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LIFE CYCLE COSTINGLIFE CYCLE COSTINGFor Facility Design, Construction , Operations and MaintenanceFor Facility Design, Construction , Operations and Maintenance

David Katz, MBA, BADavid Katz, MBA, BASustainable Resources Management Inc. Sustainable Resources Management Inc.

Tel: 416 Tel: 416 -- 493 493 -- 92329232Fax: 416 Fax: 416 -- 493493-- 53665366

Email: Email: dkatz@sustainable.on.cadkatz@sustainable.on.ca

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•• Economic Standards for Life Cycle Costing Economic Standards for Life Cycle Costing ––ASTM and NISTASTM and NIST•• What costs must be consideredWhat costs must be considered•• Data Sources: project specific and public predictionsData Sources: project specific and public predictions•• How to assess the accuracy of your LCCHow to assess the accuracy of your LCC•• Making unavoidable assumptionsMaking unavoidable assumptions•• What uncertainties will remain and how to mitigate themWhat uncertainties will remain and how to mitigate them•• Energy Pricing and other Policy changes such as GHG Energy Pricing and other Policy changes such as GHG •• Economic and Financial considerationsEconomic and Financial considerations•• Financing and Tax considerationsFinancing and Tax considerations•• Programs and software availablePrograms and software available

AGENDAAGENDA

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WHAT IS LIFE CYCLE COSTINGWHAT IS LIFE CYCLE COSTING

Definitions:Definitions:LCC are summations of cost estimates from inception to LCC are summations of cost estimates from inception to disposal for both equipment and projects as determined disposal for both equipment and projects as determined by an analytical study and estimate of total costs by an analytical study and estimate of total costs experienced during their life.experienced during their life.

Objectives to using life cycle costing:Objectives to using life cycle costing:The objective of LCC analysis is to choose the most costThe objective of LCC analysis is to choose the most cost--effective approach from a series of alternatives so the effective approach from a series of alternatives so the least longleast long--term cost of ownership is achieved.term cost of ownership is achieved.

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LCC for Facility InvestmentsLCC for Facility Investments

Typical problems that LCC can resolve:Typical problems that LCC can resolve:Having lower life cycle costs provides the Having lower life cycle costs provides the incentive to overcome the lower first cost or incentive to overcome the lower first cost or budgetary restrictions.budgetary restrictions.Capital Asset valuations that look at the Capital Asset valuations that look at the revenues and the operating costs are improved revenues and the operating costs are improved by having the lower operating costs of better by having the lower operating costs of better facilities. facilities. Making repairs to existing equipment versus Making repairs to existing equipment versus advancing the purchase of new better advancing the purchase of new better performing equipmentperforming equipment

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Application to design and construction processApplication to design and construction process

LCC analysis has many applications in the capital LCC analysis has many applications in the capital asset, buildings and infrastructure projects that use asset, buildings and infrastructure projects that use the design and construction process. Choosing the the design and construction process. Choosing the appropriate materials and costing out the operating appropriate materials and costing out the operating and maintenance cost of different alternatives and maintenance cost of different alternatives provides the design and construction professional provides the design and construction professional the ability to include the ownerthe ability to include the owner’’s financial criteria as s financial criteria as part of the process. part of the process.

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DATA REQUIREMENTS FOR LIFE CYCLE DATA REQUIREMENTS FOR LIFE CYCLE COSTINGCOSTING

Developing design alternativesDeveloping design alternativesThe LCC analysis is a comparative process of The LCC analysis is a comparative process of significantly different alternatives in order to significantly different alternatives in order to provide meaningful results. While repeating provide meaningful results. While repeating previous designs and just bringing them up to previous designs and just bringing them up to current regulatory codes may provide a capital current regulatory codes may provide a capital asset that can be accurately priced as a base asset that can be accurately priced as a base case, innovation in technology and new case, innovation in technology and new materials should be used to develop alternatives. materials should be used to develop alternatives. This may require a design Charrette that brings This may require a design Charrette that brings together all major stakeholders so that they can together all major stakeholders so that they can suggest the things they would like to see suggest the things they would like to see incorporated and for what reason. incorporated and for what reason.

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Estimating the cost inputsEstimating the cost inputsLife Cycle Costing incorporates both Life Cycle Costing incorporates both

Life Cost Planning, which occurs during Life Cost Planning, which occurs during development, and development, and implementation of that plan by Life Cost implementation of that plan by Life Cost Analysis as the asset is used or occupied.Analysis as the asset is used or occupied.Cost inputs are required for each cash flow Cost inputs are required for each cash flow item at todayitem at today’’s prices. These can be recent s prices. These can be recent purchases or past payments that can be purchases or past payments that can be updated to current prices. updated to current prices.

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Selecting the economic parametersSelecting the economic parametersLife Cycle Costing incorporates both costs that occur Life Cycle Costing incorporates both costs that occur today and those that will be paid for in the future.today and those that will be paid for in the future.

Cash flows that occur in the base year are at current prices Cash flows that occur in the base year are at current prices however future costs may escalate due to inflation and real prichowever future costs may escalate due to inflation and real price e increases, and increases, and implementation of Life Cost Analysis requires the discounting ofimplementation of Life Cost Analysis requires the discounting ofthe future cash flows to reflect the Time Value of Money.the future cash flows to reflect the Time Value of Money.Economic parameters such as the real inflation of the major costEconomic parameters such as the real inflation of the major costfactors such as energy and the general inflation that will impacfactors such as energy and the general inflation that will impact all t all recurring operating expenses will allow for cash flow items to brecurring operating expenses will allow for cash flow items to be e priced in the future years they occur.priced in the future years they occur.These cash flows are then discounted by the cost of money to These cash flows are then discounted by the cost of money to calculate the net present value for the the alternatives. calculate the net present value for the the alternatives.

Definitions Definitions ––compounding, discounting, equivalency, current and compounding, discounting, equivalency, current and constant dollars and present valueconstant dollars and present value

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Forecasting future economic scenariosForecasting future economic scenariosLife cycle costs for assets will be impacted by Life cycle costs for assets will be impacted by the economic scenarios that occur in the future the economic scenarios that occur in the future due to their long life.due to their long life.

Current prices for energy and maintenance may not reflect Current prices for energy and maintenance may not reflect the future costs due to inflation and real price increases, the future costs due to inflation and real price increases, and and Future Energy and Environmental regulation compliance Future Energy and Environmental regulation compliance costs can have volatile patterns that are not predictable. costs can have volatile patterns that are not predictable. Economic parameters such as the real inflation of energy Economic parameters such as the real inflation of energy and general inflation rates are linked to the economic and and general inflation rates are linked to the economic and monetary policies of the central banks. monetary policies of the central banks. Discount rate policies and foreign exchange variations can Discount rate policies and foreign exchange variations can all influence the cost of money used to calculate the net all influence the cost of money used to calculate the net present value for the the alternatives.present value for the the alternatives.

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CALCULATING LIFE CYCLE COSTSCALCULATING LIFE CYCLE COSTSTime value of moneyTime value of moneyCalculating present valuesCalculating present valuesUse of financial tablesUse of financial tablesCash flow versus formula method of calculation, Cash flow versus formula method of calculation, equivalency, cash flow diagrams, gradients, delayed equivalency, cash flow diagrams, gradients, delayed costs, terminal values,costs, terminal values,Effect of mortgages, depreciation and taxes, externalities Effect of mortgages, depreciation and taxes, externalities such as environment and sustainabilitysuch as environment and sustainabilitySensitivity analysisSensitivity analysisRisk/probabilityRisk/probability

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EVALUATING AND PRESENTING THE RESULTSEVALUATING AND PRESENTING THE RESULTSEvaluation approachesEvaluation approachesTotal present valueTotal present valueNet present valueNet present valueSimple paybackSimple paybackTrue paybackTrue paybackEquivalent uniform annual costEquivalent uniform annual costRate of returnRate of returnKWH savings/investment dollarKWH savings/investment dollar

1.1. Savings/benefit to investment ratioSavings/benefit to investment ratio2.2. Graphic analysisGraphic analysis

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Life cycle costs highly influence by capital funds available andLife cycle costs highly influence by capital funds available and cost of those funds and others. cost of those funds and others.

LCC shows the tradeoffs in capital and operating and repair LCC shows the tradeoffs in capital and operating and repair costs.costs.

LCC influenced by terminal values if different for major LCC influenced by terminal values if different for major components.components.

LCC can show benefit of advancing planned replacements if PV LCC can show benefit of advancing planned replacements if PV paid for by lower operating and later future repair costs.paid for by lower operating and later future repair costs.

Financing and financial and tax incentives impact LCCFinancing and financial and tax incentives impact LCC

Outsourcing and performance contracting can reduce risks Outsourcing and performance contracting can reduce risks

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•• Major changes in gas and electricity markets have made the Major changes in gas and electricity markets have made the costing on maintenance and equipment operations more complexcosting on maintenance and equipment operations more complex

•• Energy costing methodology for true energy cost has both Energy costing methodology for true energy cost has both supply and demand side implicationssupply and demand side implications

•• Utility Costs Utility Costs –– Market Prices and new contractsMarket Prices and new contracts

•• Demand Management Demand Management –– Historical approach especially in US Historical approach especially in US where Demand Charges can be more than 50% of electricity billwhere Demand Charges can be more than 50% of electricity bill

•• Real Time Pricing and Demand Response ProgramsReal Time Pricing and Demand Response Programs

•• Demand Management Today and Future Carbon issuesDemand Management Today and Future Carbon issues

Cost and Policy UncertaintiesCost and Policy Uncertainties

Energy and Climate Change issuesEnergy and Climate Change issues

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•• Major changes in gas and electricity markets have made the Major changes in gas and electricity markets have made the costing on maintenance and equipment operations more complexcosting on maintenance and equipment operations more complex

Demand side was domain of engineering and operationsDemand side was domain of engineering and operations

Supply side was the responsibility of procurement and Supply side was the responsibility of procurement and purchasingpurchasing

Integration of supply and demand is critical to control your totIntegration of supply and demand is critical to control your total al energy picture.energy picture.

New pricing regimes and equipment technologies can offer new New pricing regimes and equipment technologies can offer new opportunities and contribute to lower carbon footprint as well. opportunities and contribute to lower carbon footprint as well.

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•• Energy costing methodology for true energy cost has both Energy costing methodology for true energy cost has both supply and demand side implicationssupply and demand side implications

Example of absorption chiller and centrifugal chiller used to shExample of absorption chiller and centrifugal chiller used to show ow the past engineering method based on stable energy input prices the past engineering method based on stable energy input prices is no longer applicableis no longer applicable

Recent Programs launched by Ontario Power Authority with Recent Programs launched by Ontario Power Authority with BOMA include Fuel Switching with incentives for Peak reduction. BOMA include Fuel Switching with incentives for Peak reduction.

Thermal Storage using ice can be economic Thermal Storage using ice can be economic

Deep lake cooling are options for those in downtown.Deep lake cooling are options for those in downtown.

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Demand Management Today and Future Carbon issues Demand Management Today and Future Carbon issues

Power monitoring systems are available to support manual load Power monitoring systems are available to support manual load curtailment. Automated systems are also an option with greater curtailment. Automated systems are also an option with greater analytics and output controlanalytics and output control

New Clean energy Programs offer on site generation contracts New Clean energy Programs offer on site generation contracts that provide capacity payments and incentives while meeting the that provide capacity payments and incentives while meeting the local loads.local loads.

New carbon tax and/or cap and trade programs will add new New carbon tax and/or cap and trade programs will add new complexities to the total life cycle costs of major maintenance complexities to the total life cycle costs of major maintenance decisions with large energy component.decisions with large energy component.

All these options require the integrated approach to supply and All these options require the integrated approach to supply and demand.demand.

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•• Utility Costs Utility Costs –– Market Prices and new contractsMarket Prices and new contracts

Both gas and now electricity are deregulated for commercial and Both gas and now electricity are deregulated for commercial and industrial sectors.industrial sectors.

Real Time Pricing is now more volatile and affect the risk profiReal Time Pricing is now more volatile and affect the risk profile.le.

Options include commodity portion price protection, Weather Options include commodity portion price protection, Weather derivatives, and other peak and volume pricing schemes.derivatives, and other peak and volume pricing schemes.

•• Demand Management Demand Management –– Historical approach especially in US Historical approach especially in US where Demand Charges can be more than 50% of electricity billwhere Demand Charges can be more than 50% of electricity bill

Past practices to start generation during the traditional peak Past practices to start generation during the traditional peak periods has to be reevaluated.periods has to be reevaluated.

New rates for transmission, distribution affect options and are New rates for transmission, distribution affect options and are now unbundled from the commodity portion for energy.now unbundled from the commodity portion for energy.

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Real Time Pricing and Demand Response ProgramsReal Time Pricing and Demand Response Programs

Demand Response Programs offer incentives to shift loads and Demand Response Programs offer incentives to shift loads and respond to DR signals in GRID stresses situations.respond to DR signals in GRID stresses situations.

Hourly Price skyrockets when all the interconnected markets are Hourly Price skyrockets when all the interconnected markets are stretched due to weather, storms, and large generation plant stretched due to weather, storms, and large generation plant outages. outages.

Demand Response payments can buy the upgrades to the control Demand Response payments can buy the upgrades to the control systems that will produce the demand response but also offer systems that will produce the demand response but also offer other operational benefits that lower life cycle costs.other operational benefits that lower life cycle costs.

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Demand Management Today and Future Carbon issues Demand Management Today and Future Carbon issues

Power monitoring systems are available to support manual load Power monitoring systems are available to support manual load curtailment. Automated systems are also an option with greater curtailment. Automated systems are also an option with greater analytics and output controlanalytics and output control

New Clean energy Programs offer on site generation contracts New Clean energy Programs offer on site generation contracts that provide capacity payments and incentives while meeting the that provide capacity payments and incentives while meeting the local loads.local loads.

New carbon tax and/or cap and trade programs will add new New carbon tax and/or cap and trade programs will add new complexities to the total life cycle costs of major maintenance complexities to the total life cycle costs of major maintenance decisions with large energy component.decisions with large energy component.

All these options require the integrated approach to supply and All these options require the integrated approach to supply and demand.demand.

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Financing Options

Self Self –– Finance Finance –– Your cost of moneyYour cost of moneyToronto Atmospheric Fund Toronto Atmospheric Fund –– Financing Financing Lease or Rent Lease or Rent –– Subject to RestrictionsSubject to RestrictionsLow interest loans Low interest loans –– Banks and Credit UnionsBanks and Credit UnionsEnergy and Facility Service Companies using Energy and Facility Service Companies using Performance contractsPerformance contractsCarbon Credits and other Trading SchemesCarbon Credits and other Trading Schemes

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Federal Programs AvailableNatural Resources Canada's Office of Energy Natural Resources Canada's Office of Energy Efficiency now offers the ecoENERGY Retrofit Efficiency now offers the ecoENERGY Retrofit Incentive for Buildings, the Incentive for Buildings, the commercial/institutional component of the commercial/institutional component of the ecoENERGY RetrofitecoENERGY Retrofit financial incentives for financial incentives for existing homes, buildings and industrial existing homes, buildings and industrial processes. If you have not yet started a new processes. If you have not yet started a new energy efficiency project, you could receive the energy efficiency project, you could receive the lesser of $10 per gigajoule of estimated energy lesser of $10 per gigajoule of estimated energy savings or 25 percent of eligible project costs.savings or 25 percent of eligible project costs.Website: Website: http://oee.nrcan.gc.ca/commercial/financialhttp://oee.nrcan.gc.ca/commercial/financial--assistance/existing/retrofits/index.cfm?attrassistance/existing/retrofits/index.cfm?attr=0=0

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Provincial Programs AvailableOntario Power Authority Ontario Power Authority –– New Construction New Construction Program will build on CBIP concept of energy Program will build on CBIP concept of energy modeling and payment or Low rate interest to modeling and payment or Low rate interest to facilitate better energy performance.facilitate better energy performance.Demand Response 3 Demand Response 3 –– contractual agreement for contractual agreement for 100 or 200 hours 100 or 200 hours –– incentives paid to schedule incentives paid to schedule by term and amounts.by term and amounts.ERIP ERIP –– Local distribution company programsLocal distribution company programs

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Other Programs Available

Renewable and Clean Standard OffersRenewable and Clean Standard OffersToronto Better Building PartnershipToronto Better Building PartnershipToronto Atmospheric Fund Toronto Atmospheric Fund –– Financing Financing BOMA Toronto BOMA Toronto –– CDMCDMOPA for Continuous Commissioning and Next OPA for Continuous Commissioning and Next Gen Building AutomationGen Building AutomationTax credits and Class 43 Accelerated Tax credits and Class 43 Accelerated Depreciation on qualified equipmentDepreciation on qualified equipment

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Educational Programs and Software for LCCEducational Programs and Software for LCC

Sustainable Resources Management Sustainable Resources Management –– 2 2 -- 3 day LCC General 3 day LCC General course or applied to specific types of projects.course or applied to specific types of projects.

LeapFrog Energy LeapFrog Energy –– Renewable Energy Technology Screening Renewable Energy Technology Screening Tool RETScreen 1Tool RETScreen 1--2 day course and consulting 2 day course and consulting

Robert P. Robert P. CharetteCharette, P.E. CVS PQS , P.E. CVS PQS ––Concordia UniversityConcordia UniversityExpert on LCC for buildingsExpert on LCC for buildings-- Recent CaGBC course and LCC for Recent CaGBC course and LCC for PWGSCPWGSC

Life Cycle Costing for Facilities Life Cycle Costing for Facilities ––DellDell””IsolaIsola and Kirk and Kirk –– RSMeans RSMeans text and LCC software download from website. text and LCC software download from website.

ASTM Standards for LCC and NIST LCC manualASTM Standards for LCC and NIST LCC manual

Excel and other spreadsheets have LCC modelling capabilities Excel and other spreadsheets have LCC modelling capabilities

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Contact InfoContact Info

David Katz, MBA, BADavid Katz, MBA, BASustainable Resources Management Inc. Sustainable Resources Management Inc.

6 Morning Gloryway6 Morning GlorywayToronto, OntarioToronto, OntarioCanada Canada MM2H 3M22H 3M2Tel: 416Tel: 416--493493--92329232

Email: Email: dkatz@sustainable.on.cadkatz@sustainable.on.cawww.sustainable.on.cawww.sustainable.on.ca

In association with In association with www.energymanagementtoronto.comwww.energymanagementtoronto.com

www.centennialcollege.ca/cei/ibexwww.centennialcollege.ca/cei/ibex