Calculating economics of HVAC systems

Codes and standards, equipment efficiencies, energy modeling, commissioning, energy-conservation incentive programs, and lifecycle cost analysis all play into determining the economics of HVAC systems. Included are key aspects a mechanical engineer may need to consider when specifying HVAC systems into new or existing buildings, with a focus on the economic analysis provided to the client.


This article is peer-reviewed.Learning objectives

  • Interpret the various factors that determine the capital and operating costs of HVAC systems.
  • Estimate the lifecycle cost of HVAC systems via economic studies.
  • Recall that commissioning, recommissioning, and retro-commissioning play into the overall cost of HVAC systems.

The economics of HVAC systems include capital costs and operating costs. The operating cost comprises energy consumption, maintenance and repair, recommissioning, replacement, and asset preservation. Lifecycle analysis factors in escalation and time cost of money over the study's period of time.

Educating the owner to understand the economics of HVAC systems is paramount to delivering an exceptional experience. The engineer should take the time to gather the owner's requirements, establish a method of decision making, and present HVAC system options in an effective manner.

Most building owners understand HVAC systems in terms of thermal comfort and that these systems cost money to operate. Some building owners understand that HVAC systems have a greater impact on the building asset value by regulating moisture, temperature, air pressure, and particulate filtration. Even fewer understand how much the HVAC systems impact their bottom line. It is the role of the engineering team to educate the owner's team on the economic impacts of HVAC systems. 

Engineering economics

Numerous articles and books have been written to guide engineers through the mathematical representation of HVAC economic analysis. Before we dig into the indirect cost impacts, we must review some of the basic concepts of the engineering economic process.

Lifecycle cost (LCC) = first cost + maintenance and repair + energy + water + replacement - salvage value

Figure 1: This image shows the installation of a new skylight on an existing building, a health care facility in Minnesota. Changes to an existing building’s envelope will impact the operation of the HVAC systems. All graphics courtesy: M.A. Mortenson Co.Often, engineers are asked to determine the best option between one or more HVAC system options. There are several ways to represent the results when comparing the lifecycle costs of two or more options. Simple payback, net savings, savings-to-investment ratio (SIR), adjusted internal rate of return (IROR), and discounted payback are all methods to measure an HVAC option's economic performance over time.

Simple payback (years) = (first cost difference) ÷ (annual operating savings cost difference)*

Lifecycle payback (years) = (first cost difference) ÷ (annual operating savings cost difference)**

Net savings ($) = HVAC base option LCC - HVAC option 1 LCC

SIR = (option 1 net savings) ÷ (option 1 first cost increase)

Adjusted IROR = (average annual operating cost savings)** ÷ (initial investment) 

* Does not factor in the time cost of money or maintenance/repair, replacement, or salvage value

** Accounts for time cost of money and maintenance/repair, replacement, and salvage value

What is deemed important?

Figure 2: This image shows the chilled water supply and return pipe located in a utility corridor of a data center.It is the design professional's responsibility to understand what is important to the building owner. An owner that has experience with the construction process will provide the owner's project requirements (OPR) document. Included within the OPR may be the minimum LCC payback and/or adjusted IROR. In the event the owner does not provide an OPR, the engineer will need to survey the stakeholders to gather the project requirements.

The economics of HVAC systems can be broken into two distinct buckets: capital expenditures (CAPX) and operating expenditures (OPEX). Building owners have varying expectations regarding the overall economic impact of HVAC systems. It is safe to say all owners care about CAPX; however, not all owners understand the impact of CAPX on the OPEX. Figure 3 shows the capital construction costs of a new office, hospital, and data center. Figure 4 shows the operating costs of the different energy-consuming systems for an office, hospital, and data center. Figure 5 is a summary sheet for the lifecycle cost analysis (LCCA) of a replacement central utility plant for a health care campus.

There is a balance between CAPX and OPEX for each project. Owners often have a threshold for spending CAPX to gain OPEX. The engineer will need to understand this balance and help the owner make decisions that align with the OPR. 

Energy code

At a minimum, the design professional must comply with the adopted local
energy code
. The HVAC systems that meet the energy code are considered the Figure 3: These pie charts represent the capital construction costs for an office building, hospital, and data center.base option. The energy code has evolved and become more stringent so that
brick-and-mortar and HVAC systems have become more interdependent. Simply using R-values without defining the construction materials when performing the energy model will not account for the floor, roof, columns, and envelope material characteristics.

The thermal mass, vapor barrier, and envelope leakage will affect the capacity, configuration, and performance of HVAC systems. Modeling of the HVAC system's energy consumption and peak demand should not omit the correct brick-and-mortar elements. An HVAC system that does not respond to the material characteristics of a building will underperform. An underperforming HVAC system will have an impact on energy consumption, premature equipment failure, and occupant discomfort.

The right size?

Figure 3: These pie charts represent the capital construction costs for an office building, hospital, and data center.Engineers spend time evaluating the building envelope construction, codes/standards, and OPR impacts to select the appropriate HVAC system configuration. In the early program/schematic design phase, engineers often will use rules of thumb to establish air handling system airflow, chiller plant capacity, and heating plant capacity. As the design of the building program progresses, engineers can start to develop block loads and room-by-room heating/cooling calculations.

Often, the initial HVAC equipment sizes are adjusted to satisfy the engineering-calculated heating/cooling peak demand. At this point, engineers will consider any diversity in operating the HVAC systems to represent real-life occupancy and program schedules. Once again, the HVAC equipment and distribution systems' capacities can be adjusted. At the end of the design-development phase, updated equipment selections are made and finalized.

Figure 3: These pie charts represent the capital construction costs for an office building, hospital, and data center.So what does this have to do with the economics of HVAC systems? The most direct answer is when the design process is accelerated or altered to omit the refinement of the HVAC systems, the system capacities may end up significantly oversized because they were selected on rule-of-thumb calculations and never adjusted for the refined load calculations and diversity of operation. The impact on the CAPX budget can be significant. The impact on OPEX will be problematic due to the operating limitations of the HVAC equipment. Short-cycling and unsatisfied hours of operation or underperformance of the HVAC system can create early equipment failure, inefficient operation (increasing operating expenses), and occupant discomfort. To assume this oversizing is a safety factor is not a prudent assumption.

Energy-conservation incentives

Utility energy-conservation incentive programs should not be overlooked.
Incentive programs often employ third-party engineers to evaluate annual
energy cost savings of HVAC options. In some utility territories, LCC payback calculations are performed by the local utility company or a third-party engineer hired by the local utility company.

The engineer should check with local natural gas and electric utility providers to see if their project qualifies for an incentive program. In recent years, incentives as large as $1 million have been paid to owners for implementation of energy-saving measures. Factoring these incentives into LCC analysis could make the difference in selecting a more efficient solution.

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