Economics of Energy Use

To understand ways to save on energy, it is important to be familiar with the characteristics of various forms of energy.

The basic unit used in the United States to quantify energy consumption is the British Thermal Unit or Btu. Regardless of the type of fuel or energy source, the Btu provides a way of referring to the equivalent energy content of a given quantity of fuel. When used as Btu per hour, it refers to the rate of use of energy.

A Btu is equal to the amount of energy required to raise the temperature of 1 pound of water 1 degree Fahrenheit. It is a very small amount of energy, so we usually use thousands of Btu, (MBtu) or even millions of Btu (MMBtu) to describe large quantities of energy.

To assign a cost to energy use, or compare costs of various fuels, everything can be reduced to cost per MBtu. The cost of energy for any fuel or source, when described on a Btu basis, provides us a means of direct cost comparison.
 

Energy Units

To understand the characteristics of various forms of energy, it is useful to be familiar with units that are commonly used to describe them:

• Electricity:The basic unit of energy is the watt, but because one watt is very small, electric energy is most often referred to in thousands of watts. As a result,  electricity use is measured in kilowatts (kW). One kilowatt is equal to 3.413 MBtu per hour. A quantity of electrical energy is measured in kilowatt-hours (kWh). One kilowatt-hour is equal to 3.413 MBtu.
• Natural Gas: The basic unit of energy is the Therm or the CC. One Therm is equal to 100 MBtu. One CCF (hundred cubic feet) is equal to approximately 103 MBtu.
• Oil: The basic unit for home heating oil is the gallon. Fuel oil – One gallon of fuel oil contains approximately 140 MBtu. One gallon of kerosene contains approximately 135 MBtu.
• Propane: The basic unit is the gallon. One gallon contains approximately 91.4 MBtu.
• Wood: The basic unit is the Cord (a stack 4’x4’x8’). One cord of mixed wood contains approximately 20 MMBtu.
• Ethanol: The basic unit is the gallon. One gallon contains approximately 80 MBtu.
   

Sample Energy Costs

Electricity at $0.14 per kilowatt-hour = $0.041 per MBtu
Fuel oil at $3.50 per gallon    = $0.025 per MBtu
Natural Gas at $ 1.50 per ccf    = $0.015 per MBtu
Propane at $3.00 per gallon    = $0.033 per MBtu
 

Efficiency

Regardless of the amount of energy contained in a fuel or energy source, the amount of energy derived from it is dependent on the efficiency with which it is used.

Operating efficiency can be defined as the amount of energy we get for useful purposes divided by the total amount of energy being consumed. It is most commonly expressed as a percentage, as in the following example:

A gas furnace consumes 130 MBtu per hour, and produces 104 MBtu per hour to heat a home. Therefore, the operating efficiency is 104 MBtu/h ÷ 130 MBtu/h = 80%. This indicates that for each 130 MBtu consumed, 104 are provided for useful purposes and 26 are wasted (usually as exhaust gases).

Electrically-powered heating and cooling units use different terms to measure efficiency: Heating appliances use a coefficient of performance (COP), which expresses output in Btu per hour divided by electrical input in Btu per hour. For example, a heater that generates 2,400 Btu/h of heat from 1,000 Btu/h of electricity can be said to have a COP of 2.40 (i.e. 2,400 BTU/h ÷ 1,000 Btu/h).

Cooling appliances measure efficiency using an energy efficiency ratio (EER), which expresses cooling output in Btu per hour divided by energy consumed in watts. For example, an air conditioner that cools at 6,200 Btu/h using 500 watts of energy can be said to have an EER of 12.4 (i.e. 6,200 Btu/h ÷ 500 watts).

Seasonal efficiency ratings look at energy use over a long period of time, such as a heating or cooling “season.”

For a fuel-burning appliance, seasonal efficiency is given as annual fuel utilization efficiency (AFUE), which expresses the total annual energy output divided by the total annual energy consumed. For example, if a fuel-burning appliance put out 58.1 MMBtu and consumed 70 MMBtu, it has an AFUE of 83% (i.e. 58.1 MMBtu ÷ 70 MMBtu).

The units are different for electric heating and cooling systems: Heating appliances use heating seasonal performance factor (HSPF), which  expresses the total heat output in MBtu divided by total electrical input in watt-hours. For example, an electric heating system that puts out 50.4 MMBtu of heat and uses 6 MMw-h of electricity has an HSPF of 8.4 (i.e. 50.4 MMBtu ÷ 6 MMw-h).

Cooling appliances use a seasonal energy efficiency ratio (SEER), which expresses the total cooling output in MBtu divided by total energy consumed in kilowatt-hours. For example, an electric cooling system that uses 6,000 kWh of electricity to produce a a cooling output of 84 MBtu has a SEER of 14 (i.e. 84 MBtu ÷ 6,000 kWh).

In all cases, the higher the number in the efficiency rating, the more efficiently a heating or cooling unit operates and the cheaper it is to use.

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Energy Saving Tips

• Use Reduction: An effective and often overlooked means of energy cost reduction is simply a reduction in usage. This can be accomplished by installing more efficient lamps, appliances, and equipment, or simply by turning things off when not needed.
• Cost Reduction: Buying energy at the lowest possible price is a way of lowering energy costs. Buying energy at a lower cost may mean switching your energy provider, but it may also mean changing equipment so you can switch to a fuel with a lower cost per delivered Btu.
• Payback: Whatever means are selected to conserve energy and reduce energy costs, you will want to consider payback as part of the decision-making process. Calculation of simple payback is an effective way to compare the costs and benefits of your project. To figure out the simple payback of an energy efficiency measure, take the initial cost of the project and divide it by the expected annual savings resulting from the project. For example, a  project costing $8,000 that saves you $900 every year, for example, would have a simple payback period of 8.9 years (i.e. $8,000 ÷ $900). Simple paybacks for energy saving measures vary widely, but it is important to remember that this calculation does not take into account the almost certain future increase in energy costs that may reduce payback times significantly.
• Life-Cycle Costing: Life-cycle costing allows you to accurately evaluate the costs and savings of installing an energy efficiency measure. Life-cycle costing involves analysis and comparisons of up-front cost, long-term operating costs, and possible repair costs. In order to perform the calculations, it is important to account for the energy inflation rate, or the fact that the price of energy is almost certaintly going to rise. Over the past 30 years, the average energy inflation rate has been 7.5% with inflation rates of over 20% throughout the last five years. Use 10% as the energy inflation rate while doing your calculations because that is the lowest energy inflation will realistically be over the next 30 years, though we are more likely to see energy inflation rates of 15-20% for many of the next 30 year .

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