Cost Avoidance overview

Cost Avoidance is the Measurement and Verification (M&V) of energy and cost savings because of energy management projects. In other words, Cost Avoidance is the dollars you avoided spending because of the implementation of energy management activities.

How does Cost Avoidance work?

Cost avoidance works by comparing current bills with an adjusted baseline year. The adjustment process automatically takes into account major variables including weather (degree days), billing period length, floor area changes, commodity price, and special adjustments for other changes such as occupancy, schedule, and equipment retrofits. This enables you to compare energy use and cost from baseline to current.

The absence of consumption or cost cannot be measured, therefore cost avoidance and use avoidance cannot be precisely measured. UtilityManagement's Cost Avoidance values are reasonable estimates derived from the internationally-recognized ISO 50015 and EVO IPMVP guidelines.

Cost Avoidance diagram

Cost Avoidance diagram

Simple example

Cost Avoidance is avoided spending, not dollar savings. Avoided cost is a much more direct and accurate term than dollar savings.

Simple Cost Avoidance

February 2017

Baseline cost

$1,000

Baseline Cost: 10,000 kWh@ $0.10/kWh

February 2018

Current cost

$1,200

Current Cost: 8,000 kWh @$0 .15/kWh

 

Baseline adjusted to today's unit cost

$1,500

10,000 kWh @$0 .15/kWh

 

Cost Avoidance

$300

$(1,500 - 1,200)

According to this chart, Accounting would say no money was saved in February 2018 because the out-of-pocket cost was not reduced, even though consumption was reduced.

Simple Cost Avoidance steps

Cost Avoidance uses today as the reference point because all energy management initiatives hopefully result in a positive benefit today.

  1. Record the consumption in the pre-retrofit/baseline period.
  2. Record the consumption and cost in the post-retrofit period.
  3. Calculate what the pre-retrofit consumption would cost at today's rate.
  4. Subtract: Step 3 - Step 2 = Cost Avoidance

Why adjust the baseline

The calculation presented above simply compared the raw baseline with the current bill. This is only accurate if there have not been any changes in the weather, billing period, or other non-energy management areas.

Changes in weather, billing period, or other non-energy management areas require UtilityManagement to make adjustments—or in other words, adjust the baseline. This introduces a new step into the Cost Avoidance calculation process.

Factors that cannot be controlled are considered independent (weather, billing period length, rates). As an energy manager, you aren't responsible for how they affect cost savings.

To compare apples-to-apples, you must make adjustments for these independent variables relative to baseline conditions. The basic approach is to adjust the baseline up to today's conditions. You don't adjust today's current bills, only the baseline. The term used for the adjusted baseline is the BATCC—the Baseline (which has been) Adjusted To Current Conditions. In other words, the BATCC is what you WOULD HAVE USED AND SPENT if you continued the wasteful ways of the base year and been subjected to today's weather and other variables. This leads us to Cost Avoidance with Adjustments.

Cost Avoidance = BATCC Cost - Current Cost

Baseline cost

$1,000

Baseline Cost: 10,000 kWh @ $0.10/kWh

Current cost

$1,200

Current Cost: 8,000 kWh @ $0.15/kWh

BATCC cost

$1,650

11,000 @ $0.15/kWh  *the baseline 10,000kWh is adjusted because of severe weather

Cost Avoidance

$450

$(1,650 - 1,200)

Cost Avoidance with adjustments steps

  1. Record the consumption in the pre-retrofit/baseline period.
  2. Record the consumption and cost in the post-retrofit period.
  3. Adjust the baseline (step 1) for weather, billing period, and other uncontrollable factors so it is comparable to today's conditions.
  4. Calculate the cost of step 3 using today's rates.
  5. Subtract: step 4 - step 2 = Cost Avoidance with Adjustments.

How to increase Cost Avoidance

Examples of potential ways to increase Cost Avoidance:

  • Retrofit projects, such as HVAC control systems and LED lighting.
  • Efficiency improvements.
  • Cutting hours of use.
  • Setting back thermostats.
  • Changing rate schedules, such as from flat rate to time-of-use.

Examples of independent variables you have no control over, for which you deserve neither the credit or the blame:

  • Colder or milder winter weather.
  • Hotter or milder summer weather.
  • Change of occupancy hours or a change in the number of occupants.
  • Greater/fewer days in a billing period.
  • Utility company changed the rates.
  • Change in floor area.
  • Addition/subtraction of energy-consuming equipment.

Cost Avoidance formula validation PDF

This document describes and illustrates the formulas used by UtilityManagement to perform cost avoidance calculations.