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Life Cycle Cost Assessment Model Fact Sheet

Life Cycle Cost Assessment
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The Life Cycle Cost Assessment (LCCA) model is a key tool in determining the cost effectiveness of implementing energy conservation measures in state facilities, which can have a higher first cost than standard measures.

What is the Life Cycle Cost Assessment model?

The LCCA model is currently an Excel based spreadsheet that utilizes the same financial principles as employed by a discounted cash flow analysis. The User is asked to input data and other project information at the "front end" of the model, such as applicable utility tariff information, project costs, energy savings, and operations and maintenance cost information as appropriate. The engine of the model then calculates a cash flow stream based on the data and information inputs, and produces economic evaluation information, such as the internal rate of return, net present value of the cash flows, simple and actual paybacks, and more importantly, debt coverage ratios.

The LCCA can analyze as many as 25 ECMs which are separately input into the model. The LCCA establishes cash flows for each individual ECM, and aggregates the economic analysis of each ECM into one Project level evaluation. The model is flexible in allowing the User to select one, all, or a combination of ECMs to evaluate, which can provide for optimizing Project selection (or a portfolio of ECMs) and financing.

The LCCA model is controlled to ensure that the analysis is performed in accordance with guidelines established by the Finance and Execution Committee of the Green Action Team. The "DGS Inputs" worksheet of the LLCA model contains key variable economic metrics that are integral to the cash flow calculations. These economic metrics include inflation, discount rates, and escalator rates for utility tariff pricing. The approved values of these metrics are posted along with the LCCA model and User's Manual and Instructions (Green California Website). In using the LCCA model, the User will be limited by the posted values for these metrics (see "Recommended operation of the LCCA" below).

What is the role of the LCCA?

The primary role of the LCCA is to determine the cost effectiveness of proposed energy efficiency and conservation projects (Project) and establish whether or not a submitted and evaluated Project should be approved for GS$Mart financing (as per Budget Letter 06-27, issued September 8, 2006).

Given the flexible and scalable nature of the LCCA model, the LCCA could also be used to conduct preliminary reviews of proposed ECMs and Projects, develop "what if" scenarios for further analysis, and provide additional information for budget exercises related to pursuing GBI measures. The User should understand that the LCCA is primarily driven by kW and kWh savings, applicable utility tariffs, and project costs. The LCCA is not suited for performing Life Cycle Assessment (LCA) of green building sustainability measures, which typically utilizes a different methodology for determining cost effectiveness.

How does it fit into the overall energy efficiency effort?

The LCCA will determine whether a Project containing one or more ECMs is cost effective as per the established definition. For the purposes of securing project financing utilizing the GS$Mart program, the LCCA will substantiate that there is sufficient energy savings to repay all associated project costs, including financing. Hence, GS$Mart and the LCCA become the primary tools for implementing cost effective energy efficiency and sustainability measures. The User is advised that the quality of the LCCA will depend on the quality of the engineering and economic studies that are necessary to develop each ECM and Project.

Who performs the LCCA analysis?

The LCCA analysis can be conducted by facility level energy and/or building managers, departmental level energy or facility utility managers, or approved contractors who have been selected to provide energy services in the implementation of energy efficiency and sustainability measures. User's Guide and User's Instructions documents are posted with the LCCA model.

For securing GS$Mart financing, a submitted LCCA will be reviewed for accuracy and compliance with established requirements by appropriate DGS staff (see Management Memo MM 06-14). For more information regarding GS$Mart, access the GS$Mart Web site.

Recommended operation of the LCCA

The User's Manual and User's Instructions that accompany the LCCA Excel spreadsheet model provides the necessary operating instructions to perform an LCCA of proposed ECMs. It is recommended that the User have a firm knowledge of utility tariffs and billing (including where to obtain the most recent utility tariff information) and energy efficiency measures and how they save energy.

The recommended approach is to be conservative in the analysis. User should first run the LCCA using zero as values for inflation and utility pricing escalators. While this may seem unreasonable, the perspective is that, at a minimum, Project savings need to be sufficient to cover the Project costs over the expected useful life of the ECMs being implemented at the current utility tariff price.

The minimum required Project debt coverage ratio is 1.10 (debt coverage ratio is defined as annual energy cost savings divided by the annual financing costs). However, the User should adjust this value upwards based on the User's perceived level of Project risk. The debt coverage ratio is used as the key "go no-go" metric to approving Projects for GS$Mart financing. It is the economic metric that most closely aligns with budgetary requirements as per Budget Letter 06-27 (savings from the utility line item budget is used to finance project costs over the term of financing).

The User can then run the LCCA using the approved key variable economic metrics to determine the debt coverage ratio under a more likely scenario, based on current information regarding inflation and widely understood and accepted utility tariff price escalators. The source of this information will be from California state agencies that issue authoritative information for these types of economic metrics (e.g. Department of Finance for California inflation rates, the California Energy Commission for utility tariff price escalators, etc.).