10.+Economic+Context+of+Sustainable+Infrastructure+Systems

=Chapter 10 - Engineering Economics and Life Cycle Costs=

Author - Samuel Bell, Michael Vrtis, Alec Van Huele, Jeremy Gregory

The goal of this chapter is to analyze the link between economics, through cycle cost analysis, and sustainable infrastructure design. This goal will be met by:


 * Providing a brief overview of economic definitions and factors used to quantify economic variables.
 * Closely examining the economic benefits gained from full life cycle cost analysis.

Introduction
Although engineers are not traditionally know for their economic analysis abilities, engineering economics must be utilized when evaluating competing design alternatives. Engineering economics is defined by the American Society for Testing and Materials as the application of economic techniques to the evaluation of design and engineering alternatives. (ASTM E833) This type of economic approach allows engineers to quantify design decisions from technical terminology into dollars.

In order to be able to compare competing design alternatives it is necessary to consider the economic analysis for the entire life cycle of the project. There are two major segments of economic impact that are related to infrastructure analysis. First is the cost of the infrastructure itself in materials, building costs, and labor, referred to as internal costs. Second are the external costs which are the costs and possible benefits to society. Both internal and external costs must be considered in the design of sustainable infrastructure.

Time value of money
Time value of money (TVOM) is the first important economic concept to understand when comparing projects over a period of time. The concept of TVOM basically states that the value of money is dependent on the time of reference. For example, in sustainable design when calculating the future worth of a component or piece of equipment for a life cycle assessment the TVOM must be used to calculate the correct value. The value of money changes with time due to the following reasons:

1. Inflation - while the cause and effect of inflation are under constant scrutiny and debate, the general definition is taken as the rise in price of goods and services. The main measure of price inflation in the inflation rate, the annualized percentage change in a general price index over time.

2. Risk - must be taken into account when comparing different projects. Generally speaking, the larger the possible return, the greater the risk and vis versa.

3. Cost of money (interest and return on investment) - the cost of money refers to the money that lending institutions charge for their services, called interest, which will be discussed next.

Interest Rates
Interest is the money paid for the use of borrowed money or the return on invested capital. For example, a bank charges interest, as a percentage of the initial loan, for providing a loan which is usually a compound interest charged each month. It is important to take into account accumulated interest when comparing different alternatives. Interest amounts can be calculated as follows.

F = Future worth, P = Present worth, i = Interest rate (decimal form) N = Number of time increments;

Simple interest: F = P + P(i) = P(1+i)

Ex. Loan amount (P) = $200.00, interest rate (i) = 9% = 0.09 F = 200 + 200*(0.09) = $218.00



Compound interest: F = P(1 + i)^N

Ex. Loan amount (P) = $200.00, interest rate (i) = 9% compounded annually for a period of 8 yrs (N); F = 200*(1+0.09)^8 = $398.51



Future Worth
Future worth calculations can be useful for figuring out the value of components, equipment, materials and/or property related to a sustainable project over its life cycle. One feature of sustainable engineering that makes it stand out from typical practice is more economic benefits over time. These economic benefits can be demonstrated using the economic principle of future worth. For example, sustainable projects use materials that are either reusable or recyclable which makes them worth more in the future and also reduces environmental costs in the future. In addition, sustainable projects are friendly to the surrounding environment which makes the property more valuable well into the future, instead of releasing harmful waste into the earth which decreases property value over time.

Benefit-Cost Analysis
Benefit-Cost analysis brings together the full circle of economic losses and gains of a sustainable engineering project and also takes into account the overlap of economic, environmental, and social performance. The overall analysis will determine whether the benefits outweigh the costs. Common economic benefits include job creation and revenue gains. Sustainable design goes beyond the standard economic model by also including environmental benefits such as low pollution levels and societal benefits such as healthier living standards.

=**Economic Benefits of Sustainable Infrastructure Design and Life Cycle Costs**=

When designing an infrastructure project it is important to look at the economic factors to determine whether or not the project is sustainable. The most common way to do this is a Life Cycle Assessment (See Ch. 9) which looks at the costs and benefits of a project over the course of its life span. How is a sustainable infrastructure project beneficial economically? While some sustainable projects may cost more up front, the true economic benefits can be seen over the course of their lifespan. A sustainable infrastructure example and detailed life cycle costs are provided below. = =

**Example: Miravalles Geothermal Plant**
The Miravalles Geothermal Plant is the largest geothermal plant in Costa Rica. The plant was built in 1994 and it creates 163 MW of power. The cost to build the plant was $400 million. There is very little environmental harm and the maintenance costs are also low. Some of the maintenance costs currently involve updating the electronics and computers from analog to digital. The geothermal plant employs about 80 people. The remote location of the geothermal plant has brought new opportunities for people who lived in rural areas within Costa Rica. New communities have been created because of the power plant. Local local economies have grown due to the power plant. They now plan to build additional plants which will begin running in 2019. They plan to have a total of 400 MW being produced by 2020.

Life Cycle Costs
This stage begins with projects that are still in the conceptual or preplanning phase. The site may not have been determined or even a project strategy. This involves not only “doing the project right”, but “doing the right project”. This involves doing research, working with local communities and governments, understanding growth trends, understanding the area are all involved in the planning and design stage. The costs during this stage include fees from architects, engineers, urban planners, legal documents, permitting, and public meetings. In sustainable design, this stage may be more expensive and require more work and collaboration in the beginning but the benefits will be seen throughout the rest of the project's lifespan.
 * Stage 1: Planning and Design**

This is the core stage that will affect the life cycle costs. This involves material extraction, materials used, location of materials, the overall cost of labor, and waste disposal. The more materials used the more harmful to the environment. The construction phase may cost more as well. Currently, recycled materials often cost more than unused materials. Also, if recycled materials are unavailable, a sustainable project should use the best renewable materials available. Better materials will cost more up front, but last longer into the future. One way that sustainable projects cut down on construction costs is by producing little to no waste on site.
 * Stage 2: Construction**

This requires a more in depth audit of what input and outputs are needed to keep the building running. The inputs include material, energy and water consumption. The following outputs included are emissions to air, emissions to water, emissions to land and solid waste. These inputs and outputs includes the cost of parts and repairs that are associated with the inputs and outputs. A link between operational costs and sustainability can be seen in the electric, gas, and water bills. For example a Green Building (see Ch. 23) will consume less energy therefore putting less strain on the power companies which will cost all of society less in the future. Simple design and systems that utilize nature can cut down on maintenance costs, such as; natural heating and cooling. Proper, well-timed maintenance will also increase the life of infrastructure and lead to less repairs. This is the most important Stage of a project's life cycle because this is where the project's true potential is realized. The benefits of a well designed, planned, and executed project are directly related to the economy. For example, a project that is accepted by the local community will be used to its fullest extent, such as the streets in San Jose, Costa Rica that are pedestrian only promote safe travel that attract more people and increase business to the local shops.
 * Stage 3: Operations and Maintenance**

Sustainable projects are more economically viable at the end of their lifespan as well. The end of life of a project is also an important part of the life cycle analysis. This will take into account the cost of demolition or relocation and also what the salvageable parts will be worth. For a project to be economically sustainable it must contain recyclable materials and components and also have as little impact on the surrounding environment as possible. Recyclable materials will be worth money in the future due to dwindling resources and rising costs to extract materials. Another important economic benefit from sustainable design that ties into the environmental aspect is the low impact to the land. Leaving the site untouched from pollution or contaminants will make the land worth more in the future and eliminate the need for costly environmental remediation.
 * Stage 4: Deconstruction and Decommissioning**

Conclusion
Economic indicators can form a direct link from the social and environmental benefits of sustainable design to the business aspect of a project. Sustainable design, when taken into economic context, can show investors, policy makers, and the community that it is worth the time and money. Economically sustainable practices also allow engineers a way to plan for and measure, in dollars, efficiency, direct benefit-cost, health effects, safety, and environmental costs.


 * Works Cited**

Allen D.T. and Shonnard D.R. //Sustainable Engineering: Concepts, Design, and Case Studies.// Upper Saddle River: Prentice Hall, 2011.

Envision, version 2.0, 2012 ISI, inc. ISI Guidance Manual

Lawn, Philip A., //Toward Sustainable Design: An Ecological Economics Approach.// Boca Raton: CRC, 2001.

Watts and Chapman, //Engineering Economics,// [|www.fire.nist.gov/bfrlpubs/build02/PDF/b02155.pdf]