EPA/600/R-99/100 April 2001 Cost Evaluation Strategies for Technologies Tested Under the Environmental Technology Verification Program by Arun Gavaskar Lydia Gumming Battelle Columbus, OH 43201-2693 Contract No. 68-C7-0008 Work Assignment No. 3-16 for Project Officer, George Moore Work Assignment Manager, Richard Scharp NATIONAL RISK MANAGEMENT RESEARCH LABORATORY OFFICE OF RESEARCH AND DEVELOPMENT U.S. ENVIRONMENTAL PROTECTION AGENCY CINCINNATI, OH 45268 M t Printed on Recycled Paper ------- Notice The U.S. Environmental Protection Agency through its Office of Research and Development funded the research described here under Contract No. 68-C7- 0008, Work Assignment No. 3-16. The work was supported under the U.S. EPA Environmental Technology Verification (ETV) Program. This cost evalu- ation strategy report has been subjected to U.S. EPA's peer and administrative review, and has been approved for publication as an U.S. EPA document. In no event shall either the United States Government or Battelle have any responsibility or liability for any consequences of any use, misuse, inability to use, or reliance on the information contained herein, nor does either warrant or otherwise represent in any way the accuracy, adequacy, efficacy, or applica- bility of the contents hereof. Mention of corporation names, trade names, or commercial products does not constitute endorsement or recommendation for use of specific products. ------- Foreword The U.S. Environmental Protection Agency is charged by Congress with pro- tecting the Nation's land, air, and water resources. Under a mandate of national environmental laws, the Agency strives to formulate and implement actions leading to a compatible balance between human activities and the ability of natural systems to support and nurture life. To meet this mandate, EPA's research program is providing data and technical support for solving environ- mental problems today and building a science knowledge base necessary to manage our ecological resources wisely, understand how pollutants affect our health, and prevent or reduce environmental risks in the future. The National Risk Management Research Laboratory (NRMRL) is the Agency's center for investigation of technological and management approaches for pre- venting and reducing risks from pollution that threaten human health and the environment. The focus of the Laboratory's research program is on methods and their cost-effectiveness for prevention and control of pollution to air, land, water, and subsurface resources: protection of water quality in public water systems; remediation of contaminated sites, sediments, and ground water; and prevention and control of indoor air pollution; and restoration of ecosystems. NRMRL collaborates with both public and private sector partners to foster tech- nologies that reduce the cost of compliance and to anticipate emerging prob- lems. NRMRL's research provides solutions to environmental problems by: developing and promoting technologies that protect and improve the envi- ronment; advancing scientific and engineering information to support regulatory and policy decisions; and providing the technical support and information trans- fer to ensure implementation of environmental regulations and strategies at the national, state, and community levels. This publication has been produced as part of the Laboratory's strategic long- term research plan. It is published and made available by EPA's Office of Re- search and Development to assist the user community and to link researchers with their clients. E. Timothy Oppelt, Director National Risk Management Research Laboratory ------- Abstract The objective of this document is to provide a general set of guidelines that may be consistently applied for collecting, evaluating, and reporting the costs of technologies tested under the Environmental Technology Verification (ETV) Program. Because of the diverse nature of the technologies and industries covered in this program, each ETV pilot has the flexibility for any of the follow- ing options to be used: • No cost evaluation • Itemization of costs • Estimation of capital investment and operation and maintenance (O&M) costs • Calculation of total annualized cost, simple payback period, or present value. The four cost options are incremental; each successive option builds on and incorporates all of the elements of the previous options to provide a compre- hensive cost evaluation. One option for pilots with limited resources or other restrictions is to not evaluate costs. In the second option, all cost items are identified and quantified, without assigning monetary (dollar) values. The cost items are reported in two categor- ies, capital investment and operation and maintenance (O&M) costs. In the third option, the cost evaluation process is taken one step further. All the capital and O&M items are identified, quantified, and assigned dollar values. In the fourth option, the total impact of the technology on the user is calculated. The fourth option also facilitates the comparison of the ETV technology with a baseline or competing technology. Assessing the total impact of a technology typically involves the calculation of either total annualized cost, simple payback period, or present value. A comprehensive reporting format, which includes cost evaluation objectives and data collection methods, estimates of capital investment and O&M costs, cost analysis, list of assumptions, technical factors affecting costs, and intan- gible benefits and/or disadvantages of the technology, is recommended. IV ------- Contents Foreword iii Abstract iv Figure vii Tables vii Acronyms and Abbreviations viii 1. Introduction 1 1.1 ETV Program Description 1 1.2 Cost Evaluation Strategy 2 1.3 Summary of Cost Evaluation Options 2 1.3.1 No Cost Evaluation 3 1.3.2 Itemization of Costs 4 1.3.3 Estimation of Capital Investment and O&M Costs 4 1.3.4 Calculation of Total Annualized Cost, Simple Payback Period, or Present Value 4 1.4 Quality Assurance/Quality Control 4 1.5 Reference 4 2. Itemization of Costs 5 2.1 Identifying the Cost Evaluation Objective and Data Collection Methods 5 2.2 Determining the Design Basis 5 2.3 Identifying and Quantifying Capital Investment and O&M Costs 6 2.3.1 Identifying and Quantifying Capital Items 6 2.3.1.1 Site Preparation 7 2.3.1.2 Buildings and Land 7 2.3.1.3 Purchased Equipment 7 2.3.1.4 Utility Connections/Systems 8 2.3.1.5 Installation 8 2.3.1.6 Startup/Training 8 2.3.1.7 Regulatory Issues/Permitting 8 2.3.1.8 Other 8 2.3.2 Identifying and Quantifying O&M Items 8 2.3.2.1 Materials 8 2.3.2.2 Utilities 8 2.3.2.3 Labor 8 2.3.2.4 Maintenance 8 2.3.2.5 Waste Management 8 2.3.2.6 Regulatory Compliance 8 2.3.2.7 Other 8 2.4 Listing the Assumptions Involved in a Cost Evaluation 8 2.5 Listing the Technical Factors that Impact Costs 9 ------- 2.6 Listing the Intangible Benefits and/or Disadvantages of a Technology 10 2.7 Preparing a Cost Evaluation Report 10 3. Estimation of Capital Investment and O&M Costs 11 3.1 Estimating Capital Investment 11 3.2 Estimating O&M Costs 11 3.3 Additional Considerations in Estimating Capital Investment and O&M Costs 11 3.4 Listing the Assumptions 13 3.5 Listing the Technical Factors that Impact Costs 13 3.6 Listing the Intangible Benefits/ Disadvantages of a Technology 13 3.7 Preparing a Cost Evaluation Report 13 3.8 Reference 13 4. Calculation of Total Annualized Cost, Simple Payback Period, or Present Value 14 4.1 Calculating the Total Annualized Cost 14 4.2 Calculating the Simple Payback Period 14 4.3 Calculating the Present Value of a Technology 15 4.4 Comparing Two Technologies 16 4.5 Preparing a Cost Evaluation Report 17 Appendices Appendix A: Illustration of Capital Investment/O&M Cost Estimation and Total Annualized Cost Analysis of a Dual-Stage Filtration System in a Drinking Water Plant 18 Appendix B: Illustration of Capital Investment/O&M Cost Estimation and Simple Payback Period Analysis of an Electrodialysis System 21 Appendix C: Illustration of Capital Investment/O&M Cost Estimation and Present Value Calculation for an Energy-Efficient Water Heater 25 AppendixD: Cost Evaluation References 28 Appendix E: Time Value of Money Table 30 Appendix F: Unit Annualized Cost 32 VI ------- Figure Figure 1 -1. Summary of Cost Evaluation Methodology for ETV Technologies Tables Table 1-1. U.S. EPA Project Officers, ETV Partners, and ETV Partner Contacts for Each ETV Pilot 1 Table 2-1. List of Capital Items 7 Table 2-2. List of O&M Items 7 Table 2-3. List of Intangible Benefits/Disadvantages 10 Table 3-1. Capital Investment fora Hypothetical Water Treatment Unit 11 Table 3-2. Annual O&M Costs for a Hypothetical Nickel Recovery System 12 VII ------- Acronyms and Abbreviations BTU British thermal units DOE Department of Energy DSF dual-stage pressure filtration ECHOS Environmental Cost Handling Options and Solutions ETV Environmental Technology Verification EvTEC Environmental Technology Evaluation Center FCI fixed capital investment gpm gallons per minute kWh kilowatt-hours NRMRL National Risk Management Research Laboratory NTU nephelometric turbidity unit(s) O&M operation and maintenance ORD Office of Research and Development PV present value QA quality assurance QA/QC quality assurance/quality control U.S. EPA United States Environmental Protection Agency VIM ------- Acknowledgments This document was prepared under the direction of George Moore, project offi- cer, National Risk Management Research Laboratory (NRMRL) in Cincinnati, Ohio; and Richard Scharp, Work Assignment Manager (WAM), NRMRL. The authors would like to acknowledge the special efforts of John Abraham, NRMRL; Jeff Adams, NRMRL; and Lauren Drees, NRMRL, who provided con- siderable help in reviewing the document and providing guidance and technical support. Special acknowledgment is given to the ETV pilot managers, who provided comments and suggestions during the creation of this document. The authors appreciate the contribution of Penelope Hansen, ETV Program Director, for recognizing and supporting the need for a uniform cost evaluation strategy for assessment of ETV technologies. IX ------- ------- 1. Introduction This document contains the general methodology for estimating application costs for technologies tested under the United States Environmental Protection Agen- cy's (U.S. EPA's) Environmental Technology Verification (ETV) Program. 1.1 ETV Program Description The U.S. EPA's Office of Research and Development (ORD) initiated the ETV Program in 1994. The ETV Pro- gram is designed to accelerate the development and use of environmentally friendly technologies through objec- tive verification and reporting of technology performance. The goal of the program is to provide potential purchas- ers and regulators with an independent and credible assessment of what they are buying and permitting. The ETV Program is implemented through 12 pilot programs. These pilots are in various stages of development, and each pilot program (commonly referred to by ETV parti- cipants as a "pilot") focuses on a specific environmental area of interest. (The only exception is the Environmen- tal Technology Evaluation Center [EvTEC] pilot, which is independent and does not focus on a specific area of interest.) Table 1-1 lists the various pilots, U.S. EPA project offi- cers, ETV partners, and ETV partner managers and contacts. The U.S. EPA is responsible for auditing and oversight of these partner organizations, as appropriate, to ensure the credibility of the verification process and data. The ETV partners are responsible for evaluating the performance of the vendors' technologies based on testing and quality assurance (QA) protocols developed with input from stakeholders. Stakeholders consist of representatives of all verification customer groups: buy- ers and users of technology, developers and vendors, Table 1-1. U.S. EPA Project Officers, ETV Partners, and ETV Partner Contacts for Each ETV Pilot ETV Pilot U.S. EPA Project Officer ETV Partner ETV Partner Contacts Drinking Water Systems Jeff Adams Site Characterization and Monitoring Eric Koglin EvTEC Norma Lewis NSF International Oak Ridge National Laboratory Sandia National Laboratory Civil Engineering Research Foundation Bruce Bartley Roger Jenkins Amy Dindal Wayne Einfeld William Kirksey Pollution Prevention: Coatings and Equipment Indoor Air Products Pollution Prevention: Waste Treatment Air Pollution Control Technologies Global Climate Change Technologies Advanced Monitoring Systems Metal Plating/Finishing Wet Weather Flow Source Water Protection Mike Kosusko Les Sparks Norma Lewis Ted Brna Dave Kirchgessner Robert Fuerst Alva Daniels Mary Stinson Ray Frederick Concurrent Technologies Research Triangle Institute California Environmental Protection Agency Research Triangle Institute Southern Research Institute Battelle Concurrent Technologies NSF International NSF International Brian Schweitzer Vikki Miller David Ensor Debbie Franke Greg Williams Tony Luan Jack Farmer Stephen Piccot Karen Riggs Jim Voytko John Schenk Tom Stevens ------- consultants, and state regulators. For some pilots, the partner's facilities are utilized for technology testing, but testing is more commonly conducted at other testing facilities or demonstration sites. 1.2 Cost Evaluation Strategy An ETV pilot's verification of the technical performance of a technology is likely to be fairly definitive. However, technology cost estimates are expected to incorporate more variability and uncertainty than technical perform- ance evaluations, so it is useful to clearly differentiate the terms "cost verification" and "cost estimation." Cosf verification is a process that involves firsthand ex- perience of the cost elements required by the ETV pilot during the verification project. Thus, the verification pro- cess actually measures individual cost items, such as labor (time of operation and labor rate), energy, and materials. Measuring various cost items may present different degrees of difficulty based on the length and comprehensiveness of the testing. If the objective is to test the technology in the ETV partner's facility, as some pilots do, then an effort to verify some cost items (such as installation, operating labor, and operating energy) could be made for some types of technologies. First- hand verification of other cost items (such as mainte- nance) is more difficult if the verification process takes place over a short period. This is not to diminish the value of testing technologies in a partner's facility, be- cause considerable information on the technical perform- ance and certain cost items (such as operating labor and energy requirements) can be obtained from a simulated test in a partner's facility. However, direct verification of an item such as maintenance cost would require that a unit be installed in a user's facility for a period of one year or longer, or for the expected life of the technology. Cosf estimation, on the other hand, is a process that involves a combination of direct verification, engineering judgment by persons knowledgeable with the technol- ogy and its application, and previous experience with similar technologies by the ETV partners or vendors. Given the limitations of the ETV Program's verification process, directly verifying every cost item for all the tech- nologies in all the pilots is not feasible. In fact, the num- ber of cost items that were directly measured or verified has been limited in every other technology evaluation program. Ultimately, although the ETV Program directly verifies the technical performance of a technology under specified conditions, addressing costs probably will be a process of cost estimation rather than cost verification. 1.3 Summary of Cost Evaluation Options After technical performance of a technology, cost is the most important factor that guides decision-making by potential users. Cost information is especially useful for technologies targeted toward small businesses, because such users are less likely to have the resources to evalu- ate technology costs. The ETV Program allows each pilot manager (ETV partners in collaboration with the U.S. EPA project officers) the flexibility to select a cost evalu- ation approach that best fits the resources and needs of the pilot, as well as the type of technology and its applica- tion. This document describes four different cost evalu- ation options that an ETV pilot manager could use: • No cost evaluation (see Section 1.3.1) • Itemization of costs (see Section 2) • Estimation of capital investment and operation and maintenance (O&M) costs (see Section 3) • Calculation of total annualized cost, simple payback period, or present value (see Section 4). When using this document, ETV pilot managers decide either to not address costs, to address costs in a limited fashion, or to conduct a relatively comprehensive cost estimation and analysis. Stakeholder input also is taken into consideration when making this decision. Pilot man- agers wishing only to itemize relevant costs need not consider Sections 3 or 4 of this document. Also, each successive option mentioned in this list builds on the pre- vious one, so that the fourth option (Calculation of Total Annualized Cost, Simple Payback Period, or Present Value) builds on and incorporates all the elements of the previous three on the list to provide a comprehensive cost evaluation. Appendices A through C contain illus- trations of cost evaluation for three technologies. These four options were first described in the earlier re- view document Options for Collecting, Evaluating, and Reporting ETV Technology Costs (Battelle, 1998). The review showed that at least one of the technologies tested so far under the ETV Program had been evalu- ated under the relatively comprehensive fourth option (Calculation of Total Annualized Cost, Simple Payback Period, or Present Value). This document includes a standard cost reporting format that pilot managers can use in two ways: (1) In the plan- ning stages of an ETV technology verification test, pilot managers could use this standard format as a checklist to ensure that all the required items for the cost evalua- tion will be tracked during testing. (2) Upon completion of the ETV technology verification test, the standard for- mat could be used to ensure that all relevant items are presented and that potential users can use the reported costs to evaluate their own application or to compare competing technologies. Figure 1-1 shows how these options progressively lead to a comprehensive cost evaluation. ------- Identify and Quantify Capital Items Estimate Capital Investment List the Assumptions Used in Cost Analysis Define Cost Objectives and Data Collection Methods Determine the Design Basis List the Key Technical Factors Impacting Costs Identify and Quantify Operation and Maintenance Items Estimate Operation and Maintenance Costs List the Intangible Benefits and/or Disadvantages of the Technology Calculate Total Annualized Cost, Simple Payback Period, or Present Value Figure 1 -1. Summary of Cost Evaluation Methodology for ETV Technologies ETV technologies are diverse enough that not all cost elements described in this document are appropriate for every technology. Therefore, cost tables and reporting formats are presented in this document as examples of elements to consider when performing a cost eval- uation, and are not designed to be comprehensive for all pilots and/or technologies. In general, though, pilot man- agers should include in their evaluations as much rele- vant cost data as possible, as well as a description of the cost data not included in the evaluation. 1.3.1 No Cost Evaluation One option that pilot managers may use is to not evalu- ate costs. Reasons why pilots may not address costs include difficulty or inability in obtaining the required cost items, lack of vendor or user interest in cost evaluation, or simply a wish to conserve limited financial resources for evaluating the technical performance of a technol- ogy. The rest of this document does not apply to pilots for which the No Cost Evaluation option is exercised. ------- 1.3.2 Itemization of Costs Section 2 of this document is suitable for pilot managers who want to perform a limited cost evaluation. In this op- tion, the various cost items that may be applicable to the technology are identified and quantified, but monetary (dollar) values are not assigned. This option is suitable for pilot managers who may find it difficult to assign unit costs (or prices) for each cost item, either because the unit costs are likely to be highly variable from user to user in the affected industry or because the unit costs are not easily available. 1.3.3 Estimation of Capital Investment and O&M Costs Section 3 describes the Estimation of Capital Invest- ment and O&M Costs option, which builds on the Itemi- zation of Costs option. In addition to identifying and quantifying the cost items associated with the ETV tech- nology, unit costs (prices) are assigned for each item. Based on the quantity and unit cost of each item, the total cost of each item can be estimated. 1.3.4 Calculation of Total Annualized Cost, Simple Payback Period, or Present Value Section 4 describes the Calculation of Total Annualized Cost, Simple Payback Period, or Present Value option, and is suitable for pilot managers who want to perform a more detailed cost evaluation of a technology. In this option, the total impact of an ETV technology on a potential user is assessed. This option also facilitates the comparison of the ETV technology with a baseline or competing technology. Assessing the total impact of a technology typically involves the calculation of a total annualized cost, simple payback period, or present value. This option builds on the Estimation of Capital Investment and O&M Costs approach, and is the most comprehensive of the cost evaluation options described in this document. 1.4 Quality Assurance/Quality Control The quality assurance/quality control (QA/QC) activities associated with the data collection for cost evaluation are similar to those associated with data collection for technology verification purposes. If cost evaluation is desired, it should be identified as an objective in the project planning document. The data that need to be collected should be identified, along with the required source (if appropriate) and/or procedures used to collect the data. Depending on the needs of the project, any QA/QC requirements for the procedures used to collect the cost-related data also should be specified in the planning document. The option used for cost evaluation also should be doc- umented in the project report. The source of any data/ information used in cost evaluation should be identified, and any assumptions used in estimating costs should be discussed. Also, any deviations from QA/QC require- ments for measurements used to estimate costs should be discussed, along with the effect on cost evaluation results. 1.5 Reference Battelle. 1998. Options for Collecting, Evaluating, and Reporting ETV Technology Costs. Prepared for U.S. EPA's National Risk Management Research Laboratory, Cincinnati, OH. June. ------- 2. Itemization of Costs Costs are incurred when resources (capital) are in- vested and resources (inputs) are consumed to gener- ate products (outputs). Depending on the industry, the product or output could be treated water effluent from a wastewater treatment plant, recycled solvent from a machine shop, a new environmentally friendly surface coating that replaces a conventional chromium coating, or the numerical result from the analysis of a soil sam- ple. Inputs required to generate the product may include labor, materials, and/or energy. The Itemization of Costs option outlines a systematic way of identifying and quantifying these resources, without necessarily assign- ing monetary (dollar) amounts to them. 2.1 Identifying the Cost Evaluation Objective and Data Collection Methods The cost evaluation objective functions to help a poten- tial user decide whether to buy or not buy an ETV tech- nology. The three types of cost evaluation objectives are: • To estimate and compare the cost of the ETV technology to a "baseline" technology • To estimate and compare the cost of the ETV technology to a "competing" technology • To estimate the cost of an "add-on" ETV technology. Often, a buy/no-buy decision on an ETV technology is based on a comparison of the cost of that technology with a baseline or competing technology. A baseline tech- nology is one that is currently being applied by the user, and serves as the basis of comparison with the ETV technology. A competing technology is one that is avail- able commercially and performs the same function as the ETV technology, but is not the baseline technology currently installed in the user's facility. The only case where a comparison between technologies may not be possible is when the ETV technology is an add-on (no replacement of a baseline technology is involved) and no competing technology is available to fulfill the technical objectives of the user. Before characterizing an ETV technology as an add-on, pilot managers should carefully consider whether or not a baseline technology or operation is being replaced. For example, a small coolant recycling unit may be "added on" to a metal- working plant. Although no existing equipment is being replaced, the new technology (on-site coolant recycling) is replacing a baseline technology (off-site coolant dis- posal). The net impact of adding the recycling unit can be determined only by comparing its cost to the cost of the baseline technology, and the resulting impact could be a net saving or a net cost. It is important to identify the cost evaluation objective early in the ETV process so that the relevant cost items can be tracked during a verification test (see Section 2.6 for a discussion of relevant cost items). For many ETV technologies, this may involve tracking or estimating the costs of both ETV and baseline/competing technologies. The data collection methods used to achieve the cost evaluation objective also should be identified in the planning stages and mentioned in the cost report. Many of the required cost data can be obtained by direct mea- surement during a verification test. However, it may not be possible to quantify all cost items through direct mea- surement. For example, the labor required to operate an ion exchange unit may be observed and measured dur- ing a one-week ETV test and extrapolated to one year of operation in a relatively straightforward fashion. On the other hand, the maintenance cost item may be difficult to measure directly during a one-week test. The quantities and costs of such items may have to be determined based on the engineering judgment of pilot managers or based on the experience of the vendor with previous applications. 2.2 Determining the Design Basis The design basis refers to the performance specifica- tions and equipment design requirements of the ETV ------- technology. The performance specifications for a tech- nology may include the desired product features, as well as features of the inputs, equipment, and operations in- volved. For example, a wastewater treatment plant may require that a technology be able to treat 1,000 gal/day of wastewater and meet an effluent target of no more than 1 mg/L of chromium. These requirements of prod- uct quantity and quality are part of the design basis for the technology. In addition, the plant also may require that the technology be able to handle wastewater with a pH of 3 and containing up to 2,000 mg/L of total dis- solved solids. This limitation on the feed or input quality is also part of the design basis because it may impact the materials of construction used in the equipment and therefore the unit cost (price) of the equipment. It is important to identify the design basis at the beginning of the cost evaluation exercise, because once the design basis is established, the quantity and unit cost (price) of each individual item (e.g., equipment, labor, mainte- nance, etc.) of the technology application can be cali- brated to this basis. An important aspect of the design basis for cost eval- uation is the throughput requirement of a technology. Throughput is the quantity of material processed through or produced by the ETV or baseline/competing technology in a specified period (usually, one year) of operation. Throughput can be measured in terms of the input (e.g., gallons of wastewater treated per year) or output (e.g., annual hot water usage with a new energy- efficient water heater) related to a technology. Although throughput can be measured for any period, the com- mon practice is to determine throughput on an annual basis. Note that the throughput generally is based on the ex- pected requirement of a user of the ETV technology. Therefore, throughput may be different from the capac- ity of the equipment associated with the technology. Equipment capacity is the maximum throughput that is possible given the size of the equipment available or selected. The design throughput may be set at a value equal to or less than the capacity of the ETV technology equipment. If the design throughput is assigned to be equal to the capacity of the primary ETV technology equipment, it is essential that all associated equipment (i.e., pumps, piping, and valves) be designed to handle the same (or greater) capacity. Because the actual throughput is likely to vary from user to user, the cost report should specify the design throughput used as the basis for developing estimates of both the quantities and costs of the individual cost items and the overall cost of the technology. 2.3 Identifying and Quantifying Capital Investment and O&M Costs One distinction that is important to understand for cost evaluation is the difference between capital investment and O&M costs. Capital investment refers to the initial outlay of money required to acquire and install the tech- nology in a user's facility. It includes all the costs incurred up to the point that the technology is ready to perform its desired function in the user's facility. Exam- ples of capital items are purchased equipment, installa- tion, and training associated with the ETV technology. O&M costs are the recurring costs associated with the continued operation of the technology. Examples of O&M costs are operating labor, materials, and energy. Although O&M costs can be estimated for any time period, this document generally recommends estimating them on an annual basis. Tables 2-1 and 2-2 show the main categories of capital items and O&M items, respectively, that are likely to be associated with an ETV technology. Not all the items will be applicable to all the technologies. These tables are designed to serve as checklists so a pilot manager can ensure that common capital and O&M items are not missed during the cost evaluation. Following subsections of this document describe these cost items in more detail. 2.3.1 Identifying and Quantifying Capital Items Table 2-1 lists the common categories of capital items likely to be encountered for an ETV technology. Not all items will be applicable to all technologies. The quantity of each capital item is determined by the design basis of the user. For example, a user who wants to use a new ultrafiltration unit for one shift per day may need to train only one operator. On the other hand, another user who wants to use the unit continuously over three shifts per day may need to train three operators. Thus the quantity of training (one 8-hr day versus three 8-hr days of labor) and the associated training cost for the technology will be determined by the operating requirements of the user. Similarly, a user who has an annual throughput requirement of 80,000 gal of wastewater per year may buy an ultrafiltration unit with a rated capacity of 100,000 gal/yr (assuming that this is the next largest size of equipment available). Another user with a re- quirement of 180,000 gal/yr may opt for the next largest size of unit, rated at 200,000 gal/yr, or may buy two 100,000-gal/yr rated units. The design basis for the cost evaluation should be clearly stated in the ETV cost report. ------- Table 2-1. List of Capital Items Table 2-2. List of O&M Items Site Preparation Q In-house (labor, materials) Q Demolition/clearing, grading/landscaping Q Old equipment/rubbish disposal Q Equipment rental Q Vendor/contractor services, including fees Buildings and Land Q Equipment housing Q Plant expansion Purchased Equipment Q Primary equipment Q Associated equipment (storage and materials handling equipment) Q Monitoring/control equipment Q Laboratory/analytical equipment Q Safety/protective equipment Q Freight/shipping and handling Q Licensing and/or warranty Utility Connections/Systems Q Energy (electricity, fuel) Q Steam Q Process water and/or process air Q Sewer Installation a a a a a In-house (labor, materials) Piping, electrical, instrumentation, insulation, and painting Contractor/vendor/consultant services, including fees Construction supplies and support Equipment rental Startup/Training Q In-house (labor, materials) Q Process adjustments Q Report writing Q Process/equipment testing, training Q Safety/environmental training Q Vendor/contractor services Regulatory Issues/Permitting Q In-house (labor, materials) Q Permit fees Q Contractor/consultant services Other Q Contingency Q Any other items 2.3.1.1 Site Preparation This subcategory of cost items is used to account for expenses that may be incurred prior to the acquisition of an ETV technology. It is usually more relevant for large "system" technologies, and could include items such as in-house labor, demolition and clearing, grading and land- scaping, equipment rental, and vendor/contractor serv- ice charges. In-house labor and materials may be re- quired for activities, such as engineering (e.g., to design Materials (purchase, delivery, storage) Q Raw materials Q Chemicals Q Catalysts Q Operating supplies Utilities Q Water Q Sewage Q Energy (i.e., electricity, oil, gas, and/or steam) Labor Q Operating Q Supervision Q Clerical Maintenance Q Maintenance labor G Materials Q Replacement parts (minor system components) Waste Management (labor, materials) Q On-site handling Q Storage Q Treatment of waste Q Hauling Q Off-site treatment/disposal Q Generator fees Q Labeling Q Manifesting Regulatory Compliance (labor, materials) Q Permitting Q Training Q Monitoring/inspections/testing Q Record-keeping/reporting Other Q Any other items peripheral piping and instrumentation) or for building/ plant modifications to house the equipment. 2.3.1.2 Buildings and Land This subcategory includes the space requirements and housing for the technology. It may include items such as building/plant modifications, facilities expansion, and con- struction of a special shelter to house the equipment. 2.3.1.3 Purchased Equipment This subcategory is the core of most ETV cost evalua- tions. It is the purchase cost of the primary technology equipment and associated equipment (such as pumps, hoppers, etc.). This item may include equipment licens- ing and freight; monitoring/control equipment, laboratory equipment, and safety equipment also are included. ------- 2.3.1.4 Utility Connections/Systems This subcategory includes the cost of connecting the technology and associated equipment to providers of utilities such as electricity, water, and sewer. 2.3.1.5 Installation Installation generally consists of labor and materials. Materials may consist of piping, structures, instrumen- tation, insulation, painting, and miscellaneous items. In- house labor may involve engineer, technician or skilled worker, and/or a supervisor. In addition to "in house" labor, contractor or vendor service charges may be applicable, as well as the contractor's construction sup- plies and support. Equipment rental during installation is also included in this subcategory. 2.3.1.6 Startup/Training Startup costs are extra operating costs incurred be- tween the completion of installation and beginning of normal operations. It includes training, equipment tests, process adjustments, salaries and travel expenses of staff and consultants, report writing, and vendor fees. 2.3.1.7 Regulatory Issues/Permitting This is the cost associated with obtaining the required permits to acquire and operate the technology. Permit- ting may include in-house labor, permit fees, and vendor and/or consultant charges. 2.3.1.8 Other Any items that have not been included in Table 2-1 but are applicable should be listed in this subcategory. For example, "contingency" is a cost that may be added to an estimate to allow for any omissions and unforeseen costs; 10 to 15% is a typical range used to account for uncertainties. 2.3.2 Identifying and Quantifying O&M Items Table 2-2 lists the common categories of O&M items likely to be encountered for an ETV technology. Not all items will be applicable to all technologies. The quantity of many O&M items generally is determined based on a user's annual throughput requirement. For example, the quantities of labor, materials, and energy required to treat 180,000 gal/yr of wastewater are likely to be much higher compared to the quantities required to treat 80,000 gal/yr. The annual throughput assumed for the cost evaluation should be stated clearly in the ETV cost report. 2.3.2.1 Materials This subcategory is used to account for materials that are consumed during the operation of the ETV technol- ogy. It includes items such as raw materials, chemicals, catalysts, and operating supplies. 2.3.2.2 Utilities Utilities include water, sewage, and energy (i.e., electric- ity, oil, gas, and/or steam) required to operate the ETV technology and associated equipment. 2.3.2.3 Labor This subcategory is used to account for the labor (salary or wages) required to operate the ETV technology and includes operating labor, supervisory labor, and clerical labor, as applicable. 2.3.2.4 Maintenance This subcategory includes the labor and material costs of keeping the technology in good working condition. If maintenance labor is expected to be minimal, it may be difficult or unnecessary to distinguish it from operating labor. The materials could include items such as lubri- cants or filters. 2.3.2.5 Waste Management Waste management includes the labor, materials, ener- gy, or service charges/fees required for the handling, storage, and treatment (or off-site disposal) of any wastestream generated by the technology. 2.3.2.6 Regulatory Compliance Regulatory compliance and environmental health and safety costs associated with the technology can include the labor and materials for permitting, training, monitor- ing, and record-keeping. 2.3.2.7 Other Any items that are applicable to the ETV technology but are not included in Table 2-2 should be listed in this subcategory. 2.4 Listing the Assumptions Involved in a Cost Evaluation Often, there are limitations in measuring actual quanti- ties and costs of the inputs and outputs involved in a technology application. Working assumptions must be made based on the engineering judgement of the ETV pilot managers or on information provided by vendors. These assumptions should be mentioned in the ETV cost report so that potential users of the technology can ------- assess the basis and limitations of the cost evaluation. Common assumptions may involve the following: • Expected life of the technology: One technology feature that is often required for cost evaluation is the life of a technology. The life of a technology is important because it determines the total period over which the cost evaluation is applicable. For example, if a new catalytic oxidizer is expected to last for 7 years, then another catalytic oxidizer (or similar technology) will have to be purchased after 7 years, and a new cost cycle will begin. The life of a technology generally refers to the useful life of the primary equipment involved. For exam- ple, for a solvent recycling technology, the distil- lation still is the primary piece of equipment and may be expected to last for 10 years. Although some associated pieces of equipment (e.g., pumps) may wear out earlier, replacement of peripheral equipment may be handled as an O&M item (i.e., maintenance) as long as the primary equipment lasts. The expected life of the primary equipment generally can be determined on the basis of prior experience with similar equipment in the industry. The technology vendor also can provide some guidance on how long a particular piece of equipment may be expected to last. • Cost items that are not relevant in the cost evaluation: Any assumptions regarding the exclu- sion of certain cost items from the evaluation should be mentioned. For example, some pilot managers may exclude the capital item "Buildings and Land" if it is not relevant to the cost evaluation. • Cost items that are relevant but not included in the cost evaluation: In some cases, certain cost items may be relevant to the cost evaluation, but may not be obtainable for some reason. Such items should be mentioned in the list of assump- tions. Some pilot managers have indicated that they may exclude portions of the capital invest- ment category because vendors in their industry generally are reluctant to divulge the cost of capital items. • Capital and O&M costs: Assumptions regarding the quantities of capital and O&M items assumed for the evaluation should be mentioned, especi- ally when an extrapolation is involved in estimat- ing annual quantities from shorter-duration ETV tests. When quantities are determined from sources other than direct measurements taken during the ETV test, the source of these data should be mentioned. • Other: Any other assumptions that may affect the interpretation of the reported costs should be mentioned. 2.5 Listing the Technical Factors that Impact Costs A single technology may be applicable under a variety of operating conditions, some of which may be different from the test conditions used during the ETV process. Some of this variability may be within the capacity of the technology to handle; some may not. Therefore, it is important not only to specify the conditions of the ETV test, but also to indicate which factors might significantly impact the overall cost of the technology. Examination of the design basis may provide an indication of the technical factors that impact costs. For example, a catalytic oxidation unit may require con- siderably more energy (and higher O&M cost) to treat a feed airstream containing 30% humidity than a feed air- stream with 10% humidity. Therefore, humidity should be listed as a factor impacting the cost of the technology. The volatile organic content of the airstream may affect the frequency with which the catalyst must be replaced or regenerated (a maintenance item). Therefore, the level of organics in the airstream should be listed as a factor affecting maintenance cost. Whether or not the effect of these factors is quantified depends on the level of cost evaluation desired by the individual pilot managers. Quantifying how much more energy and how much more maintenance (and the associated higher costs) may be required for the full range of these factors (humidity and level of organics) is a level of detail that would have to be a part of the technical verification of the technology, and would involve one or more of the following steps: • Testing the technology under multiple test condi- tions (that is, with various input and operating characteristics). • Using the informed engineering judgment of the pilot managers. In many cases, past experience with similar technologies can serve as a guide for identifying technical factors impacting costs. For example, even if ETV testing of a new energy- efficient residential water heater does not include testing at different inlet water temperatures, pilot managers may be able to predict that the energy requirement (and therefore the O&M cost) of the water heater is likely to be higher when the input water is cooler and lower when the input water is warmer. In this example, the inlet water tempera- ture (which depends on the location of the user) is a technical factor impacting annual energy cost. ------- • Acquiring data from the technology vendor regarding previous applications of the ETV or similar technologies. Although quantifying these impacts may be difficult, pilot managers at a minimum should identify and list the fac- tors likely to significantly affect any of the relevant cost items. If such impacts can be quantified, pilot managers could provide a range of quantities instead of a single number. For example, instead of reporting the energy requirement of an energy-efficient water heater as 22,000 kBTU/yr, pilot managers could report it as 20,000-24,000 kBTU/yr, to cover the expected range of energy consumption based on average inlet water tem- peratures in different geographical regions, or on water usage, or on other variables. 2.6 Listing the Intangible Benefits and/or Disadvantages of a Technology Intangible benefits/disadvantages of an ETV technology are those features that cannot be quantified by the mon- etary cost evaluation, but nevertheless are relevant to the buyer's decision. Although they are difficult (or impossi- ble) to quantify, the intangible benefits and/or disadvan- tages of a technology can outweigh the results of the tangible cost evaluation, thus affecting the buy/no-buy decision of potential users. For example, potential users may find it beneficial to implement the ETV technology even if it costs more than the baseline technology. Table 2-3 is a checklist of possible ETV technology benefits and disadvantages. Given the wide variety of technologies involved in the ETV Program, this is by no means a comprehensive list; however, it may be used as a guide to identify and list relevant benefits/disadvantages. Table 2-3. List of Intangible Benefits/Disadvantages Benefits Q Energy conservation Q Water conservation Q Reduced ozone depletion Q Reduced future liability Q Reduced global warming Q Reduced Toxics Release Inventory Q Promotion of positive public relations [_) Increased plant safety [_) Increased ease of use [_) Superior product or unique service provided Q Other (state here) Disadvantages [_l Higher maintenance requirements [_l Increased energy consumption U Other (state here) 2.7 Preparing a Cost Evaluation Report The recommended reporting format for the Itemization of Costs option includes the following elements: • Cost evaluation objective and data collection methods Design basis Table of capital items - Include the description and quantity of each capital item Table of O&M items - Include the description and quantity of each O&M item List of assumptions List of technical factors that impact costs List of intangible benefits/disadvantages. 10 ------- 3. Estimation of Capital Investment and O&M Costs In this section, cost evaluation is taken a step further than the process described in Section 2 for itemizing costs. To estimate the monetary (dollar) costs of the capital and O&M items described in Section 2, unit costs (or prices) of the various items need to be determined and multiplied by the quantities of each item. This pro- cess of monetizing relevant cost items allows pilot man- agers to combine costs and thereby to obtain a more comprehensive perspective of the technology. The im- pact of various cost items (e.g., labor and materials) can be combined only when they are quantified with a com- mon measure, and monetizing the cost items provides this common measure. For example, the electricity con- sumption (measured in kWh) and the labor requirement (measured in hours) of a technology can be combined only when they are converted to dollar amounts. 3.1 Estimating Capital Investment Section 2.3.1 describes the various capital items that may be encountered when evaluating the cost of an ETV technology. In the Itemization of Costs option described in Section 2, the quantity of each capital item required to fulfill the design basis of the user is identified and listed. To estimate the dollar value of a capital investment, the unit cost (or price) of each capital item needs to be obtained and listed as shown in Table 3-1. The quantity of each capital item is multiplied by its unit cost to obtain the dollar value of each item. All of the items then can be added to obtain the total capital investment. 3.2 Estimating O&M Costs Section 2.3.2 describes the various O&M cost items likely to be encountered by ETV pilot managers. The unit costs (prices) of these items are required in order to convert the quantities of these items to dollar costs. As shown in Table 3-2, the cost of each O&M item is esti- mated by multiplying the quantity of an item with its unit cost. Table 3-1. Capital Investment for a Hypothetical Water Treatment Unit Water Treatment Unit Item Buildings and Land Prefabricated steel structure Purchased Equipment Water treatment package plant Upgrades to standard package plant Chemical feed for well supply Air compressor Chlorine monitor Flowmeter package Telemetry system and software Underground waste storage system Freight Installation Technician Engineer Startup/Training Vendor startup services Total Capital Investment Quantity* 1 1 1 1 1 1 1 1 1 100hr 100hr 1 Unit Cost $5,000 $21 ,625 $1 ,000 $1 ,000 $3,225 $2,600 $2,220 $6,845 $900 $35/hr $60/hr $4,000 Cost $5,000 $21 ,625 $1 ,000 $1 ,000 $3,225 $2,600 $2,220 $6,845 $900 $3,500 $6,000 $4,000 $57,915 * For the design basis described in the illustrative example in Appendix A. 3.3 Additional Considerations in Estimating Capital Investment and O&M Costs A few issues may be important to note while estimating capital investment and O&M costs. One issue to note is the purchase price of the primary ETV technology equipment (for example the filtration unit for an ultra- filtration technology), because this price is often a signif- icant part of the capital investment and is a unit cost that needs to be obtained from the vendor. However, when large customized pieces of equipment are involved, vendors sometimes are reluctant to divulge their prices. In this case, pilot managers may have no choice but to exclude the cost of the primary equipment from the cost evaluation. 11 ------- Table 3-2. Annual O&M Costs for a Hypothetical Nickel Recovery System Electrodialysis System Item Materials Makeup water Chemicals, NiSO4 used Chemicals, NiSO4 recycled UOIities Steam Electricity Maintenance Service contract Carbon change Evaporator cleaning Miscellaneous upkeep Annual Quantity* 15,000 gal 1 80,000 Ib -171 ,000 Ib 4.9 x 108BTU 78,600 kWh 4 visits 6 events 1 2 events 1 Unit Cost $4.1 9/1 ,000 gal $1/lb $1/lb $6/106BTU $0.118/kWh $3,000/visit $1 ,020/event $1 20/event $1 ,000 Total Annual O&M Cost * For the design basis described in the illustrative example in Appendix B. Annual Cost $63 $180,000 -$171,000 $2,940 $9,275 $12,000 $6,120 $1 ,440 $1 ,000 $41,838 On the other hand, pilot managers generally are not de- pendent on technology vendors for the costs of other capital items, such as site preparation and installation. The quantity and unit costs of these capital items can either be determined during the technology verification part of the ETV test or estimated from other sources. For example, pilot managers may determine during the ETV test that installation of an ultrafiltration unit requires 40 hours of labor at $50/hour and 30 ft of pipe at $2/ft. The installation cost of the ultrafiltration unit can be cal- culated from these data. Other sources for estimating the costs of these capital items includes the engineering judgement of pilot managers or vendors (based on exper- ience with other similar equipment) or published refer- ences that list costs or cost factors for these items. These references are described in Appendix D. Cost factors are rule-of-thumb cost estimates for certain items based on the cost of other associated items. For example, based on the information compiled in such references, pilot managers may estimate that "installation" cost is 20% of the "purchased equipment" cost of a technology. If these alternative estimation sources are used, then they should be identified in the list of assumptions. Another issue that needs to be noted is that the unit costs (prices) of various capital and O&M items are likely to vary from user to user and from technology to technology. To handle this variability, it is important to clearly state the unit cost numbers in the ETV cost evaluation report. A stated list of unit cost numbers (as shown in Table 3-1) permits individual users to see how their own unit costs differ from the unit costs applied in the ETV cost evaluation. Users can thereby assess the impact of these differences on the overall cost of a tech- nology. Representative unit costs of several capital items associated with environmental technologies can be obtained from cost references such as the Environmen- tal Remediation Cost Data—Unit Price handbook (R.S. Means Company, Inc., and Talisman Partners, Ltd., 2001). This handbook provides representative unit costs for a variety of associated equipment, such as pumps, piping, and valves, along with the cost of their installation. Another issue relates to the procedure for handling the potential income from use of certain pollution prevention technologies. Some pollution prevention or recycling tech- nologies can generate income for the user from the ability to market or reuse a recycled product. In this document, the recommended way of dealing with this income is to show it as an O&M cost with a negative sign. This nega- tive number serves to reduce the annual O&M cost of the ETV technology. For the nickel recovery system example presented in Table 3-2, 171,000 Ib of nickel sulfate are recovered and reused in the electroplating operation. The value of this recycled nickel (as nickel sulfate) is entered in the table as a negative number. The recycled nickel serves to reduce the amount of nickel sulfate that the plant needs to purchase annually. The value of the recy- cled nickel is therefore credited toward the annual O&M cost of the electrodialysis technology. A more detailed cost analysis that compares the annual operating cost of the nickel recovery system and the baseline operation is presented as an example in Appendix B. Several of the cost items in Tables 3-1 and 3-2 involve in-house labor, which is an item that may be repre- sented in terms of the salaries or wages paid to person- nel conducting the work. If any other associated costs are included in the in-house labor item, they should be stated in the list of assumptions (see Section 2.4). Costs associated with labor could include fringe benefits (e.g., vacation or sick leave) and other overhead items, and these costs are sometimes factored in the labor rate. Because many of these associated costs are likely to vary from user to user, it may be simpler to estimate labor costs in terms of just salaries or wages. 12 ------- 3.4 Listing the Assumptions Any assumptions made regarding the unit costs (prices) for the capital and O&M items should be mentioned, so that users can compare them with their own unit costs. For further details on listing assumptions, see Section 2.4. 3.5 Listing the Technical Factors that Impact Costs See the discussion in Section 2.5. 3.6 Listing the Intangible Benefits/ Disadvantages of a Technology See the discussion in Section 2.6. 3.7 Preparing a Cost Evaluation Report The recommended reporting format for the Estimation of Capital Investment and O&M Costs option includes the following elements: • Cost evaluation objective and data collection methods • Design basis • Table of capital investment - Include the quantity and unit cost (price) of each capital item • Table of O&M costs - Include the quantity and unit cost (price) of each O&M item • List of assumptions • List of technical factors that impact costs • List of intangible benefits/disadvantages. 3.8 Reference R.S. Means Company, Inc., and Talisman Partners, Ltd. 2001. Environmental Remediation Cost Data—Unit Price, 7th ed. 13 ------- 4. Calculation of Total Annualized Cost, Simple Payback Period, or Present Value Sections 2 and 3 describe how to quantify capital and O&M items and how to estimate the costs of these items. A cost analysis serves to assess the total impact of the ETV technology on a potential user and also facilitates the comparison of the ETV technology with a baseline or competing technology. The total user impact of a technology can be assessed by combining capital investment and O&M costs into an overall technology cost involving one of the following measures: • Total annualized cost • Simple payback period • Present value (PV) of a technology. 4.1 Calculating the Total Annualized Cost Calculating the total annualized cost of a technology involves combining the capital investment and annual O&M cost. Because O&M costs are measured on an annual basis ($/year), the capital investment must be annualized in order to combine these costs. In the fol- lowing equation, the annual O&M costs are added to an annualized capital investment term to obtain a total annualized cost for the technology: (4-1) The annualized capital investment term can be inter- preted as a fixed annual payment that a user would have to make every year over the life of the technology. The annualized capital investment can be estimated using the following equation, which shows how the capital in- vestment can be annualized based on a discount rate, r: Total annualized cost — Annualized capital investment + AnnuaF O&M cost Annualized capital investment Capital investment t=n I- 1 (4-2) The discount rate accounts for the return (or interest) that the money assigned for capital investment would earn if the capital items were paid for over several years, at the end of each year (time, t = 1, 2, 3, ..., n). The appropriate discount rate will vary from industry to in- dustry and pilot managers need to select a rate accord- ingly. The values of the denominator of Equation 4-2 have been documented for various values of r and n; these denominator values are presented in Appendix E, and can be used in Equation 4-2 to facilitate the calcu- lation. Appendix A provides an example calculation of total an- nualized cost for a dual-stage filtration system installed in a drinking water plant. Total annualized cost also can be represented on the basis of each unit of throughput to obtain a unit annual- ized cost for a technology, as shown in Appendix F. Unit annualized cost numbers (e.g., $0.25 per gallon of water treated) obtained from total annualized cost estimates can be misleading because the unit cost of a technology is dependent on the design basis, particularly the annual throughput. Therefore, different users may experience different unit costs for the same technology, depending on their throughputs. However, unit costs often are used in some industries for comparing technologies. 4.2 Calculating the Simple Payback Period The simple payback period is defined as the time period over which the net O&M income and/or savings become equal to the initial capital investment. Calculating the simple payback period for a technology is a method of assessing the overall cost impact of a technology by estimating the time it would take to recover the initial capital investment. The simple payback period method is based on the assumption that implementing the ETV technology will generate measurable annual O&M sav- ings or income for the user. Net O&M income and/or savings from implementing the new technology can 14 ------- arise in two possible ways. First, the ETV technology could generate a product or byproduct that has a mar- ketable value greater than the O&M cost for operating the technology. This could happen, for example, when a solvent recycling technology generates recycled solvent that can be sold (or reused) to generate significant in- come. Second, net O&M savings could occur when the O&M costs of the ETV technology are lower than the O&M costs of the baseline technology that it replaces. This could happen, for example, when a conventional water heater is replaced with an energy-efficient heater. The reduction in energy usage (an O&M item) would lead to a reduction in O&M costs; the resulting savings could offset the initial capital investment overtime. Equation 4-3 can be used to calculate simple payback period when the annual O&M savings are constant every year, which is often the case. The discount rate or the rate of return that is forgone on the capital invest- ment is ignored in this simplified equation. Therefore, this equation is useful as a quick analytical tool for assessing the attractiveness of the technology. The denominator in Equation 4-3 is the net annual O&M after-tax savings, which can be calculated as shown in Equation 4-4. In this equation, net annual O&M savings is the difference between the annual O&M cost of the baseline/competing technology and the annual O&M cost of the ETV technology. To estimate the net savings on an after-tax basis, Equation 4-4 includes a factor based on the corporate income tax rate. Simple payback period (years) Capital investment for the ETV technology Net annual O&M] after-tax savings] (4-3) Section 4.3 offers a method for calculating discounted payback period that accounts for the rate of return, as well as for cases when annual O&M costs vary from year to year. Appendix B offers an example calculation of simple payback period for a nickel recovery system for treating waste water from a metal-plating operation. 4.3 (4-4) Net annual O&M after -tax savings = Net annual O&M savings X [Corporate] 1-j income I [ tax rate j Calculating the Present Value of a Technology The present value (or life cycle cost) of an ETV tech- nology is defined as the value of all the costs incurred over the useful life of a technology discounted to the base time (time of acquisition of the technology). These costs include the initial capital investment, which gener- ally is incurred as soon as the new technology is acquired, and annual O&M costs and/or savings, which occur over several years as the technology is used. In order to combine present and future cash flows, any estimation of total lifetime cost must incorporate the effects of time on these cash flows. The most common way to account for the effects of time is by calculating the PV of all costs (capital investment and O&M costs) incurred in the present and future. In general, a technology user usually needs enough cash today to pay for the full amount of the capital investment. However, O&M cash flows that are sched- uled to occur in the future tend to free up money for productive uses in the present. Using PV calculations, a user can determine how much money he/she could set aside (i.e., invest in productive uses) today in order to grow the money to an amount equal to these future O&M costs. For example, if a user wanted to invest enough money today to pay for O&M costs that are likely to occur over the next three years, he/she would use the PV equations described in the following sub- sections to calculate PV where time t = 3. Generally, cash flows for an ETV technology are mea- sured on an annual basis. The PV of a series of cash flows (CFt) that may occur at different points in time (t) over a total time period (n) may be estimated using the following general equation: t=n PV of cash flows = V CF, (4-5) Time t = 0 represents the present or the time when the technology is first acquired; also, all cash flows that occur in a given year are assumed to occur at the end of the year, so fractional values oft are avoided. If all cash flows are estimated in real dollars or constant dollars, then r is the real discount rate, a rate which dis- counts future real cash flows to the present. The real discount rate reflects the real earning power of money over time. This approach is easier for cost analysis be- cause it is easier to estimate costs in constant dollars, and it automatically accounts for any inflation that may occur. Therefore, the real discount rate (r) is based on the user's expectation of the real return on his/her pru- dent investment, and this expectation may vary from industry to industry. It is important to mention clearly the real discount rate assumed in the ETV cost analysis. PVof cash flows CFn CF, CF, (1 + r)1 (1 + where, for many technologies: CFn 1 + r)n (4-6) 15 ------- n = CF0 CFi,CF2, ...CFn = life of the equipment in years capital investment annual O&M costs in Years 1,2, ..., n. For most ETV technologies, the capital investment will result in a cash outflow at time t = 0, and all future cash flows will result from O&M costs. Also for many ETV technologies, the annual O&M costs are likely to be the same every year. In this case, Equation 4-5 can be sim- plified as: pv=T Capital [investment] (0&Mcost)x (4-7) The values of the factors in braces {} have been docu- mented for different values of r and n, and are listed in Appendix E. Equation 4-7 is a simplified way of calcu- lating the PV of an ETV technology when the O&M costs are the same every year. However, if O&M costs are likely to vary from year to year, Equation 4-5 or 4-6 must be used. Equation 4-5 or 4-6 also can be repre- sented in a spreadsheet for ease of calculation. Appen- dix C provides an example spreadsheet calculation of PV for an energy-efficient water heater and a competing technology. A PV spreadsheet also allows an easier determination of the discounted payback period. Section 4.2 describes a simple payback period calculation that does not take into account the time value of money. A discounted payback period is defined as the time (in number of years) that it takes to recover the initial capital invest- ment in the ETV technology, given a discount rate (r). In a PV spreadsheet, the discounted payback period is the year in which the cumulative PV of the ETV technology becomes equal to the cumulative PV of the baseline technology. An example of a discounted payback period estimation based on a PV spreadsheet is shown in Appendix C. An important consideration when comparing the ETV technology with a baseline technology is that the capital investment in the baseline technology should be exclud- ed from the cost evaluation. The capital investment in the baseline technology has already occurred in the past and is irrelevant to today's decision on whether or not to buy the ETV technology. Therefore, only the ongoing O&M costs of the baseline technology need to be consid- ered, along with the capital investment and O&M costs of the ETV technology. On the other hand, both capital investment and O&M costs need to be considered when the comparison involves two competing technologies, because both the ETV technology and the competing technology require a fresh capital investment. If the baseline technology equipment has significant sal- vage value, it may be included in the PV of the ETV technology as a cash inflow or income at time t = 0, which will serve to offset the capital investment required for the ETV technology. For simplicity, the salvage value of capital equipment can be excluded from present value calculations. The salvage value is difficult to estimate and is often less than the cost of recovering the equipment. If salvage value is significant, but not in- cluded, then it should be explained in the list of assump- tions that the analysis does not include salvage value. An advantage of the PV analysis is that technologies with different lifetimes can be compared. In this case, the PV should be calculated for a period equal to the lowest common multiple of the two lifetimes. For exam- ple, if Technology A has a life of 5 years and Technol- ogy B has a life of 3 years, a second capital investment will be required in Technology B at the end of Year 3. In real dollars, the second capital investment may be the same or lower than the first capital investment; some capital items, such as training and permitting, may not have to be reincurred. Equation 4-6 can be used to determine the PV cost of the technologies. In this case, the PV analysis should be done for each technology over a period of 15 years. For Technology B, the cash flow in Years 3, 6, 9, and 12 (CF3, CF6, CF9, and CF12) will include, in addition to the O&M cost for the full 15 years, the capital investment required to replace the primary equipment. A spreadsheet may be used to facil- itate calculation of PV when the time period of the analy- sis is very large. 4.4 Comparing Two Technologies Often, the cost of an ETV technology will be evaluated against the cost of a baseline technology or a competing technology. The total annualized cost, simple payback period, or PV may be calculated separately (using an equivalent design basis) for each of the technologies in- volved in the comparison. The technology with the lower total annualized cost, simple payback period, or PV may be expected to provide a better return on investment or generate lower overall costs. The intangible benefits and/or disadvantages of the ETV technology should also be considered a part of the tech- nology comparison. Even if an ETV technology has a higher overall cost, the intangible benefits of using an environmentally friendly technology may be attractive enough to affect the decision of a potential user. 16 ------- 4.5 Preparing a Cost • Table of O&M costs Evaluation Report ~ Include the quantity and unit cost (price) of each O&M item The recommended reporting format for the Calculation 0 yst ^ assumDtions of Total Anualized Cost, Simple Payback Period, or Present Value approach includes the following elements: - Expected life of the technology used for the cost evaluation • Cost evaluation objectives and data collection - The discount rate used methods - Other assumptions • Design basis • List of technical factors that impact costs • Table of capital investment • List of intangible benefits/disadvantages - Include the quantity and unit cost (price) of each . Totg| annua|ized cost si |e back iod or capital item 17 ------- Appendix A Illustration of Capital Investment/O&M Cost Estimation and Total Annualized Cost Analysis of a Dual-Stage Filtration System in a Drinking Water Plant This example cost evaluation incorporates the eight bul- leted elements listed in Section 4.5 and calculates the total annualized cost of a hypothetical dual-stage pres- sure filtration (DSF) unit. The technology used in this illustration is a prepackaged filtration technology for a community drinking water sys- tem designed to reduce turbidity and iron to new regu- latory target levels in the treated water. The technology consists of a prepackaged DSF unit. A.1 Defining the Cost Evaluation Objective and Data Collection Methods The first element is to define the objective of the cost evaluation and to describe the methods used to accom- plish the objectives. The objective of the evaluation was to estimate the cost of the DSF application for a typical community drinking water treatment plant and compare it to a competing technology. The competing technology is a conventional coagulation/filtration unit. In this exam- ple, the cost analysis includes an estimation of the total annualized cost of the DSF unit. For the verification test, the DSF unit was installed at an existing small community water treatment site. The test site was selected because of the nature of its water quality, high turbidity, and elevated iron levels. Perform- ance and cost data were gathered for one year. Capital investment and O&M costs were tracked during the test; however, site-specific factors can contribute to wide variations in the costs a system incurs for treatment. The cost of the competing (conventional) technology was estimated by a combination of reported costs from existing plants and engineering judgment. A.2 Describing the Design Basis The next element is to describe the design basis of the technology. The DSF unit is designed to operate auto- matically with off-site monitoring through a telemetry system by the operator. Daily turbidity levels in ground- water averaged 5 to 30 nephelometric turbidity units (NTU). The system was required to achieve 0.5 NTU in 95% of the samples collected, reduce iron to improve taste and odor, and supply water to 35 connections and 100 persons. The system operated an average of 300 hrs per month, the service flowrate averaged 10 gpm, and 2.16 million gallons of water were produced during one year. The design basis is summarized in Table A-1. Table A-1. Design Basis for the DSF Unit DSF Unit Service flow, gpm: 10 Annual throughput (drinking water produced), gal/yr: 2.16 million Number of connections: 35 Average turbidity levels: 5 to 30 NTU Turbidity removal: 95% 0.5 NTU A.3 Estimating Capital Investment The next element is to determine the capital investment for the DSF unit. Table 2-1 in Section 2 of this document provides a checklist of capital items. For this example, the relevant capital items that apply include the cost of buildings and land, purchased equipment, installation, and startup/training. Regulatory/permitting and contin- gency items were not included in this estimate because no permits were involved for the demonstration. Also, because actual (and not budgeted) installation costs were available, no contingency was included. The source of 18 ------- the cost data is provided so that the user can verify the information or compare the data with other cost esti- mates. For this illustration, costs incurred during the pur- chase, installation, and startup of the technology were tracked during the verification test. The vendor provided the purchase price of the prepackaged equipment. Items such as upgrades that were not a part of the standard package are included in the purchase price, whereas items that were added for the purpose of demonstration (such as extra monitoring equipment) are excluded. Table A-2 summarizes the capital investment required for the DSF unit. Table A-2. Capital Investment for the DSF Unit Item Buildings and Land Prefabricated steel structure Purchased Equipment DSF Package Upgrades to standard package plant Chemical feed for well supply Air compressor Chlorine monitor Flowmeter package Telemetry system and software Underground waste storage system Freight Installation Technician Engineer Startup/Training Vendor startup services Total Capital Investment Quantity* 1 1 1 1 1 1 1 1 1 100hr 100hr 1 DSF Unit Unit Cost $5,000 $21 ,625 $1 ,000 $1 ,000 $3,225 $2,600 $2,220 $6,845 $900 $35/hr $60/hr $4,000 Cost $5,000 $21 ,625 $1 ,000 $1 ,000 $3,225 $2,600 $2,220 $6,845 $900 $3,500 $6,000 $4,000 $57,915 Refer to Table A-1 for the design basis. The capital investment required for a similar-sized con- ventional coagulation/filtration unit was reported by other drinking water plants to be $75,680 (adjusted based on engineering judgment). A.4 Estimating O&M Costs The next element is to determine the relevant O&M costs. For this illustration, Table 2-2 in Section 2 of this document was used as a guide; O&M items include materials (chemicals), utilities (energy and telephone), labor (operating, maintenance), and regulatory compli- ance (monitoring), all of which are considered relevant. The unit cost and amount required for each component were estimated based upon the observations made dur- ing the test and discussions with the vendor. Some minor system components associated with the DSF unit will require replacement approximately every 5 years. The periodic replacement cost (maintenance cost item) was determined as an annual O&M cost by dividing the replacement cost by the expected life, as shown in Table A-3. The vendor provided information regarding the expected life of the minor system components. Annual O&M costs are summarized in Table A-4. Table A-3. Estimation of Annual Replacement Costs for the DSF Unit Item Annual Cost Anthracite $300 Feed pumps $2,000 Raw water pump $2,000 Backwash pump $2,200 Turbidimeter $4,500 Chlorine monitor $3,000 Total Replacement Cost $14,000 Expected Life 5 years Annual Replacement Cost* $2,800/year * Part of maintenance cost item. Table A-4. Annual O&M Costs for the DSF Unit DSF Unit Item Materials Coagulant Chlorine Utilities Electricity Telephone Annual Quantity* 60 gal 48 gal 12 months 12 months Unit Cost $9/gal $1 .6/gal $120/month $80/month Annual Cost $540 $76.8 $1 ,440 $960 12 samples $20/sample 4 samples $30/sample $240 $120 Labor Operating labor (includes maintenance) 96 nrs $35/nr $3]36o Regulatory Compliance Monthly microbiological sampling Quarterly tests for iron Maintenance Labor (included in operating labor as itemized above) - - Materials Misc. $400 Replacement of filter media and equipment (annualized) 1 $2,800 Total Annual O&M Cost $400 $2,800 $9,937 * Refer to Table A-1 for the design basis. The annual O&M cost of the similarly sized conventional technology was estimated to be $18,900. This estimate was based on the costs reported by other plants and the engineering judgment of the cost engineer. 19 ------- A.5 Listing the Assumptions The next element is very important because it allows users to verify and compare the cost data with other cost estimates. The following key assumptions that impact the cost analysis, such as operating parameters, also should be included: • The expected life of the DSF unit is 20 years. The time period of the cost analysis is 20 years. The same assumptions were made for the conven- tional technology. • Costs are in real (constant 2001) dollars. • The real discount rate used is 6%. • Cash flows occur at end of the year. • The maintenance cost is based on the vendor's recommendation on replacement of filter media and associate pumps and meters every 5 years. The replacement cost of the filter media and asso- ciated equipment is $14,000. The annual replace- ment cost ($2,800) was calculated by dividing the replacement cost by the expected life. • Extra capital investment and O&M items, such as labor, were required for the verification testing. The testing-related effort and costs have been deducted to reflect the cost of routine operation. • Costs associated with regulatory/permitting activities and contingency are not included in the estimate. A.6 Listing Key Technical Factors that Impact Costs Another important element is to identify key technical factors that impact costs. For the DSF unit, the technical factors affecting cost are: • If the feed water contains high levels of colloidal solids, filters may have to be replaced more frequently, thus increasing maintenance cost. A filter aid may be necessary. • High levels of total organic carbon in the feed water may increase chlorine demand and increase O&M costs. A.7 Listing the Intangible Benefits/Disadvantages The intangible benefits and disadvantages of the tech- nology should be described, using Table 2-3 of Section 2 as a guideline. Good public relations achieved by the plant due to the improved drinking water supply was the main intangible benefit of the DSF system. A.8 Calculating Total Annualized Cost To calculate the total annualized cost of the DSF sys- tem, the following equations were used: (A-1) (A-2) Total annualized cost — Annualized capital investment + Annual O&M cost Annualized capital investment Capital investment t=n 1 57,915 11.46992 = $5,049 (A-3) (A-4) Total annualized cost = $5,049 + $9,937 = $14,986. Here, r is the real discount rate (assumed as 6% for this cost evaluation). The estimated life (n) of the technology is 20 years. For r = 6% and n = 20, the denominator in Equation A-2 is 11.46992 (from Appendix E). The cap- ital investment ($57,915) and annual O&M costs ($9,937) are obtained from Tables A-2 and A-4, respec- tively. The total annualized cost based on Equation A-1 is $14,986/year. In the same way, based on a capital investment of $75,680 and an annual O&M cost of $18,900, the total annualized cost of the conventional coagulation/filtration technology was calculated as $25,498/year. A discount rate of 6% and a life of 20 years was assumed for the conventional unit. The total annualized cost of the DSF unit ($14,986/year) is lower than the total annualized cost of the conven- tional unit ($25,498/year). The DSF unit is therefore more economical. 20 ------- Appendix B Illustration of Capital Investment/O&M Cost Estimation and Simple Payback Period Analysis of an Electrodialysis System This cost evaluation report for an electrodialysis system incorporates the eight bulleted elements listed in Sec- tion 4.5 and calculates a simple payback period. The technology used in this illustration is an electro- dialysis system that recovers nickel (as nickel sulfate) and removes other dissolved solids from rinsewater, allowing the recovered water to be reused as rinsewater in the nickel electroplating line. The technology elimi- nates the generation of wastewater requiring treatment and off-site disposal of sludge containing hazardous lev- els of nickel. It also allows the recovered nickel sulfate to be reused in the electroplating bath. The cost analy- sis will estimate the years to pay back the cost of pur- chasing and installing the electrodialysis system based on the annual savings realized. B.1 Defining the Cost Objectives and Data Collection Methods The first element is to define the objectives of the cost analysis and to describe the methods used to accom- plish the objectives, as well as the limitations of the test- ing. In this example, the objective of the cost analysis is to estimate the cost of the electrodialysis treatment and compare it with the baseline option. The baseline option is treating rinsewater in the on-site wastewater treat- ment plant, discharging the treated effluent to a sewer, and disposing of sludge at an off-site permitted facility. The cost analysis will estimate the time (years) required to pay back the cost of purchasing and installing the electrodialysis system, based on the annual O&M sav- ings realized. For this test, the electrodialysis system was operated in a user's plant for three months to generate performance and cost data. The plant's historical records were used to estimate the wastewater treatment costs, fresh water supply, and chemical costs prior to the installation of the electrodialysis system. Process water makeup, energy costs and maintenance costs were monitored during the test. The short-term nature of testing limits the direct obser- vation of long-term maintenance costs, which may be significant due to relatively high maintenance require- ments. Also, the testing was conducted at one nickel- plating operation; costs incurred during installation and O&M savings may differ between users operating the electrodialysis system at other facilities. B.2 Describing the Design Basis The next element is to describe the design basis of the technology. The equipment specifications and operating parameters for the electrodialysis system and the base- line plating operation are presented in Table B-1. B.3 Estimating Capital Investment The next element is to determine the capital investment for the electrodialysis system. Table 2-1 in Section 2 of this document provides a checklist of capital items. For this example, the relevant capital items that apply include the cost of the purchased equipment (electrodialysis unit and associated pumps), installation (labor, materials), and startup/training (labor, materials). The source of the cost data should be provided so that the user can verify the information or compare the data with other cost esti- mates. For this case study, costs incurred during the purchase, installation, and startup of the technology were tracked for the demonstration. Labor unit costs were pro- vided by the nickel-plating operating facility. Site prepa- ration, utility connections/systems, and buildings/land are not applicable for this cost analysis. Regulatory/permit- ting costs are relevant for the baseline option, but were not included in the analysis, because they could not be determined from plant records. Contingency costs 21 ------- Table B-1. Design Basis for the Electrodialysis System and Baseline (Plating) Operation Electrodialysis System Baseline (Plating) Operation (No Rinsewater Recovery) Annual throughput (rinsewater passing through the electrodialysis unit): 1,077,500 gal/yr Makeup (fresh) water: 15,000 gal/yr Nickel recovered from rinsewater: 171,000 Ibs/yr (as nickel sulfate) Operating parameters: Two 8-hr shifts/day 5 days/week 50 weeks/year Annual throughput (rinsewater required in the plant): 1,077,500 gal/yr Fresh water supply: 1,077,500 gal/yr Nickel sulfate lost to sludge: 180,000 Ibs/yr Operating parameters: Two 8-hr shifts/day 5 days/week 50 weeks/year were not included because the actual (versus budgeted) capital investment estimate was available from plant records. Table B-2 summarizes the capital investment. B.4 Estimating O&M Costs Using Table 2-2 in Section 2 as a guide, the relevant O&M costs were determined. Table B-3 summarizes the annual O&M cost. For this illustration, O&M items that are considered relevant include materials (nickel sul- fate), utilities (water, electricity, steam), labor (mainte- nance), and waste management (labor, treatment of waste, and disposal). Therefore, items such as materi- als (other than nickel sulfate), utilities, labor, insurance associated with the normal functions of the plating oper- ation is not included in the estimate. Regulatory compli- ance associated with the generation of waste is not included, although it can be significant. Although the unit was operated for three months, the costs were extrapo- lated to obtain an annual cost. The unit cost and amount required for each component were estimated based upon the observations made during the pilot test, discus- sions with the vendor, and from historical plant records. The estimate for wastewater treatment cost at the plant is shown in Table B-4. The volume of makeup water required for electrodialysis was determined by measur- ing level changes in the associated tanks. The electrical requirements were determined by the power require- ments of the associated pumps and blowers. B.5 Listing the Assumptions This element is very important because it allows users to verify and compare the cost data with other cost esti- mates. Key assumptions that impact the cost analysis, such as operating parameters, also should be included. The following assumptions were used in the case study: • All costs are in real (constant 2001) dollars. Discount rate is not used. • Life of unit is 10 years. • Labor benefits are not included in the labor unit cost. • Cost of regulatory compliance associated with the hazardous nickel sludge generation of the base- line operation is not included. • Electricity costs were estimated based on power requirements of the individual components. Some Table B-2. Capital Investment for Electrodialysis System Electrodialysis System Item Purchased Equipment Electrodialysis membrane unit (including evaporator) Installation Engineering Labor Technician Labor Materials (pumps, piping, valves, gauges, etc.) Startup/Training Engineering Labor Technician Labor Total Capital Investment Quantity 1 50 hrs 1 00 hrs 1 25 hrs 200 hrs Unit Cost $83,500 $60/hr $30/hr $14,000 $60/hr $25/hr Cost* $83,500 $3,000 $3,000 $14,000 $1 ,500 $5,000 $110,000 ' For the design basis described in Table B-1. 22 ------- Table B-3. Annual O&M Cost for Electrodialysis System and Baseline (Plating) Operation Electrodialysis System Baseline Operation Item Materials Makeup water Chemicals, NiSO4 purchased Chemicals, NiSO4 recycled Utilities Water Steam Electricity Waste Management Wastewater treatment Maintenance Service contract Carbon change Evaporator cleaning Miscellaneous upkeep Total Annual O&M Cost Annual Quantity* 15,000 gal 1 80,000 Ib -171,000lb 4.9 x 108BTU 78,600 kWh _ 4 visits 6 events 1 2 events 1 Unit Cost $4.1 9/1 ,000 gal $1/lb $1/lb $6/106BTU $0.118/kWh _ $3,000/visit $1 ,020/event $1 20/event $1 ,000 Annual Cost $63 $180,000 -$171,000 $2,940 $9,275 _ $12,000 $6,120 $1 ,440 $1 ,000 $41,838 Annual Annual Quantity* Unit Cost Cost 1 80,000 Ibs $1.00/lb $180,000 1,077,500 gal $4.19/1,000 gal $4,515 1,077,500 gal** $14/1,000 gal*** $15,085 - - $199,600 For the design basis described in Table B-1. * See Table B-4 for the estimation of this unit cost number at this plant. ** Wastewater generated by the targeted baseline (plating) operation only. This wastewater volume is just a fraction of the total volume treated annually by the plant. Table B-4. Estimation of Wastewater Treatment Unit Cost at the Plant Item Sludge disposal Strip disposal Misc. disposal Labor Chemicals Maintenance Total wastewater treatment costs at the plant Wastewater volume treated per year at the plant Unit cost of water treatment/gal Annual Cost $72,000 $60,000 $16,000 $120,000 $113,000 $53,800 $434,800 31 .300.000 gal* $14/1,000 gal Includes wastewater from the baseline (plating) operation, as wells as from all other operations at this plant. components, such as recirculating pumps, oper- ate for a fraction of the time the entire recovery unit is in operation and have been adjusted appropriately. • Steam costs were estimated from a requirement of 1,500 BTU of steam per pound of water evapo- rated. Observations during testing of the electro- dialysis unit show 78 gal (550 Ib) of water were lost to evaporation in one shift. This evaporative loss is included in the makeup water usage listed in Table B-3. B.6 Listing Key Technical Factors that Impact Costs Another important element is to identify key technical factors that impact costs. Technical factors impacting costs in this case study include the following: • Water supply used during the testing was rela- tively low in hardness (calcium and magnesium content). In regions where water hardness is higher, evaporator cleaning (maintenance) may be required more frequently, with the associated higher cost. • The plant in which the electrodialysis unit was tested had enough extra space to accommodate the electrodialysis equipment. In smaller plants, additional space (about 20 ft x 30 ft x 15 ft) may have to be created. B.7 Listing the Intangible Benefits/Disadvantages The intangible benefits or disadvantages of the tech- nology are described, using Table 2-3 in Section 2 as a guideline. One intangible benefit is that the plant no longer has the potential liability associated with storage and transport of hazardous (nickel) sludge to a landfill. One disadvantage is that close monitoring of the elec- trodialysis unit is necessary because the system has a 23 ------- tendency to foul. Also, the energy consumption of the The capital investment estimate ($110,000) is obtained electrodialysis system is relatively high compared to the from Table B-2. The annual savings ($157,762) in opera- baseline operation. tional costs are calculated by subtracting the annual O&M cost of the electrodialysis system from the annual O&M B.8 Calculating Simple Payback Period cost of the base nickel-plating operation (Table B-3). The payback period for the $110,000 system is approximately To calculate the simple payback of the electrodialysis ^ year- system, the following equation was used: Simple payback period (years) Capital investment I for the ETV technology] Net annual O&M after-tax savings (B-1) 24 ------- Appendix C Illustration of Capital Investment/O&M Cost Estimation and Present Value Calculation for an Energy-Efficient Water Heater A cost evaluation report for an energy-efficient water heater should incorporate the eight bulleted elements listed in Section 4.5. A PV is calculated for the energy- efficient water heater and compared with the PV of a conventional water heater. The technology used in this illustration is an energy- efficient water heater for residential hot water generation. C.1 Defining the Cost Objective and Data Collection Methods In this example, the cost evaluation objective is to esti- mate the PV (i.e., life cycle) cost of the energy-efficient water heater, compare it with the PV of a conventional water heater (competing technology) in a residential set- ting, and estimate the savings (if any). Although the resi- dential user was previously using a conventional water heater, the conventional heater is not considered a baseline technology because users are not expected to buy the energy-efficient heater until the life of his/her existing conventional heater is over. Therefore, the buy- er's decision depends on a comparison of the two types of water heaters as competing technologies. The capital investment required for the conventional heater is there- fore a relevant cost in this evaluation. To generate performance and cost data, the energy- efficient unit was operated at a residential home for one week and compared to a conventional heater (compet- ing technology) operated under the same conditions. Natural gas usage, recovery efficiency, and gallons of water used per day were measured during the test. However, the short-term nature of testing does not allow direct observation of the expected life of the new water heater. The test was conducted under specific operating conditions; savings obtained may differ among users operating the new water heater under different condi- tions. C.2 Determining the Design Basis The next element is to describe the design basis of the technology. The equipment specifications and operating parameters for the energy-efficient water heater and the conventional water heater are presented in Table C-1. Table C-1. Design Basis for the Energy-Efficient Water Heater and the Conventional (Competing) Water Heater Energy-Efficient Water Heater (40 gal, 2" water-blown insulation) Heat-recovery efficiency: 79.9% Burner rate: 39,550 BTU/hr Pilot burner rate: 450 BTU/hr Setpoint temperature: 135.0°F Water usage: 50 gal/day Annual throughput (water usage): 18,250 gal/yr Annual natural gas use (mBTU/yr): 21.314 Air temperature in vicinity of task: 67.5°F Water inlet temperature: 58°F Conventional Water Heater (40 gal, 1.31 inches water-blown insulation) Heat-recovery efficiency: 71.9% Burner rate: 39,550 BTU/hr Pilot burner rate: 450 BTU/hr Setpoint temperature: 135.0°F Water usage: 50 gal/day Annual throughput (water usage): 18,250 gal/yr Annual natural gas use (mBTU/yr): 23.919 Air temperature in vicinity of task: 67.5°F Water inlet temperature: 58°F 25 ------- C.3 Estimating Capital Investment The next element is to determine the capital investment for the energy-efficient water heater and the convention- al water heater. Table 2-1 in Section 2 of this document provides a checklist of capital items. For this example, the relevant capital items that apply include the cost of the purchased equipment (the water heater) and instal- lation (labor and materials). The source of the cost data should be provided so that a user can verify the infor- mation or compare the data with other cost estimates. For this case study, a reasonable purchase price was used, that was based on information provided by the vendor. The actual purchase price will vary depending on where the user buys the water heater, local sales taxes, etc. The installation cost is the same for both heaters and is not included in the analysis. Site prepa- ration, utility connections/systems, startup/training, regu- latory/permitting, contingency, and buildings and land are not relevant and are not included in this cost analy- sis. Table C-2 summarizes the capital investment for the two technologies. C.4 Estimating O&M Cost The next element is to determine the relevant O&M costs of the two technologies, as described in Table 2-2 in Section 2. The relevant O&M items for this case study only include utilities (natural gas). Materials, labor, waste management, regulatory compliance, and insurance are not relevant, and are not included in this cost analysis. It is recommended that O&M costs be reported on an annual basis, regardless of the length of the verification test. The annual natural gas use is 21.314 mBTU/yr and 23.919 mBTU/yr for the energy-efficient water heater and the conventional water heater, respectively (Table C-3). For simplicity, the unit cost for natural gas in this case study was estimated based on the U.S. Department of Energy's (DOE) Annual Energy Outlook, which fore- casts the cost of natural gas (in 1998 dollars) through the year 2020 (DOE, 2000). Assuming a unit of cost of $6.214/mBTU, the annual cost of natural gas usage is $132.45 for the efficient water heater and $148.64 for the conventional heater. Table C-3 summarizes the annual O&M cost. C.5 Listing the Assumptions This element is very important because it allows users to verify and compare the cost data with other cost esti- mates. Key assumptions that should be clearly stated when calculating net present value, annualized costs, or discounted payback period include: whether constant or nominal dollars are used (typically, constant dollars are recommended), the real discount rate, and when cash flows occur (typically at the end of the year). Other assumptions that impact the cost analysis, such as the expected life of the major equipment, also are included. The assumptions used in the case study are as follows: • Total years of analysis is 9 years, based on the expected life of 9 years for both types of heater. • All costs are in constant (real) 1998 dollars. • The real discount rate (r) used is 6%. • Cash flows occur at the end of each year. Table C-2. Capital Investment for Case Study Energy-Efficient Water Heater Item Purchased equipment Delivery of new water heater Total Capital Investment Quantity 1 Unit Cost $261 Cost* $261 .00 $261.00 Conventional Water Quantity 1 Unit Cost $235.00 Heater Cost* $235.00 $235.00 * Refer to the design basis in Table C-1. Table C-3. Annual O&M Cost for the Energy-Efficient and the Conventional Water Heaters Energy-Efficient Water Heater Item Utilities Natural Gas, mBTU Total Annual O&M Cost Annual Quantity 21.314 21.314 Annual O&M Unit Cost Cost* $6.214 $132.45 $132.45 Conventional Water Heater Annual Quantity 23.919 23.919 Annual O&M Unit Cost Cost* $6.214 $148.64 $148.64 Refer to the design basis in Table C-1. 26 ------- • The expected fuel cost over the next 9 years of $6.214/mBTU is based on DOE (2000). Actual savings will vary from user to user depending on the actual unit cost (price) of natural gas. The higher the unit cost of natural gas for the user, the greater the difference in PVs of the two heaters and the greater the savings realized. C.6 Listing Key Technical Factors that Impact Costs Another important element is to identify key technical factors that impact costs. • The natural gas requirement is based on an average inlet water temperature of 58°F and an ambient temperature of 67.5°F. The actual inlet temperature of the water will vary seasonally through the year, and geographically for various users. Users who live in regions where the aver- age water supply temperature is lower will incur higher heating requirements, and therefore, higher natural gas usage and cost. Air temper- ature in the vicinity of the water heater also will affect its efficiency. • Users with an annual water usage greater than the 18,250 gal assumed here will experience greater savings; similarly, users with a lower annual water usage will experience lesser savings. C.7 Listing the Intangible Benefits/Disadvantages The intangible benefits or disadvantages of the technol- ogy should be described, using Table 2-3 of Section 2 as a guideline. The intangible benefit for this technology is a cleaner environment due to reduced carbon dioxide (greenhouse gas) emissions and reduction in the small amounts of NOX and SO2 emissions. Also, savings in total energy consumed nationally reduce dependence on imported fuel (assuming saved natural gas can re- duce oil imports). C.8 Calculating Present Value The PV of the capital investment and annual O&M costs is estimated for each year for each technology using the following equations in a spreadsheet format. t=n P V of cash f lows = V CF, PVof cash flows CFn CF, (1 + r)1 (1 + r)2 CFn (1 + r)n (C-1) (C-2) Table C-4 presents the spreadsheet results of the PV analysis. By subtracting the PV cost of the efficient water heater ($1,161.88) from the PV cost of the conventional water heater ($1,246.01), the PV of the savings realized over the life of the water heater is $84.13. The dis- counted payback period is 2 years. The discounted pay- back period is the year in which the PV (cumulative) of the energy-efficient water heater becomes lower than the PV (cumulative) of the conventional water heater. As shown in Table C-4, this happens in Year 2. C.9 Reference U.S. Department of Energy. 2000. Annual Energy Out- look, DOE-E1A-0383. Washington, DC. Table C-4. Spreadsheet Results of the Cost Analysis: PV of the Energy-Efficient and Conventional Water Heaters Year (t) 0 1 2 3 4 5 6 7 8 9 Energy-Efficient Water Heater Capital Investment ($) Annual O&M Cost ($) Present Value ($) Cumulative PV ($) 261.00 - 261.00 261.00 0.00 132.45 124.95 385.95 0.00 132.45 117.88 503.83 0.00 132.45 111.21 615.04 0.00 132.45 104.91 719.95 0.00 132.45 98.97 818.92 0.00 132.45 93.37 912.30 0.00 132.45 88.09 1,000.38 0.00 132.45 83.10 1 ,083.48 0.00 132.45 78.40 1,161.88 Conventional Water Heater Capital Investment ($) Annual O&M Cost ($) Present Value ($) Cumulative PV ($) 235.00 - 235.00 235.00 0.00 148.64 140.23 375.23 0.00 148.64 132.29 507.52 0.00 148.64 124.80 632.32 0.00 148.64 117.74 750.05 0.00 148.64 111.07 861.13 0.00 148.64 104.79 965.91 0.00 148.64 98.85 1 ,064.77 0.00 148.64 93.26 1,158.03 0.00 148.64 87.98 1,246.01 27 ------- Appendix D Cost Evaluation References If certain cost elements for a technology application are not available for an ETV pilot manager, some refer- ences are available that provide typical costs or cost guidance to help fill in the data gaps. Three common and useful references in the environmental, chemical, and process industries are a series of unit cost books: Plant Design and Economics for Chemical Engineers by Peters and Timmerhaus (1991); The Richardson Rapid System for Process Plant Construction, Richardson Engineering Services, Inc.; and the Environmental Cost Handling Options and Solutions (ECHOS) books pub- lished jointly by R.S. Means Company, Inc. and Talisman Partners, Ltd. When ETV testing is unable to measure certain cost elements (e.g., maintenance or installation costs) directly, these references can provide cost ranges based on broad industry experience. The texts referenced in this appendix do not represent a full literature review; other industry-specific standard refer- ences may be used. Plant Design and Economics for Chemical Engineers, by Peters and Timmerhaus (1991) This book is a widely used reference in the chemical industry and discusses the economic and engineering principles involved in the design and application of pro- cessing equipment. Because environmental technolo- gies generally involve physical-chemical or biological processes for removing pollutants from a feed stream or for chemically characterizing soil, water, or air matrices, the principles in this book are generally applicable. Although the level of discussion in this book is probably too thorough for most ETV applications, there are some interesting rules of thumb in this book. In the subsection titled "Purchased-Equipment Installa- tion," there is a table that provides typical installation costs for different types of equipment as a percentage of the purchased-equipment cost. For example, typical costs for installing pumps range from 25 to 60% of the purchase price of the pump; for metal tanks the installa- tion cost is 30 to 60% of the price of the tank. If the nature of the testing or resources does not allow the ETV pilot to directly measure these numbers, these rules of thumb based on chemical industry experience can be used to estimate installation costs. In addition, these typical ranges, developed through broad industry experience, can serve as benchmarks to verify esti- mates developed by the ETV pilot manager. In the absence of direct measurements, an ETV pilot manager can use some of the other rules of thumb for estimating the amount and cost of peripheral equipment (such as piping and electrical connections) required for various types of equipment, estimating the maintenance requirements for typical equipment, and for scaling up equipment based on capacity. For example, for estimat- ing maintenance costs, industry experience suggests that typical annual maintenance costs range from 2 to 6% of fixed capital investment (FCI) for simple chemical processes, 5 to 9% of FCI for average processes under normal conditions, and 7 to 11% of FCI for complicated processes under severe operating conditions (e.g., cor- rosive environment or high temperatures). The Richardson Rapid System for Process Plant Construction, by Richardson Engineering Services, Inc. Another common cost estimating reference is The Richardson Rapid Estimating System for Process Plant Construction, which includes process plant construction estimating standards. It is similar to the cost data books produced by R.S. Means, Inc. and can be used to accu- rately estimate the cost of labor, materials, and equip- ment required for the installation and operation of ETV technologies. This reference is particularly applicable for technologies associated with chemical plants, manufac- turing facilities, and water treatment plants, as well as general construction projects. Estimates can be made quickly by using the estimating standards, which presents the worker-hours, composite 28 ------- unit costs, and detailed line-item data developed for major areas such as Site Work, Mechanical and Elec- trical Construction, and Process Equipment. Estimating forms and procedures to adjust the standard estimates for site-specific conditions are included with each set of standards. ECHOS Books by R.S. Means Company, Inc. and Talisman Partners, Ltd. Sometimes, the ETV testing setup may not incorporate all the peripheral items required for installation and operation of the technology. For example, during the ETV test, a technician may measure and add chemicals to the process manually because it is convenient for the two-week period of the test and it may not be worthwhile investing in transfer pumps, metering instruments, and piping to add chemicals on a continuous basis. How- ever, during actual operation in a user's facility, the user typically may be expected to install an automated chem- ical feed system. In this case, the cost of the technology should represent the typical use scenario. The ECHOS volumes Environmental Remediation Cost Data 2001— Assemblies Cost Book and Environmental Remediation Cost Data 2001—Unit Cost Book published by R.S. Means Company, Inc., with Talisman Partners, Ltd., are good references for supplementing the cost data col- lected during the ETV demonstration for items such as pumps, piping, instruments, and tanks. These volumes contain detailed unit price estimates of more than 4,000 assembly cost elements for labor, site demolition, site preparation, site improvement, site civil/mechanical util- ities, site electrical utilities, and environmental restora- tion activities. Other cost data books published solely by R.S. Means Company that pilots may find helpful include: • Means Building Construction Cost Data 2001 • Means Electrical Cost Data 2001 • Means Facilities Construction Cost Data 2001 • Means Mechanical Cost Data 2001 • Means Plumbing Cost Data 2001. These cost guides can be used by pilot managers to save time in researching the cost of many of the periph- eral equipment and materials needed for the installation and operation of the technology by a typical user. The prices of materials, labor, and equipment within these databases have been compiled based on a large num- ber of quotes from different manufacturers and can be used in the absence of direct quotes from the manufac- turers of such peripherals. Other Cost Estimation References Waste Treatment Technologies United States Environmental Protection Agency. 1995. Detailed Costing Document for the Centralized Waste Treatment Industry. Office of Water. EPA-821-R-95-002. January. Air Pollution Control United States Environmental Protection Agency. 1996. OAQPS Control Cost Manual, Fifth Edition Office of Air Quality Planning and Standards, Research Triangle Park, NC. EPA-453-B-96-001. February. Process and Utility Industries American Association of Cost Engineers (AACE, Inc.). 1990. AACE Recommended Practices and Standards for Cost Estimation, Cost Control, Planning and Sched- uling, and Project Management. November. 29 ------- Appendix E Time Value of Money Table 30 ------- Table E-1. Present Value of Annuity Factors* Calculated for Different Discount Rates (r) and Number of Years (n) Discount Rate (r) Number of Years (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 22 24 26 28 30 0.5% 0.99502 1.98510 2.97025 3.95050 4.92587 5.89638 6.86207 7.82296 8.77906 9.73041 10.67703 11.61893 12.55615 13.48871 14.41662 15.33993 16.25863 17.17277 18.08236 18.98742 20.78406 22.56287 24.32402 26.06769 27.79405 The numbers in this 1% 0.99010 1 .97040 2.94099 3.90197 4.85343 5.79548 6.72819 7.65168 8.56602 9.47130 10.36763 1 1 .25508 12.13374 13.00370 13.86505 14.71787 15.56225 16.39827 17.22601 18.04555 19.66038 21 .24339 22.79520 24.31 644 25.80771 1.5% 0.98522 1 .95588 2.91220 3.85438 4.78264 5.69719 6.59821 7.48593 8.36052 9.22218 10.07112 10.90751 11.73153 12.54338 13.34323 14.13126 14.90765 15.67256 16.42617 17.16864 18.62082 20.03041 21 .39863 22.72672 24.01584 table represent the 2% 0.98039 1.94156 2.88388 3.80773 4.71346 5.60143 6.47199 7.32548 8.16224 8.98259 9.78685 10.57534 1 1 .34837 12.10625 12.84926 13.57771 14.29187 14.99203 15.67846 16.35143 17.65805 18.91393 20.12104 21.28127 22.39646 values 3% 0.97087 1.91347 2.82861 3.71710 4.57971 5.41719 6.23028 7.01969 7.7861 1 8.53020 9.25262 9.95400 10.63496 1 1 .29607 1 1 .93794 12.56110 13.16612 13.75351 14.32380 14.87747 15.93692 16.93554 17.87684 18.76411 19.60044 n ,. Of V / 4% 0.96154 1 .88609 2.77509 3.62990 4.45182 5.24214 6.00205 6.73274 7.43533 8.11090 8.76048 9.38507 9.98565 10.56312 11.11839 1 1 .65230 12.16567 12.65930 13.13394 13.59033 14.45112 15.24696 15.98277 16.66306 17.29203 5% 0.95238 1 .85941 2.72325 3.54595 4.32948 5.07569 5.78637 6.46321 7.10782 7.72173 8.30641 8.86325 9.39357 9.89864 10.37966 10.83777 1 1 .27407 1 1 .68959 12.08532 12.46221 13.16300 13.79864 14.37519 14.89813 15.37245 6% 0.94340 1 .83339 2.67301 3.4651 1 4.21236 4.91732 5.58238 6.20979 6.80169 7.36009 7.88687 8.38384 8.85268 9.29498 9.71225 10.10590 10.47726 10.82760 11.15812 1 1 .46992 12.04158 12.55036 13.00317 13.40616 13.76483 7% 0.93458 1 .80802 2.62432 3.38721 4.10020 4.76654 5.38929 5.97130 6.51523 7.02358 7.49867 7.94269 8.35765 8.74547 9.10791 9.44665 9.76322 10.05909 10.33560 10.59401 11.06124 1 1 .46933 1 1 .82578 12.13711 12.40904 8% 0.92593 1 .78326 2.57710 3.31213 3.99271 4.62288 5.20637 5.74664 6.24689 6.71008 7.13896 7.53608 7.90378 8.24424 8.55948 8.85137 9.12164 9.37189 9.60360 9.81815 10.20074 10.52876 10.80998 11.05108 1 1 .25778 10% 0.90909 1 .73554 2.48685 3.16987 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457 6.49506 6.81369 7.10336 7.36669 7.60608 7.82371 8.02155 8.20141 8.36492 8.51356 8.77154 8.98474 9.16095 9.30657 9.42691 12% 0.89286 1 .69005 2.40183 3.03735 3.60478 4.11141 4.56376 4.96764 5.32825 5.65022 5.93770 6.19437 6.42355 6.62817 6.81086 6.97399 7.11963 7.24967 7.36578 7.46944 7.64465 7.78432 7.89566 7.98442 8.05518 15% 20% 25% 0.86957 0.83333 0.80000 1 .62571 1 .52778 1 .44000 2.28323 2.10648 1.95200 2.85498 2.58873 2.36160 3.35216 2.99061 2.68928 3.78448 3.32551 2.95142 4.16042 3.60459 3.16114 4.48732 3.83716 3.32891 4.77158 4.03097 3.46313 5.01877 4.19247 3.57050 5.23371 4.32706 3.65640 5.42062 4.43922 3.7251 2 5.58315 4.53268 3.78010 5.72448 4.61057 3.82408 5.84737 4.67547 3.85926 5.95423 4.72956 3.88741 6.0471 6 4.77463 3.90993 6.12797 4.81219 3.92794 6.19823 4.84350 3.94235 6.25933 4.86958 3.95388 6.35866 4.90943 3.97049 6.43377 4.93710 3.98111 6.49056 4.95632 3.98791 6.53351 4.96967 3.99226 6.56598 4.97894 3.99505 ------- Appendix F Unit Annualized Cost The unit annualized cost is calculated by dividing the total annualized cost by the annual throughput (Equa- tion F-1). As described in Section 4.1, the total annual- ized cost of a technology application is calculated by summing the annualized capital investment and the annual O&M costs associated with a technology for a given design basis. Unit annualized cost= Total annualized cost Annual throughput (F-1) The annual throughput could be the gallons of waste- water treated, the number of samples analyzed, etc. Unit annualized cost is easy to understand and provides a quick way of comparing several technologies. For example, in the case of a new field characterization tool, potential users could quickly compare the cost per sam- ple for the new field screening tool with the cost per sample incurred by sending samples to an off-site labor- atory for analysis. However, because unit annualized cost depends on the design basis (i.e., equipment ca- pacity, annual throughput), unit annualized cost also is the most likely to be misinterpreted. For example, a new water treatment unit may claim to treat water at a unit cost of $0.50/gal. But this may be based on the assump- tion that the new equipment will be sized and applied to a plant that treats 1,000,000 gal of water per year. For smaller users, who do not have the benefits of such economies of scale, the unit costs could be much higher. If the unit annualized costs of the two technologies are being compared, the pilot managers should ensure that estimates for both technologies were prepared on the same design basis. Potential users may take the unit annualized cost num- ber presented for the ETV technology and extrapolate it in a proportionate (linear) fashion to various levels of throughput. One way to avoid this misinterpretation is to present a graph of unit annualized cost versus through- put. Instead of presenting a single unit cost number, this graph allows potential users to estimate costs and com- pare technologies based on their anticipated throughput. Figure F-1 is an illustration of unit annualized cost ver- sus throughput. Capacity of System 500 1,000 1,500 Throughput (gal/day) 2,000 Figure F-1. Illustration of Unit Annualized Cost versus Throughput 32 ------- |