The discount rate is used to convert cash flows occurring at different points in time to their time-equivalent present values as of the base date.
FEMP Discount Rate
As prescribed by 10 CFR 436A, the FEMP (Federal
Energy Management Program) discount rate for energy and water conservation, and
renewable energy projects is based on long-term U.S. Treasury bond rates
averaged over 12 months prior to the annual update of BLCC5. The nominal discount rate (market rate) is converted
to a real discount rate using the projected rate of general inflation from the
Economic Report of the President. A real discount rate is to be used for a
constant-dollar analysis, which is the analysis approach most often used in
federal cost-effectiveness evaluations of projects funded from tax
appropriations. A nominal discount rate may be used for alternatively financed
projects, such as Energy Savings Performance Contracts (ESPC) or Utility Energy
Services Contracts (UESC), which are usually evaluated in current dollars.
According to OMB (Office of Management and Budget) Circular A-94, discount rates vary according to the type of project and the length of the study period.