Energy Accounting and Economics
This domain tests whether you can turn energy data into a defensible baseline and evaluate projects with the right financial metric. Questions often contrast simple payback with life-cycle measures, or ask you to compute NPV, IRR, or a weather-normalized baseline.
Metrics and baselines
- Energy intensity and EUI normalize energy use by floor area, production, or degree days.
- A baseline is a model of expected energy use under defined conditions; weather normalization often uses regression against heating or cooling degree days.
- Simple payback = installed cost ÷ annual savings; it ignores time value and savings after payback.
- ROI expresses annual savings as a percentage of cost but may also ignore project life.
- NPV discounts future cash flows at the organization's hurdle rate; IRR is the discount rate that makes NPV zero.
- Life-cycle cost includes capital, energy, O&M, replacement, and salvage over the study period.
Worked example
A chiller retrofit costs $120,000 and saves $30,000 per year for 10 years. Simple payback = $120,000 ÷ $30,000 = 4.0 years. At an 8% discount rate, the present value of a 10-year annuity of $30,000 is $30,000 × 6.710 = $201,300. NPV = $201,300 − $120,000 = $81,300, so the project clears an 8% hurdle. The reasoning: use the incremental cost of the efficient option, not the full replacement cost, and include maintenance savings or avoided capital if they are real. If savings escalate with energy prices, discount the escalated cash flows, not the first-year savings.
Traps that cost marks
- Using total project cost when only the efficiency premium is incremental.
- Ignoring demand savings, O&M changes, incentives, or taxes.
- Comparing payback across projects with different lives without a life-cycle metric.
- Using a nominal discount rate with real cash flows, or vice versa.
- Double counting an incentive as both a cost reduction and a revenue stream.
- Normalizing with the wrong degree-day base or period.