The Business Impacts of Energy Efficiency

MONETIZING ENERGY SOLUTIONS

Christopher Russell, Principal

Energy PathFINDER .com (443) 636-7746

About Christopher Russell, C.E.M., C.R.M. Independent consulting since 2006

Principal, Energy Pathfinder

Visiting Fellow, American Council for an Energy Efficient Economy, 2012+

Energy Manager, Howard County, MD, 2010-2012

Director of Industrial Programs, Alliance to Save Energy, 1999-2006

Comm. & Indus. Program Manager, American Gas Association, 1995-1999

MBA, M.A., University of MD; B.A., McGill University

2 ©2013 Energy PathFINDER.com

About Christopher Russell

PROJECT or INVESTMENT?

• PROJECTS:

– Cost money

– Take up time

– Distract from operating goals & procedures

• INVESTMENTS:

– Produce a cash flow

– Earn a rate of return

– Grow the business, create wealth


Payback Analysis

If the payback isn’t “good”….

Just WALK AWAY from the proposal.


RIGHT?

5

Can You Walk Away from the Investment?

TYPE 1: NEW INITIATIVE • Facility addition • Expanded production process • New product line

TYPE 2: EXISTING OBLIGATION • Efficiency improvement • Still bear the cost of waste

if no investment is made

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Investment Outcomes

• Investors WILL PAY either way: – For the energy solution, or – For the energy waste

You can’t walk away.

• Goal for energy solutions: seek the least cost of meeting an obligation.


$8 million ANNUAL

NET INCOME

7

EXAMPLE: Return on Invested Capital

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Production Facility

POWER HOUSE

$100 million INVESTED CAPITAL

8% RoIC

Investment “Dead Band”

YEARS TO PAYBACK

RATE OF RETURN (no compounding)

1 100%

2 50%

3 33%

4 25%

5 20%

10 10%

12.5 8%

20 5%

50% - 8% = 42% PREMIUM

….that investments must return OVER AND ABOVE cost of capital.


Investor’s Rates of Return (Thru 25 Yrs)

PROJECT COST: ECONOMIC LIFE:

$1,500,000 25 YRS

5% -

0% -

15% -

20% -

25% -


EXAMPLE: 5-YR Payback

Operating Results

ENERGY PROPOSAL IRR = 8% AFTER TAXES & FINANCE

ENERGY PROPOSAL IRR = 22% BEFORE TAXES

MUTUAL FUNDS = 3%

COST TO BORROW = 4%

COST OF INTERNAL CAPITAL = 8%

IRR = -12.6% REJECT PROJECT, NEGATIVE CASH FLOW

BEST COMPETITOR’S CAPITAL RECOVERY= 10%

10% -

TWO-YEAR PAYBACK = 50%

Capital MUST be parked somewhere….

• Core business: RoR on invested capital

• Energy project: After-tax rate of return

• Stocks/mutual funds compare to

• Cost to borrow

• Rate of capital destruction

%? 25% -

0% -

50% -

75% -

100% -

-25% -

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• $1,500,000 cost

• $200,000 rebate (YR1)

• $200,000 downpayment

Cap. recovery:

25 YRS/8%

• $1,300,000 borrowed

20YRS/4%

• 25 YR economic life

• 1.5%/yr energy price escalation

• 39-YR Straight-line depreciation

• 35% marginal tax rate

• $0.50/therm natural gas

• $0.09/kWh electricity

• $30,000 O&M saving/yr

BOILER / STEAM UPGRADE

BEFORE AFTER

ELEC kWh 5,260,000 4,734,000

GAS therm 2,700,000 2,294,680

Annual O&M $72,000 $42,000


FREE CASH FLOW?

RATE OF RETURN?

COST OF DOING NOTHING?


What do executives need to know?

Does “simple payback” answer these?

MONETIZING ENERGY OUTCOMES ACCEPT REJECT

GET

Gross life-cycle

energy savings

$$$

Satisfaction of no

capital expenditure?

$0

GIVE UP

Total amortized

project cost

$$$

Life-cycle cost of

DOING NOTHING

$$$

NET

RESULT

GET – GIVE UP=

+FREE CASH FLOW

GET – GIVE UP=

-FORFEITED NET

CASH FLOW

PRICE

TAG

$Project Invoice $Capitalized Waste

Value


“Bad” Project with 5-Year Payback

GROSS WASTE

COMMITTED EXPENSE

NET SAVINGS

TOTAL CAPITALIZED COST


$47,611,847 $47,611,847

$5,930,527

$1,947,018

$3,983,509

REJECT ACCEPT

OR:

COST OF DOING

NOTHING

OR:

CAPEX SUBSIDY

OR:

WORKING

CAPITAL

SUBSIDY

INTERPRETING ANNUALIZED COST ANALYSIS

ANNUAL EXPENDITURE

COMMITTED EXPENDITURE

ANNUALIZED PROJECT COST

ANNUAL GROSS

ENERGY SAVINGS

Annualized net savings

Annualized penalty for DOING NOTHING

Free cash flow to: • Working capital (finance your operations)

Or • Investment capital (finance your asset base)

?


Pivotal Philosophy Change

MANAGE ENERGY LIKE MONEY

• Energy = wealth

• Fuel, power = forms of currency

• What if MONEY was managed like energy?

• Just shovel it in, hand it out

• No controls, protocols or accountabilities

• Occasional reconciliation projects, time permitting

WHAT WOULD CASH BALANCES LOOK LIKE?


Boiler Example: Save or Buy Choice

Annual energy use, current application

in-place

Annual energy use, efficient alternative

AN

NU

AL

ENER

GY

C

ON

SUM

PTI

ON

REJECT THE IMPROVEMENT

$5.9064 per MMBtu consumed

$5.9064 per MMBtu

wasted

$2.8446 per MMBtu

avoided

Committed Energy Energy put to

work as intended

Energy At-Risk: You will pay for it either way

$5.9064 per MMBtu consumed

ACCEPT THE IMPROVEMENT


MONETIZE

Key Energy Assets • Payback, ROI • Costs, Incentives • Savings

• Unit price to save vs. price to buy energy • Second price tag – capital equivalent of waste • Cost of doing nothing • Cash flow and rates of return


EMOTIONAL IMPACT….

FEATURE PAYBACK

ANNUALIZED COST

ANALYSIS

Account for cash flows over the life of

the improvement?

NO YES

Incorporate the time-value of money? NO YES

Provide basis for break-even cost

evaluation?

SORT OF YES

Compare value of projects with

different economic lives?

NO YES

Describe value of free cash flow? NO YES

Provide the “price tag” for NOT taking

action?

NO YES


“It’s what you learn after you know it all that counts.”

Harry S. Truman 33rd President of the United States of America (1884 – 1972)


YOU-TUBE: search “Energy Pathfinder Investment Calculator”

Energy PathFINDER .com

Christopher Russell

@ENERGYpathfndr

Feb 2008 June 2010

THANK YOU!

The Business Impacts of Energy Efficiency

Technology

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