1. LIFE CYCLE COSTING
For Facility Design, Construction , Operations and Maintenance
David Katz, MBA, BA
Sustainable Resources Management Inc.
Tel: 416 - 493 - 9232
Fax: 416 - 493- 5366
Email: dkatz@sustainable.on.ca
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2. AGENDA
• Economic Standards for Life Cycle Costing –ASTM and NIST
• What costs must be considered
• Data Sources: project specific and public predictions
• How to assess the accuracy of your LCC
• Making unavoidable assumptions
• What uncertainties will remain and how to mitigate them
• Energy Pricing and other Policy changes such as GHG
• Economic and Financial considerations
• Financing and Tax considerations
• Programs and software available
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3. WHAT IS LIFE CYCLE COSTING
Definitions:
LCC are summations of cost estimates from inception to
disposal for both equipment and projects as determined
by an analytical study and estimate of total costs
experienced during their life.
Objectives to using life cycle costing:
The objective of LCC analysis is to choose the most cost-
effective approach from a series of alternatives so the
least long-term cost of ownership is achieved.
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4. LCC for Facility Investments
Typical problems that LCC can resolve:
Having lower life cycle costs provides the
incentive to overcome the lower first cost or
budgetary restrictions.
Capital Asset valuations that look at the
revenues and the operating costs are improved
by having the lower operating costs of better
facilities.
Making repairs to existing equipment versus
advancing the purchase of new better
performing equipment
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5. Application to design and construction process
LCC analysis has many applications in the capital
asset, buildings and infrastructure projects that use
the design and construction process. Choosing the
appropriate materials and costing out the operating
and maintenance cost of different alternatives
provides the design and construction professional
the ability to include the owner’s financial criteria as
part of the process.
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6. DATA REQUIREMENTS FOR LIFE CYCLE
COSTING
Developing design alternatives
The LCC analysis is a comparative process of
significantly different alternatives in order to
provide meaningful results. While repeating
previous designs and just bringing them up to
current regulatory codes may provide a capital
asset that can be accurately priced as a base
case, innovation in technology and new
materials should be used to develop alternatives.
This may require a design Charrette that brings
together all major stakeholders so that they can
suggest the things they would like to see
incorporated and for what reason.
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7. Estimating the cost inputs
Life Cycle Costing incorporates both
Life Cost Planning, which occurs during
development, and
implementation of that plan by Life Cost
Analysis as the asset is used or occupied.
Cost inputs are required for each cash flow
item at today’s prices. These can be recent
purchases or past payments that can be
updated to current prices.
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8. Selecting the economic parameters
Life Cycle Costing incorporates both costs that occur
today and those that will be paid for in the future.
Cash flows that occur in the base year are at current prices
however future costs may escalate due to inflation and real price
increases, and
implementation of Life Cost Analysis requires the discounting of
the future cash flows to reflect the Time Value of Money.
Economic parameters such as the real inflation of the major cost
factors such as energy and the general inflation that will impact all
recurring operating expenses will allow for cash flow items to be
priced in the future years they occur.
These cash flows are then discounted by the cost of money to
calculate the net present value for the the alternatives.
Definitions –compounding, discounting, equivalency, current and
constant dollars and present value
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9. Forecasting future economic scenarios
Life cycle costs for assets will be impacted by
the economic scenarios that occur in the future
due to their long life.
Current prices for energy and maintenance may not reflect
the future costs due to inflation and real price increases,
and
Future Energy and Environmental regulation compliance
costs can have volatile patterns that are not predictable.
Economic parameters such as the real inflation of energy
and general inflation rates are linked to the economic and
monetary policies of the central banks.
Discount rate policies and foreign exchange variations can
all influence the cost of money used to calculate the net
present value for the the alternatives.
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10. CALCULATING LIFE CYCLE COSTS
Time value of money
Calculating present values
Use of financial tables
Cash flow versus formula method of calculation,
equivalency, cash flow diagrams, gradients, delayed
costs, terminal values,
Effect of mortgages, depreciation and taxes, externalities
such as environment and sustainability
Sensitivity analysis
Risk/probability
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11. EVALUATING AND PRESENTING THE RESULTS
Evaluation approaches
Total present value
Net present value
Simple payback
True payback
Equivalent uniform annual cost
Rate of return
KWH savings/investment dollar
1. Savings/benefit to investment ratio
2. Graphic analysis
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12. Life cycle costs highly influence by capital funds available and
cost of those funds and others.
LCC shows the tradeoffs in capital and operating and repair
costs.
LCC influenced by terminal values if different for major
components.
LCC can show benefit of advancing planned replacements if PV
paid for by lower operating and later future repair costs.
Financing and financial and tax incentives impact LCC
Outsourcing and performance contracting can reduce risks
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13. Cost and Policy Uncertainties
Energy and Climate Change issues
• Major changes in gas and electricity markets have made the
costing on maintenance and equipment operations more complex
• Energy costing methodology for true energy cost has both
supply and demand side implications
• Utility Costs – Market Prices and new contracts
• Demand Management – Historical approach especially in US
where Demand Charges can be more than 50% of electricity bill
• Real Time Pricing and Demand Response Programs
• Demand Management Today and Future Carbon issues
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14. • Major changes in gas and electricity markets have made the
costing on maintenance and equipment operations more complex
Demand side was domain of engineering and operations
Supply side was the responsibility of procurement and
purchasing
Integration of supply and demand is critical to control your total
energy picture.
New pricing regimes and equipment technologies can offer new
opportunities and contribute to lower carbon footprint as well.
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15. • Energy costing methodology for true energy cost has both
supply and demand side implications
Example of absorption chiller and centrifugal chiller used to show
the past engineering method based on stable energy input prices
is no longer applicable
Recent Programs launched by Ontario Power Authority with
BOMA include Fuel Switching with incentives for Peak reduction.
Thermal Storage using ice can be economic
Deep lake cooling are options for those in downtown.
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16. Demand Management Today and Future Carbon issues
Power monitoring systems are available to support manual load
curtailment. Automated systems are also an option with greater
analytics and output control
New Clean energy Programs offer on site generation contracts
that provide capacity payments and incentives while meeting the
local loads.
New carbon tax and/or cap and trade programs will add new
complexities to the total life cycle costs of major maintenance
decisions with large energy component.
All these options require the integrated approach to supply and
demand.
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17. • Utility Costs – Market Prices and new contracts
Both gas and now electricity are deregulated for commercial and
industrial sectors.
Real Time Pricing is now more volatile and affect the risk profile.
Options include commodity portion price protection, Weather
derivatives, and other peak and volume pricing schemes.
• Demand Management – Historical approach especially in US
where Demand Charges can be more than 50% of electricity bill
Past practices to start generation during the traditional peak
periods has to be reevaluated.
New rates for transmission, distribution affect options and are
now unbundled from the commodity portion for energy.
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18. Real Time Pricing and Demand Response Programs
Demand Response Programs offer incentives to shift loads and
respond to DR signals in GRID stresses situations.
Hourly Price skyrockets when all the interconnected markets are
stretched due to weather, storms, and large generation plant
outages.
Demand Response payments can buy the upgrades to the control
systems that will produce the demand response but also offer
other operational benefits that lower life cycle costs.
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19. Demand Management Today and Future Carbon issues
Power monitoring systems are available to support manual load
curtailment. Automated systems are also an option with greater
analytics and output control
New Clean energy Programs offer on site generation contracts
that provide capacity payments and incentives while meeting the
local loads.
New carbon tax and/or cap and trade programs will add new
complexities to the total life cycle costs of major maintenance
decisions with large energy component.
All these options require the integrated approach to supply and
demand.
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20. Financing Options
Self – Finance – Your cost of money
Toronto Atmospheric Fund – Financing
Lease or Rent – Subject to Restrictions
Low interest loans – Banks and Credit Unions
Energy and Facility Service Companies using
Performance contracts
Carbon Credits and other Trading Schemes
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21. Federal Programs Available
Natural Resources Canada's Office of Energy
Efficiency now offers the ecoENERGY Retrofit
Incentive for Buildings, the
commercial/institutional component of the
ecoENERGY Retrofit financial incentives for
existing homes, buildings and industrial
processes. If you have not yet started a new
energy efficiency project, you could receive the
lesser of $10 per gigajoule of estimated energy
savings or 25 percent of eligible project costs.
Website:
http://oee.nrcan.gc.ca/commercial/financial-
assistance/existing/retrofits/index.cfm?attr=0
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22. Provincial Programs Available
Ontario Power Authority – New Construction
Program will build on CBIP concept of energy
modeling and payment or Low rate interest to
facilitate better energy performance.
Demand Response 3 – contractual agreement for
100 or 200 hours – incentives paid to schedule
by term and amounts.
ERIP – Local distribution company programs
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23. Other Programs Available
Renewable and Clean Standard Offers
Toronto Better Building Partnership
Toronto Atmospheric Fund – Financing
BOMA Toronto – CDM
OPA for Continuous Commissioning and Next
Gen Building Automation
Tax credits and Class 43 Accelerated
Depreciation on qualified equipment
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24. Educational Programs and Software for LCC
Sustainable Resources Management – 2 - 3 day LCC General
course or applied to specific types of projects.
LeapFrog Energy – Renewable Energy Technology Screening
Tool RETScreen 1-2 day course and consulting
Robert P. Charette, P.E. CVS PQS –Concordia University
Expert on LCC for buildings- Recent CaGBC course and LCC for
PWGSC
Life Cycle Costing for Facilities –Dell”Isola and Kirk – RSMeans
text and LCC software download from website.
ASTM Standards for LCC and NIST LCC manual
Excel and other spreadsheets have LCC modelling capabilities
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25. Contact Info
David Katz, MBA, BA
Sustainable Resources Management Inc.
6 Morning Gloryway
Toronto, Ontario
Canada M2H 3M2
Tel: 416-493-9232
Email: dkatz@sustainable.on.ca
www.sustainable.on.ca
In association with
www.energymanagementtoronto.com
www.centennialcollege.ca/cei/ibex
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