Life-Cycle Cost Analysis

Constructed Costs of a Net-Zero Office Building

Facility: Research Support Facility at the National Renewable Energy Laboratory in Golden, Colorado

Operational: August 2010

Constructed cost: $259/ft2 to achieve 50% less energy use than code

Constructed cost of similar office buildings in area: $225 to $300/ft2

Reaching Net-Zero: A 1.27 MW photovoltaic system was added to the project in two phases to bring the system to net-zero. This system was financed through a power purchase agreement and did not add to the constructed cost of the building. If those costs were included in the capital costs, the total constructed cost would have been 291/ft2 to reach net-zero energy use.

Learn more about the Research Support Facility.

Life-cycle cost analysis is the process of calculating whether a particular investment, in this case a renewable energy investment, will generate a positive return on investment (ROI) over the life of the technology. It is only as accurate as the estimates and assumptions used in the analysis, but is a useful tool that helps Federal agencies justify whether an investment in renewable energy is appropriate for a project. In fact, many Federal renewable energy requirements are tied to life-cycle cost effectiveness for the specific technology.

Life-cycle cost analysis should be viewed as an ongoing process that starts early in a project and is revisited through all phases of a construction process. To account for the additional up-front costs of renewable energy, life-cycle cost analysis needs to be launched during the early planning phases, ahead of preliminary budget plans, to keep the economic justifications and planning goals consistent with each other. If an agency waits for a hired design team to conduct the first look at economic feasibility of renewable energy, many opportunities may already be lost.

The renewable energy technologies included within the initial budget request need to be consistent with the energy goals and design objectives established during project programming. This gives more justification for the system and establishes a placeholder for the essential size of the renewable energy systems. The specific renewable energy technologies making up the system may change throughout the process, but the magnitude of the request should be consistent with what is required of the architectural and engineering (A&E) team.

It is important not to reject technologies based on early life-cycle cost analysis, but rather use the analysis to inform the ongoing process. Details of resource availability, design, and magnitude of energy savings cannot be fully determined until detailed analysis is conducted in later stages of design.

Life-cycle costs effectiveness should be reassessed throughout the various stages of design. The project energy lead serves as the agency's check in the life-cycle cost analysis system after the initial assessments. The design team takes these assessments into account once they have determined their optimum set of renewable energy technologies, which occurs during schematic design. The project energy lead must ensure the design team is using proper inputs and receiving accurate results. The architectural components and primary energy systems are selected within the design development phase. Some architectural and engineering firms might inadvertently leave these systems out if they do not have the proper experience with the technologies. As such, the agency is well served to have its own expertise to review architectural and engineering assumptions.

Standards for Analysis

Through life-cycle cost analysis, agencies estimate how the up-front cost of the equipment is spread through the life of the equipment. The National Institute of Standards and Technologies (NIST) provides economic parameters for making these assumptions, such as discount rates (time value of money for the Federal government), fuel escalation rates, and general inflation rates to apply to O&M. Agencies still need to understand the specific regulations and tariffs that affect their project, which may override information from NIST.

The Energy Independence and Security Act (EISA) of 2007 changed the life-cycle cost methodology for Federal buildings from 25 years to 40 years, which expands the number of potential cost-effective measures. Extending the useful life of renewable energy systems to 40 years requires proper operations and maintenance (O&M) as well as certain equipment replacements. This is feasible for photovoltaics (PV), wind, ground-source heat pumps, and building integrated technologies like daylighting, passive solar heating, and solar ventilated preheat.

The accepted life-cycle of a solar hot water heater is about 15 years, which is about the same life span as a conventional electric hot water heater. Solar hot water systems that are designed to supply 70% to 80% of the load will reduce cost and will often be life-cycle cost effective.

The Building Life-Cycle Cost (BLCC) software uses the NIST standards to help calculate life-cycle costs, net savings, savings-to-investment ratio (SIR), internal rate of return, and payback period for Federal energy and water conservation projects funded by agencies or through other renewable energy project funding. BLCC also estimates emissions and emission reductions. An energy escalation rate calculator (EERC) computes an average escalation rate when payments are based on energy cost savings.

The economic benefits of renewable energy systems also need to be quantified in the life-cycle cost analysis, including cost savings associated with offset energy use. This analysis is dependent on both a valid estimate of energy production from the system and care should be taken not to use baseline energy tariff numbers, but rather determine the full value of the energy that will be offset by the system. Additional revenue streams, such as renewable energy certificates (RECs), can improve economics. In some cases, an agency may want to sell the RECs from their project, and replace or arbitrage them with less expensive RECs from other renewable energy sources to improve system economics. Other incentives, such as available state or utility rebates or grants, also improve the economic picture.

Additional benefits of renewable energy systems might be factored into the analysis if justified. For some technologies, related non-renewable energy systems may be able to be downsized. Beyond reduced utility payments, renewable energy projects can also provide an opportunity for enhanced green marketing. For example, buildings rated by the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED®) certification process can achieve $11.24 per square foot more in rent than comparable non-LEED buildings and have 3.8% higher occupancy, and sell for $171 per square-foot more than typical properties. Rental rates in ENERGY STAR certified buildings can achieve a $2.38 per square foot premium over comparable non-ENERGY STAR buildings and have 3.6% higher occupancy.

FEMP offers information and tools for life-cycle cost analysis of energy projects.