Page 168 - Sustainable On-Site CHP Systems Design, Construction, and Operations

CHAPTER 9

CHP Economic Analysis

Kyle Landis

Itzhak Maor

CHP Economic Analysis
CHP economic analysis is the process by which the economic factors surrounding a pro-
posed CHP plant are analyzed to determine if the project makes economic sense and that
the project is a good investment for the stakeholders’ funds. The criteria for defining a
project as economically viable will vary from project to project, but at a minimum the
project typically needs to save money over the “business-as-usual” (BAU) case. More
stringent criteria may require the project to perform at least as well as a competing invest-
ment. Economic analyses methods vary from a simple payback analysis to the more com-
plicated and detailed life-cycle-cost (LCC) analysis discussed in detail in this chapter.

Simple Payback Analysis
Simple payback analysis is an economic analysis method that looks at the time required
to recoup the first costs based on the annual savings realized from the installation of the
project. Simple payback analysis does not account for the time value of money, escalation,
etc. as does LCC analysis. For CHP projects, which are not typically low-cost projects,
use of simple payback analysis is typically limited to the initial feasibility stages of the
project. As more detailed study of the project is performed, LCC is usually required.
The formula for simple payback is a follows:
Simple payback (years) = project first cost/annual savings

where project first cost = the total installed cost of the project as defined in the section
“Estimating Budgetary Construction Costs” and annual savings = the sum of the sav-
ings in energy, operations, and maintenance costs compared to the BAU case.

Life-Cycle-Cost Analysis
LCC analysis is a process by which the available economic factors spanning the life of a
system are considered in terms of the time value of money and to the degree appropriate

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