new residential units are projected, representing about 29 percent of all units existing in 1985.^

During this same time, commercial floor space will increase by approximately 14 billion square feet, representing about 35 percent of all

existing commercial floor space in 1985.^

The potential reduction in energy use in new buildings from that of most

existing buildings due to mandatory standards has been variously estimated

to range from 10 to 60 percent, depending on the building type considered

and the standard implemented.^ Such estimates have been largely based on

an upgrading of new buildings to a level which was, in fact, often considered to be "good" design practice even before the oil embargo of 1973.

These estimates rarely reflect the economic potential for even greater

reductions in energy use due to the higher cost of energy since that time.^

1 Hereafter referred to as the "Standards Act."

2 Federal Energy Administration, Project Independence Report , Washington,

D.C., November 1974, p. 164.

Ibid, p. 167.

^ Ibid, p. 169.

^ See, for example, "An Impact Assessment of ASHRAE Standard 90-75, Energy

Conservation in New Building Design," A.D. Little, Cambridge, 1975.

£ For an estimate of the higher economic potential for energy conservation

in existing housing due to higher energy prices, see Petersen, S.R.,

"Retrofitting Existing Housing for Energy Conservation: An Economic

Analysis" BSS-64, National Bureau of Standards, 1974.

3
2.2 CRITERION FOR DETERMINING CONSERVATION GOALS

The Standards Act, in requiring "... the development and implementation, as soon as practicable, of performance standards for new residential and commercial buildings which are designed to achieve the maximum

practicable improvements in energy efficiency. . .," apparently seeks

to raise energy conservation goals beyond design practices typical in

current construction. However, in doing so, the Standards Act provides

an objective criterion for establishing these new conservation goals

in that it specifies that maximum practicable improvements be considered

in the development process. If the term "practicable" is interpreted

to imply "cost justifiable," and if all energy-related costs (initial

construction costs as well as operational costs) are relevant, then the

Standards Act may be interpreted to constrain new energy conservation

requirements to those justifiable in a life-cycle-cost context. However,

energy-related life-cycle costs vary considerably as a function of climate, building type, energy costs and other technical and economic

factors. Thus the extent to which energy conservation requirements

are cost-justified varies considerably as well, depending on their

application.

In the following sections the detailed implications of a life-cycle-cost

approach to the development of energy conservation standards are discussed. The remainder of this section outlines certain other requirements and implications of the Standards Act.

2.3 PERFORMANCE CONCEPT

The Standards Act requires that a "building energy performance" standard

be developed and implemented. This term is defined in the Standards Act

as "an energy consumption goal or goals to be met without specification

of the methods, materials, and processes to be employed in achieving

that goal or goals. . ." Such an energy consumption goal might be

expressed in terms of an energy "budget," i.e., the maximum allowable

energy consumption related to defined energy-related building operations.

While the concept of a building energy performance standard is not new,

to date there have been few building standards for energy conservation

which go beyond the specification of energy performance requirements for

discrete building components. These "component performance" standards

are usually expressed in terms of the maximum allowable rates of heat

loss (or gain) through the various components of the building shell, or

in the case of service equipment, in terms of minimum allowable conversion efficiencies, rather than in terms of actual energy consumption,

perse.

The building energy performance standard, as envisioned in the legislation, is not meant to set limits on all types of energy consumption in

buildings but rather on energy use related to the actual design and

quality of construction of new buildings. These uses are primarily

space heating, cooling, and ventilating; domestic water; and illumination. Rather than actually rationing energy for these purposes, the

4

i
legislation seeks only to limit annual energy use as calculated at the

design stage. Design energy consumption calculations for large unconventional buildings will likely require computer analysis. However, in

the majority of cases compliance with a Manual of Accepted Practice

(MAP) , made available along with the standard to demonstrate acceptable

design approaches to the performance standard itself, will likely suffice.

Such a manual might allow designers to make trade-offs among specific

building components without needing an entire computer analysis of building energy requirements.

Building energy performance standards have several important economic and

energy resource implications. If the primary conservation requirements

are manifested by an overall energy budget, the designer/builder can make

a wide range of design trade-offs in order to arrive at a configuration

which can satisfy an energy budget constraint at a minimum cost. This

approach provides considerably more design freedom than component performance standards and will likely stimulate cost-saving conservation

innovations. At the same time, building energy performance standards

are more difficult to implement from an administrative, or regulatory,

point of view. Most building code authorities do not now have the

technical resources needed to assure compliance with such performance

standards at the design and construction stages. Yet the standard, while

national in scope, is expected to be enforced within the existing regulatory system at the State and local levels.

The development of acceptable energy conservation standards for buildings

will necessitate a considerable amount of research and analysis. Much

of this will be entirely technical in nature. However, the ultimate

question, "How far can conservation goals be practicably increased?,"

extends beyond the range of technical research into the realm of economic

analysis. Ultimately the costs and benefits of the resulting standards

must be addressed if they are to be politically and administratively

viable. The remainder of this report addresses the economic aspects

of the building design process and how economic efficiency criteria

can be explicitly reflected in the standards development process.

This is the procedure allowed in ASHRAE Standard 90-75, Energy Conser- vation In New Building Design , American Society of Heating, Refrigerating, and Air Conditioning Engineers, Inc., New York, 1975.

5
3.0 ECONOMICS AND THE ENERGY PERFORMANCE OF BUILDINGS

The most outstanding characteristic of energy consumption in buildings

is how widely it varies from building to building. Four major factors

influence this variation: building design (including quality of construe

tion), operational and maintenance procedures, occupant habitability

criteria, and climatic conditions.

Except for climate, all of these factors can be modified to achieve

significant reductions in energy use in buildings. However, mandatory

energy standards are likely to apply only to the building design, with

operational and maintenance procedures and occupant habitability criteria assumed fixed at recommended levels. This section examines some

of the underlying technical and economic realtionships between energy

consumption and building design in order to provide the framework for

development of an energy standard that implicitly reflects economic

considerations.

In this report occupant habitability criteria with respect to comfort,

health, and safety are assumed to meet existing standards for all buildings of the same purpose. Design changes that reduce energy consumption

in buildings are to be considered only if the habitability criteria

remain satisfied. Operational and maintenance practices are assumed

to be consistent with recommended procedures for each building type

and location considered.

The analysis in this section addresses only those design modifications

which reduce energy requirements related to heating, ventilating, and

air conditioning (HVAC) operations. However, such HVAC operations

typically consume sixty percent or more of the energy used annually

in buildings’*- and represent the energy consumption most closely related

to overall building design. Moreover, the underlying technical and

economic relationships are quite similar for other energy-consuming

operations in buildings.

3.1 TECHNICAL ASPECTS OF ENERGY PERFORMANCE

Building energy performance (BEP) is an integral, but abstract, concept

related to the development of future standards for energy conservation.

BEP may refer to the efficiency of any or all of the energy-related

activities in a building. In this report, however, BEP is expressed

in terms of HVAC-related operations only. In general, as HVAC-related

energy requirements are decreased, given a specified operational profile

energy performance increases, and vice versa. However, a precise definition of BEP has not been developed. Therefore, for the purpose of

this report, building energy performance is defined as the inverse

of the HVAC-related energy consumption of a building under a prescribed

1 Stanford Research Institute, "Pattern of

U.S. , ” Nov. 19 71.

Energy Consumption in the

6
operating schedule. This operational profile may be of short term

duration but should include habitability requirements, a schedule of

internal heat release, and climatic factors that are representative

of the range of seasonal heating and cooling conditions.

By definition, BEP is directly proportional to the extent to which

energy conservation features are usefully incorporated into a building

design. Thus, as BEP is increased, HVAC-related energy consumption

requirements are correspondingly reduced but at a decreasing rate. This

fundamental inverse relationship between BEP and energy consumption is

shown by the "trade-off" curve in Figure 1. In this figure, the vertical

axis represents the energy consumption for HVAC-related operations and

the horizontal axis represents BEP. As one moves down the curve to the

right, increased BEP is traded off for decreased energy consumption.

However, this relationship is characterized by diminishing returns; that

is, constant-size improvements in BEP result in smaller and smaller

reductions in energy consumption. Note that the habitability criteria

must be satisfied at any point on this trade-off curve.

While no attempt is made to measure BEP in absolute terms, it serves as

a useful concept for analytical purposes because it allows us to express

in common terms the extent to which many different energy conservation

modifications can be usefully incorporated into a building design. In

concept, BEP is very closely related to the measurement of the energy

performance of individual energy-related components but on a more com- prehensive (whole-building) basis. For example, while thermal resistance is a measure of the thermal performance of building shell components made of different materials, it is in fact defined as the inverse

of thermal transmittance, or the time-rate of actual heat flow through

those components. Similarly, the Coefficient of Performance (COP) of

heating and cooling equipment is inversely proportional to the energy

input required to satisfy given energy output requirements under

prescribed operating conditions: the higher the COP, the lower the

energy input required. Thus, BEP, as used in this report, is simply

an index of the overall level of energy conservation achieved in the

design of a building, measurable under prescribed operating conditions.

In fact, while the BEP concept is useful for analytical purposes in this

report, energy consumption constraints for new buildings will likely be

promulgated in terms of an annual "energy budget." This energy budget

would be based on energy consumption requirements as they correspond

to a given level of BEP c Throughout this report, energy consumption

is expressed in terms of thermal energy units as delivered to the

building site. Energy losses in production, refinement, or transmission

are not considered. Such energy losses are assumed to be accounted

for in the delivered price of energy. (Where the price of energy does

not properly reflect such costs, it may be modified by a "Resource

Impact Factor," as described in Section 5.) The significance of energy

prices in the determination of the appropriate BEP goal (or energy

budget) will be discussed at length in this section.

7
Energy

Consumption

Fig.l. Trade-off relationship between Energy Consumption and Building Energy Performance

8
3.2 ECONOMIC ASPECTS OF ENERGY PERFORMANCE

Although the technical trade-off relationships between energy conservation and energy consumption can be determined for most energy-related

modifications to a building design, they do not provide the information

needed to resolve the following design problems, which are more fundamentally economic in nature:

(1) To what extent should energy conservation features be traded

off for reductions in energy consumption requirements; i.e.,

what is the "proper" BEP goal and corresponding design energy

consumption?

(2) How does this BEP goal change as energy resources become scarcer and more costly relative to the resources used for

energy conservation?

(3) How does this BEP goal change as a given size and type

building is considered for different climatic locations?

(4) What is the best combination of the many available energy

conservation techniques for satisfying any given BEP goal

or energy consumption constraint?

These considerations are economic in nature because they directly

involve the efficient allocation of scarce resources. In this limited

context, efficient resource allocation requires that the present-value

cost of all resources used to satisfy thermal comfort criteria over

the expected useful life of a building be minimized. In a more global

sense, efficient resource allocation includes the very determination

of such thermal comfort criteria as well, since they may compete with

other desirable consumer wants and needs. This further step is beyond

the scope of this report, however, since the stated objective is to

provide an economic basis for standards development, given "acceptable"

thermal comfort criteria.

Efficient resource allocation is made possible only when the real eco- nomic costs of the resources utilized are known. This in turn is the

task of the price system. In a well-functioning, free-market economy,

prices determined competitively by supply and demand represent the real

economic cost (or relative scarcity) of a resource. For this reason,

energy prices reflect more than the thermal energy content of a a physical quantity of energy extracted, refined, and delivered to the

building site. Energy prices include non-energy resources consumed

in this process as well, including the cost of capital, equipment,

material and labor required in the supply process. In addition, energy

prices for specific energy forms reflect the degree to which other

Reference is made here to supply and demand conditions in the U.S.,

where the effect of foreign monopoly power is, in fact, a real cost.

Still, some real costs, such as pollution, may not be reflected in

market prices. The case where energy prices do not adequately reflect

all real costs will be treated specifically in Section 5.

9
energy forms can serve as substitutes. Demand for specific energy forms

for other uses will have a direct impact on the price of those energy

forms used in the building sector.

3.2.1 Economic Efficiency and Optimal BEP Goal

Economic efficiency as a design objective provides an analytical framework for dealing with the four design problems outlined above. This

analytical framework can serve as the basis for energy conservation

standards, since they implicitly address these same issues. The following analysis demonstrates the general application of economic efficiency

criteria to the energy conservation design related to HVAC operations.

In Section 4 the implications of this analysis for the development

of building standards for energy conservation are discussed.

We begin with the first of the design problems outlined above: How

high should the HVAC-related BEP goal be in the design of new buildings?

This requires a relatively straightforward economic analysis, graphically

developed in Figure 2. In this analysis it is assumed that only one type

type of energy is used in HVAC operations. In Section 3.3 the problems

inherent in multi-energy-type usage will be discussed.

In Figure 2a, total HVAC-related conservation costs’*- (TCC) incurred

and the total dollar value of energy savings (TS) realized through the

conservation improvements are shown on the vertical axis as a function

of building energy performance on the horizontal axis. Energy conservation improvements are made in order of their relative cost effectiveness. That is, improvements with a higher savin gs-to-cost ratio are employed before improvements with a lower savings-to-cost ratio. All

costs and savings are expressed in present-value, life-cycle terms,

using a discount rate which represents the best alternative use of

available investment funds or the cost of borrowing, if required. The

magnitude of TS is related to climatic factors, projected energy costs,

habitability requirements and operational procedures, as well as to

the discount rate and the expected useful life of the building.

* One must consider that conservation costs may not only be tangible (in

terms of the increased construction cost) but intangible as well (e.g.

,

where preferences for a view or architectural form must be foregone).

2 Total savings can be expressed as average annual savings at current

energy prices multiplied by a present worth factor (PWF), where

II £• PWF = Z (A±P)

t=l 1+d

y

n = useful building life in year,

p = annual rate of fuel price increase in real terms, and

d = discount rate in real terms.

10
Building Energy Performance

Fig. 2. Optimization Criteria for B< ling Energy Performance (BEP) determination

1
In Figure 2a, TS is considerably greater than TCC for lower levels of

BEP. But TS increases at a decreasing rate as BEP is increased, due to

the diminishing returns that characterize energy conservation improvements. Thus TS is eventually matched by TCC at E, and thereafter falls

below TCC. At any point between the origin and E, TS exceeds TCC,

so that any level of BEP within this range may appear to be profitable.

However, economic efficiency requires the use of the most profitable

level of BEP. This efficiency requirement is satisfied only at E,

the level of BEP for which T3 exceeds TCC by the greatest amount, i.e.,

where net saving (TS-TCC) are maximized.

This same "optimal" HVAC-related BEP goal can also be found by examining

the marginal conservation costs (MCC) and the marginal savings (MS)

related to the total cost and total savings function. (Marginal costs

or savings are the costs or savings due to each additional increment of

BEP.) This is shown in Figure 2b. As BEP increases, marginal savings

decrease, but at a decreasing rate. At any point to the left of E, MS

exceeds MCC, and thus a further increase in BEP is economically justified. At any point to the right of E, MCC exceeds MS and thus a decrease in BEP is justified. Thus, only where MS just equals MCC,

at E, is no change in BEP economically justified.

In Figure 2c, we see that total life-cycle costs (TLCC), the sum of

total conservation costs (TCC) and net energy costs (NEC) , are indeed

minimized at E.^ NEC at any level of BEP is equal to total energy costs

before energy conservation improvements are made less total savings at

that level.

The relationship shown between marginal cost and marginal savings in

Figure 2b is very useful in establishing energy conservation design

goals that are economically efficient. Because marginal savings and

costs are usually easier to identify and estimate than total savings

and costs, this approach can greatly simplify the task of determining

the optimal HVAC-related BEP for a building design.

Table 1 provides a hypothetical example of the determination of the

economically efficient levels of BEP and corresponding energy consumption for the case of space heating in a 1200 square-foot, detached,

single-family house. BEP is defined for this example as the inverse

of the purchased Btu requirements for space heating on a day with a

^ Note that MS and MCC in Figure 2b are the first derivatives of TS

and TCC respectively in Figure 2a.

2 Note that the intersection of the NEC and TCC curves has no significance in terms of minimization of TLCC.

3 NEC in Figure 2c has the same shape as the trade-off curve Figure 1;

however, it is expressed in present value, life-cycle dollar terms

rather than in terms of energy consumption.

12
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13
defined climate and operating profile. BEP is increased as insulation

is upgraded, multiple glazing is installed, more efficient HVAC equipment

is used, and air infiltration is reduced. Total and marginal conservation

costs, net energy costs and marginal energy savings are given in present

value, life-cycle terms as they correspond to different levels of BEP.

Total heating-related comfort costs are the sum of conservation costs and

energy costs.

Note that beyond BEP levels 2 and 3 the marginal conservation costs are increasing. This reflects the need to use more costly materials, to make

make structural changes to the building shell, and to further improve the

heating equipment combustion efficiency.

In this example, 7x(10 6 Btu)

-1 is the optimal level of BEP because it

results in the lowest total heating-related cost. The last column in

Table 1 shows the additional life-cycle cost to the building user for

failure to achieve this optimal level of BEP. Had BEP been examined in

smaller increments (or continuously) the optimal level would have been

found between 7 and 8. Note that where discrete increments are examined,

the optimal level of BEP occurs where marginal savings is closest to

marginal cost without falling below it.

3.2.2 Energy Costs and Climatic Factors

This same analytical approach can be used to deal with the second and

third design considerations outlined above. Specifically, how do energy

prices, energy conservation prices, and climatic factors affect the

optimal HVAC-related BEP goal and resulting design energy consumption?

In Figure 3, the vertical and horizontal axes again represent dollar

costs and BEP respectively. The marginal conservation costs (MCC)' and

marginal savings (MS) curves are sufficient to demonstrate the relationship among the variables examined here. MS2 is double the level of MSi

due either to doubled energy prices or doubled climate-related heating?

cooling load factors. The MCC curve remains fixed by assumption in both

both cases. E-,, corresponding to the intersection of MCC and MSp is the

economically efficient BEP design goal for the lower MS curve; similarly,

E

2 corresponds to the higher MS curve, MS

2

. Thus the effects of energy

prices and climatic factors on the optimal BEP goal can be readily

quantified. Likewise, shifts in the MCC curve will result in a shift in

the optimal BEP goal: increased TCC and MCC will result in a decreased

BEP goal and and vice-versa.

Note that a doubling of the MS curve does not result in a doubling of

the optimal BEP goal. Its effect is considerably less because of diminishing marginal returns to increases in BEP. As a result, relatively

small differences in energy costs or climatic factors will have only

a slight impact on optimal BEP levels. For this reason, general con- servation guidelines can be useful in applications where climates and

energy prices are similar, but not necessarily identical.

14
Building Energy Performance

Fig. 3. Optimal BEP level shifts as a function of Marginal Savings

15
Table 2 provides a hypothetical example identical to Table 1 except

that energy expenditures have doubled for a given level of BEP due to

doubled energy costs, now 5 cents per kWh. The optimal level of BEP is now 9 x (lCr Btu)~ . Table 3 provides a similar example for the case

of doubled climatic conditions, i.e. , annual heating requirements for

a house of the same BEP as Table 1 are doubled. In Table 3, energy

costs are the same as in Table 1, but the optimal BEP is 9 x (10 Btu)

as in Table 2. The design impact of doubled heating requirements due

to climatic differences is the same as that of doubled energy costs.

3.2.3 Energy Conservation Combinations

Finally, consider the fourth of the design considerations stated above:

What combination of energy-conserving design features will minimize the

cost of achieving the optimal HVAC-related BEP design goal?

In this case, the marginal savings and marginal costs attributable to

each potential energy-conserving design factor must be examined to determine its optimal utilization level. This optimization criterion results

in an economic "balance" among the energy-conserving measures utilized,

in that the last dollar expended on each of the variable components

generates the same marginal savings, or equivalently

MS-, MS 0 MSo MS_

1 _ 2 _ 3 _ . . . _ n

mcc-l mcc

2 mcc3

MCC

n

( 2 )

In establishing such an economic balance, non-variable energy-conserving

measures should be utilized whenever their TS/TCC ratios exceed the MS/MCC

ratios of the variable measures. (Non-variable measures are those conservation features which are generally fixed in the degree to which they can

be utilized; e.g., a storm door. However, quality and design improvements

can make most conservation features variable in application; for example,

a storm door can have varying insulating or air leakage values, depending

on the quality of construction.)

To some extent these measures may act in an interdependent manner so that the savings generated by one measure may be partially dependent on

the extent to which others are utilized. In such a case, the economically optimal level of investment and its allocation among all interdependent measures must be determined simultaneously.

1 Further conditions require that TS^ TCC^ for each conservation

feature, that (MS^ - MCC^) be decreasing, and that, if the techniques

are interdependent, the Hessian matrix of cross partial derivatives

be negative definite.

16
TABLE

2.

Heating-Related

Costs

asa

Function

of

BEPEnergy

Price

Increases'

Electric

Heat @

5C

per

kWh coN

m

O

m co uo o uo o o •H rH O' rH uo o O' O' vO

4J 6 O CN CN 00 o On CO

CO •H * ** CO 0) 4—

lO co CN 3 5

CL CO rH O cry I XI3

CO

T3

<u

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CC1 4-J O' CN rH O' oo CN O' O' o

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17

See

footnotes

in

Table
Go

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other

footnotes

in

Table
This "balanced" combination of energy conservation measures is implicit

in the TS and TCC curves of Figures 2 and 3. That is, incremental energy

conservation improvements with higher savings-to-cost ratios are implemented before those with lower savings-to-cost ratios. Otherwise, the

substitution of a more cost-effective measure for the less cost-effective

measure will reduce the cost of achieving a given conservation goal.

In fact, the optimal BEP goal and the optimal combination of conservation

measures suitable to achieve that goal can be determined simultaneously.

Thus, a more general economic efficiency criterion for energy conservation

investments in buildings can be stated as follows:

MSj_

= MS2_

= MS3_

= _ MSn _ i (3)

MC^ MCC

2 MCC3

*

*

* MCCn That is, MS must be equal to MCC for each variable measure utilized.

All non-variable measures are utilized as long as their total savings

equals or exceeds their total costs.

Satisfaction of this more general criterion requires that available

investment funding be sufficiently large to accomodate such energy conservation expenditures. Where available investment funds fall short of

this optimal goal (i.e., there exists a conservation budget constraint),

equation (2) provides the criterion for the maximization of savings

consistent with such a budget constraint.^

In Table 4, the costs and savings for two independent energy conservation measures (C^ and C

2

) are displayed to help determine the best

allocation of an energy conservation budget between them. Table 5 provides alternative allocations among these two conservation measures

for two selected budget constraints. If the total budget available were constrained to $250, the most efficient allocation would require C-^ to

be used at level 2 and C

2 to be used at level 1. That is, the greatest

combined savings would be realized when MS/MCC is the same for both

measures (3.2), even though full optimization (at MS=MCC) would not be

possible. When the total budget is increased to $450, the best allocation requires C-^ to be used at level 4 and C

2 to be used at level 3.

In this latter case, MS/MCC is still equal for both measures. Now,

however, MS/MCC is equal to 1.0 so that any additional investment in

either would not be cost effective under the assumptions made. The

last column of Table 5 shows the potential loss incurred in terms of

increased total life-cycle costs if the allocation of investment is

not made in accordance with these economic efficiency criteria.

^ In some cases, due to a budget constraint, a more profitable investment may have to be foregone and a less profitable one be substituted

if the former requires more additional funding than is available.

This is most likely to occur when available conservation components

vary in large discrete units rather than in continuous, or nearly

continuous, fashion.

19
Measure

(c

x

)

Measure

(c

2

)

Table 4. Cost and Savings Schedule for Two Variable

Energy Conservation Measures

Application

Level

Total

Cost

Total

Savings

Marginal

Cost

Marginal

Savings

MS

MC

1 $100 $500 $100 $500 5.0

2 150 660 50 160 3.2

3 200 740 50 80 1.6

4 250 790 50 50 1.0

5 300 820 50 30 0.6

6 350 845 50 25 0.5

1 100 320 100 320 3.2

2 150 400 50 80 1.6

3 200 450 50 50 1.0

4 250 480 50 30 0.6

5 300 505 50 25 0.5

6 350 525 50 20 0.4

20
Table 5. Alternative Allocations of Conservation Budgets 3

Conservation

Budget

Potential

Allocations

Combined Savings Potential Loss

$ 250 C

x=4; c

2 =o $ 790 $ 190

C

1=2; C

2 =l 980 0

Ci-l; C

2 =2 900 80

C

1=0; C

2 =4 480 420

$ 450 C

1=6; C

2=l $1,165 $ 75

C

x= 5

C ? =2 1,220 20

0^= 4

C

2 =3 1,240 0

Cj_= 3

C

2 =4 1,220 20

C

1=2; C2 =5 1,165 75

c i=i; C

2 =6 1,025 $ 215

3 Based on Table 4,

21
Equation (3) is a general criterion that can be of considerable value

to those concerned with the energy-related design of new (and existing)

buildings. Using this criterion as a design tool, a wide range of

energy conservation measures can be systematically considered for incorporation into new building designs in order to reduce the impact of

rising energy costs and different climatic factors to the maximum extent

economically practical. While a great deal of research is needed to

provide designers with information which can assist them in quickly identifying such optimal design configurations, this research is within the

reach of present technology. Much of this research is currently being

undertaken under Federal sponsorship.

3.3 BEP AS AN INDEX FOR MULTIPLE ENERGY TYPES

Consideration must now be given to the case where more than one energy

type (e.g. , gas, oil, and electricity) are used in a building. If the

dollar value of all energy types used were identical, there would be

no problem from an economic efficiency standpoint with a generalized

BEP index based on the thermal value of energy units delivered to the

building site. In fact, however, the dollar value of different energy

types is often quite different and may even differ for the same energy

type used at different times of the day or year. As a result, the

dollar value of a given overall level of energy consumption, measured

in thermal units, will vary depending on the relative amounts and price

of each energy type used. The dollar value of the energy used (or saved)

in a building must be known if its energy-related, life-cycle costs are

to be minimized. Thus a generalized BEP index based solely on thermal

values will not be consistent with an economic efficiency approach to

building design. If only the thermal value of the energy used is considered, equations (2) and (3) will not provide a least-cost solution

to the satisfaction of the energy consumption constraint because they

address the dollar value of the energy saved.

A more appropriate performance index would therefore require that the

thermal units of each energy type used be weighted by their unit prices.

For example, if the delivered price of a kWh of electricity is 5f and

the price of an equivalent thermal unit of oil (3413 Btu) is 2.5c, each

kWh of electricity would be considered to equal two equivalent units

of oil. Because equations (2) and (3) provide the least-cost solution

to a given dollar-value energy consumption constraint, this weighted

BEP approach is consistent with an economic efficiency approach to

building design. This same weighting approach could be equally useful

in specifying design energy budgets for buildings where more than one

type of energy is utilized.

^ Alternatively, thermal units could be

Factors, as discussed in Section 5. weighted by Resource Impact

22
3.4 ECONOMIC ASPECTS OF ENERGY CONSERVATION AT THE NATIONAL LEVEL

Equations (2) and (3) specify economic efficiency criteria for the

determination of building energy performance consistent with minimum

life-cycle cost. In a broader sense, these same equations specify

economic efficiency criteria for the determination of energy performance

levels simultaneously among all new buildings. Not only is a balanced

approach to the selection of energy conservation measures within a building important, but a balanced approach to the determination of

levels of energy performance among all buildings is desirable as well.

This is especially significant when viewed from a Federal or State policy

level, if mandatory thermal efficiency requirements are to be imposed on building designs.

In this broader context, equation (2) specifies that the last dollar

expended to improve overall energy performance in every building must

generate the same marginal dollar-value energy savings. No other specification of overall conservation requirements for buildings will

generate the same or greater dollar-value energy savings at the same

or less total conservation cost. When BEP for all new buildings is

increased to the point where the last dollar expended toward energy

conservation in each building generates one dollar in energy savings

(over the life of each building), the maximum economic conservation goal

for all new buildings is found as well, consistent with equation (3).

In evaluating conservation investments in many new buildings simultaneously, some consideration must be given to differences in appropriate

discount rates and useful building life expectancies. Because investment decisions are based on the present value of energy savings over

the useful lifetime of a building, both of these factors play an important role in determining energy conservation investment priorities

among buildings. Both the discount rate and useful life expectancy

may vary significantly among the private, commercial, and government

sectors. For this reason the economically optimal level of BEP may

vary among otherwise similar buildings.

At the national level, the expression of an overall energy conservation

goal in terms other than thermal units is important if the most economically efficient allocation of energy resources is to be achieved.

For example, at present, conservation goals are often stated in terms

of barrels of oil per day equivalent. Such a measurement, based on thermal units, does not reflect the fact that some types of energy are more scarce (or costly) than others and thus a higher priority should

be given to their conservation. Ultimately the dollar value of the

energy resources consumed in the U.S. must be addressed if a national

energy policy is to be consistent with other national objectives.

23
4.0 IMPLICATIONS FOR STANDARDS DEVELOPMENT

4.1 ECONOMIC EFFICIENCY CONSIDERATIONS

The economic efficiency criteria outlined in Section 3 can play an important role in the development of standards for energy conservation

in buildings. They provide several objective guidelines useful in the

overall development process: (1) They are useful in developing eco- nomically efficient conservation goals for buildings. (2) They are useful in the specification of economically balanced component performance requirements. (Component performance requirements are not

specified in building energy performance standards but they would be

useful in illustrating methods of compliance in an accompanying Manual

of Accepted Practice.) (3) They are useful in determining economically

balanced energy performance requirements for different building types,

located in different geographical locations, with different occupancy

requirements, and utilizing differently valued energy resources.

Economically balanced standards have an advantage over other approaches

to standards development in that they generate any given level of total

dollar-value energy savings at a lower total conservation cost. This

is because the standard implicitly requires that energy conservation

improvements with higher benefit-cost ratios be employed before those

with lower benefit-cost ratios. This is generally true whether or not

the economically efficient conservation goal is selected for promulgation.

A good example of the cost advantage of an economically balanced

approach to standards generation is shown in Table 6. In this example,

there are two otherwise identical houses which fall under the design

requirements of a building energy performance standard. The first is

heated with electricity generated at a cost of 2.5 C per kWh. The second

is heated with electricity generated at a cost of 5 C per kWh. Climatic

and operational factors are held the same for both houses. Energy con- servation costs, annual energy consumption requirements, and life-cycle

energy costs are based on Tables 1 and 2 of Section 3.

Alternative approaches to the generation of standards that results in

the same total heating energy consumption (25.4 million Btu annually)

are examined in Cases A and B of Table 6. The first case requires

different levels of heating-related BEP for each house, based on the

economically efficient (and, therefore, balanced) levels of BEP in

Tables 1 and 2. The second requires that BEP (and thus conservation

costs) be the same in each case, ignoring the cost of energy. While

total conservation costs are somewhat lower in the second approach,

total life-cycle costs related to space heating are lower in the

first approach.

Alternative approaches to the generation of standards that result in

the same total dollar-value energy consumption ($8025) are examined

24
Table 6. Alternative BEP Specifications for Two Buildings3

House I (2. 5 c/kWh)

House II

(5 C/kWh) Total

Economically Balanced Approach

BEP (10 6 Btu)" 1

7 9 N.A.

Annual Energy Use (10^ Btu) 14.3 11.1 25.4

Conservation Cost $2,000 $3,050 $5,050

Life-Cycle Energy Cost $3,140 $4,885 $8,025

Total Heating-Related Cost $5,140 $7,935 $13,075

Equal BEP Approach - Total Btu Constant

BEP (10 6 Btu)" 1 7.9 7.9 N.A.

Annual Energy Use (10^ Btu) 12.7 12.7 25.4

Conservation Cost $2,450 $2,450 $4,900

Life-Cycle Energy Cost $2,791 $5,582 $8,373

Total Heating-Related Cost $5,241 $8,331 $13,272

Equal BEP Approach - Total Energy Cost Constant with A

BEP (10 6 Btu)"1 8.22 8.22 N.A.

Annual Energy Use (10^ Btu) 12.16 12.16 24.32

Conservation Cost $2 ,621 $2,621 $5,242

Life-Cycle Energy Cost $2,675 $5,350 $8,025

Total Heating-Related Cost $5,296 $7,971 $13,627

a Based on Tables 1 and 2

25
in Cases A and C. Again, Case A requires different levels of heatingrelated BEP for each house, while Case C requires that BEP be equal in

each case. Now, not only are total life-cycle costs related to space

heating lower in the first approach, but total conservation costs are

lower as well. Thus the total cost of achieving a given dollar-value

energy conservation goal is less with the economically balanced

approach. Again, this is true whether or not the economically efficient

conservation goal is selected. The need to reflect national energy con- servation goals in terms of the dollar-value of the energy used (or

saved) has already been discussed.

Moreover, the economically balanced standard is more equitable than

other approaches to standards development for it is based on consistent

benefit-cost criteria. That is, all requirements for increased energy

performance are based on the same marginal benefit-cost criteria. Thus

the "burden" imposed on each building owner is equal in terms of the

marginal cost-benefit ratio of the required conservation actions.

Buildings using more expensive fuels would be required to have greater

conservation measures because those measures would be more cost effective than in buildings using lower cost energy, other assumptions held

equal.

4.2 DEVELOPMENT OF A COST-EFFECTIVE STANDARD

Development of a "cost-effective" energy conservation standard based on

the economic efficiency criteria outlined in Section 3 is theoretically

possible as long as (1) the technical relationships between energy

consumption and energy conservation features of buildings can be quantified, (2) the real cost of energy resources over the life of the

building and the current and recurring costs of energy conservation

measures can be projected, (3) an appropriate rate of discount is

identified, and (4) the useful life expectancy of the building (and

its conservation measures) is known. To the extent that more accurate

information on building energy conservation opportunities and future

energy costs is now more readily available than has been in the past,

these economic efficiency considerations can be better incorporated

into the standards development process.

However, there are practical limitations to the development of costeffective standards that should be considered. Energy conservation

standards must, by their nature, be sufficiently generalized that they

can be applied to large numbers of similar, but not identical, building

designs. Yet the actual energy savings potential of various energy

conservation improvements, as well as their costs (both tangible and

intangible) may vary from building to building and over time as well.

In addition, there is some uncertainty as to future energy costs and

the useful life expectancies of buildings. Thus a more generalized

approach to the use of economic analysis in the development of standards is warranted.

26
A classification scheme for buildings and building operations is fundamental to such a generalized approach. This classification scheme

should recognize design differences that have significant impacts on either energy use or long-term energy-related owning and operating costs.

These differences might include building size, habitability requirements,

hours of operation, type of service equipment, special operations (such

as a computer center), and the types of energy use. In addition, a climate classf ication scheme is needed to account for significant differences in the duration and severity of heating and cooling seasons.

Energy performance requirements, or energy budgets, would then be

developed for each class of buildings, using energy and economic data

most appropriate for that class of buildings. These performance

requirements might be based on a "representative prototype" building,

typical of buildings belonging to the class represented. The prototype

would be designed using the economic efficiency criteria examined in

Section 3. The energy required to operate the prototype building under

prescribed operational procedures would be the basis of an energy budget

to be applied to all new buildings of the same class in the same climate.

A schedule of energy budgets for each class of buildings might be

developed for a range of climates, hours of operation, type of energy

used, etc., using cost-benefit analysis to modify the representative

prototype accordingly. Such a schedule might be presented in tabular

(discrete) or equation (continuous) form.

In developing representative prototypes to serve as the basis of regulating energy use in buildings, consideration should be given to the

limitations that they impose on atypical building designs which fall

into the same class as other more typical designs. The purpose of the

standard is not to give rise to a new uniformity among building designs.

Therefore, an analysis of the practical level of design freedom remaining

after energy budgets have been developed based on prototypical designs

should accompany the standards development process.

Another problem inherently associated with the development of an appropriate building classification scheme involves the selection of those

design or operational parameters that are to be used in differentiating

classes of buildings for the purpose of establishing different performance requirements. For example, if buildings using space heating

equipment that is inherently less energy efficient than other types

available (e.g, , resistance heat versus a heat pump) are classified

differently and given a higher energy budget allowance, there is less

incentive to use the more efficient equipment. On the other hand,

if no differentiation is made, energy budgets based on the use of the

more efficient equipment may be impractical for buildings using the

less-efficient equipment. This would impose greater costs on those who

wish to use the less-efficient equipment type where it has a life-cycle

cost advantage. Similarly, if the energy budget were to be based on

the use of less-efficient equipment, the economic potential for

increased conservation in those buildings where the more efficient

equipment is used would be foregone (except through voluntary efforts).

27
A similar example can be made for heavy versus light construction materials and their energy-use implications in otherwise similar buildings.

From an economic efficiency standpoint, energy budgets should be differentiated by these major design variables. However, one could argue on

the same grounds that different energy budgets should be developed for

buildings of different relative window areas as well, which is not

likely to be acceptable from an administrative viewpoint. Thus, an administrative decision (probably at the executive level) will be

required in drawing the line between economic efficiency and energy

efficiency considerations in selecting those design features that will

be the basis of different energy budgets. This administrative prerogative will be manifested in the number of building classifications

established for energy budget calculations.

In developing a generalized approach to the use of economic analysis

in the development of standards, consideration must be given to the

selection of technical and economic factors appropriate to energy con- servation measures in each class of buildings. These factors may vary

significantly, even locally. In addition, some of these factors are

based on projections of future costs which, in fact, are largely

influenced by unforseeable events.

This does not imply that economic analysis is of little use in developing economically efficient standards. Economic analysis does provide

an objective and consistent approach to the determination of the requirements of a standard once acceptable assumptions for these factors have

been agreed upon. In fact, this provides a much more objective basis

for the concensus process, in that discussion is focused on the determination of acceptable assumptions rather than on the final results.

Moreover, as changes in these assumptions become warranted, they can be

systematically incorporated into the standard during periodic updates.

In general, an approach to the selection of these factors which is

conservative from a conservation-cost viewpoint can be justified on several grounds. The most important of these is risk aversion. For

example, if energy prices rise more slowly than projected, or building

lifetimes fall below their expected length, a standard based on the

original assumptions will have resulted in over-investment in energy

conservation, with little recourse on the part of building owners. On

the other hand, if energy prices rise faster than expected, or building

lifetimes extend beyond original projections, building owners can take

action by voluntary retrofit actions in order to further improve the

thermal performance of their buildings. Thus the life-cycle cost of

over-estimating the actual optimal energy performance level is likely

to be considerably greater than the costs of underestimating that same level at the design stage. While it is unlikely that a performance

standard could specify that options for economical retrofit be incorporated into the initial building design, it might suggest that they

at least be considered. In addition, a conservative approach will

be less likely to result in energy performance requirements that exceed

28
economic justification for building designs that differ significantly

from the representative prototype selected for their class of building

4.3 ADMINISTRATIVE COSTS

It has been shown that an economically balanced approach to energy

conservation requirements for buildings will cost building users less

than alternative approaches which result in the same total dollar-value

energy savings. However, the potential impact of such an approach

on the administrative costs associated with an energy conservation

standard for new buildings must be considered. Administrative costs

include costs incurred in the development and promulgation of a new standard as well as the costs associated with compliance and with

enforcement of the standard. Each of these is discussed in turn.

(1) Development : Development costs for standards which require a benefit-cost analysis of all requirements will likely be higher than

those that do not, largely because much of the needed analysis does not

yet exist. However, considerable data on energy and conservation costs

will likely be researched in determining the cost effectiveness of any new standards after their development. Thus, the principal additional

requirement here is to incorporate this data into the standard development process rather then as an addendum to it.

(2) Promulgation : The prospect of increased government intervention

in the construction industry resulting from new standards for energy

conservation is not entirely welcome by many groups having an interest

in that industry. Many would prefer a free-market approach to energy

conservation, based on the need to offset higher energy costs. Energy

conservation standards proposed or promulgated by some State governments

have come under sharp attack, often on the grounds that they are not

cost effective, even in life-cycle terms, in many applications.

New standards developed by the Federal government are likely to receive

a great deal more attention and analysis from interested parties than

State standards. For this reason new standards must be objectively

based and of demonstrated cost effectiveness, especially if they are significantly more stringent than existing standards. This gives a standard which inherently reflects the consideration of both long term

benefits and costs a considerable advantage over those that do not.

If life-cycle-cost effectiveness is required in order to assure successful promulgation, the economically balanced approach to standards generation is likely to result in greater energy savings than

alternative approaches. This is especially true when considering

conservation requirements for different energy sources based on their

delivered costs. If an approach is adopted which results in equal

energy consumption limitations despite significant differences in

energy costs, the consumption limitations will likely be based on the

lowest-cost energy type used in new buildings. If a higher requirement

29
were imposed, the standard would not be cost effective for the lowestpriced energy type used and thus the standard would be difficult to

promulgate successfully. Standards based on the lowest-cost energy

source would not be able to realize the conservation potential related

to other, more highly priced, energy types. Some resistance to energy

conservation requirements which vary as a function of energy costs (and

therefore, by type of energy used) might be encountered from builders/

designers who feel that this will complicate the standard and from

utility companies and manufacturers who may feel that it is biased

towards less costly energy forms or more efficient equipment types.'*'

Careful explanation of the objective benefit-cost basis of such a standard must be provided. Consumer groups and financial institutions will

generally support such a standard if they recognize that it will lead

to lower total owning and operating costs.

(3) Compliance and Verfication : The costs of compliance with an energy

conservation standard and verification of such compliance depends almost

entirely on the manner in which its requirements are formulated rather

than on the extent of those requirements. Building energy performance

standards (BEPS) are inherently more difficult to work with than componentoriented standards. If BEPS are made mandatory, design energy requirements

must be determinable with sufficient accuracy to meet any legal challenge.

For some types of buildings this may require the use of computer programs

that still need further development and verification if they are to be

satisfactory. The impact of BEPS on a regulatory system that is largely

dependent on local or State support and ill-equipped to deal with such

an advance in the technology of building standards will likely require

considerable Federal support. However, the extent to which such support

will be needed is not likely to be affected by the economic basis for

determining the level of the performance requirements.

It is extremely important that the classification schemes for buildings

and climates be sufficiently clear that there be no difficulty or con- fusion in determining the appropriate energy conservation requirements

for a new building. Schedules of conservation requirements (or energy

budgets) for buildings of the same class located in different climate

zones, using different energy types or having significantly different

operating schedules should be easily understandable. Manuals of

Accepted Practice can provide examples of designs which satisfy energy

conservation requirements at minimum first cost. By following these

examples, the need for an engineering analysis of energy requirements

in the case of routine building designs would be eliminated.

Where energy prices are artifically low due to price controls or other non-market forces. Resource Impact Factors might be used to

better reflect true social value of the energy used. This is

discussed in more detail in the following section.

30
In addition, energy budgets for building energy performance requirements might be formulated in terms of energy use over short periods

of time (e.g., one week in each season) that typify operational con- ditions. This would eliminate the need to estimate annual energy

requirements and thus reduce both compliance and verification costs.

However, all of these factors are associated with compliance with and

verification of BEPS, regardless of the basis of their requirements.

Although the requirements may be more extensively classified in a benefit-cost approach to standards development, once the requirements

for a given building are understood, the basis of such requirements

should have no impact on compliance or verification costs.

4.4 POTENTIAL ENERGY SAVINGS IN THE RESIDENTIAL SECTOR

An estimate of the impact of standards based on economic efficiency

considerations on energy use in residential buildings was made by Eric

Hirst in a recent study made at Oak Ridge National Labs."*- In that

study, Hirst estimated that energy use in residential buildings would

total 543 x 10^-8 joules between 1975 and 2000, without improvements

in the energy efficiency of the service equipment or shell of the

structure over pre-1975 levels. By incorporating an ASHRAE 90-type

standard to improve the thermal efficiency of new and existing building

shells, energy use could be reduced to 525 x 10^ joules. Upgrading

the energy efficiency of new equipment through the year 2000 would

further reduce energy use to 478 x 10^® joules, about 2.6 times more

than the improvement in the shell. However, Hirst states that the energy

saving impacts from an ASHRAE-type standard are "much lower than could

be achieved with standards that minimize life-cycle costs rather than

maintain initial costs." He estimates that "a tough, but economically

efficient, set of thermal standards for new and existing residential

units would yield savings comparable to those for the equipment efficiency programs."

Thus Hirst implies that the economic efficiency approach to building

standards would likely increase energy savings due to thermal improvements of residential shells by considerably more than twice that available through the adoption of an ASHRAE 90-type standard. Further savings

are likely by taking a similar (economic efficiency) approach to the

improvement of service equipment performance. Such an analysis implies

that a standard for residential buildings that is to make a significant

impact on residential energy use must focus on both the shell and

the service equipment, using economic efficiency criteria in determining

the extent to which conservation measures should be required for both.

Eric Hurst, "Residential Energy Use Alternative: 1976 to 2000,"

Science, vol. 194, p. 17, December 197 6 .

31
5.0 REAL ENERGY COSTS VERSUS MARKET ENERGY PRICES

In Section 3 the projection of energy prices over the life of a building

was shown to be an essential element in determining the optimal size of

energy conservation investments in buildings. These conservation investments are, in turn, a major determinant of the building's annual energy

requirements. Thus the price of energy is an important factor in determining at the design stage how much energy should be used in building

operations

.

Similarly, in the development of standards for energy conservation based

on a benefit-cost approach, energy prices are an important determinant

of conservation requirements. However, since energy standards may be

mandated in response to national needs in addition to private needs,

a different basis for valuing energy resources may be warranted.

The prospective building owner can minimize his expectation of presentvalue, life-cycle, energy-related costs by making design decisions based

on the best available projection of energy prices to be incurred over

the useful life of the building. As a result, his allocation of energy

and energy conservation resources is optimal from his own (i.e., private)

economic perspective. Where market prices represent the real cost of

supplying those resources to the building site, the allocation of expenditures between energy and energy conservation resources will be

optimal from the national, or social, point of view as well. That is,

the real cost to the nation, in terms of scarce resources consumed in

satisfying given habitability requirements, cannot be further reduced

by reallocating expenditures among the resources employed. These real

costs are a measure of more than the thermal content of the energy units

consumed, per se . They include the land rents, capital, labor and necessary profits involved in extracting, refining, and transporting those

resources; environmental hazards; and national security considerations

as well as foregone opportunities for using that energy in other buildings and/or sectors of the national economy.

When energy prices do not properly reflect these real costs, that allocation of resources considered optimal by the building owner will not be

the same as that optimal for the nation. For example, if the price of

some energy form is held below its real cost, the optimal level of con- servation in buildings will be lower for the owner than for the nation

as a whole. As a result, the units of energy that would be conserved

by a building owner at the higher price are allocated to operations in

his building instead of to more socially valuable applications in competing sectors or in other buildings. (If the price of energy resources

is held below the real costs incurred in making them available, we can

expect some shortfall in the amount of that resource produced over the

amount demanded at that lower price. This may ultimately lead to some form of energy rationing.)

32
There are many reasons why delivered prices and real costs for energy resources may fail to coincide. Some of these reasons may work in

opposite directions. The most important of these factors are:

(1) unit taxes, such as sales tax or special energy taxes;

(2) price controls, such as government regulation of wellhead

prices, transportation rates, and utility rates;

(3) environmental impacts, such as thermal, water and air

pollution; oil spills; strip mining; and the risk of

catastrophic accidents at power plants, where these are not internalized into the market price of energy;

(4) monopoly powers, if and where they may exist. (This does

not include the impact of foreign energy cartels, if we consider only the efficient allocation of resources within

the U.S. Higher energy costs due to monopoly power abroad

represent real costs to the U.S. in terms of export requirements to pay for energy imports.)

(5) national security considerations and the potential economic

disruption that would result from an oil embargo; and

(6) failure to accurately assess the fossil fuel reserves of

the U.S. and the world and the rate of technical progress

that may provide new sources of energy at affordable cost.

A national standard for energy conservation, if it is to address

national resource allocation problems or avoidance of counterproductive

impacts, must therefore consider the real economic cost of energy

resources in determining energy conservation goals for new buildings.

If these real costs are expressed in dollar terms they can be used

directly in determining the energy conservation goals for new buildings

that are optimal from the national (or social) standpoint.

Resource Impact Factors (RIF's) have been suggested as one way of incorporating all economic costs into a cost-sensitive energy standard.

A RIF is an index which can be used to adjust an actual energy price so that the true social value of the energy resource is better represented.

A RIF would be developed by an appropriate Federal agency for each type

of energy used and for each geographical region where there would likely

be a significant difference in the real cost of producing and delivering

a unit of that energy type. The RIF would reflect, to the extent practical, differences between real and market energy costs as well as anticipated changes in relative costs over time. The RIF would not be

used to modify actual energy prices but would serve as a "shadow price"

in determining the most cost-effective level of investment in energy

conservation for standards development purposes.

Weber, Stephen F., The Effect of "Resource Impact Factors" on Energy

Conservation Standards for Buildings , National Bureau of Standards

Interagency Report 77-1199, 1977.

33
RIF's can be formulated directly in terms of dollar costs or indirectly

in terms of a multiplicative factor to be used with market (actual)

energy costs. Formulation of RIF's directly in dollar terms to achieve

uniformity over wide geographic regions would likely be more appropriate

because this approach would avoid local, short term differences in energy

prices. Such differences are largely due to the discrete nature of

contractural supply agreements and rate schedules and are not indicative

of long term differences in real energy costs. Thus another advantage of

the RIF approach, when formulated in dollar terms, is to ignore these

temporary differences, providing a more uniform and rational long-term

basis for the energy cost data used in generating costsensitive standards.

An additional attraction for RIF's is their potential to coordinate

standards development with other Federal government energy policies.

For example, if the Federal government wished to encourage the use of

coal over imported oil for the generation of electric power, this could

be reflected in standards for buildings through the assignment of RIF's.

In such a case, electricity generated by coal would be assigned a lower

RIF than electricity generated by oil. As a result, buildings in areas

served by coal-generated electricity would have lower conservation

requirements.

34
6.0 SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS FOR FURTHER RESEARCH

6.1 SUMMARY AND CONCLUSIONS

Even before the oil embargo of late 1973 and subsequent energy shortages

the Federal government and several State governments had considered energy

conservation standards for new buildings to be an important element of a comprehensive energy policy. Several States have already adopted such

standards into their building regulatory systems. At the Federal level,

the President and the Congress have given high priority to enacting

legislation that would lead to the development of national standards

for energy conservation in new buildings.

The Energy Conservation Standards for New Buildings Act of 1976, Title III

of Public Law 94-385, specifically requires the development of performance

standards which are designed to achieve the "maximum practicable" improvements in energy efficiency in new buildings. This report suggests how

this goal can be accomplished through the explicit consideration of lifecycle costs and benefits related to the improved energy performance of new buildings. Moreover, the economic efficiency criteria presented can

be utilized in minimizing the long run cost of achieving any overall

conservation goal, whether "maximum practicable" or not. In fact, the use of economic efficiency criteria to "balance" the requirements of a standard as it is applied to different buildings may be more significant

than the actual determination of the maximum practicable conservation

goal itself.

Two basic economic efficiency criteria for new building design were examined and their implications for standards development discussed:

(1) The economically efficient energy performance goal, whether

for a given building or all buildings, is found at the point

where the last dollar invested in energy conservation in

each building results in a dollar's worth of energy savings

over the life of the building; i.e. , at the point where

marginal savings just equal marginal cost (Section 3.2.1);

and,

(2) The least-cost combination of energy conservation measures

in a given building, consistent with any given energy performance goal, is found at the point where the last dollar

invested in the modification of each component results in

the same dollar-value energy savings, i.e., the ratio of

marginal savings to marginal conservation cost (MS/MCC) is

equal for all components (Section 3.2.3).

This second criteria can be adapted to specify economically balanced

performance goals for all new buildings whether or not such goals

achieve the maximum degree of cost effectiveness:

35
(2a) The specification of building energy performance goals that

minimize total conservation costs incurred in satisfying a given overall conservation goal for all new buildings requires

that MS/MCC be equal for every new building; i.e., the last

dollar invested in every building should generate the same life-cycle, energy-related savings (Section 3.3). In addition,

if that overall conservation goal is expressed in terms of

thermal energy units weighted by their respective costs, the

actual conservation costs incurred in achieving that goal

will be minimized with such an approach (Section 4.1).

Implications were examined for the use of these economic efficiency

criteria and benefit-cost analysis in general in the development of

energy conservation standards for new buildings. Due to the generalized

nature of standards, which must be applicable to a wide range of buildings, economic efficiency criteria cannot be exactly satisfied in every

application, but they can provide a meaningful and consistent framework

in which to develop standards. Given such a framework, a systematic

method can be established for the generation of standards for different

building types, located in different climates, using differentiallyvalued energy resources, and having other features that significantly

affect life-cycle costs. Once such a framework is established, focus

can be directed on the particular technical and economic assumptions

which drive the standards generation process. As significant changes

in these assumptions occur over time, the standards can be systematically

changed during periodic updates.

A classification scheme for building which reflects those factors that

have a significant impact on the costs and benefits of energy conservation improvements is essential to a benefit-cost approach to standards

development. Technical and economic assumptions, critical to the determination of appropriate levels of energy conservation investment within

the economic efficiency framework, should be conservatively estimated

so that they will not force conservation requirements that are not

economically justified in most atypical applications.

The development costs of standards based on a benefit-cost approach are likely to be somewhat higher than alternative approaches because sufficient data on the economically efficient levels of conservation improvements in new building design is not available. However, the costs

associated with promulgation, compliance, and verification should be no higher than those for similar performance standards not based on economic analysis, since in either case the resulting standards will

likely be stated in energy budget terms. At the same time, standards

based on economic efficiency criteria should result in considerably

more energy savings than other approaches. This is because the economic

potential for energy conservation (in terms of reduced energy-related

life-cycle costs) is considerably higher in most new buildings than has

been generally recognized. Moreover, because the resulting standards

will be economically balanced, no alternative standards can achieve

36
the same overall level of dollar-value energy savings (nationwide) at

a lower conservation cost.

Economic balance among the conservation requirements also results in more equitable cost-benefit burdens on building users than alternative

standards. This is especially true if economically balanced standards

are used instead of standards which maintain constant conservation

requirements despite significant differences in climate, energy costs,

and other operational factors.

Energy consumption estimates in the residential sector with and without

an economically efficient energy conservation standard were examined.

It has been estimated elsewhere that the economic efficiency approach

to standards development would result in significantly greater energy

savings, especially with respect to the building envelope. These

savings may be more than twice that realizable from an ASHRAE 90-75-type

standard

Finally, the problem of discrepancies between real energy costs and

actual energy prices was discussed in Section 5. The use of Resource

Impact Factors was suggested as one way to take account of some of

these discrepancies and to provide a more uniform base for reflecting

local energy costs in an energy standard. In addition, these same Resource Impact Factors can provide consistency with other government

energy policies.

6.2 RECOMMENDATIONS FOR FURTHER RESEARCH

As was stated near the outset of this report, the technical relationships between energy conservation and energy consumption are better

understood than the economic relationships. And yet any decision as

to the allocation of scarce resources between these two factors is,

by its nature, an economic decision. For this reason reliable data

of both a technical and an economic nature are needed in order to

provide a sound basis for standards making.

Building energy performance standards based on an energy budget concept

are inherently difficult to formulate as evidenced by the fact that

there are few such standards in existence today. Considerable research

has been directed towards the development of an acceptable approach

to such standards at the National Bureau of Standards. However, much

additional research needs to be undertaken.

At present, one major obstacle to the development of building performance standards appears to be the lack of a comprehensive knowledge

of the energy performance of buildings and their design components.

This is essential if energy budgets are to be verified at the design

stage. Other research prerequisites to the generation of an acceptable

standard must be accomplished as well. A classification scheme for

buildings must be developed and representative prototype building

37
designs for different clases of buildings must be found. Climate classification methods, operational and usage assumptions, and normalization

factors to account for differences in building size must all be developed

in order to support the standard. A Manual of Accepted Practice must be

prepared in order to show a variety of illustrative solutions to the

energy budget constraint of the standard so that a computerized energy

analysis is not required of every new building.

All of these technical requirements are necessary to the development of

building energy performance standards, regardless of their economic

orientation. However, these same requirements will serve as the basis

of much of the data needed for economic analysis, especially with regard

to estimating the energy savings to be derived from the standard. Transformation of potential energy savings to potential dollar savings on

a life-cycle basis will require additional research into appropriate

discount rates, useful building lifetimes, and projected energy costs

for different energy types. In addition, cost data for the energy

conservation improvements assumed in the prototype buildings are needed,

including installed costs, finance costs, depreciation rates, replacement

costs, insurance costs, and operational and maintenance costs. This data

is needed for many different types of buildings and must be regionalized

for different parts of the United States as well.

Incorporation of this data into an energy standard might be achieved

through the design of representative building prototypes. These representative prototypes would be designed with the goal of reducing energy

use and life-cycle, energy-related costs, using technology and building

practices presently available to the building community. For each building type represented, a range of designs appropriate to the range of

climates and energy costs (or RIF's) in the U.S. would be prepared.

Actual energy budgets for corresponding climates and energy costs would

be generated by computer analysis of these prototypes. In addition,

these prototypes would serve as the basis of a Manual of Accepted

Practice.

The major difference between building energy performance standards based

on economic analysis and those generated without such analysis is in the

design of the representative prototypes. Where the prototype designs

used in the generation of alternative standards might be based on existing component-specific energy standards (e.g., ASHRAE 90-75) or on

an administratively directed goal, the prototype designs would instead

be determined using consistent economic decision criteria.

Because the energy budget generated through the use of economic analysis

will tend to vary to a greater extent than those generated through alternative means, a clear, unambiguous method of selecting the appropriate

energy budget for any given building must be developed. Finally, assumptions implicit in the standard must be reviewed periodically in order to

reflect changes in long run energy costs, conservation costs, building

technology, and other factors which might have significant impact on the

cost-effectiveness of energy conservation modifications in building

designs.

38
Nb j- 1 14A i r

v. u-77)

U.s. DEPT. OF COMM. bibliographic data

SHEET

1. PUBLICATION OR REPORT NO. NBSIR 78-1471

2. Gov’t Accession

No.

3. Recipient’s Accession No.

4. TITLE AND SUBTITLE

THE ROLE OF ECONOMIC ANALYSIS IN THE DEVELOPMENT OF

ENERGY STANDARDS FOR NEW BUILDINGS

5. Publication Date July 1978

6. Performing Organization Code

7. AUTHOR(S)

Stephen R. Petersen

8. Performing Organ. Report No.

9. PERFORMING ORGANIZATION NAME AND ADDRESS

NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

10. Project/Task/Work Unit No.

11. Contract/Grant No.

12. Sponsoring Organization Name and Complete Address (Street, City, State, ZIP)

Department of Housing and Urban Development,

and the Department of Energy

Washington, D.C.

13. Type of Report & Period Covered

14. Sponsoring Agency Code

15. SUPPLEMENTARY NOTES

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.)

The Federal Government and a number of states are currently developing energy

conservation standards for new buildings. This report suggests that economic

considerations be incorporated directly into the standards development process.

A life-cycle benefit-cost approach to standards development can provide a systematic and objective framework for standards specification. Differences in

climate, building type, energy cost, and operational requirements can be directly

incorporated into the standard as they impact energy-related benefits and costs.-

It is shown that the life-cycle costs associated with any given overall conservation

goal can be reduced by developing an economically balanced standard. In addition,

it suggests that a standard which has as its goal the minimization of life-cycle

costs will likely lead to greater effective energy savings than alternative

approaches. Specific suggestions for the incorporation of economic analysis into

the standards development process are made.

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; building standards; energy conservation;

life-cycle building costs; and performance standards

18. AVAILABILITY ^Unlimited 19. SECURITY CLASS

(THIS REPORT)

21. NO. OF PAGES

, T For Official Distribution. Do Not Release to NTIS

UNCL ASSIFIED

48

|

1 Order From Sup. of Doc., U.S. Government Printing Office Washington, D.C. 20402, SD Stock No. SN00^003

20. SECURITY CLASS

(THIS PAGE)

22. Price

[y 1 Order From National Technical Information Service (NTIS)

Springfield, Virginia 22151 UNCLASSIFIED $4.50

USCOMM-DC 66039-P7e
-

t)