CEM Energy Economics and Financial Analysis 2 — Questions and Answers
Question 1: A facility's monthly electricity bill shows a demand charge of $15/kW for a peak demand of 500 kW. What is the monthly demand charge?
- $3,500
- $5,000
- $7,500 (Correct answer)
- $10,000
Correct answer: $7,500
Monthly demand charge = $15/kW × 500 kW = $7,500.
Question 2: In an Energy Savings Performance Contract (ESPC), the contractor's payment is primarily based on:
- Total hours worked on the project
- The number of energy conservation measures installed
- Verified energy savings achieved after implementation (Correct answer)
- The capital cost of equipment installed
Correct answer: Verified energy savings achieved after implementation
In an ESPC, the contractor is paid from the verified energy savings, directly aligning contractor incentives with actual performance outcomes.
Question 3: The Modified Accelerated Cost Recovery System (MACRS) is used in energy project financial analysis to:
- Calculate the escalation rate for energy costs
- Determine tax depreciation deductions over the asset's recovery period (Correct answer)
- Estimate the salvage value of equipment
- Calculate the present value of energy savings
Correct answer: Determine tax depreciation deductions over the asset's recovery period
MACRS is the IRS-approved depreciation system that determines how capital costs of energy equipment are deducted for tax purposes over specified recovery periods.
Question 4: In energy economics, the marginal cost of energy refers to:
- The average cost across all energy consumption
- The fixed monthly service charge from the utility
- The cost of the next unit of energy consumed (Correct answer)
- The minimum bill amount charged by the utility
Correct answer: The cost of the next unit of energy consumed
Marginal cost is the cost of consuming one additional unit of energy, which is critical for evaluating the economic benefit of incremental energy reductions.
Question 5: An energy project requires a $100,000 investment and generates $25,000 in annual savings over a 10-year life. What is the simple Return on Investment (ROI)?
- 25%
- 150% (Correct answer)
- 250%
- 25% per year
Correct answer: 150%
Simple ROI = (Total savings − Investment) / Investment × 100 = ($250,000 − $100,000) / $100,000 × 100 = 150%.
Question 6: The 'avoided cost' of energy is most accurately described as:
- The cost of energy already consumed
- The cost savings that result from not consuming a unit of energy (Correct answer)
- The penalty for exceeding contracted energy demand
- The cost of renewable energy certificates
Correct answer: The cost savings that result from not consuming a unit of energy
Avoided cost represents the economic value of energy that does not need to be purchased due to conservation or efficiency measures.
Question 7: The concept of 'time value of money' in energy project analysis implies that:
- Energy costs increase over time due to inflation
- A dollar of savings today is worth more than a dollar of savings in the future (Correct answer)
- Energy projects should only consider costs within the first year
- Future maintenance costs can be ignored in the analysis
Correct answer: A dollar of savings today is worth more than a dollar of savings in the future
The time value of money principle states that money available now is worth more than the same amount in the future due to its earning potential.
CEM Energy Economics and Financial Analysis 2
A facility's monthly electricity bill shows a demand charge of $15/kW for a peak demand of 500 kW.
What is the monthly demand charge?