Economic Life

At most utilities, the approach to identifying assets at end of life is a technical one: they consider the age and condition of assets and replace or rehabilitate them when their condition is poor or their age reaches the “expected service life” for the asset type in question. The problem with this approach is that it does not consider risk in a quantitative way; it is subjective and qualitative, relying heavily on the opinions of technical experts. This approach has faced increasing scrutiny from utility managers and from regulators recently. Questions such as, What if you don’t replace it?, are being raised. The economic life concept is a useful way of justifying spending on replacement or refurbishment of aging infrastructure in terms that resonate with financial and other non-technical audiences.

Conceptually, economic life is the service life that optimizes the balance between the benefit of delaying expenditures as long as possible and the cost due to risk of failure as assets age and their condition degrades. If you replace too early you will spend too much capital, but if you replace too late you will incur too much risk. Economic life has two meanings in the Feeder model. For a new asset, it is the service duration that is expected to minimize the life-cycle cost of ownership. For an existing asset, it is the number of years until the marginal cost (Risk Cost plus Maintenance Cost) exceeds the EAC of a new asset, at which point it is cheaper to replace the asset than to continue operating it.

It is important to note that the economic life calculation is in general different for each asset. Although capital Replacement Cost may be the same for each asset in a particular population, the Consequence of Failure can vary widely depending on the number of customers served by the asset and the configuration of the asset. This is a critical distinction from the technical approach to identifying assets in need of replacement, which takes little cognizance of varying Criticality within an asset class.

Continue to Economic Life of a New Asset.


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