• Previously hidden costs become more visible
• Costs become more variable for different customer classes
• The true cost of power per customer segment becomes more transparent, leading to new incentives for DE.

a. Determine site energy usage for the past several years (kWh)
b. Review the current cost of electric power
c. Review current fuel costs (natural gas, diesel, fuel oil)
d. Evaluate site energy goals and the role DE might play, which include answers to such questions as:

i. Are costs the number one criterion?
ii. For businesses, is energy used mostly during the day (retail hours), two shifts per day, or is it required 24 hours per day?
iii. Will the DE resource be needed to cover 100%, or a portion of the maximum load?
iv. How important is reliability? Is an uninterruptible power supply required?
v. What fuel choices are available to you (e.g., natural gas, propane, heating oil, solar, wind, diesel)?
vi. How much space is available to house the equipment?

a. Simple payback - A basic, but widely used method, of dividing the investment by the periodic project savings. This allows calculating how many months it requires to recover the initial investment.
b. Net Present Value (NPV) - This method converts future costs and revenues to today's money to allow comparison to the DE buyer's internal cash cost, or required rate of return. A positive number indicates that the project will have a positive return.
c. Life cycle costs (LCC) - Utilizes NPV, but instead of analyzing a required rate of return, LCC only analyzes the costs associated with the life of project. The lowest LCC is preferred.
d. Internal Rate of Return (IRR) - Also derived from NPV, however, this approach involves varying the discount rate until NPV goes to zero. A project in with an IRR greater than your required rate of return is worth pursuing.

a. The DE calculator can be used to narrow down the technologies that are applicable.
b. Approximate costs are contained in the DE calculator. For exact costs to meet specific needs, utilize the contact information supplied by the DE calculator for each manufacturer or use the additional links to contact manufacturers who are not yet included in the product database directly. The manufacturer or associated installer can provide a firm turnkey price.

4. Calculate the site economics (The simple payback method is used in the example calculation provided below):

a. Determine the current cost of electricity and thermal energy from utility bills.

i. Electricity cost calculation for continuous 100 kW load:

1. Usage (kW) x Rated Cost for Output ($/kWh) x Period (hrs/yr)
2. 100 kW x $0.11/kWh x 8760 hrs/yr= $96,360/yr

ii. Thermal energy fuel cost calculation for 500 lb/hr of steam produced on site using a natural gas fired boiler with 80% efficiency:

1. Steam Usage (lb/hr) x [1/Heat Content of Steam (lb/btu)] x [1/Boiler Efficiency] x Price Fuel ($/thousand ft3)) x Energy Content of Fuel (btu/ ft3) x Period (hrs/yr)
2. 500 lb steam/hr x 1000 btu/lb steam x [1/0.8] x $3.10/thousand ft3 natural gas x [1 thousand ft3 gas/1,048,000 btu] x 8760 hrs= $16,195

iii. Total energy cost calculation: $96,360 + $16,195 = $112,555

b. Determine projected cost of DE combined heat and power produced from a natural gas fired 100 kW microturbine combined heat and power unit, also providing the required 500 lbs/hr steam.

i. Determine the cost of thermal energy supplied by turbine (Note: Fuel flow can be obtained from the vendor or calculated from either the unit output and heat rate or the efficiency and the heat content of the fuel being used.):

1. Fuel Flow Output (thousand btu/hr) x Natural Gas Heat Value Correction x Price Fuel ($/thousand ft3) x Energy Content of Fuel (thousand ft3/btu) x Period (hrs/yr) (Note: the Natural Gas Heat Value Correction takes into account the heat lost to water vapor formed during combustion, which is not taken into account with the Lower Heating Value (LHV) number reported in the microturbine manufacturer's specifications for the unit. This Correction converts the LHV to a Higher Heating Value (HHV) unit, which takes into account this inefficiency of natural gas fuel combustion.
2. 1.30 million btu/hr x 1.1 x $3.10/ thousand ft3 x [1 thousand ft3/1.048 million btu] x 8760 hrs = $36,976

ii. Determine the supplemental fuel cost to generate steam not supplied by the turbine, if necessary (Note: The steam production capability can also be obtained from the vendor, along with the additional heat requirements for supplemental firing to produce excess steam. In this example, it was determined that 626,310 btu/hr of additional heat would be required to produce the 500 lbs/hr of required steam):

1. Fuel Flow Output (thousand btu/hr) x Natural Gas Heat Value Correction x Price Fuel ($/thousand ft3) x Energy Content of Fuel (thousand ft3/btu) x Period (hrs/yr)
2. 0.626310 million btu/hr x 1.1 x $3.10/ thousand ft3 x [1 thousand ft3/1.048 million btu] x 8760 hrs= $17,852

iii. Calculate fuel cost sub-total: $36,976 + $17,852 = $54,828

iv. Obtain standby power charge from power provider (utilities assess this infrastructure charge to provide back-up power capability) and calculate annual standby fee: $3.00/kW/month x 12 months x 100 kW= $3,600

v. Calculate maintenance cost (estimated $/kW maintenance cost can be obtained from microturbine vendor): $0.01 $/kWh x 100kW x 8760 hrs/yr= $8,760

vi. Total for DE is $54,828 + $3,600 + $8,760= $67,188

c. Determine Annual Energy Cost Savings

i. Savings cost calculation: Current Energy Cost per Year - DE Fuel Cost per Year
ii. $112,555 - $67,188 = $45,367

d. Determine the time required to pay off the project. The Simple Payback Method provides an estimate by dividing the investment by the periodic project savings. Payback periods tend to vary by segment: 10-12 years for institutions and 10-20 years for utilities. For residential and businesses, especially if the costs are incorporated into a mortgage, the payback may be as much as 30 years. Typically, however, payback for residential and businesses tends to be in the 5 year range.

i. Obtain the total installed cost from the manufacturer or the DE Calculator. The microtubine with heat recovery considered here costs $90,000.
ii. In this case the payback is $90,000/$45,367 = 1.98 years to payback capital.

Table 2: Summary of Example Simple Payback Method Calculation

There are excellent references in the links to economics or you can ask others specific questions in the Discussion Forum if you wish to complete a more complex economic analysis. Many organizations have internal models for analyzing capital cost decisions. Without these models, it is even more important to model the system efficiency correctly. Many manufacturers will provide white papers on project economics. The more complex analysis would take into account factors such as internal rates of return, projected fuel prices over the useful life of the DE equipment, costs of operations including rates for skilled service personnel, the rate the customer will pay to cover the fixed costs of the system when they are generating power, and the cost of other fixed grid access charges if necessary.

Using current technology, the cost to produce a kWh of electricity for the average small user, such as the residential and small business customer, will be higher than utility supplied power unless heat recovery is employed. Consequently, a decision to employ DE technologies would have to incorporate other economic factors such as the value of reliability, which is an extremely important factor to which high cost value is often applied, and power quality, or include non-economic factors like the preference for renewable or environmentally benign power.

Compared to the average small energy user, commercial and small industrial customers have a wider range of technologies from which to choose as well as lower fuel costs and somewhat lower electric rates. Thermal requirements allow the DE economics to improve with the capture of waste heat and resultant reduction in gas usage by reducing use of boilers or chillers on site. The availability of new technologies such as microturbines and fuel cells, which have a higher recoverable heat value for smaller scale systems than reciprocating engines, will expand the potential for combined heat and power. Reliability and power quality add greater potential value to DE resources for this market segment as well.

Large industrial customers have a wide array of available technologies with lower capital costs than those available for the smaller-scale customers. At the same time, the larger customer can often purchase fuel at prices close to those realized by electric utilities. Further, there are many more heat recovery applications. DE is easy to justify for these customers on a payback basis alone. For this reason, a significant DE market currently exists for large industrial customers.

As suggested above, reliability is an important issue to consider when evaluating DE economics. At the consumer level, power quality has become an increasingly important issue as appliances like VCRs, digital clocks and computers have gained widespread acceptance in the marketplace. Momentary interruptions in the flow of electricity, not noticed before, became obvious when it was necessary to reset the blinking clocks every time such an outage occurred.

The electric grid system has electromechanical components that operate on a regular basis in response to unexpected short circuit events that lead to instantaneous power disruptions. For instance, two lines touch in high winds causing a breaker that detects the momentary short circuit to open the line. The breaker closes almost instantaneously, and as the short circuit lasted 1/6th of a second, it is difficult to notice the almost instantaneous interruption. Nonetheless, a momentary outage occurred. The early VCR and digital clocks could not tolerate even this brief of an interruption.

Recent economic studies of electric reliability requirements reveal that the "3 nines" U.S. bulk power standard, which dictates that electric grid power should be 99.9 % reliable, is unacceptable to a growing number of commercial customers. The information and service economy, with Internet communications and server facilities, in particular, are major drivers for improved electric power reliability. Some Internet facilities require "6 nines," or 99.9999 % reliability while many high-cost process manufacturers and some service industries now require "5 nines" of reliability.

System Savings

The concepts of system savings or improvements in reliability are of great concern to utilities, policy makers and regulators. Capital savings from a DE installation at a customer premise would flow from three sources: transmission, distribution, or central station power plant deferrals. Depending on congestion, capital cost savings may actually be greater than a direct kW for kW deferral of transmission or distribution. When DE is located at or close to load, the transmission and distribution (T&D) electrical resistance or line losses are reduced.

There are two primary considerations when capitalizing line losses. The obvious element is converting these variable annual energy losses into an equivalent capital cost. The second element is the increase in generation that is necessary to make up for the lost power. Peak line losses for some distribution feeders during peak periods may be as high as 16 % while average values are more likely to be five to eight percent. In a simplistic analysis, the potential system savings are roughly equal to the capital cost of the DE equipment.

Figure I below depicts the basic engineering design and economics of the electricity delivery infrastructure, which provides the context for assessing the attractiveness of DE use. In the current predominant configuration, generation is located at a considerable distance from most of the load it serves. It must move over increasingly small (lower voltage) wires to reach the customer. Losses to residential and small commercial customers are higher than those of transmission connected industrial customers.

Figure I: T&D Capital Costs and Peak Line Losses

Source: DTE Energy Technologies

The typical electric customer is located some distance from the power plants. Electric power leaving the generation station is stepped-up to a high voltage (230kV to 765kV) to keep losses to a minimum. Except for the very largest customers, the voltage must be reduced to a lower level as the power delivery system nears the customer.

In order to create the infrastructure to deliver electricity, capital cost is incurred to build the wires and maintenance costs must be incurred to keep them operating. Moreover, the longer the distances and the lower the voltages over which the electricity travels, the greater the line losses. By the time electricity reaches the typical small residential or commercial consumer, the utility will have invested $400-$500 per kW in capital and several cents per kWh in maintenance costs to keep the physical assets in operation. Although average energy losses in delivery of electricity are five to seven percent, peak losses to the individual residence or small business may be as much as 13-16 % of electricity that left the generator. All of these costs and line losses are reflected in the price the customer pays. That is, the full cost of the line and the total cost of the energy as generated will be covered by the charges customers pay for energy as used.