The Business Impacts of Energy Efficiency

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The Business Impacts of Energy Efficiency

  1. 1. MONETIZING ENERGY SOLUTIONS Christopher Russell, Principal Energy PathFINDER .com (443) 636-7746
  2. 2. 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
  3. 3. 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 3©2013 Energy PathFINDER.com
  4. 4. Payback Analysis If the payback isn’t “good”…. Just WALK AWAY from the proposal. 4©2013 Energy PathFINDER.com RIGHT?
  5. 5. 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 ©2013 Energy PathFINDER.com
  6. 6. 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. 6©2013 Energy PathFINDER.com
  7. 7. $8 million ANNUAL NET INCOME 7 EXAMPLE: Return on Invested Capital ©2013 Energy PathFINDER .com Production Facility POWER HOUSE $100 million INVESTED CAPITAL 8% RoIC
  8. 8. 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. 8©2013 Energy PathFINDER.com
  9. 9. Investor’s Rates of Return (Thru 25 Yrs) PROJECT COST: ECONOMIC LIFE: $1,500,000 25 YRS 5% - 0% - 15% - 20% - 25% - 9©2013 Energy PathFINDER.com 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%
  10. 10. 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% - 10©2013 Energy PathFINDER .com
  11. 11. • $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 11©2013 Energy PathFINDER.com
  12. 12. FREE CASH FLOW? RATE OF RETURN? COST OF DOING NOTHING? 12©2013 Energy PathFINDER .com What do executives need to know? Does “simple payback” answer these?
  13. 13. 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 13©2013 Energy PathFINDER.com
  14. 14. “Bad” Project with 5-Year Payback GROSS WASTE COMMITTED EXPENSE NET SAVINGS TOTAL CAPITALIZED COST 14©2013 Energy PathFINDER.com $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
  15. 15. 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) ? 15©2013 Energy PathFINDER .com
  16. 16. 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? 16©2013 Energy PathFINDER .com
  17. 17. Boiler Example: Save or Buy Choice Annual energy use, current application in-place Annual energy use, efficient alternative ANNUALENERGY CONSUMPTION 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 17©2013 Energy PathFINDER.com
  18. 18. 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 18©2013 Energy PathFINDER .com
  19. 19. 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 19©2013 Energy PathFINDER.com
  20. 20. “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) 20©2013 Energy PathFINDER.com
  21. 21. YOU-TUBE: search “Energy Pathfinder Investment Calculator” Energy PathFINDER .com Christopher Russell @ENERGYpathfndr Feb 2008 June 2010 THANK YOU!

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