A demand reduction project competes for capital against everything else the business could buy, and it wins or loses on the same terms: payback, internal rate of return, effect on the cost line. This section builds those cases. It covers avoided-cost modeling from interval data, how to price a kilowatt of avoided peak correctly when a ratchet is in force, total cost of ownership for batteries and controls, federal investment tax credit and depreciation treatment as they apply to energy equipment, utility incentive and demand response program payments, and measurement and verification protocols rigorous enough that a finance function accepts the savings claim. The recurring theme is that the engineering is usually right and the financial framing is what fails.
The engineering on these projects is usually right. What fails is the financial framing — the wrong avoided cost, a payback number where an appraisal was needed, and no plan to prove the saving.
Everything underneath the pillar, in this subject area.
Most electricity budgets are last year plus a percentage, which is why most of them are wrong. Forecasting the determinants separately produces a number you can defend in March.
A saving nobody can demonstrate is, for capital allocation purposes, a saving that did not happen. Deciding how it will be proved belongs before the equipment is installed.
Tax treatment can move the after-tax cost of an energy asset substantially. What the rules are is a question for the IRS and your adviser — what they change in the model is a question you can answer.
Installed cost is the visible number and rarely the decisive one. Degradation, augmentation, availability and end-of-life determine whether a fifteen-year case actually holds.
You are already funding these programs through a rider on your own bill. The application process is where most of the available money is left uncollected.
The base demand rate is not the answer. Riders, taxes, the ratchet and seasonality all change the figure, usually upward, and the correct number decides every project after it.
