A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies

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A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies ( a-manual-economic-evaluation-energy-efficiency-and-renewable )

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have prices different than the utility’s avoided costs. PURPA, FERC,and many state regulations will supportnegotiatedcontracts. Stateregulatorshavethefreedomtoprovideincentivesforcogenerationas long as PURPA and FERC regulations are not violated. On the subject of avoided costs, the analyst must remember to include avoided transmission and distribution (T&D) costs when applicable. Studies have shown that T&D benefits can be large enough to make DSM or conservation programs cost-effective, even for programs not considered cost-effective prior to the inclusion of T&D benefits (Krause, Busch, and Koomey 1992). Major Repairs and Replacements Many renewable and conservation systems have components that will need to be repaired or replaced duringtheanalysisperiod. Iftheseareannualadjustments,suchasanairfilter,costsshouldbeincluded intheannualoperatingcostestimates. Ontheotherhand,theremaybelarge,significantadjustmentsthat need only be done once or twice during the analysis period. The costs of these larger repairs or replacements should be explicitly included in the analysis. The more common method of accounting for these significant repairs and replacements is to assume that the repair or replacement occurs at the end of the component’s expected usehl life, discount the repair or replacement cost to its present value at the beginning of the analysis period, then add it to the initial investment cost. Of COUTtSh~e,present value of the repair or replacement should not be added to the initial investment costs before the investment cost is multiplied by factors that compute property taxes, insurance, and so on. Another method of accounting for repair and replacement costs is to annualize the costs over the system life and include these costs with annual O&M. However, the analyst must be careful when using this method because for tax purposes major repair or replacement costs should be capitalized and the cost recovered through depreciation. The method would be fine for a homeowner, who does not depreciate items for tax purposes. Salvage Value Salvagevalueisthevalueofaninvestmentremainingattheendoftheanalysisperiod. Forexample,if an investment can be resold or recycled, a positive salvage value exists, and if the investment must be dismantledordestroyed,anegativesalvagevalueexists. Inmostcases,salvagevalueisestimatedasthe resalevalueoftheinvestment. Anothermethodisreplacingthecostoftheinvestmentwiththatofequal characteristicsandconditions. Stillanothermethodistoequatesalvagevaluetotheunamortizedportion of the original or replacement costs. For all economic measures, except payback, salvage value is treated as a revenue stream at the end of the evaluationlife, Salvagevalueisnotaccountedforwhencalculatingdepreciationfortaxpurposesusing an accelerated depreciation method. However, an asset may not be depreciated below a reasonable salvage value (CCH 1992). Unequal Lifetimes Many of the measures introduced up to this point present useful, unbiased results only if the two investments being compared have equd lifetimes. Those measures most impacted by unequal lifetimes include life-cycle cost, required revenues, and internal rate of return. The inequity of comparing alternatives with different lifetimes using cost measures such as life-cycle cost arises because the costs of 79

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