What is cost effective?

A cash-strapped company may want a payback of one year or less. Investors may want 12 percent minimum return on the Investment (ROI) Another company may want the best Net Present Value (NPV) at a 12-percent discount rate A utility may want photovoltaic power produced at less than seven cents per kilowatt-hour. Cost effective may mean different things to different people. The important thing is to be sure to capture all the real costs over the entire life of the project and compare the options using a life-cycle cost analysis. There are many ways to calculate the numbers decision makers need to deem a project viable. The first step is to gather a list of all known and projected costs and benefits. Consider not only quantifiable hard data but any factors that may affect the project. We will worry about quantification later.

The ASA ROI Spreadsheet:

Next, decide how you will analyze your data. Joseph Whitmore builds a business case for a corporation considering converting paper forms to electronic ones (www.AL-Solar.org/tech/eForms_ROI.pdf). I recommend you read this case study and see how Whitmore collects and analyzes data. The Alabama Solar Association has built an Excel spreadsheet (available at www.ALSolar.org/tech/ROI.xls) that closely mirrors this business case. The figure to the right is not an eye chart; don try to read it. Instead, just notice the overall layout. Well examine individual lines in detail a few at a time. White cells are for your data entry. Some are already filled in as sample labels or even sample data. Keep these default entries or change them to suit your project. Light green cells are answers calculated by Excels formulas based on the input you supplied in the white cells. You can use the standard formulas provided or modify them to fit your needs. Numbers appearing in red are negative values.

The spreadsheet opens in Read Only mode. So save any changes you make to your computer using a different file name. The spreadsheet will calculate the ROI and the simple payback based on the data you enter. Begin by entering the project description and a general description of the benefits. Again, feel free to use provided labels or change them to meet your projects needs.

Next we enter the expected benefits for successful project completion. Some benefits may be hard to quantify, but do the best you can. Benefits are the key to getting the project approved. If you cannot quantify an intangible benefit, list it anyway. Someone else may be find a way to measure it, or it may even be used as a tie-breaker if more than one project offers similar results.

The Implementation filter (next to the last line above) is similar to the Adoptidion Rates used by Whitmore in his case study. How much will users resist the new system? Our example assumes that 15 percent of users will continue to use the old system the first year the new one is in place. Implementation improves five percent during year two and three. Next we skip down and enter projected investments costs in lines 53 through 57.

Caution: Beware the GIGO! (Garbage In-Garbage Out). Make all numbers as realistic as you possibly can. Come back and revise them as necessary. Determine the discounted benefit flow. Discounted Benefits = Where:
i = interest or discount rate

Total Benefits (1+i)N

N = Number of years being considered Select your discount Rate, and the spreadsheet calculates present value, simple payback, and discounted cash benefits flow.

The spreadsheet now presents you with the cost and benefits flow. You may wish to draw a cash flow diagram to help explain the cash flow to others:

Now we get the results that will help you sell the project:

Note the simple payback period is between one and two years,

or more specifically 1.24 years. The spreadsheet also gives you the Return on Investment (ROI) for each year of the analysis. The return on investment is calculated by dividing the net profits after taxes by total assets.

Using RETScreen Software:

A more complete analysis is available with RETScreen Clean Energy Project Analysis Software. This unique tool was developed in Canada by numerous experts from government, industry, and academia. The software, provided free-of-charge, can be used worldwide to evaluate the energy production and savings, costs, emission reductions, financial viability and risk for various types of Renewable-energy and Energy-efficient Technologies (RETs). The software (available in multiple languages) also includes product, project, hydrology and climate databases, a detailed user manual, and a case study based college/university-level training course, including an engineering e-textbook. Download the free software and supporting documentation at www.retscreen.net. RETScreen provides you: Climate data from local weather stations around the world Language and unit choices used by two-thirds of the population of the world Benchmarks based on achievable goals from past projects Templates for typical projects including solar PV, solar thermal, geothermal, wind, building envelopes, conservation, and many more Case studies of actual projects from around the world. Users can build a cost model based on default values, based in an ever-increasing knowledge base, or they can use empirical factors based on local experience and knowledge. They can select SI or metric units and choose a language from those spoken by two-thirds of the world population. The model can be as simple or as complex as you wish to make it. You decide.

RETScreen opens in an Excel workbook. This one is the Solar Water Heating Model from RETScreen Version 3.1. it includes worksheets for the energy model, solar resource and heating loads, cost analysis, an optional greenhouse gas analysis, and a financial summary. The opening sheet also provides hyperlinks to the RETScreen website and a host of training and help resources.

The energy model lets you enter specific parameters relating to your project. This is the top portion of a sheet for a bowling alley and restaurant on Redstone Arsenal, Alabama. This example used Metric units of measure, but RETScreen allows you to use English units as well. You can import weather data from a nearby weather station or input empirical data from another source. You can connect to a product database of a participating manufacturer to import the characteristics of a standard product, or you may enter the characteristics of an entirely new model under development. The software is as simple or as complex as you wish to make it.

The Solar Resource and Heating Load Calculation sheet opens from a tab in the energy model sheet. It contains weather data imported from the nearest weather station and allows users to indicate when the system is not to be used year round. A link at the bottom of the sheet returns you to the energy model worksheet.

The Cost Analysis worksheet allows you to enter a complete cost estimate for the construction of your project. Since this example was a preliminary feasibility study, I chose to estimate all system costs based on an empirical value of dollars per square foot of collector. This sheet uses meters and square meters, but I had selected 4-foot by 10-foot collectors, so it was easy to enter an Excel formula multiplying the number of collectors by 40 square feet each by $150 per square feet to produce a lump sum project cost. As the project moves forward, I will look more closely at each system component and prepare a more realistic cost estimate.

The Financial Summary page shows the numbers that will likely sell the project to management. Since this is a US Government project, there are no taxes, thus there are no tax advantages or penalties to consider. RETScreen considers increased profitability for energy savings of private businesses, and it allows you to calculate increased taxes based on increased profits. This does not apply to Government projects.

RETScreen is rather conservative in cost estimates, and the Government has low TVA utility rates, so the numbers on this preliminary analysis do not look that great. The ROI is 7.5 percent, and that is still much better than a bank CD and much more secure than a stock market investment. The payback is just within the Government mandated 25 percent, and the break-even point is 14.9 years. Government agencies are under Presidential mandate to reduce Greenhouse Gas (GHG) emissions, but the mandate is unfunded. A healthy GHG reduction will help sell the project, although there is no financial advantage to do so. As design progresses, the financial summary is likely to show better numbers.

The bottom of the Financial Summary sheet shows diagram of the key financial indicators. RETScreen set of software, and it is free. You can use it to make a quick and simple financial analysis, like the example above, and later refine it into an accurate project budget.

The Bottom Line:

Renewable energy projects are almost always life-cycle cost effective. Costs for renewable energy sources can usually be reliably predicted well into the future. Costs for fossil fuels and even nuclear is much more volatile. Get the numbers, do the math, and make a sensible decision. You have the power. A. Morton Archibald, Jr., P.E., C.E.M. President, Alabama Solar Association June 2010, Alabama Solar Association