Cost Savings Flashcards
Cost savings are typically determined by one of two methods:
1) Determining the difference in the total costs of energy consumption and demand in the reporting period and what costs would have been without the EEM(s).
2) Valuing savings directly from energy unit savings based on marginal or time-of-use prices.
When planning for and reporting savings under a performance contract (or any contract where payments are contingent on proven energy/cost-saving performance) the parties should consider and agree on what to do with the uncertainty (if calculated) in reported savings in the context of financial reconciliation.
Marginal and Time-of-Use Prices
Alternately, cost savings may be calculated directly from energy unit savings using actual unit prices. This method for valuing savings applies per-unit prices of energy directly to energy unit savings. This involves multiplying energy units saved by the actual prices of the units of energy saved, which may vary. The actual per-unit price may be the marginal price, which is the cost of one additional unit of a commodity billed under a complex rate schedule such as block rates, which charge a certain price for the first defined amount used, with a different price for each additional block used. Similarly, determining cost savings under time-of-use rates requires tracking the energy savings during each pricing period.
Be careful to ensure that the marginal price(s) determined is valid for the level of consumption and demand of both the baseline and reporting periods. Similarly, care is required when applying time-of-use rates which charge different prices per unit of energy used based on time-of-day and season. The concept of establishing base prices and associated reporting period escalation factors, as discussed below, can apply to marginal price valuation procedures. Use of the actual price schedule is required in establishing the proper marginal prices for the future valuation of the project-specific savings.
Average or blended prices determined by dividing billed cost by billed consumption are usually different from actual marginal prices. In general, average prices create inaccurate statements of cost savings and should not be used.
Price Schedules
The price schedule should be obtained from the energy supplier. This price schedule should include all elements that are affected by metered amounts, such as consumption charges, demand charges, transformer credits, power factor, demand ratchets, fuel price adjustments, transmission fees, early payment discounts, and taxes.
The selected price schedule may be fixed or changed as prices change. (Increasing prices will shorten the EEM payback period, and decreasing prices will lengthen the payback period though total energy costs will drop when prices drop). When the conditions of the reporting period are used as the basis for reporting energy savings (i.e., avoided energy consumption or demand), the price schedule of the reporting period is normally used to compute “avoided cost.”
Where a third party has invested in an owner’s facility and/or payments are based on verified savings such as in a performance contract, the price schedule for savings reporting is normally fixed at a base price schedule at the time of commitment of the investment (or contract) and not normally allowed to drop below that for the purposes of determining verified energy cost savings to meet the guarantee and support payments.
Price schedules may change at points in time different from meter reading dates. Therefore, Cb and Cr in Equation 11 should be computed for periods exactly aligned with price change dates. This alignment may require an estimated allocation of quantities to periods before and after the price change date. The allocation methodology should be the same as that used by the energy supplier.
Fuel Switching and Price Schedule Changes
The general strategy of applying the same price schedule to baseline and reporting period energy introduces some special considerations when the EEM creates a change in fuel type or a change in price schedule between the baseline and reporting periods. Such situations arise, for example, when an EEM includes a change to a lower-cost fuel or shifts the energy consumption and/or demand pattern such that the facility qualifies for a different price schedule.
In such situations, use the price schedule of the baseline commodity to determine Cb in Equation 11. The price schedule of the reporting-period commodity should be used in determining Cr. However, both commodity-price schedules would be for the same time period, usually the reporting period.
For example, the heating source is changed from electricity to gas, and the use reporting period prices is intended. Then Cb would use the reporting period’s electricity-price schedule for all electricity. Cr would use the reporting period’s gas-price schedule, for the new gas load and the reporting period’s electricity- price schedule for any remaining electricity use.
Estimating Future Values
Defining how energy savings will be valued in future years requires significant consideration of potential risks that actual costs are more or less than those used in the M&V Plan.
Estimating future energy values may be complicated by the use of time-of-use rates and facilities with renewable energy, energy generation, and energy storage systems. In these cases, using hourly data is often necessary, and sub-hourly data can be required to assess peak demand cost impacts.
For a performance contract where there are guaranteed energy savings and the associated energy cost savings are used to determine payments to the contractor, particular care must be taken in establishing energy prices. If the EEM performance is focused on the energy consumption and demand savings and the contractor is not taking any risk on the guarantee of energy prices throughout the contract reporting period, then the energy prices should be defined in the contract’s M&V Plan and agreed to between the owner and contractor.
These contractually defined energy prices would then be used in reported savings rather than the actual reporting period energy prices. This lowers the risk to the owner of energy cost savings meeting the guarantee due to higher than projected actual energy prices while the energy savings in consumption and demand do not meet the performance guarantee. This similarly lowers the risk to the contractor of meeting the energy performance guarantee in consumption and demand but still not meeting the associated cost savings due to a factor out of the contractor’s control.
The determination and stipulation of an annual escalation rate to be applied to the base price schedule (to reflect projected reporting period prices) for each year of the reporting period may be agreed to in order to value energy savings. There are industry tools available to assist with the energy price forecasts. However, this is a project and site-specific variable that must be carefully determined with and agreed to by the owner in the contract M&V Plan before implementation of the project.
For performance contracts, the defined energy prices then become the contract energy prices, and the actual rates during the reporting period are for information only (they can be used to illustrate energy costs savings but the verified cost savings to prove the guarantee are calculated using the contract energy prices).
