Energy efficiency projects – are they cost effective?
14 March 2013
In the Climate and Energy 20-20-20 package, the Irish Government made a commitment to Europe that it will make a 20% improvement in energy efficiency by 2020. To reinforce this, the Government must shortly transpose the recast Energy Services Directive, which will commit energy suppliers to earn ‘energy credits’ equivalent to 1.5% of the energy they supply to customers each year.
This means that energy efficiency improvement projects must be implemented which save circa 1,200 GWh each year, year-on-year to 2020. NEEAP2, released in early March 2013, sets an even higher energy efficiency target of circa 2,000 GWh pa from now until 2020.
Having made such commitments, it is understandable that the Government, with its agency the Sustainable Energy Authority of Ireland (SEAI), will strongly promote energy efficiency projects. Such projects, besides helping to achieve our EU commitment, also create employment and reduce energy imports.
But end users may not have the luxury of sharing such a macro-economic perspective. The end user will expect the energy efficiency project to provide a reasonable payback on the money invested. This is especially so in the non-domestic sector, where money is difficult to borrow and most companies expect payback periods of fewer than three years on non-essential spending (which energy efficiency is).
I watched with interest a recent BBC documentary dealing with a report by the European Court of Auditors regarding the cost effectiveness of EU co-funded energy efficiency projects carried out in three member states during the period 2007-2013. The report found that the average time to recoup the expenditure was 50 years, with some projects extending to 150 years. Could this be happening in Ireland?
Let me start with an examination of a much-promoted energy saving technology in Ireland – solar water heating. I was somewhat amused to read a recent advertisement stating that each square metre of solar panel receives the heat equivalent of 100 litres of oil per annum from the sun. Yes, this is true. One hundred litres of oil has a heat content of circa 1,000 kWh and this approximates to the solar radiation in Ireland for a year. But the unsuspecting lay person may not realise that only 40% of this will be recovered into useful hot water.
SOLAR PANEL INSTALLATIONS
The UK Government carried out tests on 88 existing solar panel installations in the UK mainland and also in Ireland, north and south. The report showed the average recovery as 1,150 kWh per house, which equates to a useful recovery of 285 kWh per square metre given that the typical size of domestic panel is 4m2. They repeated the tests on eight more houses and got a result of 294 kWh/m2 of panel.
Having examined solar water heating in some detail, I would expect 400 kWh/m2 from a well installed and regularly serviced system. So, let us look at the economics of a 4m2 system recovering 1,600 kWh per annum.
If one has an existing gas boiler central heating installation that also heats the water, then the benefit of the 1,600 kWh is about €172 per annum (assuming system/boiler efficiency of just 70%). If the boiler is oil fired, then the saving works out at €272 per annum, and if a heat pump is installed the saving would be €86 per annum). Current energy prices plus 35% were used in this analysis to account for future increases.
The costs for servicing must be included. Solar systems have a pump and controls and these are unlikely to last 20 years. Also, and more importantly, in summer there will be many days when not all of the recovery can be accommodated by the hot-water cylinder. This results in ‘stagnation’ to protect the system which, in turn, causes degradation of the heat transfer fluid (a type of anti-freeze solution). Manufacturers recommend that this be checked every year or two and replacement is likely to be required every six years. All in all, it would be reasonable to include an average service cost of €90 per annum to cover call out charges and materials. Also, €10 per annum has been added for additional pumping costs.
The installation cost for such a system is circa €3,500 (incl VAT and net of SEAI grant of €800). The repayments on this over 20 years (life of panel) at 7% borrowing cost works out at €330 per annum.
Hence, repayments plus service costs amount to €430 per annum. Compare this to the saving of just €152 per annum for someone using a gas boiler for heating, €242 in the case of oil, and €76 in the case of a heat pump. The repayment period is infinite.
Solar water heating is also being promoted by SEAI in non-domestic buildings. Because of the five-day week operating profile of most such buildings, the saving will be correspondingly lower. And worse still, in schools which are closed in summer (when solar is highest), the saving will be very much lower.
Let us take another energy efficiency investment example – upgrading of lighting in an office block that operates for 55 hours per week. Assume that the existing lighting is of the older type, T8 (ie, 1 inch diameter), fluorescent lamps with magnetic ballast. These luminaires (ie, the complete light fittings) could be replaced by new ones with T5 fluorescent lamps or the latest LED lamps.
In this cost/benefit analysis account is taken of the cost of the new fittings, the longer life of the new lamps (less lamp replacement cost) and, of course, the electricity saving. It is assumed that the capital is borrowed at 7% over 10 years. Also, the price of electricity has been increased from today’s price by 20% to account for the inflation increases over the payback period.
Figure 1 (right) compares the total operating costs, including repayment costs. The existing lamps have, obviously, no repayment costs but they use significantly more energy than the new lamps. For the T5 replacement, the overall cost remains more or less the same – the energy saving just about repays for the money borrowed. The LED option is more expensive, but this price premium is decreasing. Also, the longer lamp life for LED means that lamp replacement is less frequent and this can provide additional saving in situations where access is difficult, for example, in shopping centres.
So, the payback for lighting upgrade is circa 10 years for office lighting that operates for 55 hours per week.
A factor to bear in mind here is that the analysis assumed that the same level of lighting would be provided. It is often the case that the original system was over-designed and that the use of modern lighting design software will allow a reduction in the number of luminaires and the Wattage needed to achieve the recommended lighting level. This will have the double positive effect of reducing the capital cost and the running cost.
Automatic control is another energy reduction possibility, for example, daylight dimming and occupancy sensing. But the upfront cost is significant and one must bear in mind that the extra saving is a percentage of a much lower power consumption cost (because of the more efficient lamps). Automatic lighting controls can be cost effective but this needs individual analysis.
Longer operating hours will obviously improve the saving and reduce the payback time. Shopping centres, hospitals and 24-hour car parks are examples that fall into this category. On the other hand, primary schools with very short occupancy will give longer paybacks.
These are just two of many examples I have examined over the recent past. Others have included biomass, insulation, district heating, combined heat and power and wind power. Let me say that regularly, I identify cost effective (for the user) energy-saving opportunities. But the Government’s target will involve ‘deep retrofit’ on a large scale and this will invariably involve the long payback projects. Most of the ‘low-hanging fruit’ has been dealt with.
In addition, how much will it cost to achieve the Government’s energy efficiency target? The two examples above indicate a capital cost of €1.70 and €1.50 per kWh per annum saved. These, together with other energy-saving projects examined, suggest that the investment required per kWh per annum saved will be at least €1.00. Even taking a low figure of €1.00 per kWh per annum, this works out at a spend of €2 billion per annum until 2020 on energy efficiency projects, if the Government’s energy efficiency target is to be achieved.
The Government has announced the allocation of €35 million as seed capital to an energy efficiency fund aimed at the public and commercial sectors. It is known that negotiations are under way with private institutions to match this with a further €35 million, or even more. The fund will not be made available as a grant; it will be available to ESCOs and others to fund projects, but the borrowed money will have to be paid back.
Investment in energy efficiency is important from a global perspective and has several positive spin-off benefits. The question is, will there be many commercial companies ready to take on discretionary commitments with 10 year plus breakeven periods? Other governments have recognised this dilemma and have moved in with large grant/subsidy drivers. Can we afford this?
Desmond Murphy is a chartered engineer with 30 years’ experience in the area of energy utilisation having worked in Ireland, UK and internationally. His company, Kovara, focuses on helping clients to form a commercially rational approach to energy management and energy reduction investment. Key areas of advice include energy policy, purchase/utilisation, cost optimal Energy Management, using ESCO services, measurement & verification and Energy Services Directive response.