LCC & Financial Modeling
The ISO 50001 required companies to consider the energy performances of purchased energy, product, equipment and services that could influenced energy performances during the expected or planned life time. The life cycle cost calculation mostly will produce more comprehensive information on the impact of energy performances of procured product or services. An electric pump consumed energy equal to 30 times of its pump purchased price during the whole life cycle of the pump, imagine if we purchase low-efficiency pump for the shake of its initial cost, we will lose a lot of money by its high energy cost.
Some of energy efficiency measures required significant amount of investment which need top management approval but mostly engineer do not have the capacity to conduct appropriate financial modeling. A financial modeling will help the top management to decide on an EE investment.
Life cycle cost should elaborated the item cost that need to be considered during the life time of a product of services. Fo example, an electric pump cost is not only purchased cost of the pump but also the electricity cost of the pump, the maintenanceof the pump, and even the lost time caused by pump failure. All this induced cost should be identified. The next step is to quantify the cost and calculated for the whole pump life time i.e 10 years. The life cycle cost should consider time value of money using the hurdle rate as the discount factor of the LCC value. Most of the time the LCC value will surprise the company team because purchased cost or initial cost found not significant compare to other costs such as energy.
The financial modeling should be able to help the energy team and engineers to calculate to financial feasibility of an EE investment straight away. The model only required the engineer to input the project title and its cost and what will be the annual cas flow generated from the project which are the energy cost saving value. Some basic assumption such as hurdle rate, interest rate, deprecition periode, taxes, commissioning periode need to be inputted. After all required input completed the model should generate its proforma report and the IRR, NPV, Profitability index calculation result which ready to use.
LCC, Financial Modeling, IRR, NPV, Profitability Index, EE Investment