Evaluating Your Energy Options and Making the Right Choice for Your Facility is Important for Long-term Operations and Sustainability Goals
Choosing the right energy infrastructure for your building is essential. You need to install appropriate equipment to meet your load requirements and it’s important to consider a variety of factors that impact the best investment for you.
Facility managers and building owners have many options to consider when it comes to heating and cooling. In many U.S. cities, it’s common to compare the costs of installing and maintaining onsite natural gas boilers against using a centralized system, like district energy. However, evaluating these two options isn’t always straightforward. To ensure you’re comparing apples-to-apples and making the best energy decision to meet your business objectives, make sure to ask these three key questions:
- What are the lifecycle costs?
- What are my opportunity costs?
- Does this energy option align with our institutional objectives?
We’ve expanded on these questions to help you understand how to evaluate your facility’s best energy option.
Calculating Lifecycle Costs
Here are our two cents: It’s easy to look strictly at the price of natural gas today and conclude that onsite gas boilers are the right economic choice for your facility. However, this is not always the case. It’s risky to evaluate a long-term investment by only accounting for one variable – fuel costs.
The most effective way to compare between onsite natural gas boilers and district energy is to calculate lifecycle costs. A lifecycle cost analysis is a powerful tool to determine the cost-effectiveness of the different investment options you’re considering. This analysis considers many factors, including the equipment’s purchase price, financing costs and operating and maintaining the equipment over time. Boiler maintenance is often overlooked but can be a significant expense.
A lifecycle cost analysis provides you with the most comprehensive picture of your energy options’ costs and benefits. You can use the data-backed lifecycle analysis to support your decision when discussing energy alternatives with internal stakeholders. Many of us feel the pressure to make long-term investment decisions in an uncertain and challenging environment, where capital and budgets are tight. Using this tool can help you feel confident you’ve done the work to validate and justify your decision through a robust analysis.
In any lifecycle cost analysis of gas boilers versus district energy steam, it’s essential to include and assess the following variables:
Financing costs: Both natural gas plants and district energy connections typically require an up-front investment. The investment size will vary mainly depending on the natural gas equipment and connection costs for district energy. Suppose you need to borrow money from the bank to purchase and install equipment or make other modifications to your space, including loan expenses. In that case, you will need to include the capital cost in your analysis. Interest expense is often overlooked and can be quite large, depending on the project’s size and your borrowing rate.
Even if your organization has capital in the bank to cover the cost of a new plant, there is always an opportunity cost to using those funds for energy infrastructure, which we’ll cover in Assessing Your Opportunity Costs. You could use the capital to finance projects that are more aligned and core to your institutional priorities or toward revenue-generating investments.
Operations and maintenance (O&M): There are always costs associated with owning, operating and maintaining your equipment. O&M could include full-time staff (consider in your analysis the fully burdened labor costs inclusive of taxes, benefits, etc.) or contractors operating the system. It’s essential to check your local regulations to ensure that you factor in the appropriate number of people with the right qualifications/licensing to meet your city’s requirements. You will also need to account for ongoing maintenance, including parts replacements and future upgrades to keep your system running optimally.
Natural gas plants tend to require much higher operating costs, especially over time as systems age, whereas district energy requires little to no O&M budgeting.
Variable energy costs: As discussed earlier, many facilities managers and building owners look at the low price of fuel and immediately assume an onsite natural gas plant is the answer. It’s undoubtedly a critical input to the decision-making process. But, to assess your variable energy costs, you need to consider not only the commodity itself but also supply costs and any expectations for increases in future consumption, such as an expansion of a hospital wing.
While no one has a crystal ball, we are transitioning quickly to a low carbon economy where carbon taxes are more likely to be a reality. Any decision you make today will have consequences for the next few decades. While the fuel costs are a factor for both district energy and an onsite natural gas plant, many district energy companies are evaluating alternatives to gas and fossil fuels. District energy systems can evolve and adapt to different fuel sources as new technologies emerge.
And, finally, evaluate the rate structure(s). It’s vital to ensure you fully understand the rates associated with natural gas and district energy. For example, are you being offered a firm or an interruptible rate? If it’s the latter, while often much less expensive, remember that your service can be interrupted at any time and that this could directly impact your operations.
Fixed costs: The fixed costs associated with each option need to be carefully assessed. District energy companies tend to charge a capacity rate, a charge to reserve capacity on the system to ensure your load is uninterrupted. Other fixed costs that should be incorporated are taxes and insurance, which can vary depending upon the option you are evaluating.
Assessing Your Opportunity Costs
Even if you have the capital on hand to finance new equipment, there are always opportunity costs with every investment decision, such as losing potential gain from other alternatives. If you spend your cash on a new mechanical room, that leaves less budget to invest in your core operations. For a hospital, this could mean new technologies or equipment to treat patients, upgrades or expansions to tenant spaces for commercial real estate, or a new lab building on a college campus to educate students. All these examples tie directly to an organization’s core mission. Depending upon the required capital cost for an energy infrastructure project, it’s important to think about the investments you’re giving up or foregoing that could better serve your customers or constituents.
In addition to capital, there are opportunity costs associated with space, particularly in cities where it’s limited and expensive. How property managers utilize and leverage space is vital to the bottom line. Typically, mechanical rooms, large chiller or boiler plants and cooling towers take up a considerable amount of precious space within urban buildings. Of course, there could be other valuable uses for your space to consider, from amenities and retail to storage and parking.
Finally, consider the opportunity cost associated with an outage. Outages can impact your tenants’ safety, comfort or well-being of your patients. Interruptible rates are less expensive but provide the utility with the ability to interrupt your service on what could be a peak winter day or a critical business operation. Evaluating the cost of an outage and downtime is vital in assessing which option to select to best meet your energy needs.
Alignment with Other Institutional Objectives
The last piece worth considering is the alignment of your decision with other institutional objectives. While it’s often difficult to put a dollar figure around objectives, positioning your energy investment to align with your organization’s goals can be valuable.
Many companies and institutions today have environmental, health and safety (EH&S) objectives. Energy decisions have a direct impact and correlation with environmental or sustainability goals. As organizations seek to reduce their carbon footprint, an energy infrastructure decision can be heavily influenced by expected emissions output. However, there are other EH&S-related impacts from an energy infrastructure decision, including the safety of occupants from onsite combustion, other onsite mechanical equipment, air quality and many other factors to consider.
As you evaluate your organization or facility’s options, carefully consider how each of them supports or detracts from your objectives. For example, will steam deliver more immediate carbon savings, relative to onsite combustion, to meet sustainability goals? And, importantly, review the policies your local jurisdictions are considering. These financial impacts on your organization shouldn’t be overlooked.
Making the Right Choice
Ultimately, the factors that lead to your energy infrastructure decision will be unique to your organization’s goals and circumstances. While there are many factors to consider when making an energy decision – from incentive programs, opportunity costs, sustainability objectives and more – a lifecycle cost analysis ensures you are comparing apples-to-apples to make an informed energy decision that meets your institution’s goals and objectives.