Product Life-Cycle Cost and Payback Period Analysis

The effects of energy efficiency standards on purchasers include a change in operating expense (usually decreased) of more efficient appliances or equipment and a change in the purchase price (usually increased). We analyze the net effect on purchasers by calculating the life-cycle costs (LCC) and payback period (PBP). 

Inputs to the LCC calculation include the cost to the purchaser of the installed equipment (purchase price plus installation cost), energy use, energy prices, repair costs, and maintenance costs, the lifetime of the equipment, and consumer discount rates. See the flowchart below.

We conduct LCC and PBP analyses by modeling both the uncertainty and variability in the inputs using Monte Carlo simulation and probability distributions. The Monte Carlo approach provides a significant advantage over other approaches (such as an approach using typical or average values to characterize inputs) by identifying the percentage of purchasers benefiting and burdened by a prospective standard.

Example LCC Calculation Flowchart

The Monte Carlo simulation is implemented by a computer model. Each Monte Carlo simulation would typically consist of 10,000 LCC and PBP calculations. Each calculation uses input values sampled from a probability distribution or defined as single point values. For example, probability distributions are used to characterize equipment lifetimes and discount rates, while point values may characterize the other LCC inputs. The analysis results are presented as a distribution of LCC values and summary statistics. The variability in energy use or annual energy consumption is also handled in this manner.

Analysis Example and Tool

A recent example of a life-cycle cost and payback period analysis is described in chapter 8 in the Final Rule Technical Support Document for Residential Central Air Conditioners and Heat Pumps. The associated Life-Cycle Cost Analysis spreadsheet may be found in the docket for Energy Conservation Standards for Residential Central Air Conditioners and Heat Pumps.

Related Publications

Fujita, K Sydny, and Jesse Strecker.Commercial, industrial, and institutional discount rate estimation for efficiency standards analysis Sector-level data 1998–2023. (2024). PDF

Franco, Victor H, Youness Bennani Smires, Jing Ke, Edward Cubero, and Alex Lekov. Estimating Residential Appliance Lifetime for Energy Efficient Policy Analysis. 2018 ACEEE Summer Study on Building Energy Efficiency. Pacific Grove, CA, 2018. PDF.