CEP CEP Financial Analysis & Energy Budgeting 1 — Questions and Answers
Question 1: Which financial metric measures the ratio of annual energy cost savings to the total investment required for an energy project?
- Simple payback period
- Return on investment (ROI) (Correct answer)
- Net present value (NPV)
- Internal rate of return (IRR)
Correct answer: Return on investment (ROI)
Return on investment (ROI) is calculated as annual savings divided by total investment cost, expressed as a percentage.
Question 2: In energy budgeting, what does a 'load factor' represent?
- The ratio of average demand to peak demand over a period (Correct answer)
- The cost per kilowatt-hour of electricity consumed
- The percentage of renewable energy in the supply mix
- The transmission loss factor applied to billed energy
Correct answer: The ratio of average demand to peak demand over a period
Load factor is the ratio of average load to peak load over a billing period, indicating how efficiently capacity is being used.
Question 3: Which cost component in an electricity bill is typically based on the highest 15- or 30-minute interval of demand recorded during the billing period?
- Energy charge
- Demand charge (Correct answer)
- Transmission charge
- Fuel adjustment charge
Correct answer: Demand charge
Demand charges are assessed on the peak demand recorded during the billing period, incentivizing customers to reduce peak consumption.
Question 4: A company pays $0.08/kWh for energy and $12/kW for demand. If monthly usage is 500,000 kWh and peak demand is 1,200 kW, what is the total monthly bill?
- $40,000
- $54,400 (Correct answer)
- $55,400
- $60,000
Correct answer: $54,400
Total = (500,000 × $0.08) + (1,200 × $12) = $40,000 + $14,400 = $54,400.
Question 5: What is 'avoided cost' in the context of energy procurement financial analysis?
- The cost of energy that was not purchased due to efficiency improvements (Correct answer)
- A penalty charge for exceeding contracted capacity
- The hedging premium paid to lock in fixed energy prices
- The cost of backup generation capacity
Correct answer: The cost of energy that was not purchased due to efficiency improvements
Avoided cost refers to savings realized by not having to purchase energy or capacity that demand reduction or generation measures eliminate.
Question 6: Which financial instrument allows an energy buyer to lock in a fixed price for future electricity delivery while the seller assumes price risk?
- Energy option contract
- Fixed-price forward contract (Correct answer)
- Variable tariff agreement
- Capacity market bid
Correct answer: Fixed-price forward contract
A fixed-price forward contract obligates both buyer and seller to transact at a predetermined price on a future date, shielding the buyer from price volatility.
CEP CEP Financial Analysis & Energy Budgeting 1
Which financial metric measures the ratio of annual energy cost savings to the total investment required for an energy project?