HECM Phase 6 Cost and Prioritisation Workshop 24 th September 2010

HECM Phase 6

Cost and Prioritisation Workshop

24th September 2010

Agenda

Session 1: Introduction and context– Timeline– Where are we now?– HEFCE Guide– The Carbon Management Plan (CMP)– Estimating Capital Cost of Projects – Understanding Financial and Carbon Metrics

Session 2: Prioritising and the CMPR– Prioritising Projects Using Combined Carbon &

Financial Metrics – Getting to Grips with the CMPR– Recap Progress Against Target– Next steps

Timeline

HECM6 – the timeline

We are here

November

Where are we now?

Key Statistics

Baseline 2008/9 - 42.43 tonnes2005 Baseline – 29.08 tonnes

Target 2008 to 2015 – 35%Target 2008 to 2020 – 45%

Total Carbon To Identify in CMP (to 2015)–14.85 tonnes

Summary of Carbon Emissions and Targets

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

2005 2010 2015 2020

Carbon Emission to Date CMP Planned ReductionCIF2 Target ReductionConstuction Lines

Summary of Carbon Emissions and Targets

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2005 2010 2015 2020

Projected emissions in 2020 Target Year –

xxx tonnes

Emissions in 2005/06

Baseline Year

xxx tonnes

Emissions in 2009/10

xxx tonnes

Difference between 2009/10 emissions and projected 2020 emissions (Percentage Reduction – xx %)

Difference between emissions in 2005/06 and projected 2020 emissions (Percentage Reduction – XX%)

Projected emissions in 2014/15 xx tonnes

Where are we now?

Current Projects

Number of ProjectsTotal Carbon IdentifiedWho is responsible for each project?How close do these projects bring you to your target?Are there any current projects we’ve missed?

Target 35%Target 35%

Current Projects xx%

RAPProjects YY%

Opps WorkshopProjects YY%

Opps WorkshopProjects YY% Gap

Projects from the Opportunities Workshop

Number of ProjectsTotal Carbon Identified So FarWhich projects are you investigating?Who is responsible for each project?How close do these projects bring you to your target?

RAPProjects YY%

Opps WorkshopProjects YY% Gap

RAP Tool Projects

Top 10 RAP Tool ProjectsTotal Carbon Identified So FarWho is responsible for each project?How close do these projects bring you to your target?

RAPProjects YY%

Closing the Gap

What actions need to be completed to close the gap?

RAPProjects YY%

HEFCE Guide

Alignment with CIF2

Baseline

Mobilisation and Objective Setting

Carbon Management Plan

Prioritisation of Opportunities

Costing

Opportunities Identification

Target Setting

Implement Plan

Approve Plan

Identification and Quantification

Baseline, Forecasts, Targets

Mobilise Organisation

Baseline

Mobilisation and Objective Setting

Carbon Management Plan

Prioritisation of Opportunities

Costing

Opportunities Identification

Target Setting

Implement Plan

Approve Plan

Identification and Quantification

Baseline, Forecasts, Targets

Mobilise Organisation

HEFCE Good Practice Guide

Costing– CAPEX, OPEX– Need for life-cycle costing– Established investment appraisal protocols

and procedures need to be applied– Simple payback as a minimum, need for

NPV for larger projects– Need also to look at cost of inaction

Prioritisation– Need internally agreed criteria– Need to consider cost/affordability and impact/savings– Overlap and interaction with other strategies and priorities– MACC

The Carbon Management Plan (CMP)

The Carbon Management Plan (CMP)Section 4 - Projects

Capital OperationalFinancial (Gross) tCO2

Net Present Cost(£)

1Secondary glazing - Offices £450,000 £8,010 54.5 tCO2

does not payback £300,854 0.72% 2012

2Voltage optimisation - Block A £90,000 £24,440 133. tCO2 3.7 -£215,756 1.76% 2009

3Cavity wall insulation - Research Centre £100,000 £15,000 102.1 tCO2 6.7 -£179,300 1.35% 2010

Upgrade to condensing boilers - Swimming pool hall £200,000 £22,291 151.7 tCO2 9.0 -£215,061 2.00% 2013

5Video and web conferencing £9,000 £2,049 £6,058 14.6 tCO2 2.2 -£9,625 0.19% 2010

6 Automatic Meter Reading £90,000 £28,545 £123,484 753.8 tCO2 0.9 -£738,249 9.96% 2010

7Lighting upgrades - Residential Hall A £100,000 £90,000 489.8 tCO2 1.1 -£695,825 6.47% 2012

Ref Project Lead

Cost Annual Savings (yr 1)

Pay back (yrs) % of TargetImplementation

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 TOTAL

Annual cost saving

£0 £215,743 £384,936 £434,897 £442,473 £450,047 £843,991 £2,772,087

Annual tCO2 saving

113 2,510 3,435 4,171 4,242 5,975 7,923 28,369

% of baseline CO2 saving 0.46 10.27 14.05 17.06 17.35 24.44 32.41

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 TOTAL

Annual costs:

£1,114,032 £65,590£858,61

3£858,962 £178,096 £0 £0 £0 £3,075,293

Committed funding:

£1,114,032 £65,590£670,03

4£783,096 £178,096 £0 £0 £0 £2,810,848

Unallocated funding

£0 £0£188,57

9£75,866 £0 £0 £0 £0 £264,445

Savings

Funding

The Carbon Management Plan (CMP)Section 5 - Financing

CMPR flowchart

Import baseline

Review payback graphic

Check cost estimates

Initial analysis

Advanced analysisReview MACC

Review Reduction

Complete Project List

Review summary page and

CMP outputs

Estimating capital costs

Estimating Costs of Projects

RAP toolSalixRules of ThumbCarbon Trust SurveysOrganisation’s own experience – use your teamQuotes from suppliers

Understanding financial and carbon metrics

Metrics for analysing project effectiveness

Initial Analysis– Simple payback– Salix £/tonne CO2 lifetime

Advanced Analysis– Net present cost– Cost effectiveness ratio (£/tonne CO2)

– Internal rate of return (IRR)

Use to……. 1. establish financial case2. prioritise projects

Capex – capital expenditure/costs– Single one off costs in year 0, usually includes

design, materials, technologies, installation, commissioning etc.

Opex – Operational expenditure/costs– Usually annual costs for running a project, e.g.

maintenance and servicing, lease costs or staff resource costs. Does not normally include energy costs for carbon reduction projects as these are accounted for in the savings data

– There may also be opex savings through some projects

Basic metrics

CO2 savings in year 1 (tCO2 or kgCO2)– The amount of carbon savings expected from a

project in the first full year of operation.

Simple Payback (yrs)– How long a project takes to pay the Capex back

through the financial savings achieved (yrs)

Capex(£)Annual financial savings (£/yr) – Opex (£/yr)

-£40,000

-£20,000

£20,000

£40,000

£60,000

£80,000

£100,000

0 1 2 3 4 5 6

Simple payback

Best output Value tends to zero

Worst output Does not pay back – savings not realised during the lifetime of project

No financial savings – need to update p/kWh costs in the Conversion Assistant tab.

Exercise 1

Payback exerciseProject Capex Opex £ Savings

(gross)Payback (yrs)

Secondary glazing - Offices

£450,000 £8,010

Voltage optimisation - Block A

£90,000 £24,440

Cavity wall insulation - Research Centre

£100,000 £15,000

Upgrade to condensing boilers - Swimming pool hall

£200,000 £22,291

Video and web conferencing

£9,000 £2,049 £6,058

Automatic Meter Reading £90,000 £28,545 £123,484

Lighting upgrades - Residential Hall A

£100,000 £90,000

ExamplesProject Capex Opex £ Savings

(gross)Payback (yrs)

£450,000 £8,010 does not payback in project lifetime

(25 yrs)

£90,000 £24,440 3.68

£100,000 £15,000 6.67

Upgrade to condensing boilers - Swimming pool

£200,000 £22,291 8.97

£9,000 £2,049 £6,058 2.24

Automatic Meter Reading £90,000 £28,545 £123,484 0.95

£100,000 £90,000 1.11

Payback

0.95 1.11

6 7 5 2 3 4

Project Ref. Number

Simple Payback Graph in CMPR

Project Ref. Number Description of Project

Simple Payback (years)

6 Automatic Meter Reading 0.95

7Lighting upgrades - Residential Hall A 1.11

5 Video and web conferencing 2.24

2 Voltage optimisation - Block A 3.68

3Cavity wall insulation - Research Centre 6.67

4Upgrade to condensing boilers - Swimming pool hall 8.97

Further metrics

Pounds per tonne CO2 (£/tCO2)

– Capex per tonne of CO2 saved in year 1

Capex (£)Tonnes CO2 saved year 1 (tCO2)

Lifetime CO2 savings (tCO2)– The amount of carbon likely to be saved over the

lifetime of a project

Tonnes CO2

(year 1)x Project lifetime

(yrs)Adjusted to account for ‘persistence’ of CO2

savings in CMPR. (default 0%)

Salix metrics

Best output Value tends to zero (low £, high CO2)

Worst output Large positive number (high £, low CO2)

Persistence factor

Capex (£)=

• Provided by Salix (see References and lookup tab in CMPR)• Effectively a reduced lifetime of the technology

=£↓

↑CO2Tonnes CO2

(year 1)x

Salix pounds per tonne CO2 lifetime (£/tCO2 LT)

Financial metrics

Net Present Value (NPV)– The present value of an investment's future net

cash flows minus the initial investment.

Net Present Cost– The negative value of the NPV – Works better for energy saving projects as a larger

negative number shows greater savings

= Capital Cost + Operating Cost – Savings (discounted over project lifetime)

Financial Metrics

Discount rate– The interest rate used in determining the present value

of future cash flows, or – Multiplier that converts anticipated returns from an

investment project to their present value.

– For the public sector this is usually 3.5% as set by UK Treasury Green Book, 2008

Example

you expect £1,000 in one year's time. To determine the present value of this (what it is worth to you today) you would need to discount it by a particular rate of interest. Assuming a discount rate of 10%, the £1,000 in a year's time would be the equivalent of £909.09 to you today

(£1000/[1.00 + 0.10]).

Option ADiscount rate (r ) 3.5%

Year (n) 0 1 2 3 4 5factor [=1/(1+r)^n] 1.00 0.97 0.93 0.90 0.87 0.84Capex 9,000OpexSavings -3,000 -3,000 -3,000 -3,000 -3,000Net cash flow 9,000 -3,000 -3,000 -3,000 -3,000 -3,000Discounted cash flow 9,000 -2,899 -2,801 -2,706 -2,614 -2,526 -4,545

Net Present CostOption BDiscount rate (r ) 3.5%

Year (n) 0 1 2 3 4 5factor [=1/(1+r)^n] 1.00 0.97 0.93 0.90 0.87 0.84Capex 9,000OpexSavings -1,500 -1,500 -1,500 -1,500 -1,500Net cash flow 9,000 -1,500 -1,500 -1,500 -1,500 -1,500Discounted cash flow 9,000 -1,449 -1,400 -1,353 -1,307 -1,263 2,227

Net Present Cost

Net Present Cost examplesfactor [=1/(1+r)^n]

Other rates in the CMPR

Inflation rate– 3.1% (Consumer Prices Index, CPI – July 10)– Use an appropriate rate to reflect rising energy

costs, not just overall inflation

‘Persistence’ rate– How quickly the opportunities’ energy savings

degrade over time . – E.g. a draught proofing project saves 1,000 kgCO2

in year 1, but thereafter saves 3% less each year due to deterioration. So year 2 will save 970 kgCO2

Amending the rates in the CMPR

Cost effectiveness ratio (£/tonne CO2)

Best output Large negative number

Worst output Large positive number

Lifetime CO2 Savings

Net Present Cost= =

↑CO2

Cost effectiveness ratio (£/tonne CO2)

Cost effectiveness ratioProject Capex Opex £ Savings

(gross)Cost effectiveness ratio(£/tonne CO2)

£450,000 £8,010 £248.40

£90,000 £24,440 -£115.92

£100,000 £15,000 -£79.05

£200,000 £22,291 -£63.81

£9,000 £2,049 £6,058 -£134.64

Automatic Meter Reading £90,000 £28,545 £123,484 -£102.42

£100,000 £90,000 -£148.59

Understanding Financial Metrics

Internal Rate of Return (IRR)– The discount rate often used in capital budgeting that

makes the net present value of all cash flows from a particular project equal to zero.

– The higher a project's IRR the more desirable it is to undertake the project.

– IRR can be used to rank several prospective projects being considering.

Agenda

Session 1: Introduction and context– Timeline– Where are we now?– HEFCE Guide– The Carbon Management Plan (CMP)– Estimating Capital Cost of Projects – Understanding Financial and Carbon Metrics

Session 2: Prioritising and the CMPR– Getting to Grips with the CMPR– Prioritising Projects Using Combined Carbon &

Financial Metrics – Recap Progress Against Target– Next steps

Getting to grips with the Carbon Management projects Register (CMPR)

CMPR flowchart

Import baseline

Initial analysis

Review Reduction

CMP outputs

Initial analysis

Advanced Analysis

Prioritising Projects Using Combined Carbon & Financial Metrics

CMPR flowchart

Import baseline

Initial analysis

Review Reduction

CMP outputs

Sort by Payback

Payback

0.070.50 0.61

1.85 1.85 2.05

2.692.98 3.03

3.58 3.703.98 4.05 4.28

4.695.10

7.588.09

8.559.11

16 46 26 45 37 31 41 28 17 14 40 33 27 29 13 35 39 36 15 44 42 32

Project Ref. Number

Implement

Marginal Abatement Cost Curve(MACC)

Implement

Marginal Abatement Cost Curve for top 100 opportunities

16 14 10 8 13 3 18

5 7 6 15 11 201 4 19 17

-£500.00

-£400.00

-£300.00

-£200.00

-£100.00

£100.00

£200.00

Project reference

Cost effectiveness ratio (£/tonneCO2)

Cumulative CO2 Savings(tonnes)

Exercise 2

Draw a MACCProject Cost effectiveness

ratio(£/tonne CO2) CO2 savings in yr 1 (tonnes)

£248.40 54.5

-£115.92 133.0

-£79.05 102.1

-£63.81 151.7

-£134.64 14.6

Automatic Meter Reading -£102.42 753.8

-£148.59 489.8

Something like this…..

Marginal Abatement Cost Curve for top 100 opportunities

7 5 2 63 4

-£200.00

-£150.00

-£100.00

-£50.00

£50.00

£100.00

£150.00

£200.00

£250.00

£300.00

Project reference

Cost effectiveness ratio (£/tonneCO2)

Cumulative CO2 Savings(tonnes)

Recap progress against target

CMPR flowchart

Import baseline

Initial analysis

Review Reduction

CMP outputs

The Quantification Process Map

Check Progress

Is there a short fall?

Consider IncreasingTarget

Quantify Highest Priority Opportunity

Do you have opportunities

to quantify?Generate More Ideas

Project Maturity

What stage are your projects at now? – RAP Tool Estimates?– Quantified energy?– Etc…

80% or more

Reduction plan

Carbon progress against target

10,000

15,000

20,000

25,000

30,000

35,000

2008 2009 2010 2011 2012 2013 2014

YearPredicted Business as Usual Emissions

Target Emissions

Emissions in chosen plan

Financial progress

-£4,000,000

-£2,000,000

£2,000,000

£4,000,000

£6,000,000

£8,000,000

2008 2009 2010 2011 2012 2013 2014

Capex for year

Total net cost savings for this year (Incl OpEx)

Cumulative net present cost

Next steps

Linking to the CMP

‘CMP outputs’ tab

Capital OperationalFinancial (Gross) tCO2

Net Present Cost(£)

1Secondary glazing - Offices £450,000 £8,010 54.5 tCO2

does not payback £300,854 0.72% 2012

2Voltage optimisation - Block A £90,000 £24,440 133. tCO2 3.7 -£215,756 1.76% 2009

3Cavity wall insulation - Research Centre £100,000 £15,000 102.1 tCO2 6.7 -£179,300 1.35% 2010

Upgrade to condensing boilers - Swimming pool hall £200,000 £22,291 151.7 tCO2 9.0 -£215,061 2.00% 2013

5Video and web conferencing £9,000 £2,049 £6,058 14.6 tCO2 2.2 -£9,625 0.19% 2010

6 Automatic Meter Reading £90,000 £28,545 £123,484 753.8 tCO2 0.9 -£738,249 9.96% 2010

7Lighting upgrades - Residential Hall A £100,000 £90,000 489.8 tCO2 1.1 -£695,825 6.47% 2012

Ref Project Lead

Cost Annual Savings (yr 1)

Pay back (yrs) % of TargetImplementation

Project Definition Template‘Appendix B’

Project:

Reference:

A short name for the project

It would help the Carbon Trust if you also use the following reference:

LA7-[first three letters of your authority]–[sequence number, e.g. 001]

but you may choose to use a unique reference of your own.

Owner (person) Name of the person responsible for delivering the project

Department Which part of the organisation the project sits within

Description A short description of the project, no more than a paragraph

Benefits Financial savings: £ [x]

Payback period: [x] years

CO2 Emissions reduction: [x] tonnes of CO2

% of target – the percentage of your CO2 saving target will this project annually contribute

Give an idea of how confident these estimates are, eg 1st pass using rules of thumb, costed by suppliers etc.

Funding Project cost, e.g. the initial cost of implementing the project

Operational costs, e.g. annual maintenance or running costs

Source of funding: internal, external, investment criteria to be met etc.

Say how /when decision on funding will be made

Resources Additional resource (e.g. people) requirements to enable delivery and where these will come from

If this project will be delivered within current resources, say so

Ensuring Success

Key success factors, or things that will need to happen for this project to succeed

Principal risks: technical, financial (eg what happens if the project is insufficiently resourced), etc.

Measuring Success

Metrics for displaying performance or achievement

When success will be measured / evaluated

Timing Milestones / key dates e.g.

o start date: dd/mm/yyyy

o completion date (when it will deliver savings): dd/mm/yyyy

o interim deliverable / decision points

[you could also lay these out as a milestone chart for ease and clarity]

Thank you

HECM Phase 6 Cost and Prioritisation Workshop 24 th September 2010

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