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Reference Publication: Parker, D., Fairey, P., McCluney, R., Gueymard, C., Stedman, T., McIlvaine, J., "Rebuilding For Efficiency: Improving the Energy Use of Reconstructed Residences in South Florida", Prepared for U.S. Department of Energy, Florida Energy Office, and Florida Power & Light Company, FSEC-CR-562-92, December 1992.

Disclaimer: The views and opinions expressed in this article are solely those of the authors and are not intended to represent the views and opinions of the Florida Solar Energy Center.

Improving the Energy Use of Reconstructed
Residences in South Florida

Appendix G
Economic Criteria for Analysis

Homeowners are generally much more concerned with reducing their monthly electric bill than they are concerned with saving energy. On the other hand, utilities are interested, not only of saving energy, but also of reducing the electricity use at the time of system peak demand. In both cases we need a set of economic criterion sufficient to judge the relative economic merit of a set of energy saving options on a comparative basis.

Consumer Affordability

From a consumer standpoint, the most universally accepted notion of economic attractiveness is simple payback. This is the ratio of the increased cost of the measure, relative to conventional practice, compared with the annual savings. It gives an indication of the time required before the savings have offset the cost of the initial investment.

SPB = Added Costs ($) / Annual kWh Saved * $/kWh


SPB = Years till added cost is recouped

Most consumers prefer a payback for investments of less than seven years; the more rapid, however, the better. Many consumers will not consider options with paybacks longer than three years. It is also noteworthy that lower income groups, with less disposable income will desire very short paybacks-- often less than one year. A major drawback of simple payback as an economic decision criteria is that it biases against projects with greater initial costs, that also may provide very large benefits over the project life.

Cost of Conserved Energy

A useful economic criteria for utilities is the cost of conserved electricity (CCE). An important advantage of this measure is that it allows direct comparison of the cost of saving energy with an energy efficiency measure to the cost of providing electhcity using new generation resources.

CCE = Added Cost * CRF / Annual Saved kWh


CCE = Cost of Conserved Electricity ($/kWh)
CRF = Capital Recovery Factor

The capital recovery factor converts the total measure cost into an equivalent annual payment at discount rate (d) over the time horizon of the analysis (n). The base case value for the discount rate in the analysis presented here was 5% real, which does not include inflation and compares to approximately a 10% nominal rate. The time horizon is individual to the specific measure.

CRF = d / 1-(1+d) -n


d = discount rate (fraction)
n = useful life of the measure (years)

Perhaps more important to capacity constrained utilities is how cost effectively measures save peak electric power. This is easily estimated once the kilowatt savings that are coincident with utility peak are known:

CAPP = Added Costs ($) / Savings at Coincident Peak (kW)


CAPP = Cost of Avoided Peak Power ($/kW)