Research on the Financial Effectiveness of Alternative Water Supply Systems in European Countries
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Currently, the financial criterion is a decisive criterion in the process of making investment decisions. Taking this into account, a financial analysis was carried out for various variants of sanitary installations in single-family buildings located in selected cities in Europe. The research was carried out using the Life Cycle Cost methodology.
6.1 Life Cycle Cost Methodology
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.
operating costs; €;
costs of liquidation or economic use, €
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.
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%.
the present value of the accumulated annual costs incurred in the future for the use of the building;
operating costs in a year t, €;
duration of the LCC analysis, years;
constant discount rate;
the number of years after installation;
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).
6.2 Variants of Sustainable Water Management in Buildings
- Variant 0—traditional installation supplied with water from the water supply network and sewage discharged into the sewage system (Fig. 6.2),
- Variant 1—rainwater installation for toilets flushing (Fig. 6.3),
- Variant 2—rainwater installation for toilets flushing and washing (Fig. 6.4),
- Variant 3—installation using rainwater for toilets flushing, washing, and watering the garden (Fig. 6.5),
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.
6.3 Case Studies
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.
Data used in the calculation of LCC costs
Analysis period T
The cost of filter change in GWRS after each 10 years
The cost of purchasing and installing the GWRS 250 dm3/day INVGWHS_250
The cost of purchasing and installing the RWHS INVRWHS_1m3
The cost of purchasing and installing the RWHS INVRWHS_2m3
The cost of purchasing and installing the RWHS INVRWHS_3m3
The cost of purchasing and installing the RWHS INVRWHS_4m3
The cost of purchasing and installing the RWHS INVRWHS_5m3
The cost of purchasing and installing the RWHS INVRWHS_7m3
The cost of purchasing and installing the RWHS INVRWHS_9m3
The cost of purchasing and installing the RWHS INVRWHS_11m3
The cost of purchasing and installing the sanitary systems INV0
The discount rate r
Unitary prices accepted for LCC analysis
The cost of purchasing water from the water-pipe network and sanitary sewage discharge to the sewage network in the year 0, €/m3
The annual increase in the prices of purchase of water from the water-pipe network and sanitary sewage discharge to the sewage network, %
The cost of purchasing electricity in the year 0, €/kWh
The annual increase in electricity prices, %
The cost of the discharge of rainwater to the sewage network in the year 0
6.4 Analysis Results
6.4.1 Results of Life Cycle Cost Analysis
The research conducted showed that the selection of the right investment option had a decisive impact on the total amount of life cycle costs of the plumbing installation in the residential buildings considered. The results of calculations for the LCC indicator obtained for various conditions of use of the installation indicate that both the number of inhabitants and the price of purchasing water and wastewater disposal determine the profitability of applying individual solutions in the analyzed European cities.
When analyzing the results of the research in the scope of the LCC analysis for all the locations considered, it was noticed that the use of alternative variants of water installation in single-family buildings is financially beneficial for their locations where the purchase price of water from the water supply network and for sewage disposal was above 3 EUR/m3 (Madrid, Prague, Rome) or if the annual increase in this price was significant (Lisbon). In the case of the other four locations, i.e., Bratislava, Budapest, Warsaw, and Stockholm, the implementation of rainwater harvesting systems and graywater recycling systems was unprofitable because in these cities, unit prices and their annual increase were at a lower level, which resulted in lower annual operating costs and as a result, higher LCC values.
6.4.2 The Impact of Life Span
In order to examine the impact of the analysis period on the value of LCC costs, there were carried out the studies in which the T parameter changed. It was assumed that T will be 20 years and 50 years. Accepting a longer period of operation of the system for research, as did by other authors (Roebuck et al. 2011; Morales-Pinzón et al. 2012; Silva et al. 2015), may lead to more favorable results from the investor’s point of view. This is also supported by the durability of materials currently used for building installations, mainly plastics, for which manufacturers declare a minimum service life of 50 years. For this reason, the research was conducted for the adopted initial input data which checked how the values of financial ratios characterizing the undertaking would change when the lifetime was extended to 50 years. The impact of a shorter analysis period on LCC costs was also examined, which may be significant especially in the case of variants with alternative water sources for which the LCC index value slightly differed from its level for a traditional installation solution.
As for T = 30 years, the largest LCC costs were obtained for variants with a wastewater recycling system (Variant 4 and Variant 5). Among the variants analyzed, the variant with the use of rainwater for toilets flushing, washing, and watering the garden (Variant 3) is most favorable compared to Variant 0. This is especially noticeable for four users of the installation. Such unfavorable results for variants with alternative water sources in buildings located in Budapest, Bratislava, Stockholm, and Warsaw, despite the extension of the LCC analysis period, are affected by relatively low purchase prices of water from the water supply network in these cities. In addition, the savings obtained, even over a long period of 50 years, do not compensate for the investment outlays that should be allocated to the implementation of RWHS and GWRS as well as the costs of replacing filters and pumps during the operation of these systems.
Considering that the annual increase in the purchase price of water and sewage, which was included in the study, had a significant impact on the value of total costs, a sensitivity analysis of the investment was carried out based on change, including this parameter. The results of this research are presented in Sect. 6.5.
6.5 Sensitivity Analysis
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.
Scenario A—change in the value of initial investments.
Scenario B—change in the value of operating costs resulting from the amount of tap water used and the amount of sanitary wastewater discharged from the building to the sewage network.
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.
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.
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.
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