Types of Energy Audits and

Energy-Audit Methodology

Energy saving helps in two ways: protection of the environment and reduction
Ty in fuel bills. Energy audit is a key for developing energy management. It varies
widely from one organization to another and is a tailormade process for each
: end applicant. However, it typically involves one or more of the following:
1. Data collection and review
2. Plant surveys
3. Measuring instruments
4. Observation of processes
5. Data analysis
Therefore, an energy audit is a process to determine when, where, why, and how energy is used in
a plant or a building. Collection of this information helps identify the situation where there is a need
to improve energy efficency, decrease production cost, and reduce impact on the environment by
controlling the climate. Apart from the environment, the following also benefit by an energy audit.
1. Building owner
2. Goverment agency
3. Manufacturer
4, Utility company
5. Financial institutions
Normally, an energy audit is carried out by external agencies (BEE certified energy auditors); it is
recommended that a company/plant/building have its own energy cell with a qualified team of energy
managers and auditors, and possess measuring/survey instruments. By conducting the audit process
in industry, employees begin considering energy as a manageable expense and try to conserve it in
day-to-day actions.

CL} 2.1 DEFINITION OF ENERGY AUDIT

A simple definition of energy audit is “an energy audit is developing an understanding of the specific
energy consumption of a particular facility.”
As per the EC Act 2001, the definition of energy audit is “Energy audit means the verification,
monitoring, and analysis of use of energy including submission of technical reports containing
recommendations for improving energy efficiency with cost-benefit analysis and an action plan to
reduce energy consumption.”
 Types of Energy Audits and Energy-Audit Methodology 23

Thus, an audit performed, focuses on energy-saving technologies and capital improvements.

Audits performed in small industries and buildings reveal low-cost energy-saving options and
process/operation modifications.

C} 2.2 COMPANY/BUILDING WHERE ENERGY AUDIT IS PERFORMED

A system which is to be audited can be a company, industrial plant, or a building. It may be an

extensive multiplant and multiprocess industry (e.g., a state fertilizer company, a cement company,
etc.) or a limited single equipment or a process (e.g., a boiler, a textile plant, etc.) Chart 2.1 explains
the generic structure of an energy-consuming plant or a building. More complex plants/buildings
have many branches at various levels or a combination of plants and buildings, etc.

| Industry/Building

| Plant A/Ground Floor | Plant B/First Floor

Department Department Devacmert| en

A/Section | B/Section II

Process Process

Equipment
Equipment B Equipment A caupment | Equipment
A

Chart 2.1 Symbolic representation of the company or building where the audit is performed
Before performing an energy audit, the following steps are to be carried out:
1. Define the boundary of the applicant (company, building, or plant).
2. Select the convenient unit of energy measurement. As different types of energy flows will
be involved, select one common unit which makes energy balance easier, e.g., kWh or MJ.
3. Identify streams crossing the boundary, e.g., hot water supplied to the plant or chilled air
coming out of the plant, etc.
4. Identify energy conversion within and across the boundary.

L} 2.3 ENERGY-AUDIT METHODOLOGY

Out of three common resources entering to a plant or a building—energy, material, and labour—
energy is the foremost entity having the highest cost-reduction potential. As mentioned earlier, each
end user of an energy audit will have its own method of energy audit, but in the broad spectrum,
it can be divided as preliminary energy audit or detailed energy audit. Preliminary audit is also
known as walkthrough audit. Table 2.1 gives the primary differences between preliminary audit
and detailed audit.
24 Handbook of Energy Audit

Table 2.1 Preliminary and detailed audits

Preliminary audit (Walkthrough audit) Detailed audit

Fast process of existing data collection, e.g., collection Observe the parameters if metering devices are
of energy bill, gas bill, invoice. installed and if not, use measuring devices.
Check for steam, fluid, compressed air, chilled air, Apart from physical check, carry out energy and
fuel leak, damper position, etc. material balance for each stream and process.
Identify immediate and low-cost energy-saving areas, In addition to immediate and low-cost energy-
e.g., setting the thermostat on higher temperature in saving potential, work out vigorously for technology
air conditions, reducing lighting lamps, etc. change, retrofits, cost of change, or upgradation of
installation, etc.
Identify the areas where detailed energy audit is Carry out in-depth financial analysis of proposed
required like process modification, waste-heat changes. Suggest ESCOs.
utilization, etc.

Detailed audit is a comprehensive process of data collection and analysis followed by report
preparation. It is performed in multiple parts or phases like planning and organizing in the first
phase; data collection, energy balancing, and cost analysis in the second phase; and implementing
in the third phase.
Thus, a detailed audit is a systematic assessment of current energy-use practices from purchase to
end use. Similar to a financial audit, an energy audit tells us how energy is handled and consumed.
The audit process is divided into three phases, namely,
e Phase1 Preparation
e Phase2 Execution
e Phase3 Reporting
Chart 2.2 shows the flow diagram of a detailed audit process and each step followed by it. A
detailed discussion of each step of the audit process is described thereafter.
Phase | Audit Preparation
> Step 1: Defining Criteria for Performing Audit
Prior to starting an energy audit, setting the criteria for the audit will help auditors use their time
effectively and meet the needs of the organization where the audit has to be performed.
e Define the objective of performing the audit like reducing energy consumption, specific fuel
consumption, maximum demand, etc. Is future expansion plan or future increase in load
assessment part of the audit?
e Outline the type and methodology to be used.
e Prepare the audit team and company staff (both technical and clerical).
 Types of Energy Audits and Energy-Audit Methodology 25

Audit criteria Data inventory

and
gy measurement
ee Preparing the audit
Scope report with
gy recommendations

Ta Analyzing
Selection of energy-use
team pattern

Audit plan |

—_ vr. Ie paing Preparing the action

Checklist comparative analysis Bee
preparation

Initial ee
walkthrough Identifying
energy-saving
potential

Collecting energy
bills and data Implementing the
action plan

Cost-benefit
Preliminary analysis analysis

PREPARATION EXECUTION REPORTING

Chart 2.2 Three phases of audit

e Clarify the need for any sort of external support from consultants, utilities, government
organizations, contractors, etc.
e Define the boundary of the company
e Decide the timeline, i.e., date by which preliminary data findings will be performed and the
completion date.
e Check for breakdowns, maintenance practices, lack of capacity, ete.
e Check for other requirements, if any.
> Step 2: Scope of Audit
The audit scope includes the definition of the system audited, source of information, and the method
of analysis. The scope of audit decides whether the total plant is to be audited or only a particular
process or equipment is to be audited. As an example, green indicates the area/process/plant as a
part of the audit scope in Chart 2.3.
26 Handbook of Energy Audit

Industry/Building

|
| |
Plant A/Ground Floor Plant B/First Floor

|
|
Department Department Department} Department
A/Section | B/Section II A B

— |
Process Process
Process Process A B Process

Equipment Equipment Equipment

Equipment Equipment A A quip
A B —

Chart 2.3. Scope of audit

Thus, the scope of audit includes following points:
e Define the boundary of the plant and systems within the boundary. (Building, department,
processing unit, etc., define the boundary of the plant; and boiler, steam-distribution network,
refrigeration plant, HVAC, etc., define systems under the boundary.)
e Outline the type of energy input and output for all flows including direct, indirect, measurable,
and nonmeasurable. Electricity, gas, steam, and water are direct and measurable energy flows.
Drain water, vented air, and flue gas are indirect and measurable energy flows. Heat loss from
a building and energy in products are indirect and nonmeasurable energy flows. It includes
electricity bills, fuel bills, production and process data, etc.
e Identify and define subsystems.
> Step 3: Selection of Audit Team
Depending on the end user, the audit team can be internal or external. In case of an external team, the
consultant (who is the accredited energy auditor/agency) decides team members who are external
to the plant and may involve some staff within the plant.
In case of a large company, internal staff is appointed as a part of the audit team who will perform
energy audit. There can be separate electrical and thermal energy audit members in both the cases.
The audit-team leader decides and distributes the roles and responsibilities of each team member.
> Step 4: Audit Plan
It defines the audit procedure and execution. It helps the auditor check the consistency, completeness,
and schedule of the audit process and ensures that no event is left out. It includes the following:
 Types of Energy Audits and Energy-Audit Methodology 27

Timeline and schedule of each event

High-priority events
Tasks assigned and responsibilities of each team member
Outline and format of the audit report
> Step 5: Audit Checklist
Prior to performing the audit, a systematically prepared checklist helps an auditor conduct the audit
in a systematic and timely manner. A checklist includes:
e List of information collected by the audit team
e List of measuring equipment required, installed and to be carried at the time of audit
e Required measurement and proposed observation tables
e List of systems and subsystems to be assessed during audit
e Historical data and reports
> Step 6: Initial Walkthrough Audit
The initial walkthrough audit is very important if an external team is performing the audit. The
team gets acquainted with the process and plant in a plant visit prior to performing the audit.
Experts say that 80% of an audit task is identified in the first walkthrough audit. During the initial
tour, the team will observe existing measuring instruments, leaks, waste, etc. The team may interact
with plant employees and receive initial information about the plant.
> Step 7: Collecting Energy Bills and Data
Before starting the audit, all types of energy bills and production-rate data are required for present
and previous years. Historic data helps an auditor compare plant and system performances. Year-
round data helps an auditor understand the effect of weather on energy bills and rate of production.
Data collection includes the following:
e Monthly and yearly energy bills and invoices
e Monthly and yearly production data
e Weather information
e Parameters measured by presently installed measuring instruments
e Plan and process layouts
e General information like year of installation, renovation, expansion, modification, types of
products, batch or shift details, maintenance schedules, breakdown if any, etc.
> Step 8: Conducting Preliminary Analysis
A preliminary analysis is a tentative planning of the actual audit process. A preliminary analysis
identifies energy in and out, process or equipment energy utilization, material in and out, source
of energy and material waste, etc. A simple but informative flow chart is prepared prior starting
the actual audit process. A few such flow charts are shown in Figures 2.1 and 2.2. An auditor
has to identify different inputs and outputs at each process step and sources of waste heat/energy
generation.
28 Handbook of Energy Audit

Fine gas
902 MJ Hot exhaust
air 1500 MJ

Electricity
10 KJ
1 Steam Process Condensate
HDioil boiler 3987 KJ heating 1600 KJ

|
5000 MJ

Blow down loss Product

‘50 MJ Air

Electricity | Refrigeration |C°ld water | process Finished

500 MJ plant cooling => product

Heat from condenser 1500 MJ !

Figure 2.1 Energy flow chart 1

Total Efficiency (HHV) : 65.00%
Recycle: 50%
1 0.99 MPa
1273 K 34mols YY 1149 K
566 K 0.99 MPa
55.181 MW 0.99 MPa 1780 K 310 mol/s
SOFC
Combustor

ee 0.772V Exhaust oar 0.101 MPa

° 7 y 1237K Wat
lower f
4
1123K 7 0.98 MPa at
0.032 MW 1.0 MPa Heat
exchanger
841K
i Feed
Pre- Pre- A pump
heater [7 heater 0.97 MPa 400 K
0.1 MPa
100 MW Y
Natural gas A 4.01 MPa
(methane) Vapor
290 K Separator
1.01 MPa 290 K
112 mol/s 1.01 MPA
12.620 MW

A.C. gen Li
ique-
95% 322 K > faction
Air 0.1 MPA
290 K Air Air 1.844 MW Carbon Hioxide

2264 mol/s 365 K 290 K an

Figure 2.2 Energy flow chart 2
 Types of Energy Audits and Energy-Audit Methodology 29

Phase Il Execution

> Step 1: Data Inventory and Measurement

Balancing the energy in and out of the system is the main activity of energy auditing. A Sankey
diagram is a convenient tool to indicate the magnitudes of energy input and output. A sample
diagram is shown in Figure 2.3. To successfully conduct an energy audit, it is important to collect
all necessary data related to energy use. While auditing a plant, some data will be readily available,
some needs to be measured from installed measuring devices, and the rest will be measured by
external energy-audit equipment. It is a must that all data collected are realistic and have minimum
assumptions. Energy-audit instruments are discussed in Chapter 3. Different data inventories and
measurements are shown in the following figures:

TOTAL
ENERGY
IN
T% = 100% 7
or
T Joules 17

17 27
Waste SoundS% HeatH%
energy or or
out S Joules H Joules

Figure 2.3. A sample Sankey diagram

250
Diesel consumption in GPM

2005

150-

100-

50-

Jan Feb Mar April May June July Aug Sept Oct Nov Dec
Month of the year

Figure 2.4 Inventory diagram for diesel-oil consumption per month

30 Handbook of Energy Audit

3300
3200+
g 3100"
~e 30004
2 2900-
EE 2800-
§ 2700-
o
z 2600-
2500+
2400-
Jan Feb Mar April May June July Aug Sept Oct Nov Dec
Month of the year

Figure 2.5 Inventory diagram for annual electricity consumption

Cleaning cost
4%
Maintenance
cost
16%

Energy Cost
54%

Figure 2.6 Pie chart of annual building-operating cost (See color figure)

7000
Consumption in MJ
Annual Energy

oO
So
So
So
So
oS
o
oa
Ss
oS
Oo
o

3000 qT qT qT qT qT qT

2007 2008 2009 2010 2011 2012 2013 2014

Year

—@PlantA —# Plant B

Figure 2.7 Specific energy consumptions of two different plants

 Types of Energy Audits and Energy-Audit Methodology 31

Salvage value

Revenues

End of life-cycle

Maintenance costs

Initial cost

Figure 2.8 Cash flow of a project

Use of graphical representation of collected data helps an audit team understand the nature of
energy consumption in the plant. Some first-hand information like the following can be identified
from such graphs:
e Time-affected change in energy consumption, e.g., air-conditioning load increases during
summer or furnace load increases during charging hours, etc.
e The charts provide direct information about the ways and the main areas of energy use on
hourly, daily, monthly, and seasonal basis.
e Comparison of energy indexes can be made between similar plants or buildings within the
same premises.
e When more than one type of fuel is used, costs can be compared between them.
> Step 2: Analyzing Energy-use Patterns
Graphical representation of energy-use patterns on hourly, daily, monthly, or yearly basis helps to
the audit team understand energy-use very well. Sudden changes or spikes in energy-use graphs
shows abnormality and locations of energy savings. An auditor has to calculate the Energy Intensity
(EI), which is the energy used per unit production. It can be calculated per hour, per month, or per
year based on the type of energy used.
Energy consumed (kW)
Energy intensity (kW per ton) = (2.1)
Production (ton)

> Step 3: Benchmarking and Comparative Analysis

In this step, comparative analysis is prepared for current and past energy consumption of a process
or a building. Policymakers use benchmarking to declare energy saving and design policies to
32 Handbook of Energy Audit

reduce greenhouse-gas emissions. Benchmarking energy performance enables auditors identify

possible energy-conservation areas. As an outcome, high-performing systems or buildings (those
who consume less compared to previous years) are rewarded and poor performers are targeted for
immediate actions. Benchmarking and comparing analysis is performed in several ways like the
following:
e Comparing the company’s historical performance with the present one.
e In case of multi-unit premises or buildings, the comparison is made between two similar
processes or buildings.
e Comparing with a peer company producing the same products, e.g., comparing electricity
consumption of two similar textile machinery plants having same production rates.
e Calculating specific energy consumption, e.g., electricity used to produce unit mass of finished
products.
e Comparing for best in industry, based on energy consumption as well as quality of product.
e Benchmarking is carried out for a common unit of production, e.g., fineness of cement, type
of yarn, GSM quality of paper, iron ore produced, tonnage capacity of cold storage, ice plant
or air-conditioning unit, etc.
> Step 4: Identifying Energy-saving Potential
Based on the result of in-site survey and analysis performed in earlier steps, an auditor has to identify
energy conservation possibilities. Energy Conservation Methods (ECM) suggested by the auditor
are based on technical analysis, commercial analysis, operational feasibility, environmental impact,
etc. More detailing on financial analysis will help the owner understand and implement ECM.
Preferably, the report should include existing financial policy, possibility of financial support for
proposed change in technology, available funding agencies, loan availability, and rate of interest
of loans.
The following guidelines are given to suggest ECM in an energy-audit report:
e Include the fuel quantity saved annually in terms of physical quantity and heat content. Also,
mention annual electricity saving due to adoption of new technology and summarize annual
rupee saving due to suggested changes. In addition, if any change in load pattern or reduction
in peak-hour energy consumption is likely to occur, mention its effects.
e Estimate the annual reduction in pollutants due to suggested change in technology. If possible,
suggest the approximate value of reduction in each constituent like NO, SO,, CO, COs, etc.
Also, calculate and suggest proposed Carbon Credits (CC) earned by implementing the
project, if any, and reduction in carbon footprint.
e Technical and operational details should include operational reliability and feasibility of
the proposed retrofit. How adoptable the new technology is and what change in existing
manpower is required should be discussed in the suggested ECM. Proposed maintenance and
repair schedules and cost involvement should also be included.
e Financial criteria should cover capital cost of project, annual profit, possible funding support,
etc.
 Types of Energy Audits and Energy-Audit Methodology 33

> Step 5: Cost-benefit Analysis

An auditor will be asked certain questions related to the suggested ECM like, is the project worth
adopting financially? In any case, do the proposed savings exceed the project cost? Is there any
temporary solution instead of going for a high-investment project? In case of no investment or low
investment-conditions, which project should be prioritized? An efficient auditor not only suggests
good ECMs but also suggests them in the most convincing ways. Some methods to perform a cost-
benefit analysis are discussed in financial methods (Section 2.4).
Phase Ill Reporting
> Step 1: Preparing Audit Report with Recommendations
As energy audit is a tailor-made process to suit the type of organization, the report prepared does
not have a standard format. Based on the type of organization, size, depth of audit, etc., the report is
prepared and presented to the authority. It is seen that once submitted, audit reports gather dust on
the shelf. To avoid this situation, some tips for good report writing are discussed here:
e A report should be written, targeting the audience to comprehend. The report reader can be
a CEO or a shift supervisor. Hence, a report must include a summary which gives highlights
of the report to senior and busy persons; and at the same time, technical reasoning must be
provided for end persons who are going to implement the suggestions.
e The report should be written in simple and direct language. If abbreviations are used, give
their full forms whenever used for the first time or make a special list of abbreviations, e.g.,
VSD should be mentioned as Variable Speed Drive (VSD) or VAV should be mentioned
as Variable Air Volume (VAV). Be consistent in terminologies and units. Use of Btu at one
location and Joule at another location creates confusion for the reader, so use standard units.
Sight one sample calculation in the annexure of the report.
e Maximize use of graphical and colourful representations instead of plain text. Use of bar
charts, fishbone diagrams, pie charts, flow charts, etc., helps the reader easily understand the
report.
e Recommendations mentioned should be clear and direct and, preferably, with financial
analysis. For an example, “change colour shop motor” should be presented as “1 HP XYZ
company-made colour shop motor is required to be replaced with 1 HP ABC company’s
energy-efficient motor-model no. RST.”
e Make a list of assumptions prior to technical and financial analyses. Technical analysis is
catried out assuming operation hours, efficiency of certain parts, manpower availability, etc.,
and any change in the assumed situation will make a direct effect on the result. Hence, all
the assumptions should be clearly stated wherever applicable. Similarly, financial-analysis
assumptions like interest rates, taxes, and depreciation should be clearly mentioned at
appropriate locations of the report.
e A summary on key audit findings, recommended energy conservation measures, cost to
company, payback period, etc., must be highlighted in the report. A sample audit report is
presented in Table 2.2.
34 Handbook of Energy Audit

Table 2.2. Sample audit report

1 Summary of report
1.1 Key findings like annual consumption, budget, performance indicators, etc.
1.2 Recommended energy-conservation methods
1.3 Outcome of financial analysis
2 Audit, objective, scope, and methodology
3 About the plant
3.1 Introduction of plant and general plant details
3.2 Process and production of plant
3.3 Plant layout
Type of energy used in the plant
4 Process description
4.1 Flow diagram
4,2 Energy balance
5 Energy analysis (whichever applicable)
5.1 Boiler assessment
5.2 Lighting system assessment
5.3 HVAC system assessment
5.4 Compressed-air system assessment
6 Energy use and cost analysis
6.1 Specific energy consumption
6.2 Analysis of energy use and production pattern
6.3 Energy benchmarking
7 Energy-conservation measures
7.1 Suggested energy-conservation measures with financial analysis
7.2 Energy-action plan
7.3 Energy benchmarking
8 Concluding remarks and brief action plan for implementation of energy-saving measures
9 Acknowledgement
10 Annexure
Worksheet and calculations
Technical data
List of supplier/vendors for technologies and systems
> Step 2: Preparing the Action Plan
An auditor has to prepare an action plan for implementation of each ECM. The planning should
include the following details:
 Types of Energy Audits and Energy-Audit Methodology 35

Phase-wise target to implement the project and time schedule of each phase.
Authority and budget for implementing ECM, indicating stages of progress.
Well-defined work progress monitoring methodology.
In case of more than one project executed simultaneously, coordination between them has to
be properly targeted.
Thus, it is required that steps and targets are well defined and resources are best known to
implement the energy-action plan. An auditor and his/her team have to efficiently bridge the gap
between suggested ECMs and implemented ECMs, and this is achieved by creating performance
targets, setting timelines, and monitoring the progress.
> Step 3: Implementing the Action Plan
Next to preparation of the action plan, comes execution of the action plan. Support of both internal
and external agencies is needed for this. The methodology given below is followed in implementing
the action plan.
e Provide necessary information about the proposed ECM to the plant operators.
e Conduct trainings and seminars related to the new technology adopted.
e Motivate plant operators about change in the set-up and make them understand the benefits
of the proposed ECM.
e Monitor the action plan, its purchase, installation, function, etc., on at regular intervals.
e After successful implementation, evaluate actual advantages by monitoring energy-use
patterns, product modification, flexibility, etc. This act not only helps one understand the
advantages of the present change in system but also encourages future energy audits and
energy-conservation methods.

L} 2.4 FINANCIAL ANALYSIS

There are different energy-conservation options available as an outcome of energy audit. An auditor
has to evaluate each option with various financial analysis methods. A proper approach selected and
well-presented increases chances of implementation of the energy-conservation project. In general,
the criteria for evaluating any financial decision is that saving generated by the investment must be
greater than the cost incurred. Lifecycle cost analysis, discounting, net present value, internal rate
of return, saving-to-investment ratio, simple payback method, etc., are commonly used financial
tools to analyze and present the viability of the project. Common terms used in financial analysis
are explained in brief followed by different methods of financial analysis.
When money is borrowed from an external agency (government scheme, bank, etc.) to finance a
project, a fee is charged on borrowed money. The borrowed amount is known as principal (P) and fee
charged is called interest (J). Interest rate is based on the value of principal amount, time for which the
money is borrowed, etc. The difference between total cash received, inflow, and total cash disbursed,
outflow, for a given time is known as cash flow. It is necessary to account cash flow accurately over the
lifetime of the project. Cash flow is positive when it represents money received and is negative when
it represents money spent. As values of most assets decrease over time, the income tax law permits
reasonable deduction from taxable income to consider this value, and it is known as depreciation.
36 Handbook of Energy Audit

The time value of money is explained as what is more? Rupees 100 today or rupees 100 after
one year? Inflation and interest are two deciding factors about the time value of money. Taking 100
rupees today and investing it in an interest-bearing bank account will get the investor an amount
greater than 100 rupees after one year. Purchase power of today’s 100 rupees and after one year is
decided by inflation.
Interest earned on the original principal amount at the rate of i % per year is known as simple
interest. When 100 rupees are invested in a bank bearing a simple interest rate of 8%, the investor
will carn rupees 108 at the end of the first year, rupees 108 at the end of the second year, and rupees
108 at the end of the '" year. Mathematically, it is represented as
F,= Pltn*i) (2.2)
where
F,= future amount of money at the end of the n'” year
P= present amount of money
n= number of years
i= interest rate
In case of compound interest, it is earned on the original principal amount plus interest
accumulated from previous years. When 100 rupees are invested in a bank bearing a compound
interest rate of 8%, the investor will earn rupees 108 at the end of the first year, rupees 108.64
(= 0.8 * 108) at the end of the second year, and rupees (1 + 0.08)” at the end of the n" year.
Mathematically, it is represented as
F= P(+iy" (2.3)
The cost associated with design, planning, installation, and commissioning of the project is
termed capital cost. It is usually a one-time cost and has no effect of inflation. Annual cash
flow occurs throughout the year and includes taxes, energy bills, service, maintenance, insurance,
labour, etc.

2.4.1 Simple Payback

Simple payback is the primary method to check the feasibility of the energy-conservation method.
The major limitations of this method are that it does not consider cost of money and advantage of
the project achieved after the payback period.

Capital cost
Simple payback in years= —————_- (2.4)
pepe Annual savings
The limitation of the simple payback method is shown in the following example.
Project A and Project B require the same investment of 10 lakh rupees. The life of Project A is 5
years and that of Project B is 15 years. Both projects save 2 lakh rupees annually for the first five
years, and Project B saves 7, 9, 11, 13, 15, 17, 19, 21, 23, and 25 lakh rupees at the end of the 6%.
7 got yo, 11, 12", 13", 14", and 15" years respectively. The simple payback for both the
projects is 5 years, but Project B is more effective because it gives more returns over time.
 Types of Energy Audits and Energy-Audit Methodology 37

terri?
0 5 0 5 10 15
Project life (years) Project life (years)
Project A Project B

Figure 2.9 Simple payback method applied to two different types of projects
Thus, the simple payback method should not be used to select a project among multiple and
mutually exclusive projects.

2.4.2 Return on Investment

Return on investment indicates the annual return expected from initial capital investment and is
expressed as follows:

Return on investment = Annual net cash flow x100 (2.5)

Capital cost
When multiple projects are compared, a project with higher ROI indicates better returns.
Limitations of the return-on-investment method are that it does not consider time value of money
and variable annual net cash flow. Return on investment is calculated as per the following equation
for the entire life of the project:
Total saving (for life of project) — Estimated project cost x 100
Return on investment = : - ——
Estimated project cost Project life
(2.6)

2.4.3 Net Present Value and Internal Rate of Return

As mentioned in the time value of money, rupees 100 today is more valuable than rupees 100 after
a year because the interest on the principal amount will accumulate over the year. To calculate
the time value of money, two terms are defined—present value of money and future value of
money— and expressed as follows:
Future Value = Present value (1 + 7)” (2.7)
Or

Present Value = Future Value / (1 + i)” (2.8)

38 Handbook of Energy Audit

When net present-value calculations are carried out for different discount rates, at a higher
discount rate, the net present value decreases and eventually becomes negative. At a particular
discount rate, the net present value becomes zero and this discount rate is defined as internal rate
of return. Many organizations/companies consider internal rate of return as a key criteria to decide
the feasibility of a project. Net present value and internal rate of return are calculated as per the
following equations:

—¢, B, 2% -C, , “Gy

27... PnB_-C
~&n _ a,
Bo 0a “ant? Gen” ° Ce)
where B,, is the profit in the year ¢, C,, is the cost in ¢ years, r is the discount rate, and n is the
lifetime of the project.

By—Cy+ B, —C,
oe B, —C,
Hp reeee pe B, _—8
—C,,
=0 (2.10)
(1+ IRR) (1+ IRR) (1+ IRR)"
| Example 2.1 | e

An initial investment of 83,200 rupees will generate cash flow of 34,000 rupees in the first year,
40,700 rupees in the second year, 33,500 rupees in the third year, and 20,500 rupees at the end of
the fourth year. At the end of the fourth year, the machinery will be sold for 9000 rupees. Calculate
the present value of investment for a discount rate of 12%. Maintenance of the machinery would
cost 3000, 4000, 5000, and 6000 rupees respectively in the first, second, third, and fourth years.
Solution Using the following equation:

By— CotB-G, C, +. ceceeep Pn

| By ~Cy Gn — y 5

(+r) +r) (+ry" jd+n'

we have,
832004 3400 — 3000 + 40700 — 4000 33500 — 5000 2500 + 9000 — 8955 Rupees
(1+ 0.12) (1+0.12)* (1+0.12)° G40.12)4
Accept the project as the net present value is positive.
&

Example 2.2
°

Calculate the internal rate of return in the above example.

Solution The above exercise is repeated for different discount rates and presented in a table. It
shows that the net present value is positive for 17% discount rate and becomes negative for 18%
discount rate. Hence, the internal rate of return is just a little higher than 17%.
2
¢
 Types of Energy Audits and Energy-Audit Methodology 39

Table 2.3 Net present value for different discount rates

IDNR a ec Ima
12% +8955
16% +7139
17% +441
18% -1104
Calculating the internal rate of return is a labourious process if done with a calculator. Most
spreadsheets have an in-built function for calculating IRR. As shown in Figure 2.10, when given
values are entered in Microsoft Excel and the IRR function is used, it shows an internal rate of
return of 17.28%.

f Function Arguments 2 emo

IRR
Values 86:810 |E%s| = {-83200;31000;36700;28500;23500}
Guess (Fass =

= 0.172821285
Returns the internal rate of return for a series of cash flows.
Values is an array or a reference to cells that contain numbers for which you want to
calculate the internal rate of return.

Formula result = 0.172821285

Help on this function [ «x | Cancel

Figure 2.10 Screenshot of Microsoft Excel 2007

2.4.4 Lifecycle Cost Method

This is the most preferred method for financial evaluation in which capital, install, operating,
maintenance, and disposal costs are considered. Also, when there are more options, the lifecycle
cost method suggests a more suitable alternative for given applications. In this method, all costs
are discounted and reflected to count the time value of money. The general formula to calculate the
lifecycle cost is given in the following equation.

Lifecycle Cost (LCC)= "=p —t— (2.11)

“O14 dy
where C, is the sum of different costs for ¢ years and d is the discount rate to adjust cash flow.
LCC in the above formula considers the following costs:
LCC= I1C+RC+EC+ WC+ MC- DC (2.12)
40 Handbook of Energy Audit

where
IC = initial investment cost
RC= replacement cost
EC stands for = energy-bill cost (gas, electricity, etc.)
WC = water-bill cost
MC = maintenance and repair cost
DC = disposal cost (resale value, scrap value, salvage value, etc.)
This method provides a consistent way of counting all the cost related to a project over its life
cycle and, hence, is preferred for financial analysis.

L} 2.5 SENSITIVITY ANALYSIS

Some degree of uncertainty is inherent in most of the cost-benefit study and financial analyses. The
impact of variables affecting the result is difficult to measure or predict, and the value of impacts
may be hard to monetize. Sensitivity analysis is a bunch of techniques used to examine the degree
of uncertainty in a cost-benefit analysis. Whenever cost-benefit analyses are carried out, certain
assumptions are made to calculate the financial benefit of the project. A sensitivity analysis shows
how the results would be affected in case of changes in the values of specific variables. Examples
of variables are a cash flow which is affected by inflation in future or variation in project life.
Sensitivity analysis is helpful in the following ways:
1. Supports decision-making and recommendations
2. Presents recommendations in a more credible, understandable, and persuasive form
3. Quantifies the relation between input and output variables
To conduct a sensitivity analysis, all the inputs and parameters are connected through an algorithm.
Parameters can be inflation rate, raw-material rate, running cost, debt and equity costs, change in
project life, change in interest, tax and depreciation rates, change in government subsidies, change
in energy price, etc. The model will calculate the output (profitability) of the project. Normally,
only one of the above variables is changed at once, keeping others constant. Many variables are
interdependent, so changing a single variable may not give the real picture every time.

CL} 2.6 PROJECT-FINANCING OPTIONS

Project financing is long-term financing of industrial projects based on the projected cash flow of
the project.

2.6.1 Credit Financing (Loan)

A lender provides a borrower with capital for a defined purpose for a fixed period of time. A
borrower has to pay fixed instalments against the loan. These instalments cover the amount
borrowed, interest rate, and other charges like processing fees, etc. A loan is disbursed against the
purchase of equipment to secure the fund.
 Types of Energy Audits and Energy-Audit Methodology 41

2.6.2 Lease Financing

In this option, instead of buying equipment or technology, is the same is taken on lease for a
required period of time. Leasing equipment for a short time is known as operating lease, and for a
long term is called capital lease. The advantage of lease finance is a company can keep cash flow
for other financial needs and also have the advantage of lower down payment.

2.6.3 Equity and Bonds

Issuing stock to an investor is selling a portion of ownership of the business and its assets. It raises
capital for funding a project. Thus, a project is financed at the expense of business owners and
shareholders. The fund is raised by issuing a bond to the investor and the company has to give fixed
interest rate and the principal amount at the time of maturity.
Some other financing options are government grants, supplier credit, working capital loan, etc.

L} 2.7 ENERGY MONITORING AND TARGETING

As discussed earlier, as a part of the audit method, energy consumption is monitored and targeted
for a particular company or premises. Energy monitoring is regular collection of information
of energy use. It helps one understand why energy consumption is deviating from an established
pattern and identify energy-conservation opportunities (also known as ENCONS). Formats of data
collection depend upon the type of user and some of them are discussed in the earlier sections. It
can be monthly electricity consumption for a furnace, or daily gas consumption for a bakery, or
weckly steam production for textile house, etc. Energy monitoring helps us understand the effect of
rate of production, weather, occupancy, etc., on energy consumption. Thus, energy monitoring is a
process of relating energy consumption to different variables. Some methods of energy monitoring
are discussed here:
Table 2.4 Tabulated data for energy consumption for 12 weeks

a. Production (tonnes) WapaM eU Oe ALLL}

1 140 145
2 90 105
3 70 92
4 80 87
5 120 147
6 130 157
7 140 145
8 100 110
9 90 114
10 80 106
11 70 84
12 65 76
42 Handbook of Energy Audit

2.7.1 Regression Analysis

In most of the processes, energy is used to heat, cool, change, or transfer material. Though the use
of energy cannot be generalized, an attempt can be made to relate it with production and it can be
plotted as a straight line of the form
y= mX+C (2b)
where, C is an intercept and m is the slope of the line.
In this method, the functional relationship between production and energy consumption is
obtained by linear regression. Figure 2.11 shows such a plot and the relationship is given in Eq.
(2.14).
Electricity (kWh) = 0.957 * Production (ton) + 20.27 (2.14)
Though this relationship is affected by many variables like breakdown, maintenance, etc., this
gives a baseline against which all other performances can be measured. Using this relationship,
future performances can be anticipated.
180

1604 y = 0.9572x + 20.277 *

140 R= 0.9049 °
1204
Energy (kWh)

1004
80- r
60-
40
204
0 qT q T qT T qT qT

0 20 40 60 80 100 120 140 160

Production (tonnes)

Figure 2.11 Energy consumption vs production

2.7.2 Cumulative Sum (CUSUM)

Cumulative sum represents the difference between the basic or standard consumption and actual
consumption over a period of time. It provides a trend line as well as calculates losses or gains in
energy consumption over a period of time. It follows a trend until something happens that changes
the pattern of energy consumption. For example, energy consumption increases in summer due to
high ambient temperature, or energy consumption decreases due to decrease in production rate.
Here is an example to understand cumulative sum technique.
| Example 2.3 =
The following table gives data collected in a heat-treatment plant for 24 months. The company
installed a heat-recovery wheel in the 12'" month. Carry out cumulative sum assessment for the
given data.
 Types of Energy Audits and Energy-Audit Methodology 43

Solution
Cc

Step 1: Plot energy vs production graph for the first twelve months (refer Figure 2.11).

Step 2 Draw the straight line to cover the maximum number of points.

Step 3 Derive the equation for the line.

E= 0.565 P+ 216.6 (2.15)

Table 2.5 Energy consumption for different production rates over two years

IO Energy consumption (toe/month) Production (tonnes/month)

1 610 720
2 630 780
3 590 680
4 700 840
5 680 770
6 580 630
7 620 780
8 750 960
9 690 790
10 710 830
11 570 610
12 590 670
13 600 780
14 650 820
15 680 940
16 590 750
17 550 610
18 580 670
19 580 780
20 620 830
21 530 950
22 670 840
23 650 800
24 610 710
44 Handbook of Energy Audit

= 800
5 y = 0.5651x+ 216.69
£ 750+
o
£
= 700+
2
= 650+
=
e
9 600-
~
oD
3 550+
c
Ww
500 T T T T

500 600 700 800 900 1000

Producton rate (tonnes/month)

Figure 2.12 Energy consumption vs production rates for the first twelve months

Step 4. Calculate the energy consumption as per the equation.

Step 5: Calculate the difference between the actual energy consumption and calculated energy
consumption.

Step 6: Calculate the cumulative sum.

Step 7: Plot the CUSUM graph.

Step 8: Identify the savings due to heat-recovery wheel.

Table 2.6 Calculated values of energy consumption and CUSUM

Month Energy consumption Production Energy consumption Energy consumption CUSUM

(actual) (calculated) (actual - calculated)
610 720 623.4 -13.4 -13.4
630 780 657.3 -27.3 -40.7
NY

590 680 600.8 -10.8 -51.5

WO

700 840 691.2 8.8 -42.7

FF

680 770 651.65 28.35 -14.35

NO

580 630 572.55 7.45 -6.9

620 780 657.3 -37.3 -44.2
mON

750 960 759 -53.2

690 790 662.95 27.05 -26.15
Oo

710 830 685.55 24.45 -1.7

©

570 610 561.25 8.75 7.05

—&
—

590 670 595.15 -5.15 1.9

NO
—

600 780 657.3 -57.3 -55.4

wo
—

Contd...
 Types of Energy Audits and Energy-Audit Methodology 45

Month Energy consumption Production Energy consumption Energy consumption CUSUM

(actual) (calculated) (actual - calculated)
14 650 820 679.9 -29.9 -85.3
15 680 940 747.7 —67.7 -153
16 590 750 640.35 —50.35 —203.35
17 550 610 561.25 -11.25 -214.6
18 580 670 595.15 -15.15 -229.75
19 580 780 657.3 -77.3 -307.05
20 620 830 685.55 -65.55 -372.6
21 530 950 753.35 —223.35 —595.95
22 670 840 691.2 —21.2 -617.15
23 650 800 668.6 -18.6 -635.75
24 610 710 617.75 -7.75 -643.5
100 -

0 T T T T T T T T T T T T T T T T T 1

1 5 9 11 17 19 21 23
-100 +
200 J Months
=
” -300 -
5
oO
—400 +

-500 +

-600 -

-700 -

Figure 2.13 CUSUM chart for given data

Figure 2.12 shows that for the first fourteen months, the cumulative sum oscillates around the
horizontal axis (near to zero cumulative sum value) and after that it deviates sharply from the
fifteenth month.

2.7.3 Targeting

Information gathered in energy monitoring helps us set a realistic target of energy saving. It is very
important to ensure that set targets are achievable. Key tools related to target setting are discussed here:
e Performance Benchmarks In this, historical data of the building or a plant is used to set
performance targets. Bar charts or column charts are used to compare the data of previous and
past years.
e Normalized Performance Indicator In this technique, energy consumption is calculated
per unit area or volume, i.e., kWh/m?/year or kWh/m? /year, and then compared with data of
similar industries or buildings existing in the vicinity or with the published data.
46 Handbook of Energy Audit

e Specific Energy Consumption It is a measure of energy consumption per unit production

of goods, e.g., energy consumed per unit tonne of steel. It can be for a batch or measured
continuously depending upon the type of industry.

Descriptive Questions

Q-1 Compare preliminary audit with detailed audit.

Q-2 Write the stepwise methodology of performing an energy audit.
Q-3 Make a list of data to be collected from a sugar factory to perform its energy audit.
Q-4 Draw a sample Sankey diagram, bar chart, and pie diagram for data collected from a cement
industry.
Q-5 Define the following terms:
a. Energy intensity b. Benchmarking
Q-6 What data should be included in the suggested energy-conservation method?
Q-7 Write a sample audit report for a paper industry.

Short-Answer Questions

Q-1 How is an energy audit helpful? Who can perform an energy audit?
Q-2 Define energy audit.
Q-3 How do you fix the boundaries of an energy audit?
Q-4 What do you understand by scope of audit?
Q-5 How can you select an audit team?
Q-6 Which are the points in an energy auditor’s checklist?
Q-7 How is graphical representation of energy data helpful to an energy auditor?
Q-8 How can you prepare an action plan after performing the energy audit?
Q-9 Define the following financial terms:
(a) Depreciation (b) Cash flow
(c) Time value of money (d) Simple and compound interest rates
(e) Capital cost
Q-10 What are the limitations of the simple payback method?
Q-11 Make a list of parameters affecting sensitivity analysis.

Multiple-Choice Questions

Q-1 The advantage of performing an energy audit is

(a) decreased production cost (b) reduced environment impact
(c) reduced import bills (d) all of the above