Sustainable Public Procurement: Towards a low‐carbon economy

55 Sustainable Public Procurement: Towards a low carbon economy
criteria only for those items which are either very expensive or
are energy intensive and are likely to consume large amounts of
energy thereby increasing the company’s overall energy
expenditure. There is a condition in IFFCO’s NIT that if power
consumption is less in one product, then it is the chosen product
for procurement. Power consumption is quantified and then
accordingly, annual total cost is calculated, on the basis of which
a decision is taken. This is a technical requirement and normally
(90%), it is there in procurement of big items only as it is not
feasible to follow this procedure in small requirements due to
cost factor. Similarly, BHEL procures high grade CRGO (Cold
Rolled Grain Oriented Steel) that reduces the heat loss. These
grades are more expensive but are still procured considering their
energy efficiency.
In order to calculate a life cycle cost, the present value of all the
costs is taken into consideration. The costs include initial capital
cost, repair, operation and maintenance cost, cost of energy,
water and replacement over the life time. 35
While calculating the total cost, an inflation factor is added in
each of the cost components to reflect the changes over the time
period considered for the life cycle analysis. The present value of
the costs is calculated by using the discount factor, which is based
on the weighted average cost of capital. The weighted average
cost of capital is the average of the bank interest rates and return
on equity weighted by the proportion of the debt and equity
amount. In the United States of America, in projects related to
energy efficiency, energy conservation projects, renewable energy
projects, the discount factor has a floor of 3% and a ceiling of
12% 36 . It is calculated based on the average yields of the treasury
bonds that could not be called off before 10 years 37 . The discount
factor is dependent on the cost of capital, lifetime considered.
Often the discount factor is adjusted by the inflation rate and a
real discount factor is used in calculating the life cycle costs.
35 A simple formula for life cycle costs would be – Life Cycle Costs =
(Present Value of capital cost, repair, operation and maintenance cost, cost
of energy, water and replacement)
36 Guidance on Life-Cycle Cost Analysis Required by Executive Order
13123
January 8, 2003, www1.eere.energy.gov/femp/pdfs/lcc_guide_rev2.pdf
37 Guidance on Life-Cycle Cost Analysis Required by Executive Order
13123
January 8, 2003, www1.eere.energy.gov/femp/pdfs/lcc_guide_rev2.pdf
T E R I Report No. 2007GL01