Research on the Financial Effectiveness of Alternative Water Supply Systems in European Countries

There are many different definitions of the Life Cycle Cost (LCC) methodology in the literature. However, regardless of whether they concern the costs of a single product, equipment, entire production technology, or buildings and structures, LCC analysis includes the same main components.

The idea of the Life Cycle Cost methodology was created in the United States of America in the 1960s. The Department of Defense of the United States introduced it to practice in the implementation of public procurement (Epstein 1996). The department also published recommendations for the use of LCC analysis in various areas related to the functioning of the American army (Military Handbook… 1983a; Military Handbook Military Handbook… 1984a, b).

At the same time, there was a sharp increase in the cost of ownership and maintenance of buildings in the United States, which led to the demand to take into account the choice of the possibility of using different construction technologies already at the stage of making investment decisions. In relation with the above in 1978, the American Institute of Architecture published a book where it described the possibilities of using LCC analysis by architects in the design process of construction works (Haviland 1978). In subsequent years, attempts were made to adapt the LCC methodology to related investments with urban infrastructure (Dell Isola and Kirk 1981; Flanagan and Norman 1987; Flanagan et al. 1987).

In the 1980s, the US Department of Energy introduced a statutory requirement to use LCC analysis when purchasing federal facilities, primarily to compare alternative water and energy supply concepts, including renewable energy (Fuller and Petersen 1996).

Currently, LCC cost analysis is used in various fields of the economy, including power engineering, industry, transport, construction, infrastructure, or pumping technology. It is mainly used as a tool in decision-making and management (Bakis et al. 2003; Gluch and Baumann 2004). By carrying out the economic efficiency of a given investment, or the cost-effectiveness of purchasing a product throughout the life cycle, there is an option of choosing the cheapest solution, i.e., the one in which the total costs are minimized (Landers 1996). Often, it happens that the only selection criterion is the initial investment expenditure. This is an easy-to-use criterion but it can lead to a wrong decision in financial and environmental terms, as in some cases, the cost of use may exceed the cost of acquisition several times.

The LCC analysis results can provide valuable information and help make decisions when assessing and comparing alternatives. In many countries, the Life Cycle Cost methodology is legally required for the implementation of new investments, especially those characterized by high initial costs and long service life.

The use of LCC analysis can be important to assess the cost of existence of buildings and structures that have been in use for decades. Taking it into account already at the stage of building design and selection of various materials and technologies may affect not only the initial capital expenditure but above all, the value of operating costs, which are incurred throughout the life of the building.

The use of the LCC technique in the assessment of investment projects related to building development is recommended by the European standard ISO 15686–5 (Buildings… 2008). In 2006, the General Directorate for Entrepreneurship and Industry at the European Commission began the work to formulate a common Life Cycle Cost methodology used in sustainable construction. The effect of these works was, among others, several publications whose aim is to disseminate this methodology in the European Union countries (Life Cycle… 2007a, b, c).

LCC analysis is considered as one of the elements of sustainable development, which is a priority of the “Europe 2020 Strategy” adopted in 2010. According to it, this development is characterized by the support of a resource-efficient economy, a more competitive economy, and an environment-friendly economy.

The Life Cycle Cost costing process consists of several main steps (Fig. 6.1). The detailed tasks (stages) of the LCC analysis may vary and depend on which product or investment it is being carried out. The first stage of the analysis is to determine the problem that LCC analysis is to address and define the main goals of this analysis and its scope. The second stage is the preparation of the cost structure. This stage is divided into cost categories, i.e., capital expenditure and operating costs, which are identified by collecting the correct input data of the model. The next stage involves the development of a comprehensive LCC model, which consists of detailed investment and operating cost models. This model describes reality by mathematically recording the sum of costs associated with the problem under study. As a part of the fourth stage, calculations of individual costs are made, which constitute the input data for the next stage, which is the interpretation and evaluation of the obtained results. The final stage is the sensitivity analysis. It is carried out in order to examine the impact of changes in model data on LCC, e.g., changes in energy prices over the assumed lifetime of the facility. In the event that the formulated objectives of the analysis are not achieved in the first stage or if errors in the model are found, then it is necessary to introduce some changes in the third stage.

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Sensitivity analysis is performed to examine the impact of future changes in the key parameters of the model on the level of LCC costs and, therefore, on the profitability of the investment. Its results allow determining at the decision-making stage, the sensitivity of the model to changes in various variables such as the discount rate, energy prices, and water prices (Pastusiak 2003; Brigham and Ehrhardt 2008; Lang 2007).

In the LCC sensitivity analysis of facilities that will be used for decades, it is important to consider changes in data that affect the value of operating costs (Life Cycle… 2011). The results of such research may help a person who makes an assessment of the profitability of a given investment make a rational decision or by changing the assumptions of the LCC model will allow recalculating the investment project.

The investment sensitivity assessment can be made using various techniques. In the simplest form, the sensitivity analysis involves examining the impact of percent deviations of individual model variables on the value of the decision criterion, for example, LCC costs or operating costs alone. This method assumes a deviation of the variable from its base value, e.g., from −10 to +10% and again for this data, the total value of the investment is calculated (Rogowski 2004). It is important to accept only one data change at a time to determine how much the LCC cost will change if the value of this variable changes by x%.

Guidelines contained in (DOE 2014) studies provide that wherever the life span of an analyzed system goes beyond the foreseeable future, its residual value at the completion of exploitation need not be defined in quantifiable terms. Consequently, such costs were not taken care of in the quantitative analysis, similar to studies conducted by other authors (Rahman et al. 2012).

Due to the fact that in most of the considered cases, the sum of water demand for flushing toilets and watering the garden significantly exceeds the inflow of gray sewage into the system, it would be unprofitable to use it. Therefore, the financial analysis was carried out for a variant in which gray water was used only for toilets flushing (Variant 4) and a hybrid system (Variant 5), where treated gray sewage is used for flushing toilets and rainwater for washing and watering the garden.

The results obtained on the simulation model of rainwater harvesting systems (RWHS) and data on the graywater recycling systems (GWRS) presented in Chap.  5 were used as input data to assess the financial effectiveness of the investment consisting of the implementation of these systems in different variants in single-family houses. The research was carried out for houses located in European cities: Madrid, Lisbon, Rome, Prague, Bratislava, Budapest, Stockholm, and Warsaw.

The studies took into account the purchase and installation costs of water supply and sewage pipes in the building. In addition, in the options assuming the use of alternative water sources, the capital expenditure necessary to bear in connection with the implementation of the described systems was taken into account. In variants 1, 2, and 3, it was RWHS, while in variant 4 a, graywater recycling system. In turn, variant 5 includes the purchase cost of both systems.

In all variants, on the basis of the formulated simulation models, the operating costs resulting from water purchase and costs caused by the discharge of sanitary and rainwater sewage into sewage systems were calculated. Unit prices for these services have been established for each location from the information provided by the water supply companies. In configurations with alternative water sources, additional operating costs resulting from the use of electricity for pumping gray water and rainwater from tanks to the installation were also taken into account. In addition, according to the manufacturer’s guidelines, these options also include the cost of replacing filters and pumps.

The GWRS adopted for the analysis is a professional system with advanced methods of purification and disinfection that enable the removal of 99.9% of contaminants, viruses, and bacteria. In turn, the cost of RWHS depended on the capacity of the tank. The tests included rainwater harvesting systems with a capacity of 1, 2, 3, 4, 5, 7, 9, and 11 m³ offered by European producers, which are typical for single-family houses. In cases where rainwater was used for washing, additional filters and disinfection were provided.

In order to assess the investment risk associated with the use of the analyzed installation variants in a single-family residential building located in various European cities, a sensitivity analysis was carried out for selected calculation cases. This analysis consisted of determining the value of total LCC costs assuming that individual components of operating costs or investments would change by a specific percentage. When analyzing the share of total OMC operating costs and INV investments in the LCC costs of the considered installation variants, it was noticed that the latter accounted for 19% to 75%, 22% to 78%, 20% to 87%, and 14% to 68%, respectively, for investments in Warsaw, Bratislava, Budapest, and Stockholm. The lower values are the INV share for Variant 0 and the maximum for Variant 5. In these locations, therefore, it was justified to examine the impact of INV changes on the LCC value, because it was this part of the total life cycle costs that determined the profitability of individual plant configurations.

In operating costs, the vast majority of them were costs related to the purchase of water and the discharge of sewage to the sewage system, while the cost of electricity associated with pumping rainwater or gray water accounted for only 2–3%. Therefore, it was assumed in the research that only the costs of purchasing water and draining sewage would change. Considering the results of the LCC analysis and the cost-effectiveness of individual installation options for each location, it was found that it would be justified to examine the impact of reducing operating costs on the total costs of LCC in Lisbon, Madrid, Rome, and Prague, i.e., in cities where the use of alternative installation solutions was cost-effective. For these four locations, investments accounted for a maximum of 20%, and in some computational cases, they were only 1%. Therefore, it was decided that a sensitivity analysis for these locations would be made taking into account the total operating costs.

Due to the extensive data received, this chapter presents selected results of this analysis. In the case of variants with rainwater harvesting system, the focus was on those tank volumes that proved to be optimal in the first stage of research.

The results of the research regarding changes in initial investments (Scenario A) are shown in Figs. 6.21 and 6.22. On their basis, it can be concluded that reducing the INV amount by 10% does not change the profitability hierarchy of individual variants, both for the case when the installation is used by two and four residents. The traditional option (Variant 0) was still the most cost-effective solution for all locations. A 25% reduction in investments for variants with alternative water sources results in an increase in LCC costs for Variant 0, which in turn causes a change in the profitability of the investment in favor of Variant 3, but only in the case of Stockholm. For other cities, the use of unconventional installation variants in a single-family building is still financially disadvantageous. It is only by halving the investments that the financial efficiency of the analyzed options for all locations improves. In the case of Warsaw, Bratislava, and Stockholm, the most cost-effective solution is the variant, which provides for the implementation of a rainwater harvesting system for toilets flushing, washing, and watering the garden (Variant 3). However, in a situation where the investment was located in Budapest, the lowest LCC costs were obtained for two variants Variant 3 (two persons) and Variant 5 (four persons) assuming the use of rainwater and gray water. Generally, it can be stated that, with one exception, the highest LCC costs for all locations and for all computational cases were the variants equipped with a graywater recycling system. This means that due to the very high investments that are necessary to implement these systems, it is not cost-effective to use gray water as an alternative source of water in locations where there are relatively low fees for purchasing water from the network.

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However, it should be noted that such large fluctuations in the value of initial investments will not take place due to the fact that their amount, in contrast to the costs associated with the use of the installation, can be determined very precisely at the investment planning stage. The sensitivity analysis carried out in this regard, however, allowed drawing an important conclusion, namely cofinancing for costs allocated to the implementation of alternative water systems may increase their financial efficiency and contribute to their wider use in countries where they are rarely used. Such funding as an element of pro-ecological policy has been practiced for many years in various countries around the world.

In the case of cities where investments constituted an insignificant part of LCC costs, their change would not cause significant differences in the value of total life cycle costs, and thus would not affect the profitability hierarchy of individual installation variants. Taking this into account, research on investment sensitivity for these locations was carried out, taking into account the reduction of operating costs by 10%, 25%, and 50% that could be caused in the future, less than expected increase in water purchase prices and prices for sewage disposal into the sewage system. The results of this analysis are shown in Figs. 6.23 and 6.24. They clearly show that the investment based on the implementation of systems with alternative water sources in Lisbon is not sensitive to changes according to Scenario B. Even reducing the operating costs by half will not change the most cost-effective option, i.e., Variant 5, which brings the greatest water savings. In the case of Rome, where the differences in LCC costs between the considered variants were a slight reduction in costs in the examined area, it improves the financial efficiency of the traditional installation solution (Variant 0), to the detriment of the variant with the rainwater harvesting system (Variant 3). The situation is similar in the case of Prague. Madrid was the second city after Lisbon with the largest share of operating costs in the total costs of LCC. However, the location of alternative water system variants in its area is more risky than in Lisbon, with a 50% reduction in operating costs, the LCC indicator for Variant 0 reaches the same level as for variants with RWHS and GWRS, especially for four users.

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Variant 0, i.e., the traditional installation layout, always has the lowest investments. As a result, most investors are currently choosing such a solution for plumbing and building installations, without analyzing the operating costs associated with the operation of the system in the long run. Meanwhile, the Life Cycle Cost analysis showed that operating costs can determine the level of the LCC indicator and decide on the financially most favorable option. It is especially observed for cities with high fees for water and sewage disposal and/or their annual increase is significant. In the study, these were the following locations: Lisbon, Madrid, Rome, and Prague. It was in these cities that the implementation of alternative solutions for water installations supplied with rainwater and gray water was financially profitable. The necessity to incur additional investments for rainwater harvesting system (RWHS) and graywater recycling system (GWRS) and the lack of coverage by savings resulting from their use meant that unconventional installation systems were unprofitable in Warsaw, Bratislava, Budapest, and Stockholm.

The sensitivity analysis conducted also showed that the results obtained in the first stage could be considered correct, and the investments consisting in the implementation of RWHS and GWRS were slightly susceptible to changing individual parameters of the financial model. No significant changes in the profitability hierarchy of the installation variants were observed.

The results of the LCC analysis also have a practical aspect and can be a guide for potential investors and operators to apply this type of system already at the investment planning stage. An additional impulse to use them, especially in locations where their use is not profitable, could also be funding from the state budget or from pro-ecological funds of international organizations, as is the case in many other countries.