Energy Economics and Alternative Financing
What the exam expects
Economics questions test simple payback, discounted payback, net present value, internal rate of return, life-cycle cost, and escalation. Simple payback ignores the time value of money; NPV compares discounted cash flows with the initial cost; IRR is the discount rate that makes NPV zero. Know performance contracting structures: guaranteed savings, shared savings, and energy-as-a-service. Understand leases, power purchase agreements, tax incentives, depreciation, rebates, and residual value. Financing choice affects who owns the asset and who bears performance risk.
Traps
Selecting a project by IRR alone can conflict with NPV when project sizes differ. Another trap is omitting escalation, maintenance, or replacement costs. A PPA is not the same as owning the system, and a shared-savings contract splits savings rather than guaranteeing a fixed payment.
Worked example
A project costs $100,000 and saves $25,000 per year for 10 years. Simple payback is 4 years. At an 8% discount rate, the present value annuity factor is 6.710, so PV of savings is $167,750 and NPV is $67,750. The project is attractive on both simple payback and NPV, but the NPV result depends on the discount rate and assumed savings persistence.