REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal...
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Transcript of REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal...
REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS
September 10, 2013
Christopher Russell,Principal
Energy PathFINDER .com(443) 636-7746www.energypathfinder.com
TAKE-AWAYS FOR TODAY:
2 ©2013 Energy PathFINDER.com
•Connect the dots between energy solutions and business performance
•You know the technical merits. Now make a strong business case.
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
3 ©2013 Energy PathFINDER.com
About Christopher Russell
Energy + Business:A FORCED MARRIAGE
No ENERGY means…No PRODUCTION…and no REVENUE.
End of story.
4 ©2013 Energy PathFINDER.com
ENERGY EXPENSE
5 ©2013 Energy PathFINDER.com
ENERGYEXPENSE
$
6 ©2013 Energy PathFINDER.com
EXPENSES,INTEREST,
ORINFLATION
CAPITAL IS ALWAYS IN MOTION
ECONOMY(opportunity)
PLACE OF LOW
RETURNS
PLACE OF HIGHRETURNS
CAPITAL IS NEVER AT REST
7 ©2013 Energy PathFINDER.com
A BUSINESS FACILITY IS A MICRO ECONOMY
FACILITY(opportunity)
WEALTH INPUTS
WEALTHCREATED
EXPENSES,INTEREST,
ORINFLATION
Who will get superior returns from your facility assets?YOUR BUSINESS or the UTILITY COMPANY?
8 ©2013 Energy PathFINDER.com
So What’s the Point?ECONOMIC OPPORTUNITY IS
PURSUED THROUGH INVESTMENT
1. Benchmark current capital performance2. Perceive opportunities for superior performance3. Estimate investment risk/return 4. Reinvest capital5. Continuous improvement. See Step 1.
For the ECONOMY… For the FACILITY…DYNAMICS ARE THE SAME
9 ©2013 Energy PathFINDER.com
FREE CASH FLOW?
RATE OF RETURN?
COST OF DOING NOTHING?
10©2013 Energy PathFINDER.com
What do executives need to know?
Think INVESTMENT, Not PROJECT
• 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
11 ©2013 Energy PathFINDER.com
FACILITIES: A COST TO MINIMIZE…
…OR A CASH FLOW ATM MACHINE?
12 ©2013 Energy PathFINDER.com
CASE STUDY:ACME INDUSTRIES
• Core business has 8% operating margin$0.92 of inputs $1.00 of revenue
• Current boiler not broken, but inefficient• Potential to save $250,000/yr in energy• Improvement costs $1,500,000 • Investment criteria: 2-yr simple payback or
better
13 ©2013 Energy PathFINDER.com
INVESTMENT ANALYSIS:Boiler Upgrade
• $1,500,000 cost• $200,000 rebate (YR1)• Cost of capital = 8%• 25 YR economic life• 1.5%/yr energy price escalation• $0.50/therm natural gas• $0.09/kWh electricity• $30,000 O&M saving/yr 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
14 ©2013 Energy PathFINDER.com
SIMPLE PAYBACK = 4.6 years.
BAD PROJECT?
What IS Simple Payback?• A measure of time, not a rate of return• Describes time for an operating budget to replenish
itself• A pre-tax number • Relative to operations, not investment• Has no connection to business profitability• Fails to indicate rate of return on an investment
relative to other alternatives
15 ©2013 Energy PathFINDER.com
Investment Performance Measurement is a PERCENTAGE
How about your 401k?
What simple payback do you get on mutual funds?
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
RATE
OF
RETU
RN (
No
Com
poun
ding
)
SIMPLE PAYBACK (Years)
INVESTMENTDEAD BAND
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SIMPLE PAYBACK VS.RATE OF RETURN
UNDERSTANDING OPERATING MARGINS$1 ENERGY SAVINGS = $1 OPERATING INCOME
INCOME STATEMENTREVENUE $1,000,000 100%
OPERATING EXPENSES $920,000 92%
OPERATING INCOME $80,000 8%
FINANCIAL EXPENSE $20,000 2%
NET INCOME $60,000 6%
REVENUE EQUIVALENT8% operating margin?
Then $12.50 of revenue = $1 of operating income:
REVENUE=
$1=
$12.50OPER. MARGIN 8% $1.00
SAMPLE OPERATING MARGINS BY INDUSTRY
OPERATING MARGIN
REV. EQUIV. OF $1 OF ENERGY SAVINGS
SIMPLE PAYBACK ON CORE BUSINESS
Food Processing 3.02% $33.11 33 YEARS
Retail Store 3.33% $30.03 30 YEARS
Metal Fabricating 7.51% $13.32 13 YEARS
Specialty Chemicals 7.95% $12.58 12 YEARS
Electrical Equipment 9.98% $10.02 10 YEARS
SOURCE: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html
18 ©2013 Energy PathFINDER.com
Is This a Bad Proposal?Simple payback of 4.6 yrs > 2 yr requirement.
• NPV = $2,095,047 thru 25 yearsSum of all benefits minus sum of all costs (discounted CF)
• IRR = 23%Core business provides only 8%
• Cost to save energy (gas+elec) = $2.84/MMBtuCost to buy energy = $5.9064/MMBtu. Ratio = .48
• Capitalized cost of energy waste = $3,023,172This is the “second price tag” …associated with “doing nothing”
19 ©2013 Energy PathFINDER.com
Net Present Value (NPV)
• Annual savings = $250,000 energy + $30,000 O&M in year 1.
• Allow for 1.5% annual energy price escalation• Total savings over 25 years =
$8,417,647 undiscounted$3,395,047 discounted @ 8% cost of capital
• Sum of benefits minus sum of costs = NPV$3,395,047 - $1,500,000 - $200,000 = $2,095,047
20 ©2013 Energy PathFINDER.com
Internal Rate of Return (IRR)
• Compares cash flow to investment amount• Describes “how hard the investment works” in
a relative (percentage) measure• IRR is the rate that discounts future cash flows
so that their sum just equals the investment outlay
• For this example: 23%• Compare to core business: 8%
21 ©2013 Energy PathFINDER.com
You cannot “walk away” from an energy efficiency investment
22
Purchased Energy
COMMITTEDENERGY VOLUMEAN
NU
AL E
NER
GY
CON
SUM
PTIO
N
CURRENT ALTERNATIVE
ENERGYWASTED
ENERGY AVOIDED
VOLUME AT-RISK:PAY FOR IT EITHER WAY.
©2013 Energy PathFINDER.com
Cost to Save vs. Cost to Buy• Cost to buy = $5.91/MMBtu (elec & gas)
delivered price from utility• Cost to save = $2.84
(annualized cost of improvement) / (annual volume of MMBtu saved)
($1,300,000 x .0926) ÷ 42,327 MMBtu = $2.84
$2.84$5.91 = 0.48
42,327 MMBtu (15%) of current annual consumption can be displaced at a cost of $0.48 on the dollar
23 ©2013 Energy PathFINDER.com
Break-Even Price for the Improvement• Improvement should cost no more than the value
it saves• This project: $280,000 savings in first year• Capitalize the annual result:
• Project price tag: $1,500,000 - $200,000 = $1,300,000• Alternative price tag (when “doing nothing”) = $3,023,172• $3,023,172 = the present value of forfeited savings over 25 years
=$280,000.0926*
$3,023,172
*.0926 = capital recovery factor for 25 years, 8% discount rate
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0% -
20% -
25
ENERGY PROPOSAL IRR = 23% thru 25 yrs PRE-TAX
MUTUAL FUNDS = 3%COST TO BORROW = 4%CURRENT RoR ON CORE BUSINESS = 8%
10% -
4.6-YEAR PAYBACK = 22%
©2013 Energy PathFINDER.com
30% -
40% -
50% -Ex: Boiler Retrofit vs. 2-YR Payback
PRE-TAX INVESTMENT RESULTSCost: $1.5 million, $200,000 rebate
Savings: $250,000/YR, 25-YR Economic Life
50% -
Monetize Energy Solutions:KNOW YOUR INVESTMENT OUTCOMES
26 ©2013 Energy PathFINDER.com
REJECT ACCEPT
GET Satisfaction of no capital expenditure?
Gross energy savings + net change in O&M
GIVE UP
Gross annual savings forfeited minus
annualized capital cost saved
Annualizedproject cost
-PENALTY +ANNUAL GAIN
FIRST YEAR RESULTSACME INDUSTRIES BOILER UPGRADE
27 ©2013 Energy PathFINDER.com
REJECT ACCEPT
GET $0 $280,000
GIVE UP
$280,000 - $120,403 = $159,597
$120,403
-$159,597 +159,597
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