Discounted cash flow

HOW SHOULD energy-saving investment opportunities be evaluated? I recommend discounted cash-flow (DCF) rather than the commonplace, but somewhat crude, metric of simple payback period. DCF will give you two measures of a project’s value:

1. Internal rate of return (IRR) is the rate of interest you’d need to get from investing your cash in something else, to make that the more profitable choice; and
2. Net present value (NPV) shows you what lump sum today would equal the lifetime profit from the project, assuming that you place relatively less weight on future savings the further off they are.

To carry out a DCF calculation for an energy-saving project you start with year-by-year estimates of costs and savings. In the simplest model there is a single cost item in the first year and equal annual savings thereafter; but with some projects there will be costs in future years, or the savings may be predicted to vary in future. The screenshot below shows an annotated example in an Excel spreadsheet. It evaluates a heat-recovery system which, as well as an up-front investment cost, will incur annual electricity costs and maintenance charges (all outgoings being shown in red):

The IRR in this example is 54.7%.

The NPV depends on what you choose as a ‘test rate of discount’. In theory this would be the interest you pay on borrowings, although in practice it is often set a lot higher as a hedge against perceived risk. The example above uses 16% and you can see in row F the discount factors that result. In Year 3 the factor is 0.641, meaning that the savings of £31,332 expected that year are only worth £20,073 in today’s terms.  In aggregate the NPV is £91,444. That’s how much better off you would be than the option of doing nothing.

Note that with a lower test rate of discount, the discount factors in row F increase, which raises the net present value.

A DCF workbook is available to download here. It includes the annotated example shown above, a live calculation that you can use for experimentation and familiarisation, and an unlocked version which you can copy and adapt.

Product guidance

The Government’s Energy Technology List (ETL) is a highly recommended resource. The ETL was devised to complement the Enhanced Capital Allowances scheme (a meagre tax concession for installing energy-efficient equipment) but it is useful in its own right because products cannot get onto the list without rigorous scrutiny from expert assessors. This makes it useful for filtering out bogus products.

Of course not every manufacturer, supplier or product that could be on the list is necessarily there. But the ETL itself, which lists products, is complemented by an Energy Technology Criteria List which lays down the criteria for inclusion within each product category. This will help you establish what to look for if you are doing your own evaluation of unlisted products (or if you just want to know what attributes are important, or what performance thresholds separate good products from the rest).

The ETL website has recently been revamped and can be accessed at https://etl.beis.gov.uk/.

Energy jargon buster

Absorption chiller: Cooling apparatus driven by heat alone

Accuracy: Degree to which a measurement reflects actual reality

AHU: See Air handling unit

Air curtain: Sheet of heated air projected across an open doorway to prevent discomfort from draughts; usually in retail premises

Air handling unit: Air handling unit:  assembly of fan, filters, etc  for supplying air to or extracting air from a ducted distribution system

Ammeter: Instrument for measuring electric current

amp (A): Unit of measurement of electric current

Anemometer: Device to measure air velocity

Audit, energy: Systematic review of energy-using systems and associated procedures with a view to identifying opportunities for energy saving

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Ballast: Component of electrical control gear in a fluorescent light fitting.

BEMS: Building energy management system:  computerised control and monitoring equipment for regulating time and temperature schedules etc

BEMS: See Building energy management system

Blending valve: See Mixing valve

Blowdown: Removal of a fraction of boiler water to enable removal of sludge and dilution of dissolved solids

BMS: See Building energy management system

Building energy management system: Computer system which controls the operation of heating, ventilation, air conditioning, lights and other energy services in buildings

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Calorific value: Energy content of fuel per unit mass or volume

Capacity charge: Rental paid for an electrical supply connection capable of carrying a certain current

CFL: Compact fluorescent lamp:  plug-in substitute for a light bulb.

Chiller: Machine for cooling air, water, etc

CHP: See Combines heat and power

CNG: Compressed natural gas

Code 5: In UK context, a meter for registering half-hourly electricity consumption for loads above 100 kW

Coefficient of performance: In refrigeration systems, the ratio of output cooling power to input electrical power.

Cogeneration: See Combined heat and power

Colour rendering: How effective a given light source is at allowing discrimination between colours

Colour temperature: Numerical value describing a light source in terms of how ‘warm’ or ‘cool’ it appears

Combined heat and power: Electricity generation in which part of the waste heat is put to use

Compensator: Control device to regulate circulating water temperature in a heating system, reducing temperature when heat demand is low and vice versa

Condensate: Water resulting from the cooling of steam

Condenser: In a refrigeration circuit, the component through which heat is rejected.

Conduction losses: Heat losses through the walls, roof, floors, doors, windows and other solid elements of the building envelope.

Constant temperature: In heating system, regime in which circulating water is maintained at a fixed temperature and control of heat output is effected by regulating flow to heat emitters

Convection losses: Heat lost in air leaving the building through draughts and deliberate ventilation

Convector, fan assisted: Heat emitter on a central heating system in which a fan blows room air across a heat exchanger

Convector, natural: Heat emitter on a central heating system, usually enclosed in a cabinet with inlet and outlet vents, which warms room air without the assistance of a fan

Cooling tower: Device in which water used for cooling something gives up some of its heat to the air, enabling it to be recirculated in a closed loop. May be ‘dry’, employing a sealed heat exchanger, or ‘wet’ in which case evaporation of the water increases the cooling effect

CoP: See Coefficient of performance

Coriolis meter: Technology for measuring the flow rate of for example dust-laden gases; the flow rate affecting the resonant frequency of a U-shaped section of vibrating pipe

Correction factor: In the context of natural gas, the factor by which its metered volume must be multiplied to account for its pressure and temperature being other than that assumed as standard

CT: In heating system:  see Constant temperature;  in metering see Current transformer

Current: Rate of flow of electrical energy

Current transformer: Device placed around one conductor of an electrical supply cable to convert the current flowing in it into a safely-measurable signal for input to a meter

Cusum: Cumulative sum of deviance

CV: See Calorific value

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Damper: Flap used to control air flow in a duct

Data logger: Device for recording data from energy meters, temperature probes and other instruments

Dead band: Switching differential between for example the activation of heating and cooling in a space; sometimes in a thermostatic control the spread between temperatures that trigger changes of state each way between on and off.

Degree days: Measure of how hot or cold the weather was over a given interval, typically a week or month, in a given location or region. Used in an analogous fashion to production output as the driving factor for heating opr air-conditioning energy consumption.

Deliquescent: Dessicant material which dissolves in the water it absorbs

Delta: Connection method for three-phase devices where the load is connected from phase to phase without a neutral (cf star)

Demand, maximum: See Maximum demand

Dessicant: Material which absorbs water vapour; used for example in compressed-air dryers

Deviance : Difference between actual and expected consumption

Dew point: Air temperature at which moisture will begin to condense; also known as saturation temperature

Dichroic: Attribute of a filament spotlamp whereby the reflector allows heat to escape through the back

Direct-fired heater: Heater in which fuel is used directly, as distinct from a heat emitter on a hot-water or steam circuit with centralised combustion.

Discounted cash flow: Method of accounting for future expenditure and receipts which explicitly recognises that postponing a cash flow diminishes its value in present terms

Driving factor: Recurrent and measurable determinant of energy consumption, such as production output or degree-day value.

Dry cycling: Excessive starting and stopping of boilers, especially when supporting each other’s standing losses

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Economiser: Heat recovery unit specifically for preheating boiler water from heat in exhaust gases

Efficiency: The ratio of useful output to energy input

Electronically-commutated motor: machine, typically for DC or single-phase AC supplies, which turns a permanent-magnet rotor by synthesising of a rotating magnetic field

Embedded generation: Electricity generator owned and operated by the organisation which uses the output

EMS: See Building energy management system

Energy: Electricity, gas, oil, steam, compressed air or other like medium

Energy performance coefficient: ratio of actual to expected consumption; a numerical index of energy performance much less susceptible to distortion than specific energy ratio

Enthalpy: Total energy content of a fluid, representing both thermal and mechanical energy that could be extracted from it

Enthalpy control: Control regime in air-conditioning systems to optimise the energy requirement for regulating both humidity and temperature

Evaporator: In a refrigeration circuit, the component through which heat is absorbed

Expected consumption: rational estimate, either based on the known previous relationship between consumption and one or more relevant driving factors , or calculated from first principles

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Far infra-red: ill-defined term most commonly associated with fake energy-saving products; usually denoting heat radiated from surfaces at no more than about 80°C

Flash steam: Steam resulting when hot condensate is dropped to a lower pressure

Flue: Duct through which combustion products pass en route to the chimney

Flue gas: Combustion products

Fluidised bed: Combustion not in an open flame but within a bed of loose powder

Forced draught: Fans which drive combustion air into a boiler (cf Induced draught)

Free cooling: Cooling effect achieved by drawing in cold fresh air rather than chilling recirculated air

Frost protection: Automatic application of heat to prevent freezing damage out of hours

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GCV: See Gross calorific value

Geothermal energy: Heat drawn from deep underground at sufficiently high temperature to be directly useable (cf Ground-source heat pump)

GLS: General lighting service:  conventional filament lamp

Gross calorific value: Total chemical energy content of a fuel, including what would be recovered by condensing the water vapour from the products of combustion. Also called higher calorific value. Cf Nett calorific value.

Ground-source heat pump: Reverse refrigeration cycle which cools the ground in order to provide a heating effect from its condenser (cf Geothermal energy)

GSHP: See Ground-source heat pump

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HCV: See Gross calorific value

Heat: Thermal energy which can raise something’s temperature, or melt or boil it.

Heat emitter: Radiator, convector, or other device delivering heat in a heating system

Heat exchanger: Device within which a hot fluid stream gives up heat to a cold stream while maintaining separation between the two

Heat map: Graphical display of profile data in which for example demand levels are depicted as colour contours on a matrix in which each column represents one day, midnight to midnight.

Heat pipe: Closed length of tube containing a small charge of volatile liquid and a wick; transfers heat end to end through fluid boiling at one end and condensing at the other, returning via the wick

Heat pump: Refrigeration unit operated in reverse, providing heat at moderate temperature by cooling either the outside air or the ground nearby.

Heat wheel: Form of regenerative heat recovery in which the heat storage matrix is in the form of a wheel rotating continuously between the hot and cold streams.

hertz (Hz): Unit of measurement of frequency:  cycles per second

Higher calorific value: See Gross calorific value

Historical baseline performance characteristic: Performance characteristic which applied at the outset of the energy management campaign

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Incidental gains: Heat gains in a building arising from lights, equipment, uninsulated hot surfaces, occupants, sunshine etc..

Induced draught: Fans which draw exhaust gases from a boiler (cf Forced draught)

Inhibitor: Chemical additive in boiler water to reduce corrosion

Insulation: Material which reduces the conduction of heat

Inverter: Electrical device for converting direct to alternating current; component of a variable-speed drive

joule (J): Unit of energy: one watt-second

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kelvin: (K) unit of temperature difference

Landfill gas: Methane emanating from waste-disposal sites and collected as a fuel

Latent heat: Heat required to melt or vaporise a substance; or heat released when a vapour condenses or a liquid solidifies. Notwithstanding the release or absorption of heat, the change of state between liquid and solid or vapour occurs without a change of temperature.

Load factor: Ratio between actual output or input and the maximum theoretically possible with continuous operation at full output or input.

Logger: See Data logger

LPG: Liquefied petroleum gas

lumen: Unit of light output power

Luminaire: Light fitting including reflector, lamp holder, control gear and lens etc

lux: Measure of the light incident on a surface per unit area

LV: Low voltage

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M&T: See Monitoring and targeting

Maximum demand: In UK context, the peak electrical power drawn over any half-hour period in a month

Mercury discharge: Type of fluorescent lamp typically used for floodlighting

Metal halide: Type of filament lamp

Mixing valve: In a Variable temperature heating circuit, the valve which regulates flow temperature by blending water from the boiler(s) with cooler water returning from the heating system. Also called a three-port valve as it has two inputs and one output connection.

Monitoring and targeting: Systematic assessment of actual against expected consumption by means of weekly (usually) overspend league table augmented by analysis tools to assist in target-setting and diagnosis of abnormal performance.

Motorised valve: Valve actuated by an electric motor under the dictates of a control system

MV: See motorised valve

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Night blind: Insulating blind on chilled display cabinet to reduce cooling requirement out of hours,

NOx: Oxides of nitrogen generated as a by-product of combustion

NTP: Normal temperature and pressure:  reference used for correcting volumes and densities (0°C and 1.013 bar); cf STP, RTP

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Optimum start: Time-control regime which postpones startup, usually of heating boilers, to the latest possible time commensurate with achieving desired internal conditions at the required time.

Orifice plate: Restriction placed in a gas, air, or steam line to create a measurable pressure drop from which flow arte can be inferred

OSC: Optimum start control

Overspend league table: Weekly (usually) or monthly report in which deviations from expected consumption are ranked in descending order of excess cost.

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Passive infra-red: Technique for detecting the presence of people in a space

Performance characteristic: Mathematical relationship between energy consumption and one or more driving factors

Phase: Alternating-current electrical supplies are either single-phase (delivered through one pair of wires) or three-phase (delivered through three wires, the current waveform in each being one-third of a cycle behind or ahead of the others).

PIR: See Passive infra-red

Polyphase: arrangement of electrical supply in which (most commonly) three lines are energised by alternating current one-third of a cycle apart

Power:  Rate of flow of energy

Power factor: In alternating-current electrical supplies, the ratio of useful power delivered to the theoretical maximum possible for the given current and voltage

Precision: Degree of resolution in a measurement

Profile: Pattern of demand over a day, week, or other chosen interval.

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Radiant: Heat transfer without physical contact

Receiver: Pressure vessel for storing compressed air.

Recuperator: Heat-recovery device

Reflective: property of material e.g. aluminium foil which impedes the flow of radiated energy across a transparent medium

Refractory: High-temperature insulation found in furnaces and kilns

Regenerator: In heat recovery, a pair (usually) of heat stores which take it in turns to collect heat from a hot stream and return it to a cold stream

Regression line: Best-fit line through points on a scatter diagram

Relative humidity: The ratio between the amount of water vapour present in the air and the theoretical maximum at the prevailing temperature

Repeatability: Degree to which measurements vary consistently irrespective of accuracy

Rewind: Repair of electric motor by replacement of burned-out windings

RTP: Reference temperature and pressure used for correcting volumes and densities (25°C and 1.013 bar) cf NTP, STP

Run-around coil: Split heat-recovery system in which heat is recovered to an intermediate fluid circuit, allowing heat collection and delivery to be in different places

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Sankey diagram: Diagrammatic representation of energy flows through a process or organisation in which the magnitudes of flows are represented by the widths of pathways

Saturation temperature: See Dew point

SCADA: See Supervisory, control and data acquisition

Scatter diagram: Chart showing the relationship between one value and another:  commonly showing weekly energy use (vertical or x axis) against driving factor (horizontal or y axis)

Sensible heat: Heat which when added to or removed from a body, alters its temperature

Sequencing: Usually of boilers but also applicable to chillers, compressors, and other ganged utility equipment:  a control regime which regulates how many units are enabled so as to match the load.

Smart meter: Consumption meter which is capable of recording data at frequent intervals for onward transmission, normally with two-way communication to facilitate remote disconnection of the user, reporting, etc

Smoke pump: Device to measure the level of soot present in flue gases when testing oil and coal-fired appliances

SON: Sodium discharge lamp giving a pure yellow light (commonly used for street lighting)

Specific energy ratio: simple ratio of energy input to (usually) product output. Supposedly an indicator of energy performance but highly susceptible to distortion.

Specific heat: Property of a material expressing the amount of heat required to raise its temperature by one degree

Stack: Chimney

Stand-alone control: Time or temperature control device that operates independently (as distinct from an Outstation)

Standing loss: Incidental heat loss from equipment incurred regardless of demand

Star: Connection method for three-phase devices where the load is connected between each phase and neutral (cf delta)

STP: Standard temperature and pressure:  reference used for correcting volumes and densities (15.5°C and 1.013 bar); cf NTP, RTP

Sun pipe: Internally-reflective tube used to conduct daylight into an internal space where conventional rooflights cannot be used.

Supervisory, control and data acquisition: Computerised control and monitoring equipment for industrial process plant

Survey, energy: Review of energy-using systems with a view to identifying opportunities for energy saving

Synchronous motor: AC machine with permanent-magnet rotor which rotates exactly at supply frequency or submultiple thereof; absence of rotor winding giving reduced losses

For training in energy management topics see vesma.com/training

Target performance characteristic: Performance characteristic representing the best achievable consumption relative to appropriate driving factors

Tariff: Table of charges; typically understood as applying to supplies other than those negotiated under contract

TDS: See Total dissolved solids

Temperature: Measure of how hot something is

Thermocouple: Temperature-measuring device exploiting the small voltage developed when a junction between dissimilar metals is heated

Thermostatic radiator valve: Direct-acting device for regulating heat output from a radiator

Three-port valve: See Mixing valve and diverting valve

Total dissolved solids: Measure of the concentration of dissolved salts in boiler water

Trace heating: Heating applied to pipes in order to prevent the contents solidifying

Transformer: Device for converting alternating-current electricity from one voltage to another.

Turbine: Rotating device for converting (typically) steam into mechanical power; also found on a small scale as a fluid-metering technology

Two-port valve: Straight-through valve giving on/off or regulated flow

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U-value: Property of an element of the building envelope expressing how easily heat flows through it per square metre of surface area

Vapour-compression chiller: Cooling apparatus driven by mechanical power

Variable air volume: Regime for ventilation air distribution where the supply of cooling is regulated by changing the volume of air distributed

Variable refrigerant volume: Regime for regulating cooling power in an air conditioning system

Variable temperature: In heating system, regime in which the circulating water temperature is varied to limit heat output according to likely demand (see also Compensator)

Variable-speed drive: Electronic device which alters the mains frequency fed to an electric motor, causing it to rotate at a different speed

VAV: See Variable air volume

Venting: Removal of air from, for example, steam circuits

Venturi: Tapering constriction in pipework used as a means of inferring flow rate from the pressure drop in the throat

Viscosity: Property of a fluid which determines its resistance to flow

volt (V): Unit of measurement of electric potential or driving force

Vortex meter: Gas, air or steam meter in which flow rate is inferred from the frequency of eddies shed by the fluid passing over a bluff body

VRV: See Variable refrigerant volume

VSD: See Variable-speed drive

VT: See Variable temperature

watt (W): Unit of power