ENERGY AUDIT

Unit – 4

ECE-2
IV-II
 Syllabus
Economic Aspects
Costing Techniques – cost factors – break-even
charts – sources of capital and hire charges -
capital recovery – depreciation – budgeting and
standard costing – charging energy – cash flow
diagrams and activity charts.

Text Books:
1. Energy management by W.R. Murphy & G. Mckay Butter worth,
Elsevier publications. 2012
2. Hand Book of Energy Audit by Sonal Desai- Tata McGraw hill.
Course Objectives:
To understand energy efficiency, scope, conservation and
technologies.

To understand energy conservation in HVAC systems.

To design energy efficient lighting systems.

To estimate/calculate power factor of

systems and propose suitable
compensation techniques.
To calculate life cycle costing analysis and return on
investment on energy efficient technologies.
Course Outcomes:
After the completion of the course the student should
be able to:
 Explain energy efficiency, conservation and various
technologies.
 Explain energy conservation in HVAC systems.
 Design energy efficient lighting systems.

 Calculate power factor of systems and

propose suitable compensation techniques.
 Calculate life cycle costing analysis and return on
investment on energy efficient technologies
Introduction
Energy Audit Procedures

 An energy audit is a procedure for assessing how your

business uses energy and identifying ways to increase
efficiency and save money.

 A typical audit entails collecting historical data of costs and

consumption for all energy sources, comparison to benchmarks
and identification of opportunities for improvement and
potential solutions.

 The audit procedure can be repeated after implementing

energy-saving projects to verify whether the intended savings
were achieved.
What is a Commercial Energy Audit?
 An energy audit determines the most effective low-cost means
of reducing energy use.

 A commercial energy audit provides a clear breakdown of how,

where, and when electricity is used in your building, as well as
the current electric costs and how electric rates apply to the
facility and its uses.

 It presents a specific list of potential modifications with

engineering and financial analyses that, if implemented, will yield
energy savings.

 A ranking is applied to the recommended modifications based

on financial and other relevant benefits and trade-offs.
Three levels of Energy Audit for Cost Analysis
Level 1 – Walk-through Analysis
Yields the most obvious and un-quantified assessment of
quick-hitter changes that will help with energy costs.

Level 2 – Energy Survey and Engineering Analysis

Provides prioritized, quantified recommended modifications
sufficient for making business decisions and budgeting for
each recommended modification.

Level 3 – Detailed Analysis of Capital-Intensive Modifications

Presents elaborate project cost and saving calculations with
a high level of confidence sufficient for capital investment
decisions.
How much will a commercial Energy Audit cost?
To put it simply, it depends on……… what business is being
audited, and why is it being audited?

Level of Energy Audit

Depending on which level is recommended for the
business, there is possibility for additional phases to address
specific projects based upon the findings of the previous level.

Size of Facility
Buildings with more square feet of floor space and
multiple floors will cost more to have audited than a small
facility with less area to assess.
Type of Business
A big energy user, such as a manufacturing facility that
must light a large space with multiple machines running
simultaneously, will cost more money than a small retail space.

Scope of Assessment
An audit of the interior of a single building will cost less
than an audit of a campus—multiple buildings needing
assessments of the interior and exterior of each building.
Costing Techniques
 Based on strategies applied for energy auditing, energy
costing is essential before we generate it, transmit it decide to
sell it through distributors for utilization in various sectors.

For any business, the first step before selling the products is
to calculate the cost.

This helps in strategically planning the production and

managing the finances.

To do so, the companies follow several processes depending

on the needs and methods.
This leads to the facilitation of making managerial decisions for
cost accounting.

However, before knowing the techniques of costing and types of

costing methods, it is essential to understand the definition of
cost accounting and its components. Let us help you understand
these concepts better.

What is Cost Accounting?

Cost accounting is defined as the process of taking into
account all the costs involved in the production, processing and
selling of any projects or products.

Under this, a complete note is taken along with the

analysis of the process. Cost accounting plays a key role in
helping the company make cost-effective decisions.
Different Techniques of Costing
1) Marginal Costing
The premise of marginal costing is to divide all costs into fixed
and variable costs.

Fixed costs are unrelated to production levels and as the name

implies, these costs stay constant regardless of manufacturing
volume.

Variable expenses fluctuate according to production levels.

They are proportionate in every way.

The variable cost per unit, on the other hand, remains constant.

In marginal costing, we solely take these variable expenses into

account when determining production costs.
2) Standard Costing
Standard costing is a process in which a company compares
the expenses incurred for the manufacture of goods to the
expenditures that should have been incurred.

In essence, it is a comparison of actual costs vs. conventional

expenses.

Here, variances are the discrepancies between the two.

3) Historical Costing
Historical costing is the process of determining and recording
costs after they have occurred.

It serves as a record of what has occurred and, as a result, is a

postmortem of the actual costs.
4) Direct Costing
All direct expenses are charged to operations, processes, or
products, whereas all indirect costs are written off against
profits in the period in which they occur.

5) Absorption Costing
There is no distinction between fixed and variable costs in
absorption costing.

In addition, all costs, whether fixed or variable, are taken into
account when calculating the cost of production.

Full costing is another name for absorption costing.

6) Uniform Accounting
Uniform costing, unlike marginal costing, is not a different
approach to cost accounting.

It is one of the most recent costing and cost control

approaches.

It refers to all or many units in the same industry accepting

and adhering to the same costing concepts and methods by
mutual agreement.
What is Cost Factor?
 Factor cost or cost factor can be defined as the total cost
of all the factors of production in manufacturing a good.
 Factors of production include capital, land, labor, and
enterprise.
 It does not account for the subsidies received and taxes
paid. Hence, it is not the same as the market price.
Formula
Let’s look at a few measures of national income at factor cost.

Gross Domestic Product at factor cost

This is a commonly used parameter and helps calculate the output in
terms of factors of production.
GDP–FC = GDP–MP + Subsidies – Indirect Taxes

Net National Product at factor cost

This measures the total value of the cost of factors of production and
net factor income abroad, i.e., the amount earned by domestic citizens
overseas.
NNP–FC = NNP–MP – Indirect Taxes

Net Value Added at factor cost

It accounts for the value of commodities and services produced in a
country but excludes taxes and depreciation.
NVA–FC = GVA – Depreciation + Subsidies – Indirect Taxes
 But, we must understand some concepts before using these
formulas to arrive at the final result.

Gross value added (GVA) denotes the value of all goods and services
produced in an economy.

GVA = Final value – Value of intermediate consumption

Gross domestic product at market price (GDP-MP) is the final value of
the economic activities in a country at the price at which consumers
buy them, hence market prices. It is a widely used measure.

GDP-MP = GVA x MP
Net national product at market price (NNP-MP) is the final value of
economic activities a country produces domestically and
internationally, with less depreciation.

NNP-MP = GNP-MP – Depreciation

GNP-MP = GDP-MP + Net factor income abroad
Break-Even Charts

A break-even chart is an economic diagram to study

the relationships of cost, volume and profits.

 A break-even chart is a graphical representation of

marginal costing.

 It is considered to be one of the most useful graphic

presentation of accounting data.

 It is a readable reporting device that would otherwise

require voluminous reports and tables to make the
accounting data meaningful to the management
 This chart shows the inter-relationship between cost, volume
and profit.

 It shows the break-even point and also indicates the

estimated cost and estimated profit or loss at various volumes
of activity.
Assumptions Underlying Break Even Chart:

 All costs can be separated into fixed and variable costs.

 Fixed costs will remain constant and will not change

with the change in level of output.

 Variable costs will fluctuate in the same proportion in

which the volume of output varies.

 Selling price will remain constant even though there

may be competition or change in volume of production.
The number of units produced and sold will be the
same so that there is no opening or closing stock.

 There will be no change in operating efficiency.

 There is only one product or in the case of many

products, product mix will remain unchanged.

 Product specifications and methods of manufacturing

and selling will not change.
Advantages of Break Even Charts:

 Information provided by the break even chart can be

understood by the management more easily than
contained in the Profit and Loss Account and the Cost
Statements.

 A break even chart is useful for studying the

relationship of cost, volume and profit for taking
managerial decisions.

 It is helpful in the determination of sale price which

would give desired profits.
 It is helpful in knowing the effect of increase or
reduction in selling price.

 The chart is very useful for forecasting costs and

profits at various volumes of sales.

A break even chart is a tool for cost control

because it shows the relative importance of the
fixed costs and the variable costs.

Profitability of various products can be studied

with the help of these charts and a most profitable
product mix can be adopted.
 The profit potentialities can be best judged from a
study of the position of the break even point and the
angle of incidence in the break even chart.

 Low break even point and large angle of incidence in

the break even chart indicate that fixed costs are low and
margin of safety is high. It is a sign of financial stability.
Limitations:

 A break even chart is based on a number of assumptions

which may not hold good.

 Fixed costs vary beyond a certain level of output.

 Variable costs do not vary proportionately if the law of

diminishing or increasing returns is applicable in the
business.

Law of Diminishing returns states that “as investment

in a particular area increases, the rate of profit from that
investment after a certain point cannot continue to
increase if other variables remain constant”.
 Law of increasing returns also called diminishing costs
states that “after reaching a certain capacity of utilisation,
an increase in the factor of production will result in
decrease of the cost per unit”.

Sales revenues do not vary proportionately with changes in

volume of sales due to reduction in selling price as a result of
competition or increased production.

 A limited amount of information can be shown, in a break

even chart.

A number of charts will have to be drawn up to study the

effects of changes in fixed costs, variable costs and selling
prices.
The effect of various product mixes on profits cannot be”
studied from a single break even chart.

A break even chart does not take into consideration capital

employed which is a very important factor in taking
managerial decisions.

Therefore, managerial decisions on the basis of break even

chart may not be reliable.
Capital Sources/Sources of Capital
 The most important elements of a clean energy/energy
lending program are the capital source and the capital
provider.

 The capital source provides the funding to pay for clean

energy/energy projects, and the capital provider manages
those funding sources.

 For example, a bank might use its customers' deposits as a

capital source, but as the capital provider, the bank manages
the investment of that capital.
Capital sources and providers can be from one or a
combination of the following:
Bonds
Bank capital
Credit union capital
Foundation grants and funds
Community Reinvestment Act funds
Federal funds
State government funds
Utility system benefit charges and ratepayer funds
Local government general funds
Emissions allowance revenues
BONDS
 Bonds consist of many different types of funds that are too
numerous to describe here.

 Some of the more common types of bonds are tax-exempt

bonds that can fund investments in government facilities or,
subject to many limitations, investments in certain private
activities.

BANK CAPITAL
Banks can invest their own depository capital in clean energy
lending projects if they feel the return is sufficient, given their
understanding of the risk involved in the investment.
CREDIT UNION CAPITAL
 Like banks, credit unions invest their capital in projects for
which they feel the return will justify the risks as they
understand them.

 Credit unions tend to be smaller than most national banks

and are closely tied to particular communities or constituents.
FOUNDATION GRANTS AND FUNDS
Community development financial institutions (CDFIs) receive
foundation grants to cover their operations and make loans to
businesses, nonprofits, and homeowners in the community.

COMMUNITY REINVESTMENT ACT FUNDS

Commercial financial institutions often meet their regulatory
responsibilities under the federal Community Reinvestment Act
by placing funds at a low interest rate with CDFI lenders.

FEDERAL FUNDS
Federal funds, for example any national government can
provide federal finance facilities made available for energy
efficiency upgrades and clean energy deployment .
STATE GOVERNMENT FUNDS
 Government entities can make loans and have often done so.

 For instance, some state energy offices created clean energy

lending programs in the late 1980s and early 1990s using
allocations of funds through certain legal settlements.

 Other state financing authorities operate lending programs

using a number of different capital sources.

In some cases, state treasurers may be willing to invest a

portion of their capital in energy efficiency lending.
UTILITY SYSTEM BENEFIT FUNDS
 Public utility commissions will often require utilities to collect
funds from their bill payers to support clean energy programs,
including financing programs.

 These funds can provide direct loan capital, credit

enhancements, technical assistance, rebates, and other support
for energy efficiency and renewable energy projects.
LOCAL GOVERNMENT GENERAL FUNDS
Tax revenues can sometimes capitalize on a clean energy or solar
energy loan program.

EMISSIONS ALLOWANCE REVENUES

States that receive revenues from participating in a cap-and-
trade structure (e.g., the Regional Greenhouse Gas Initiative) can
use those funds to seed clean energy finance programs.
Hire Charges

 They means all the charges that includes operator costs,

Waiver Fee and other fees (as applicable) charged in respect of
the hire of the Plant and Equipment.

 Hire Charges means the rates set out in the Plant Hire Order.

 Hire Charges for Tools & Plants Machinery, if issued

Departmentally, will be recovered from the Contractor at such
rates as will be fixed by the Engineer-in-charge.
What Is Capital Recovery?
Capital recovery is a term that has several related meanings
in the world of business.

It is, primarily, the earning back of the initial funds put into
an investment.

When an investment is first made in an asset or a company,

the investor initially sees a negative return, until the initial
investment is recouped.

The return of that initial investment is known as capital

recovery. Capital recovery must occur before a company can
earn a profit on its investment.
Capital recovery also happens when a company recoups the
money it has invested in machinery and equipment through asset
disposition and liquidation.

The concept of capital recovery can be helpful to a business as

it decides what fixed assets it should purchase.

Separately, capital recovery can be a euphemism for debt

collection.

Capital recovery companies obtain overdue payments from

individuals and businesses that have not paid their bills.

Upon obtaining payment and remitting it to the company to

which it is owed, the capital recovery company earns a fee for its
services.
A capital recovery analysis is typically done before a company
makes a substantial new purchase.

 Initial cost, salvage value, and projected revenues factor into a

capital recovery analysis when a company is determining
whether and at what cost to purchase an asset or invest in a new
project.

KEY TAKEAWAYS
Capital recovery refers primarily to recovering initial funds put
into an investment through returns from that investment, making
it a break-even measure.

It can also refer to recouping invested funds through the

disposition of assets.

The term can also refer to corporate debt collection.

What is Depreciation?
The term depreciation refers to an accounting method used to
allocate the cost of a tangible or physical asset over its useful life.

Depreciation represents how much of an asset's value has been

used.

It allows companies to earn revenue from the assets they own
by paying for them over a certain period of time.

Because companies don't have to account for them entirely in

the year the assets are purchased, the immediate cost of
ownership is significantly reduced.

Not accounting for depreciation can greatly affect a

company's profits.
 Companies can also depreciate long-term assets for both tax
and accounting purposes.

 Depreciation can be compared with amortization, which

accounts for the change in value over time of intangible assets.

“Amortization is an accounting method for spreading out

the costs for the use of a long-term asset over the expected
period the long-term asset will provide value”.
KEY TAKEAWAYS
Depreciation ties the cost of using a tangible asset with the
benefit gained over its useful life.

There are many types of depreciation, including straight-line

and various forms of accelerated depreciation.

Accumulated depreciation refers to the sum of all depreciation

recorded on an asset to a specific date.

The carrying value of an asset on the balance sheet is its

historical cost minus all accumulated depreciation.

The carrying value of an asset after all depreciation has been

taken is referred to as its salvage value.
CHARGING ENERGY
Unlike other commodities as electricity cannot easily be stored, the
market cannot alleviate price fluctuations by drawing down
reserves and so inconsistencies in electricity supply and demand
can create more frequent or more dramatic price changes.

The electricity market tends to follow two discrete cycles:

The seasonal cycle: Demand for energy rises during winter (peak
heating season) and summer (peak cooling season) and drops
during spring and autumn.

The energy market cycle: As in other openly traded markets, energy

prices tend to rise and fall over the course of four- to eight-year
cycles with phases of flat and low, rising, flat and high, and falling
prices.
What Drives Energy Prices
Weather: weather can change unexpectedly and cause unforeseen
variances in demand.

Extreme Weather:
Catastrophic weather events such as hurricanes, floods and
blizzards. When forecasters anticipate extreme weather, market
prices typically take the probability of such events into account.
Prices are also subject to change in the aftermath of extreme
weather when actual damage and impact are clear.
Government Regulations:
 When regulatory agencies propose or introduce changes, the
wholesale market may respond with changes in pricing.
 In addition, regulations affecting process fuel industries may
also resonate on the electricity.

Outages:
 Power plants periodically shut down or slow production to
complete facility maintenance.
 Either scheduled outages or unexpected closures can impact
prices.

Source Fuels:
The electricity markets are swayed by the supply, demand and
pricing in other source fuel markets, including crude oil and coal.
Geopolitical Events:
In regions that import or export natural resources, events such as
political unrest, war, and hostage crises, can affect the energy
market.

Typically, these events impact the market immediately, which can

affect short-term prices.

Protracted events produce prolonged uncertainty, causing

wholesale market prices to escalate long term.

Conversely, trade agreements that open a new stream of fuel

supply to the global market can create advantageous prices.
Cash-flow diagram

A cash-flow diagram is a financial tool used to represent

the cash flows associated with a security, "project", or business.

 As per the records, cash flow diagrams are widely used in

structuring and analyzing securities, particularly swaps.

They may also be used to represent payment schedules

for bonds, mortgages and other types of loans that were used in
energy management.
Activity Charts