CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES 

TABLE OF CONTENTS 

8.1 INTRODUCTION .............................................................................................................. 8-1

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analyses ...............8-1

8.1.2 Overview of Life-Cycle Cost and Payback Period Analyses Inputs ...................8-2

8.2 LIFE-CYCLE COST ANALYSIS INPUTS....................................................................... 8-4

8.2.1 Definition .............................................................................................................8-4

8.2.2 Total Installed Cost Inputs...................................................................................8-5

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

8.3 PAYBACK PERIOD INPUTS......................................................................................... 8-19

8.3.1 Definition ...........................................................................................................8-19

8.3.2 Inputs.................................................................................................................. 8-20

8.4 RESULTS USING TARIFF-BASED ELECTRICITY PRICES ..................................... 8-20

8.4.1 Life-Cycle Cost Results .....................................................................................8-20

8.4.2 Payback Period Results...................................................................................... 8-23

LIST OF TABLES 

Table 8.1.1 Summary Information of Inputs for the Determination of LCC and PBP........... 8-4

Table 8.2.1 Inputs for Total Installed Costs............................................................................ 8-5

Table 8.2.2 Products Evaluated for the BVM Life-Cycle Cost and Payback Analyses......... 8-6

Table 8.2.3 Baseline Manufacturer Prices per Unit................................................................ 8-6

Table 8.2.4 Standard-Level Manufacturer Price Increases (Price Increases Relative to 

the Price of Baseline Efficiency Equipment at Level 1)...................................... 8-7

Table 8.2.5 Overall Baseline Markups by Distribution Channel and Overall WeightedAverage, Including the Weighted Average Sales Tax, for Manufacturing 

Facilities............................................................................................................... 8-8

Table 8.2.6 Overall Incremental Markups by Distribution Channel and Overall 

Weighted-Average, Including the Weighted Average Sales Tax, for 

Manufacturing Facilities...................................................................................... 8-8

Table 8.2.7 Installation Costs for Baseline BVM equipment ................................................. 8-9

Table 8.2.8 Installation Cost Indices (National Value = 1.000) ............................................. 8-9

Table 8.2.9 Costs and Markups for Determination of Average Total Installed 

Costs (BVM)*.................................................................................................... 8-10

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8-ii 

Table 8.2.10 Average Equipment Price, Installation Cost, and Total Installed Costs for 

BVM (B-L-IO), at U.S. Average Prices (2008$)* ............................................. 8-11

Table 8.2.11 Inputs for Operating Costs................................................................................. 8-12

Table 8.2.12 Estimated Commercial and Industrial Electricity Prices by State 

(2008 cents/kWh)............................................................................................... 8-13

Table 8.2.13 Derived Average Electricity Price Paid by Business Type................................ 8-14

Table 8.2.14 Nominal and Real Discount Rates by Ownership Category.............................. 8-19

Table 8.4.1

............................. 8-23

Distribution of Life-Cycle Cost Savings from a Baseline Level (Level 1) 

for A-L-IN BVM Equipment Category by Efficiency Level

Table 8.4.2 Summary of PBP Results for BVM Equipment Category................................. 8-25

LIST OF FIGURES

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP ....................... 8-4

Figure 8.2.1

.............................................................................. 8-14

Cumulative Probability Distribution Showing the Electricity Prices Paid 

by All Customers (in 2008$)

Figure 8.2.2 Electricity Price Trends for Commercial Rates to 2042 .................................... 8-16

Figure 8.4.1

..................................... 8-21

Effect of the Change in Efficiency Level on Life-Cycle Cost for BottlerOwned A-L-IN BVM in Manufacturing Facilities (2008$) at Average U.S. 

Conditions (Level 1 is the Baseline Efficiency Level).

Figure 8.4.2 A-L-IN BVM, Level 4 Efficiency: Cumulative Chart of LCC Savings........... 8-22

Figure 8.4.3

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

Effect of the Change in Efficiency Level on Payback Period for A-L-IN 

BVM Equipment category, in Manufacturing Facilities at Average U.S. 

Conditions (Level 1 is the Baseline Level).

Figure 8.4.4 A-L-IN BVM Level 4 Efficiency: Cumulative Chart of PBP ......................... 8-25

EERE-2006-STD-0125 COMMENT 46
CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES 

8.1 INTRODUCTION 

This chapter describes the methodology for analyzing the economic impacts of possible 

energy efficiency standards being developed for beverage vending machines (BVMs) on 

individual customers. The effect of standards on individual customers usually includes a 

reduction in operating cost and an increase in purchase cost. This chapter describes two metrics 

used in the analysis to determine the economic impact of standards on individual commercial 

customers: 

 Life-cycle cost (LCC) is the total customer cost over the life of an appliance or 

equipment, including purchase costs and operating costs (which in turn include 

maintenance, repair, and energy costs). Future operating costs are discounted to the time 

of purchase, and summed over the lifetime of the appliance or equipment. 

 Payback period (PBP) measures the amount of time it takes customers to recover the 

assumed higher purchase price of more energy-efficient equipment through reduced 

operating costs. 

Inputs to the LCC and PBP analyses of the BVM equipment are discussed in sections 8.2

and 8.3, respectively. Results for each metric are presented in section 8.4. Key variables and 

calculations are presented for each metric. The calculations discussed here were performed with a 

series of Microsoft Excelspreadsheets that are accessible over the Internet 

(http://www.eere.energy.gov/buildings/appliance_standards/commercial/beverage_machines.html). 

Details of and instructions for using the spreadsheets are discussed in appendix E, User 

Instructions for Life Cycle Cost Spreadsheet. A more complete set of results of the analyses is 

presented in appendix F, Detailed Life-Cycle Cost Output. 

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

Recognizing that each commercial building that uses the BVM equipment is unique, the 

U.S. Department of Energy (DOE) analyzed variability of costs by performing the LCC and PBP 

calculations detailed here for seven types of businesses, which can be categorized as follows: 

 manufacturing facilities 

 office/healthcare – a large number of firms engaged in financial and other services, 

headquarters functions, medical and dental offices, outpatient care, nursing homes, longterm care, and assisted care facilities, and hospitals 

 retail – most types of retail stores as well as food and beverage service facilities 

 schools – primary and secondary, colleges, and universities, and large-group housing 

facilities owned by state governments, such as prisons 

 federal – all federal buildings, including military bases, offices, and housing facilities 

 other – facilities such as hotels and motels, warehouses, airports, sporting arenas, movie 

theaters, exhibition halls, and other miscellaneous facilities 

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 a local bottler or vending machine service company – the most common building type 

that typically leases space in any one of the six types of buildings, provides vending 

services, and splits the profits with the owner of the host site through a contract that splits 

the annual coin box receipts. 

Vending companies do not typically pay the electricity bill associated with their vending 

machines, but some portion of that bill may be shared with the site owner through the coin box 

contract. One BVM or BVM unit may serve a motel/hotel, an office building, a break room in a 

factory, a convenience store with gas pumps, or a hospital. Beverage vending machines may be 

located either inside the building or in some cases outside, frequently in a kiosk-like setting. 

Aside from energy, the most important factors influencing LCC and PBP analyses are 

related to the State within the United States to which each BVM unit is shipped. These factors 

include energy prices, installation cost, markup, and sales tax. The LCC analysis presented here 

used the predicted energy consumption based on the engineering analysis and reviewed in 

chapter 7, Building Energy Use Characterization. Energy consumption of BVMs located in 

outdoor settings in this approach is sensitive to climate, so energy use varies by geographical 

location. At the national level, the spreadsheets explicitly modeled both the uncertainty and the 

variability in the model’s inputs using probability distributions based on the shipment of BVM 

equipment to different states. 

The LCC and PBP results are displayed as distributions of impacts compared to the 

baseline efficiency level. Results are presented at the end of this chapter. A variety of graphic 

displays can be created to illustrate the implications of the analysis. Examples of graphic 

displays are (1) a cumulative probability distribution showing the percentage of BVM equipment 

in U.S. commercial buildings that would experience a net savings, and (2) a frequency chart 

depicting variation in life-cycle cost for each BVM efficiency level considered. 

8.1.2 Overview of Life-Cycle Cost and Payback Period Analyses Inputs 

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

and operating cost (including energy cost). Future operating costs are discounted to the time of 

purchase and summed over the lifetime of the equipment. The PBP is the increase in purchase 

cost of higher efficiency equipment divided by the decrease in annual operating cost (because of 

the lower energy consumption) of the equipment. It represents the number of years it will take 

the customer to recover the increased purchase cost through decreased operating costs. In the 

calculation of PBP, future costs are not discounted. 

Inputs to the LCC and PBP analyses are categorized as follows: (1) inputs for 

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

calculating the operating cost (i.e., energy, maintenance, and repair costs). 

The primary inputs for establishing the total installed cost are: 

 Baseline manufacturer price: The price charged by the manufacturer to either a 

wholesaler or customer for equipment meeting existing minimum efficiency (or baseline) 

standards. The manufacturer price includes a markup that converts the cost to 

manufacture to a manufacturer price. 

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 Standard-level manufacturer price increases: The incremental change in manufacturer 

price associated with producing equipment at each of the proposed higher standard levels. 

 Markups and sales tax: The markups and sales tax associated with converting the 

manufacturer price to a customer price. The markups and sales tax are described in detail 

in chapter 6, Markups for Equipment Price Determination. 

 Installation price: The cost to the customer of installing the equipment. The installation 

price represents all costs required to install the equipment but does not include the 

marked-up customer equipment price. The installation price includes labor, overhead, and 

any miscellaneous materials and parts. Thus, the total installed cost equals the customer 

equipment price plus the installation price. 

The primary inputs for calculating the operating cost are: 

 Equipment energy consumption: The equipment energy consumption is the site energy 

use associated with the use of the BVM equipment. Although there are potentially some 

interactive effects on the overall heating and cooling of the building, for purposes of the 

NOPR, the LCC analysis includes only the use of electricity by the equipment itself. This 

approach is consistent with most other DOE equipment efficiency rulemakings. 

Chapter 7, Energy Use Characterization, provides complete details on the BVM 

equipment energy use simulations and their results. 

 Electricity prices: Electricity prices used in the analysis are the price per kilowatt-hour 

($/kWh) paid by each customer. Electricity prices are determined using average 

commercial and industrial electricity prices in each State, as determined from Energy 

Information Administration (EIA) data for 2008.1 The two types of buildings that use 

industrial electricity are assumed to pay the average industrial price. The 2008 average 

commercial prices were modified to reflect the fact that the four types of buildings pay 

commercial prices and use BVM equipment pay prices that, on average, are either 

slightly higher or lower than the average commercial prices.2

 Electricity price trends: The EIA’s Annual Energy Outlook 2009 (AEO 2009) is used to 

forecast electricity prices into the future.3

 For the results presented in this chapter, DOE 

used the AEO 2009 reference case to forecast future electricity prices. 

 Maintenance costs: The labor and material costs associated with maintaining the 

operation of the equipment (e.g., cleaning heat exchanger coils, checking refrigerant 

charge levels). 

 Repair costs: The labor and material costs associated with repairing or replacing 

components that have failed. 

 Lifetime: The age at which the BVM or BVM equipment is retired from service. 

 Discount rate: The rate at which future costs are discounted to establish their present 

value. 

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

cost inputs for the calculation of the LCC and PBP. Table 8.1.1 summarizes the various inputs 

used for the calculation of the LCC and PBP. As noted earlier, most of the inputs are 

characterized by probability distributions that capture variability of the input variables. Also 

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listed in Table 8.1.1 are chapters in the technical support document (TSD) where more detailed 

information on the input variables can be found. 

Installation Costs Installation Costs

Repair Costs Repair Costs Lifetimes Lifetimes

Annual Maintenance

Electricity 

Consumption Electricity 

Consumption

Manufacturer Base 

Price

Total Installed Cost 

(Std i –Base)

Manufacturer Base 

Price

Contractor Markups

Markups

Wholesaler/ 

Distributor Markup

Electricity Prices

National Account 

Markup

Equipment Prices

Sales Tax

Manufacturer Base 

Price

Installation Costs

Manufacturer Std 1 

Base Price

Manufacturer Std 1 

Base Price

Manufacturer Price

Standard i= 1...n

Electricity 

Consumption Annual Energy Costs

Annual Maintenance

Repair Costs

Annual Operating 

Cost (Std i - Base)

Payback 

Period

Discount Rate

Lifetimes

Lifetime 

Operating 

Cost (Std 

i – Base)

Lifecycle 

Cost

Annual Maintenance 

Costs

Installation Costs Installation Costs

Repair Costs Repair Costs Lifetimes Lifetimes

Annual Maintenance

Electricity 

Consumption Electricity 

Consumption

Manufacturer Base 

Price

Total Installed Cost 

(Std i –Base)

Manufacturer Base 

Price

Contractor Markups

Markups

Wholesaler/ 

Distributor Markup

Electricity Prices

National Account 

Markup

Equipment Prices

Sales Tax

Manufacturer Base 

Price

Installation Costs

Manufacturer Std 1 

Base Price

Manufacturer Std 1 

Base Price

Manufacturer Price

Standard i= 1...n

Electricity 

Consumption Annual Energy Costs

Annual Maintenance

Repair Costs

Annual Operating 

Cost (Std i - Base)

Payback 

Period

Discount Rate

Lifetimes

Lifetime 

Operating 

Cost (Std 

i – Base)

Lifecycle 

Cost

Annual Maintenance 

Costs

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

Table 8.1.1 Summary Information of Inputs for the Determination of LCC and PBP 

Factor Value Concept TSD Reference Section 

Total Installed Cost Primary Inputs 

Baseline manufacturer price Varies with product Chapter 5 

Standard-level manufacturer price 

increases 

Varies with product and efficiency level Chapter 5 

Markups and sales tax Varies with distribution channel and location Chapter 6 

Installation price Varies with location Chapter 8 

Operating Cost Primary Inputs 

Equipment energy consumption Varies with product, efficiency level, and location Chapter 7 

Electricity prices Vary with location, business/building type Chapter 8 

Electricity price trends Vary with price scenario Chapter 8 

Maintenance costs Varies with product Chapter 8 

Repair costs Varies with product Chapter 8 

Lifetime Assumed to be 10 years Chapters 3, 8 

Discount rate Varies with type of business Chapter 8 

All of the inputs depicted in Figure 8.1.1 and summarized in Table 8.1.1 are discussed in 

sections 8.2 and 8.3. 

8.2 LIFE-CYCLE COST ANALYSIS INPUTS 

8.2.1 Definition 

Life-cycle cost is the total customer cost over the life of a piece of equipment, including 

purchase cost and operating costs (which comprise energy costs, maintenance costs, and repair 

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costs). Future operating costs are discounted to the time of purchase and summed over the 

lifetime of the equipment. Life-cycle cost is defined by the following equation: 

 Eq. 8.1 

 

N

t

t

t rOCICLCC

1

)1/(

Where: 

 LCC = life-cycle cost ($), 

 IC = total installed cost ($), 

∑ = sum over the lifetime, from year 1 to year N, where N = lifetime of equipment 

(years), 

 OC = operating cost ($), 

 r = discount rate, and 

 t = year for which operating cost is being determined. 

Because DOE gathered most of its data for the LCC analysis in 2008, DOE expresses all 

the costs in 2008$. Total installed cost, operating cost, lifetime, and discount rate are discussed 

in the following sections. 

8.2.2 Total Installed Cost Inputs 

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

 EQPIC  INST Eq. 8.2

Where: 

 EQP = equipment price (i.e., customer price for the equipment only), expressed in 

dollars, and 

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

labor and materials), also expressed in dollars. 

The equipment price is based on how the customer purchases the equipment. As 

discussed in chapter 6, Markups for Equipment Price Determination, DOE defined three types of 

distribution channels to describe how the equipment passes from the manufacturer to the 

customer: (1) the manufacturer sells the equipment to a wholesaler, who in turn, sells it to the 

vending machine operator; (2) the manufacturer sells the equipment to a wholesaler/distributor, 

who sells to a site owner; or (3) the manufacturer sells the equipment to the local vending 

machine operator through a national account. The remainder of this section provides information 

about the variables DOE used to calculate the total installed cost for BVM equipment. Inputs for 

the determination of total installed cost are shown in Table 8.2.1. 

Table 8.2.1 Inputs for Total Installed Costs 

Baseline manufacturer price ($) 

Standard-level manufacturer price increases ($) 

Wholesaler markup 

Mechanical contractor markup 

General contractor markup 

National accounts markup 

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Sales tax (%) 

Installation cost ($) 

8.2.2.1 Baseline Manufacturer Price 

The baseline manufacturer price is the price charged by manufacturers to either a 

wholesaler/distributor or very large customer for equipment meeting existing minimum 

efficiency (or baseline) standards. The manufacturer price includes a markup that converts the 

cost to manufacture (i.e., the manufacturing cost) to a manufacturer price. DOE developed the 

baseline manufacturer prices through an efficiency level analysis supplemented by certain 

design-option considerations. Refer to chapter 5, Engineering Analysis, for details. The LCC and 

PBP have been carried out on a set of six equipment size categories in two equipment classes (A 

and B) identified in chapter 5. The set of six equipment categories evaluated is shown in Table 

8.2.2. 

Table 8.2.2 Products Evaluated for the BVM Life-Cycle Cost and Payback Analyses 

Equipment Category Symbol 

Class B, Large, Indoor-Outdoor B-L-IO 

Class B, Medium, Indoor-Outdoor B-M-IO 

Class B, Small, Indoor-Outdoor B-S-IO 

Class A, Large, Indoor Only A-L-IN 

Class A, Medium, Indoor Only A-M-IN 

Class A, Small, Indoor Only A-S-IN 

DOE developed the manufacturer selling prices for the baseline efficiency equipment as a 

part of the engineering analysis, which are shown in Table 8.2.3. 

Table 8.2.3 Baseline Manufacturer Prices per Unit 

Equipment 

Category Baseline Manufacturer Price (2008$) 

B-L-IO $1,725.34 

B-M-IO $1,667.51 

B-S-IO $1,468.18 

A-L-IN $2,368.67 

A-M-IN $2,187.45 

A-S-IN $1,817.34 

8.2.2.2 Standard-Level Manufacturer Price Increases 

The standard-level manufacturer price increase is the change in manufacturer price 

associated with producing equipment at proposed higher efficiency levels. DOE developed 

manufacturer price increases associated with increases in equipment efficiency levels through a 

combination of efficiency level and design-option analyses. Refer to chapter 5, Engineering 

Analysis, for details. Manufacturer price increases as a function of equipment efficiency were 

developed for each of the six equipment categories. The engineering analysis produced 9 

efficiency levels (Levels 0–8) that were used in the LCC and PBP analyses. Most of the analysis 

presumes at least ENERGY STAR Tier 1 efficiency (Level 1) in the market. As of 2008 most 

currently shipped BVM equipment meets the ENERGY STAR TIER 1 level. By 2012, a large 

fraction (but not all) is expected to meet the ENERGY STAR TIER 2. DOE often establishes the 

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baseline level for the LCC analysis on what best represents the bottom end of the efficiencies 

currently shipped, in this case the ENERGY STAR Tier 1 level. 

The highest (Level 8) is considered the maximum technologically achievable efficiency 

level. Appendix D discusses the selection of efficiency levels for the LCC and PBP analyses. 

The efficiency level analysis established a distribution of manufacturer price increases for 

each efficiency level. Table 8.2.4 summarizes the estimated manufacturer price increases for 

BVM efficiency levels considered in the LCC and PBP analyses. 

Table 8.2.4 Standard-Level Manufacturer Price Increases (Price Increases Relative to 

the Price of Baseline Efficiency Equipment at Level 1) 

Equipment 

Type Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level 8 

B-L-IO $23 $40 $75 $87 $507 $1,660 $1,660 

B-M-IO $23 $44 $79 $91 $511 $1,530 $1,530 

B-S-IO $23 $70 $70 $82 $502 $1,388 $1,388 

A-L-IN $27 $65 $106 $136 $166 $198 $1,419 

A-M-IN $47 $56 $113 $157 $187 $217 $1,234 

A-S-IN $37 $80 $122 $147 $172 $199 $1,116 

8.2.2.3 Overall Markup 

For a given distribution channel, the overall markup is the value determined by 

multiplying all the associated retail markups and the applicable sales tax. Because there are 

baseline and incremental markups associated with the wholesaler and mechanical contractor, the 

overall markup is also divided into a baseline markup (i.e., a markup used to convert the baseline 

manufacturer price into a customer price) and an incremental markup (i.e., a markup used to 

convert a standard-level manufacturer price increase because of an efficiency increase into an 

incremental customer price). 

As discussed in chapter 6, Markups for Equipment Price Determination, overall markups 

are based on one of three assumed distribution channels, as well as whether the equipment is 

being purchased for the new construction or the replacement market. The distribution channel is 

based on whether equipment is purchased through (1) a wholesaler/distributor, or (2) a national 

account. 

Based on input from equipment manufacturers, for the new construction market it 

appears that 27 percent of equipment is purchased by vendors or local bottlers directly from 

wholesaler/distributors, 5 percent is purchased by site owners from wholesaler/distributors, and 

68 percent is purchased by local vendors through national accounts. DOE’s understanding is that 

most existing equipment replacements are done as a result of obsolescence or failure after two 

rounds of machine refurbishment. DOE has assumed that this split of percent of equipment 

purchases among the distribution channels is the same for new and replacement equipment. With 

three distribution channels, there are a total of six overall baseline and incremental markups 

possible. All six sets of overall markups and their associated components are presented in 

Table 8.2.5 and Table 8.2.6 for the baseline and incremental markups, respectively, for 

Manufacturing Facilities. Similar tables were calculated for the six other business types. 

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Based on the percentages of the market attributed to each of the three distribution 

channels, weighted-average overall markups are also presented in Table 8.2.5 and Table 8.2.6. 

The overall weighted-average baseline markup for Manufacturing Facilities equals 1.14, while 

the overall weighted-average incremental markup equals 1.10. See chapter 6 for details. 

Table 8.2.5 Overall Baseline Markups by Distribution Channel and Overall WeightedAverage, Including the Weighted Average Sales Tax, for Manufacturing Facilities 

Wholesaler/Distributor to Site 

Owner or Vendor 

Manufacturer 

Direct to Vendor 

Overall 

Weighted Average

Distributor(s) Markup 1.460 1.000 1.069 

Sales Tax 1.070 1.070 1.070 

Total Markup 1.562 1.070 1.144 

Table 8.2.6 Overall Incremental Markups by Distribution Channel and Overall 

Weighted-Average, Including the Weighted Average Sales Tax, for Manufacturing 

Facilities 

Wholesaler/Distributor to Site 

Owner or Vendor 

Manufacturer 

Direct to Vendor 

Overall Weighted 

Average

Distributor(s) Markup 1.200 1.000 1.030 

Sales Tax 1.070 1.070 1.070 

Total Markup 1.284 1.068 1.102 

8.2.2.4 Installation Cost 

The installation cost is the price to the customer of labor and materials (other than the 

actual equipment) needed to install the BVM equipment. DOE derived installation costs for 

BVM equipment from data in Foster-Miller, Inc., which provides estimates on the person-hours 

required to install BVM and the labor rates associated with the type of crew required to install 

the equipment.4

 The installation cost was calculated by multiplying the number of person-hours 

by the corresponding labor rate. Labor rates vary significantly from region to region of the 

country and the U.S. Bureau of Labor Statistics (BLS) provides the necessary information to 

capture this regional variability.5

 BLS provides median wage rates for installation, maintenance, 

and repair occupations that reflect labor rates for each individual State and allows the 

computation of State labor cost indices relative to the national average for these occupations. 

These cost indices were incorporated into the analysis to capture variation in installation cost, 

depending on customer location. 

Since data were not available to indicate how installation costs actually vary with BVM 

or BVM equipment category or efficiency, DOE considered two scenarios: (1) installation costs 

varied in direct proportion to the cost of the equipment, or (2) installation costs remained flat 

(not varying with cost of the equipment). For the former case, the engineering analysis developed 

linear relationships of installation cost as a function of efficiency for BVM equipment. All 

baseline equipment, however, in a given equipment category, is assumed to have the same 

baseline installation costs. 

Table 8.2.7 summarizes the nationally representative person-hours and labor rates 

associated with the installation of BVM equipment as presented in Foster-Miller Inc.4

 In 

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Table 8.2.7, both “bare” installation costs (i.e., costs before overhead and profit [O&P]) and 

installation costs including O&P are provided. DOE decided that the installation costs that 

include O&P represent the installation costs for baseline equipment. The installation costs are 

assumed to remain fixed regardless of efficiency level (a “flat” installation cost scenario). 

However, the LCC spreadsheet allows for an alternative scenario; that the installation cost 

increase with higher efficiency levels, and this alternative was implemented in the LCC 

spreadsheet by providing for an installation price that varies in proportion to increased 

manufacturer cost above the baseline efficiency level. DOE did not, however, find a basis for the 

latter assumption. 

Table 8.2.7 Installation Costs for Baseline BVM equipment 

Labor Base Costs (2008$) 

Equipment Type Person-Hours Labor Rate Cost 

All BVMs 2.0 (1 hr • 2 workers) $37.95/hr $75.96 

The basis for the installation costs are 2002 labor costs (adjusted to 2008$) for 

installation of mercantile equipment. Daily rates were for a two-person installation crew, 

requiring one hour (including service call driving time) on average to set up a BVM. 

Table 8.2.8 summarizes the cost indices for installations in each of the 50 States, plus the 

District of Columbia, used to vary the nationally representative installation costs in Table 8.2.7. 

Table 8.2.8 Installation Cost Indices (National Value = 1.000) 

State Index State Index State Index 

Alabama 0.916 Kentucky 0.927 North Dakota 0.948 

Alaska 1.341 Louisiana 0.885 Ohio 0.998 

Arizona 0.958 Maine 0.912 Oklahoma 0.908 

Arkansas 0.854 Maryland 1.060 Oregon 1.038 

California 1.105 Massachusetts 1.147 Pennsylvania 0.989 

Colorado 1.042 Michigan 1.121 Rhode Island 1.030 

Connecticut 1.153 Minnesota 1.083 South Carolina 0.914 

Delaware 1.009 Mississippi 0.817 South Dakota 0.871 

Dist. of Columbia 1.167 Missouri 0.957 Tennessee 0.907 

Florida 0.889 Montana 0.932 Texas 0.878 

Georgia 0.962 Nebraska 0.929 Utah 1.000 

Hawaii 1.095 Nevada 1.081 Vermont 0.953 

Idaho 0.898 New Hampshire 1.009 Virginia 1.002 

Illinois 1.089 New Jersey 1.146 Washington 1.140 

Indiana 1.004 New Mexico 0.867 West Virginia 0.836 

Iowa 0.922 New York 1.070 Wisconsin 1.027 

Kansas 0.986 North Carolina 0.952 Wyoming 1.056 

8.2.2.5 Weighted-Average Total Installed Cost 

As presented in Eq. 8.2, the total installed cost is the sum of the equipment price and the 

installation cost. DOE derived the customer equipment price for any given standard level by 

multiplying the baseline manufacturer price by the baseline markup and adding to it the product 

of the incremental manufacturer price and the incremental markup. Because manufacturer prices, 

markups, and the sales tax all can take on a variety of values, depending on location, the 

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resulting total installed cost for a particular efficiency level will not be a single-point value, but 

rather a distribution of values. 

As an example, the average costs for the B-L-IO equipment category (manufacturer sale 

price of $1,780) are presented for the baseline level at national average markup rates and national 

average installation costs. The section also applies the corresponding incremental values to 

provide an indication of the increase in the total installed cost of the higher efficiency equipment. 

The derivation of the total installed cost is relatively straightforward. The baseline 

manufacturer price and the standard-level manufacturer price increases are the starting points for 

determining the total installed cost (values are taken directly from Table 8.2.3 and Table 8.2.4). 

The baseline and incremental markups, the sales tax, and installation costs are used to convert 

the manufacturer prices into total installed costs for BVM equipment where the incremental 

installation costs are held flat. Table 8.2.9 summarizes the average or mean costs and markups 

necessary for determining the average baseline and standard-level total installed costs. 

Table 8.2.9 Costs and Markups for Determination of Average Total Installed 

Costs (BVM)* 

Variable Average or Mean Value 

Baseline Manufacturer Sale Price $1,780 

Standard-Level Manufacturer Price Increase (Efficiency Level 4) $75 

Overall Baseline Markup 1.144 

Overall Incremental Markup 1.102 

Installation Cost–Baseline $76 

1.00** Installation Cost Factor –Incremental 

*

 Incremental installation costs held flat

** National incremental cost index on a population-weighted national basis is equal to 1.00.

To illustrate the derivation of the weighted-average total installed cost shown in 

Table 8.2.10, DOE presents the calculation below for the baseline efficiency and higher 

efficiency (Level 4) BVM. For baseline product, the calculation of the total installed cost at 

national average conditions is as follows: 

ICBASE BVM = EQPBASE- BVM +INSTBASE- BVM Eq. 8.3

= MFGBASE- BVM • MU BASE- BVM + INST BASE-BVM 

= $1,780 • (1.144) + $76 

=$2,036 + $76 

= $2,112 

Where: 

 IC = total installed cost, expressed in dollars, 

 EQP = equipment price, expressed in dollars, 

 INST = installation cost or the customer price to install equipment, expressed in 

dollars, 

 MFG = manufacturer price, expressed in dollars, and 

 MU = markup. 

In this specific example, MFG is the national average baseline manufacturer price for the 

BVM equipment category and MU is the overall baseline markup. The calculation of the higher 

8-10 

EERE-2006-STD-0125 COMMENT 46
efficiency (Level 4) total installed cost includes the use of a manufacturer price adder. In 

addition, DOE derived an incremental markup. 

Based on incremental equipment price changes, the derivation of the Level 4 total 

installed cost is based on determining the change in equipment price over the baseline equipment 

price. The manufacturer price increment for higher efficiency equipment is multiplied by the 

incremental markup. 

DOE calculated the Level 4 total installed cost (IC BVM LEVEL4) as follows: 

IC BVM LEVEL4 = EQP BVM LEVEL4 +∆EQP BVM LEVEL4 + INST BVM LEVEL4•(MFG BVM LEVEL4/ Eq. 8.4

MFG BASE BVM ) 

= MFG BASE BVM •MU BASE BVM + ∆MFG BVM LEVEL4 •MU BVM LEVEL4 + INST• 

ISTINDEX 

= $1,780 • (1.144) + $75 • (1.102) + $76 • (1.00) 

= $2,195 

Where: 

 IC = total installed cost, expressed in dollars, 

 EQP = equipment price, expressed in dollars, 

ΔEQP = change in the equipment price, expressed in dollars, 

 INST = installation cost or the customer price to install equipment, expressed in 

dollars, 

 MFG = manufacturer sale price, expressed in dollars, 

 MU = markup, 

 ISTINDEX = location dependent, but approximately 1.0 at a national average. 

Table 8.2.10 presents the weighted-average equipment price, installation costs, and total 

installed costs for the BVM equipment category at the baseline level and each proposed higher 

efficiency level. 

Table 8.2.10 Average Equipment Price, Installation Cost, and Total Installed Costs for 

BVM (B-L-IO), at U.S. Average Prices (2008$)*

Efficiency 

Level 

Equipment Installation Total Installed

Price Cost Cost

1 $2,036 $76 $2,111 

2 $2,061 $76 $2,137 

3 $2,079 $76 $2,155 

4 $2,118 $76 $2,194 

5 $2,131 $76 $2,207 

6 $2,594 $76 $2,670 

7 $3,865 $76 $3,941 

*Results may not match text due to rounding. 

8.2.3 Operating Cost Inputs 

DOE based the operating cost for the LCC analysis on energy consumption data 

developed from whole-building simulations on a sample of buildings from the 2003 Commercial 

8-11 

EERE-2006-STD-0125 COMMENT 46
2 Building Energy Consumption Survey (CBECS). After the LCC analysis was performed, DOE 

generated a distribution of LCC differences (i.e., the LCC difference between the baseline 

efficiency equipment and equipment with a higher efficiency level) to determine the mean LCC 

difference, as well as the percentage of customers analyzed that had LCC savings associated with 

more energy-efficient equipment. 

DOE defined the operating cost by the following equation: 

OC = EC+ RC+ MC Eq. 8.5

Where: 

 OC = operating cost, 

 EC = energy cost associated with operating the equipment, 

 RC = repair cost associated with component failure, and 

 MC = service cost for maintaining equipment operation (all of the above expressed 

in dollars). 

The remainder of this section provides information about the variables that DOE used to 

calculate the operating cost for BVM equipment. 

Table 8.2.11 shows the inputs for the determination of operating costs. The lifetime, 

discount rate, and effective date of the efficiency standard are required for determining the 

operating cost and for establishing the operating cost present value. The electricity consumption 

for the baseline efficiency and standard cases (efficiency levels 1, 2, etc.) is used to determine 

the operating costs of the equipment. 

Table 8.2.11 Inputs for Operating Costs 

Electricity price ($) 

Electricity price trend 

Repair cost ($) 

Maintenance cost ($) 

Lifetime 

Discount rate 

Effective date of standard 

Baseline electricity consumption 

Standard case electricity consumption 

8.2.3.1 Electricity Price Analysis 

Introduction to the analysis of electricity prices. This section describes the electricity 

price (cents/kWh) analysis used to develop the energy portion of the annual operating costs 

(price multiplied by the electricity consumption) for BVM equipment in the hotel/motel sector. 

Subdivision of the country. Because of the wide variation in electricity consumption 

patterns, wholesale costs, and retail rates across the country, it is important to consider regional 

differences in electricity prices. For this reason, DOE divided the continental United States into 

the 50 States and the District of Columbia. DOE used reported average effective commercial 

electricity prices (which apply to four of the six building types) and the lower industrial 

8-12 

EERE-2006-STD-0125 COMMENT 46
electricity prices (which are assumed to apply to the manufacturing plants and federal facilities) 

at the state level from an EIA database on commercial and industrial electricity prices.1

 The 

latest available prices from this source are for the calendar year 2008. Table 8.2.12 provides data 

on the state electricity prices. 

Table 8.2.12 Estimated Commercial and Industrial Electricity Prices by State 

(2008 cents/kWh) 

Commercial 

Electricity 

Price 

Industrial Commercial 

Electricity 

Price 

Industrial Commercial 

Electricity 

Price 

Industrial 

Electricity 

Price 

Electricity 

Price 

Electricity 

State State State Price 

Alabama 9.61 5.92 Kentucky 7.10 4.78 North Dakota 6.72 5.54 

Alaska 13.11 14.41 Louisiana 10.24 8.04 Ohio 9.15 6.16 

Arizona 8.95 6.70 Maine 13.00 11.93 Oklahoma 8.19 6.04 

Arkansas 7.72 5.97 Maryland 12.68 10.50 Oregon 7.55 4.97 

California 13.07 10.28 Massachusetts 16.01 14.24 Pennsylvania 9.40 7.03 

Colorado 8.72 6.63 Michigan 9.41 6.87 Rhode Island 15.25 14.21 

Connecticut 15.94 13.83 Minnesota 7.86 6.00 South Carolina 8.47 5.30 

Delaware 11.98 10.31 Mississippi 9.94 6.39 South Dakota 6.79 5.30 

Dist. of Col. 13.74 11.52 Missouri 6.67 5.00 Tennessee 8.60 6.02 

Florida 10.01 8.19 Montana 8.47 6.46 Texas 10.83 8.97 

Georgia 9.16 6.70 Nebraska 6.59 5.14 Utah 6.77 4.68 

Hawaii 29.64 26.01 Nevada 10.14 8.28 Vermont 12.50 9.01 

Idaho 5.63 4.56 New Hampshire 14.12 13.05 Virginia 7.15 5.45 

Illinois 8.79 6.91 New Jersey 14.94 12.82 Washington 6.72 4.78 

Indiana 7.62 5.42 New Mexico 8.65 6.46 West Virginia 5.99 4.15 

Iowa 7.26 4.92 New York 17.02 10.34 Wisconsin 9.19 6.50 

Kansas 7.74 5.83 North Carolina 7.61 5.53 Wyoming 6.63 4.47 

Furthermore, DOE recognized that different kinds of businesses typically use electricity 

in different amounts at different times of the day, week, and year, and therefore face different 

effective prices. To make this adjustment, DOE used the 2003 CBECS data2

 set to identify the 

average prices paid by the four kinds of commercial businesses in this analysis compared with 

the average prices paid by all commercial customers (manufacturing and federal facilities are 

assumed to pay the average industrial price). The ratio of prices paid by the five types of 

commercial buildings was used to increase or decrease the average commercial electricity prices 

as shown in Eq. 8.6. 

EPRICECOM BLD I STATE 2008 = EPRICE COM STATE 2008 • (EPRICE BLDG I US 2003/EPRICE COM US 2003) Eq. 8.6

Where: 

 EPRICECOM BLD I STATE 2008 = average commercial sector electricity price paid by 

business type I in a specific state in 2008, 

 EPRICE COM STATE 2008 = average commercial sector electricity price in a 

specific state in 2008, 

 EPRICE BLDG I US 2003 = national average commercial sector electricity price 

paid by business type I in 2003 CBECS, and 

 EPRICE COM US 2003 = national average commercial sector electricity price in 

2003 CBECS. 

Table 8.2.13 shows the derivation of the EPRICE ratios from CBECS. 

8-13 

EERE-2006-STD-0125 COMMENT 46
Table 8.2.13 Derived Average Electricity Price Paid by Business Type* 

Office and 

Health 

Business Type Care 

Manufacturing 

(Use Industrial) Retail School 

Military 

(Use 

Industrial) Other 

All 

Commercial 

Buildings 

Electricity Price 6.4 7.7 8.5 7.4 6.1 7.9 7.9 

(cents/kWh) 

Ratio of Electricity 

Price to Average 

Price for all 

Commercial 

Buildings 

1.000 x 

Industrial 

0.975 1.074 0.937 1.000 x 

Industrial 

0.996 1.000 

*Source: CBECS 2003

Once the building types have prices adjusted, the resulting estimated prices paid are the 

electricity prices used in the analysis. To obtain a weighted average national price, the prices 

paid by each building in each state are weighted by the estimated sales of BVM equipment in 

each state to each prototype building type, based on population.6

 The state/building type weights 

are the probabilities that a given BVM or BVM equipment shipped will be operated with a given 

price. For evaluation purposes, the prices and weights can be depicted as a cumulative 

probability distribution. The effective prices range from approximately 4.2 cents per kWh to 

approximately 32 cents per kWh. 

Figure 8.2.1 illustrates the results for all customers. 

Figure 8.2.1 Cumulative Probability Distribution Showing the Electricity Prices Paid by 

All Customers (in 2008$) 

8-14 

EERE-2006-STD-0125 COMMENT 46
8.2.3.2 Electricity Price Trend 

The electricity price trend provides the relative change in electricity prices for future 

years out to the year 2030. Estimating future electricity prices is difficult, especially considering 

that there are efforts in many states throughout the country to restructure the electricity supply 

industry. 

DOE applies a projected trend in national average electricity prices to each customer’s 

energy prices. Of the following four scenarios, the LCC analysis uses the AEO 20091

 reference 

price scenario: 

1. Constant energy prices at 2008 values (Constant at 1.0 in Figure 8.2.2) 

2. AEO 2009, High Price (“High” in Figure 8.2.2) 

3. AEO 2009, Reference Case (“AEO 2009” in Figure 8.2.2) 

4. AEO 2009, Low Price (“Low” in Figure 8.2.2) 

Figure 8.2.2 shows the trends for the three AEO 2009 commercial price projections where 

prices are assumed to change. DOE extrapolated the values in later years (i.e., after 2030) from 

their relative sources because AEO 2009 does not forecast beyond 2030. To arrive at values for 

these later years, DOE used the price trend from 2020–2030 of the forecast to establish prices in 

2030–2042. This method of extrapolation is in line with methods currently used by the EIA to 

forecast fuel prices for the Federal Energy Management Program. 

Commercial Electricity Price Projections

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

2002 2012 2022 2032 2042 2052

Year

Index (2008=1.00)

High

AEO 2009

Low

8-15 

EERE-2006-STD-0125 COMMENT 46
Figure 8.2.2 Electricity Price Trends for Commercial Rates to 2042 

The default electricity price trend scenario used in the LCC analysis is the trend from the 

AEO 2009 Reference Case,1 which is the middle line in Figure 8.2.2. Spreadsheets used in 

calculating the LCC have the capability to analyze the other electricity price trend scenarios, 

namely, the AEO 2009 High Price and the AEO 2009 Low Price price trends and constant energy 

prices. 

8.2.3.3 Repair Cost 

The repair cost is the cost to the consumer for replacing or repairing components in the 

BVM equipment that have failed. DOE based the annualized repair cost for baseline efficiency 

equipment on the Foster-Miller Inc. 2002 report4

 and were adjusted to 2008 prices. Because data 

were not available to indicate how repair costs vary with equipment efficiency, DOE considered 

two scenarios: (1) repair costs that varied in direct proportion with the manufacturer price of the 

equipment and (2) repair costs that were kept constant (i.e., did not increase with efficiency). 

DOE used repair costs that increase with manufacturer price (the first scenario above) as 

the default annualized repair cost scenario in the LCC and PBP analysis. Spreadsheets were used 

to calculate LCC and PBP based on the second scenario as well. 

8.2.3.4 Maintenance Cost 

The maintenance cost is the cost to the consumer of maintaining equipment operation. 

The maintenance cost is not the cost associated with the replacement or repair of components 

that have failed (as discussed above). Rather, it is the cost associated with general maintenance 

(e.g., checking and maintaining refrigerant charge levels, cleaning heat exchanger coils). 

Virtually no data are available on annual maintenance cost per unit. DOE estimated the 

annualized maintenance costs for BVM equipment from data in comments provided by 

stakeholders at the ANOPR. The cost of the basic preventative maintenance for an individual 

BVM or BVM unit is $97 per year (2008$) and the annualized value of the single 

refurbishment/remanufacturing (one-time cost of approximately $550 at the 5-year point in the 

equipment lifetime) is about $57 (2008$), which varies with the discount rate. Total annualized 

maintenance cost is approximately $154 per year for the largest BVM equipment market 

segment (bottlers). 

Because data were not available to indicate how maintenance costs vary with equipment 

efficiency, DOE decided to use preventative maintenance costs that remain constant as 

equipment efficiency increases. 

8.2.3.5 Lifetime 

DOE defined lifetime as the age when a BVM unit is retired from service. DOE based the 

lifetime on comments received during the ANOPR, which concluded that a typical lifetime of 

10 years is appropriate for BVM equipment, which is typically replaced when buildings are 

renovated about every 10 years before the equipment would have physically worn out. 

Furthermore, DOE modeled the lifetime BVM equipment as a Weibull statistical distribution 

8-16 

EERE-2006-STD-0125 COMMENT 46
with an average lifetime of 10 years and a maximum lifetime of 15 years. Because of this, there 

is a used-equipment market for these products. DOE understands, however, that the salvage 

value to the original purchaser is very low and thus this has not been taken into account in the 

LCC analysis. Chapter 3, Market and Technology Assessment, contains a discussion of 

equipment life. 

8.2.3.6 Discount Rate 

The discount rate is the rate at which future expenditures are discounted to establish their 

present value. DOE derived the discount rates for the LCC analysis by estimating the cost of 

capital for companies that purchase BVM equipment. The cost of capital is commonly used to 

estimate the present value of cash flows to be derived from a typical company project or 

investment. Most companies use both debt and equity capital to fund investments, so their cost of 

capital is the weighted average of the cost to the company of equity and debt financing. 

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

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

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

company. The cost of equity financing tends to be high when a company faces a large degree of 

systematic risk and it tends to be low when the company faces a small degree of systematic risk. 

DOE determined the cost of equity financing by using several variables, including the 

risk coefficient of a company (β -beta), the expected return on “risk-free” assets (Rf), and the 

additional return expected on assets facing average market risk, also known as the equity risk 

premium or ERP. The risk coefficient of a company (β) indicates the degree of risk associated 

with a given firm relative to the level of risk (or price variability) in the overall stock market. 

Risk coefficients usually vary between 0.5 and 2.0. A company with a risk coefficient of 

0.5 faces half the risk of other stocks in the market; a company with a risk coefficient of 2.0 

faces twice the overall stock market risk. 

The following equation gives the cost of equity financing for a particular company: 

ke = Rf + (β • ERP) Eq. 8.7

Where: 

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

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

β = the risk coefficient, and 

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

DOE defined the risk-free rate as the yield (January 2007) on long-term government 

bonds. DOE used a 5.5 percent estimate for the ERP based on data from the Damodaran Online 

site.7

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

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

compensation for default risk (the risk that a firm will go bankrupt) and excludes deductions for 

8-17 

EERE-2006-STD-0125 COMMENT 46
taxes. DOE estimated the cost of debt for companies by adding a risk adjustment factor to the 

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

current (and future) company costs to obtain debt financing. It based the adjustment factor on 

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

The weighted average cost of capital (WACC) of a company is the weighted average cost 

of debt and equity financing: 

 k =ke• we+ kd• wd Eq. 8.8

Where: 

 k = the (nominal) cost of capital, expressed as a percentage, 

 ke = the expected rate of return on equity, expressed as a percentage, 

 kd = the expected rate of return on debt, expressed as a percentage, 

 we = the proportion of equity financing in total annual financing, and 

 wd = the proportion of debt financing in total annual financing. 

The cost of capital is a nominal rate, because it includes anticipated future inflation in the 

expected returns from stocks and bonds. The real discount rate or WACC deducts expected 

inflation (r) from the nominal rate. DOE calculated expected inflation (2.0 percent) from the 

average of the projected change in gross domestic product (GDP) prices in the Economic Report 

of the President.

8

To estimate the WACC of BVM equipment purchasers, DOE used a sample of 

companies involved in large hotel/motel chains drawn from a database of over 7,000 

U.S. companies given on the Damodaran Online website,7

 which includes most of the publicly 

traded companies in the United States. 

DOE divided the companies into the six ownership categories shown in Table 8.2.14

according to their type of activity. DOE sought financial information for all of the firms in the 

full sample involved in the six lines of business. This resulted in a final sample of about 

4,139 firms. In cases where one or more of the variables needed to estimate the discount rate was 

missing or could not be obtained, DOE discarded the firm from the analysis. Overall, it discarded 

about 20 percent of the firms in the full database for this reason. 

8-18 

EERE-2006-STD-0125 COMMENT 46
Table 8.2.14 Nominal and Real Discount Rates by Ownership Category 

No. of 

Companies 

Weighted Average 

Cost of Capital 

Standard 

Deviation 

Weighted Real 

Ownership Category Cost of Capital 

Bottlers 10 7.65% 1.29% 5.54% 

Manufacturing 1894 8.37% 1.87% 6.25% 

Office and Health Care (Financial, Services, 

and Diversified Companies) 

1760 6.90% 1.88% 4.81% 

Retail Trade (Restaurants, Building Supplies, 

Retail Automotive, Retail (Special Lines), 

General Retail, Pharmacy Services) 

243 8.12% 1.65% 6.00% 

Schools NA 4.40% 0.0% 2.35% 

Military NA 5.09% 0.0% 3.03% 

Other (Arts and Entertainment, 

Transportation/Warehousing, Wholesale 

232 7.63% 1.54% 5.23% 

Hotels/Motels) 

Source: Pacific Northwest National Laboratory (PNNL) calculations applied to firms sampled from the Damodaran Online 

website.7

Deducting expected inflation from the cost of capital provides the estimates of the real 

discount rate by ownership category shown in Table 8.2.14. The overall weighted average is 

5.54 percent because of the market dominance of bottlers. Although bottlers represent only 10 

companies in Table 8.2.14, they purchase the vast majority of BVMs. 

8.2.3.7 Effective Date of Standard 

The effective date is the future date when a new standard becomes operative. Pursuant to 

42 U.S.C. 6313(a)(6)(c), the effective date of any new energy efficiency standard for BVM 

equipment will be 3 years after the final rule is published. DOE calculated the LCC for all 

customers as if they each would purchase a new BVM or BVM unit in the year the standard 

takes effect. Consistent with its published regulatory agenda, DOE assumed that the final rule 

would be issued in 2009 and that, therefore, the new standards would take effect in 2012 and 

used these dates in the NOPR analyses. It based the cost of the equipment on this year; however, 

all dollar values are expressed in 2008$. Annual energy prices are considered for the life of the 

BVM equipment. 

8.3 PAYBACK PERIOD INPUTS 

8.3.1 Definition 

The payback period is the amount of time it takes the customer to recover the assumed 

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

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

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

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

in operating cost over time or the time value of money; that is, the calculation is done at an 

effective discount rate of 0 percent. 

The equation for PBP is: 

8-19 

EERE-2006-STD-0125 COMMENT 46
PBP =∆IC/∆OC Eq. 8.9

Where: 

 PBC = payback period in years, 

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

equipment (efficiency levels 2,3, etc.) and the baseline efficiency equipment, 

and 

∆OC = difference in annual operating costs. 

Payback periods are expressed in years. Payback periods greater than the life of the 

equipment mean that the increased total installed cost of the more efficient equipment is not 

recovered fast enough in reduced operating costs. 

8.3.2 Inputs 

The data needed for the PBP calculation are the total installed cost of the equipment to 

the customer for each efficiency level and the annual (first year) operating costs for each 

efficiency level. The inputs to the total installed cost are the equipment price and the installation 

cost. The inputs to the operating costs are the annual energy cost, the annual repair cost, and the 

annual maintenance cost. The PBP uses the same inputs as the LCC analysis described in section 

8.2, except that electricity price trends and discount rates are not required. Since the PBP is a 

“simple” (undiscounted) payback, the required electricity cost is only for the year in which a new 

efficient standard is to take effect (in this case, 2012). The electricity price used in the PBP 

calculation was the price projected for 2012, expressed in 2008$, but not discounted to 2008. 

Discount rates are not used in the PBP calculation. 

8.4 RESULTS USING TARIFF-BASED ELECTRICITY PRICES 

8.4.1 Life-Cycle Cost Results 

This section presents LCC results for the efficiency improvement levels specified in the 

engineering analysis (chapter 5) and also presented in section 8.2.2.2, Standard-Level 

Manufacturer Price Increases. The results presented here are based on annual operating costs 

calculated from average annual electricity prices developed for each business type. Section 8.2

presents the electricity price inputs as well as all other LCC inputs. 

Because the values of most inputs are uncertain in this analysis, DOE represents them as 

a distribution of values rather than a single point-value. Thus, DOE represents the LCC results as 

a distribution of values. Before proceeding with the presentation of the distribution of LCC 

results, DOE presents average values for total installed costs, annual operating costs, and LCC to 

show how these costs vary with efficiency for each of the BVM equipment categories. 

8.4.1.1 LCC Breakdown Based on Average Input Values 

For each equipment category, Figure 8.4.1 and Figures F.8.4.2–F.2.21 in appendix F 

show how on an average basis the total installed costs, annual operating costs, and LCC vary 

with efficiency. Figure 8.4.1 and Figures F.2.1–F.2.2.1 pertain to each equipment category. 

8-20 

EERE-2006-STD-0125 COMMENT 46
Owner's Installed Cost-LCC Tradeoff

$6,594 

$6,083 $6,030 $6,007 $5,983 $5,965 $5,960 $5,974 

$7,701 

$0 

$1,000 

$2,000 

$3,000 

$4,000 

$5,000 

$6,000 

$7,000 

$8,000 

$9,000 

$2,785 $2,852 $2,881 $2,923 $2,969 $3,002 $3,035 $3,070 $4,415 

Level 0

(Market

Baseline)

Level 1

(Energy

Star Tier

1)

Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level 8

(Max

Tech)

Installed Cost and Efficiency Level

Life Cycle Cost

Installed Cost-LCC Tradeoff

 Equipment= A-L-Indoor-Only, Fuel Price=AEO 2009 - Reference Case, Start Year= 2012

Figure 8.4.1 Effect of the Change in Efficiency Level on Life-Cycle Cost for BottlerOwned A-L-IN BVM in Manufacturing Facilities (2008$) at Average U.S. Conditions 

(Level 1 is the Baseline Efficiency Level).

DOE divided the figures for total installed cost into equipment price and installation cost. 

DOE divided the figures for annual operating cost into annual electricity, repair, and 

maintenance costs. DOE also divided the figures for LCC into total installed cost and lifetime 

operating cost. Although these figures are based on mean or average values rather than results 

from the Monte Carlo simulation analysis, the figures demonstrate how the various inputs affect 

LCC. In view of the total installed cost results for the equipment categories, the equipment price 

is the largest contributor to increased total cost since the installation cost remains relatively 

constant across the efficiency levels. 

Annual electricity cost is the largest contributor to the overall operating cost at any 

efficiency level. As efficiency increases, electricity cost decreases. 

The LCC results reveal that as efficiency increases, the lifetime operating cost has more 

of an impact on the LCC than the total installed cost. In other words, the decrease in lifetime 

operating costs offsets the increase in total installed cost that occurs with increased equipment 

efficiency. As a result, the LCC at efficiency levels is lower than that for the baseline level 

(Level 0) at levels 1-7. 

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EERE-2006-STD-0125 COMMENT 46
Again, the results shown in Figure 8.4.1 and the corresponding figures in appendix F are 

based on average input values rather than input distributions. Thus, one can observe how the 

various inputs impact LCC and, in turn, how the resulting LCC changes with efficiency for this 

example. Conclusions, however, should be drawn from the distribution of LCC results presented 

in section 8.4.1.2. 

8.4.1.2 Differences in LCC between Baseline and Standard-Level Equipment 

DOE’s first step in developing LCC results was to establish the baseline LCC for each of 

the equipment categories. The baseline efficiency level for the NOPR analysis is the 

ENERGY STAR Tier 1 level (Efficiency Level 1). 

This section presents the differences in the LCC of standard-level equipment relative to 

the baseline efficiency equipment. The LCC differences are depicted as a distribution of values. 

DOE presents the results in a cumulative chart showing the cumulative distribution of LCC 

differences along with the corresponding probability of occurrence for each proposed efficiency 

level. In each chart, DOE provides the LCC difference along with the percent of the population 

for which the LCC will decrease. In this analysis, the population is the number of BVM units in 

hotels, health care (nursing homes, assisted living, etc.), and small offices (mainly medical and 

dental). 

Figure 8.4.2 presents the LCC results for the case of Efficiency Level 4 in the A-L-IN 

(BVM) equipment category. Additional cases are shown as Figures F.2.2 through F.2.24 in 

appendix F. In Figure 8.4.2, the 50-percent line shows the median change in LCC (a savings of 

202$ in this example). Half of the purchasers of this BVM unit would save more than 202$ while 

half would save less than 202$. The “0” horizontal line is the minimum savings value, which in 

this example is 23$. The maximum LCC savings is 442$. 

Figure 8.4.2 A-L-IN BVM, Level 4 Efficiency: Cumulative Chart of LCC Savings 

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EERE-2006-STD-0125 COMMENT 46
Appendix F contains the cumulative charts for all the efficiency levels considered for all 

BVM equipment categories. These are Figures F.2.2 through F.2.24 in appendix F. These charts 

provide more complete information, but DOE provides a summary of the change in LCC from 

the baseline by percentile groupings (i.e., of the distribution of results) for each of the equipment 

category in Table 8.4.1, which also shows the mean LCC savings and the percent of equipment 

with LCC savings for each efficiency level. 

Table 8.4.1 Distribution of Life-Cycle Cost Savings from a Baseline Level (Level 1) for 

A-L-IN BVM Equipment category by Efficiency Level 

Decrease in LCC from Baseline Efficiency (Level 1) 

Shown by Percentiles of the Distribution of Results (2008$) 

Percent 

of Units 

with 

LCC 

Efficiency 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Savings 

Mean 

Savings 

Level 

2 $26 $29 $50 $52 $68 $80 $97 $106 $121 $138 $177 $91 100% 

Level 

3 $24 $32 $70 $74 $103 $124 $155 $175 $201 $233 $304 $145 100% 

Level 

4 $23 $35 $91 $99 $142 $202 $219 $250 $288 $337 $442 $204 100% 

Level 

5 $22 $37 $106 $116 $170 $206 $265 $304 $351 $412 $542 $246 100% 

Level 

6 $13 $31 $110 $122 $184 $224 $293 $340 $393 $463 $613 $272 100% 

Level 

7 -$11 $9 $94 $109 $177 $218 $293 $344 $402 $481 $642 $271 93% 

Level 

8 -$1,759 -$1,759 -$1,663 -$1,557 -$1,521 -$1,447 -$1,415 -$1,361 -$1,269 -$1,147 -$992 -$1,419 0% 

As an example of how to interpret the information in Table 8.4.1, a review is provided of 

the overall results for the A-L-IN BVM equipment category. The Level 4 efficiency level in 

Table 8.4.1 (row 3) shows that the change in LCC (0 percentile column) is a minimum savings of 

23$. For 90 percent of the cases studied (90th percentile), the change in LCC is a reduction of 

337$ or less. The largest reduction in LCC is 442$ (100th percentile). The mean change in LCC is 

a net savings of 204$. The last column shows that 100 percent of the sample has LCC savings 

(i.e., reductions in LCC greater than zero). 

Appendix F Figures F.2.1–F.2.2 graphically depict the LCC results. The first figure for 

each equipment category shows mean LCCs at U.S. average prices and market conditions, while 

the second figure shows the percentage of equipment at each efficiency level with reduced 

LCCs. 

8.4.2 Payback Period Results 

This section presents PBP results for the efficiency improvement levels specified in the 

engineering analysis (chapter 5) and also presented in section 8.2.2.2, Standard-Level 

Manufacturer Price Increases. The results presented here are based on annual operating costs 

calculated from state average commercial electricity prices. Section 8.4 describes the tariff-based 

electricity price inputs as well as all other PBP inputs. 

Similar to LCC, the analysis provides an estimate of the simple payback period at 

different ranges of energy prices, sales taxes, and installation costs that prevail across the country 

for each efficiency level and each building (building) type. Figure 8.4.3 shows the effect on 

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EERE-2006-STD-0125 COMMENT 46
payback period as the level of efficiency changes from Level 1 (the baseline), for BVM 

equipment in Manufacturing Facilities at U.S. national average energy prices, sales taxes, and 

installation costs. 

Owner's Installed Cost-Payback Tradeoff

2.7 4.1 4.3 4.6 5.1

100.0

0.0 3.7

20.0 

40.0 

60.0 

80.0 

100.0 

120.0 

$2,881 $2,923 $2,969 $3,002 $3,035 $3,070 $4,415 

Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level 8 (Max

Tech)

Installed Cost and Efficiency Level

Payback Period (Years)

Installed Cost-Payback Period Tradeoff

 Equipment= A-L-Indoor-Only, Fuel Price=AEO 2009 - Reference Case, Start Year= 2012

Figure 8.4.3 Effect of the Change in Efficiency Level on Payback Period for A-L-IN BVM 

Equipment Category, in Manufacturing Facilities at Average U.S. Conditions (Level 1 is 

the Baseline Level). 

Similar to the LCC differences, DOE depicted PBP results as a distribution of values. 

Thus, it presents the results as a cumulative probability chart showing the distribution of PBPs 

with the corresponding cumulative probability of occurrence. Each chart provides the mean PBP. 

Figure 8.4.4 is an example of a cumulative probability chart showing the overall 

distribution of payback periods for the increased efficiency levels for the A-L-IN BVM 

equipment category. Appendix F contains the frequency charts for all the efficiency levels 

considered for all BVMs in this analysis. In Figure 8.4.4, the y-axis shows cumulative percent of 

all BVM equipment (“Probability” at left y-axis). The x-axis is the PBP of a higher efficiency 

level (in this example, Level 4) relative to the baseline efficiency level (Level 1). In Figure 8.4.4, 

a Level 4 efficiency level provides BVM equipment with a median PBP of 3.0 years, a mean 

payback period of 3.2 years, and a payback period range from just about 1.4 years to 

approximately 6.2 years. (Note that these cannot be read with precision from the chart; rather, the 

analysis output data provides these values in a statistical summary.) 

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EERE-2006-STD-0125 COMMENT 46
Figure 8.4.4 A-L-IN BVM Level 4 Efficiency: Cumulative Chart of PBP

Table 8.4.2 summarizes the PBP results for the BVM equipment category. Results are 

summarized for PBP by percentile groupings (i.e., percentile of the distribution of results). The 

chart also shows the mean PBP for each efficiency level. 

Table 8.4.2 Summary of PBP Results for A-L-IN BVM Equipment Category 

Payback Period in Years Shown by Percentiles of the Distribution of Results 

Percent 

Less 

than 3 

Years 

Payback 

Efficiency 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Mean 

Level 2 1.0 1.1 1.2 1.6 1.7 1.9 2.1 2.3 2.4 3.3 4.0 2.1 85% 

Level 3 1.4 1.5 1.6 2.2 2.4 2.5 2.8 3.1 3.2 4.5 5.6 2.9 67% 

Level 4 1.4 1.6 1.8 2.4 2.6 3.0 3.1 3.4 3.5 5.0 6.2 3.2 53% 

Level 5 1.6 1.7 1.9 2.5 2.7 3.0 3.2 3.5 3.7 5.2 6.5 3.3 51% 

Level 6 1.7 1.8 2.0 2.7 2.9 3.1 3.4 3.8 3.9 5.6 7.0 3.5 45% 

Level 7 1.8 1.9 2.2 3.0 3.2 3.4 3.8 4.2 4.4 6.3 7.9 3.9 29% 

Level 8 18.6 20.8 26.3 54.4 65.9 85.0 100.0 100.0 100.0 100.0 100.0 74.0 0% 

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8-26 

REFERENCES 

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