In today’s economy, energy efficiency is a top priority for both public and private institutions. It promises to reduce energy expenditures, lower GHG emissions, and – of course! – to save a pile of money. While there’s been talk of energy efficiency since the 1970s, excitement has grown recently due to oil price fluctuations and energy efficiency funding in the federal stimulus plan. So, does this mean that we can finally save money from energy efficiency – without having to spend more cash first?
The good news is that there are plenty of great energy efficiency ideas out there that offer real savings. Programs abound for lighting and HVAC retrofits, fleet fuel efficiency improvements, green computing solutions, water management and more – all with quite compelling investment metrics. It’s not uncommon for some of these initiatives to have a payback of less than one year, with an ROI that beats corporate hurdles by a long shot.
The bad news is that you still need to spend money to save money. It’s an inconvenient truth, but the reality remains: energy efficiency will save you significant money in the long run – but it still requires a sometimes sizeable upfront investment.
Here are some examples:
- I was listening to an interview on NPR, and a “green” construction representative explained that in a residential energy retrofit project, they would typically start off with a $600 energy audit, followed by $4,000-$8,000 of efficiency investments – all before the homeowner sees a single cent of savings.
- In a commercial setting, a lighting retrofit project I was recently involved with showed paybacks ranging from 6 months (good) to 77 months (not so good).
Both of these examples involved a hefty initial investment before any benefits would be realized – and in the case of the energy audit, money had to be spent just to figure where it would be saved.
So what? You might say that investments are always required to generate a return – and that any investor should do proper due diligence to evaluate every option. That’s true, but during this economy, it is especially difficult to find the capital to fund any investments, even ones with a positive return.
In a recent conversation with a CFO of a specialty retailer, I learned that their line-of-credit had been reduced by two-thirds, making even their everyday operations difficult. Obviously, this made it nearly impossible to fund any efficiency investments, even if they could save money. The challenge that this CFO posed to me was that if I could figure out a way to review their energy “spend”, identify the savings opportunities and implement the solutions – with no up-front investment – then I would have a deal.
So are there any good options to finance energy efficiency projects with the savings that they generate?
Well, here are a few ideas that I have come across:
- Work with an ESCO (an Energy Savings Company – like Carrier, Chevron Energy Solutions, Honeywell, etc.) to do the analysis, design and installation of the energy efficiency solutions. ESCOs typically front the initial cost, and then use the future savings in energy bills to pay back their capital investment over a five- to twenty-year period. In addition, if the solution does not provide the stated return on investment, the ESCO is responsible to pay the difference. This is a great option for large-scale energy efficiency initiatives, but often is impractical on a small scale.
- If you have a vehicle fleet, consider working with a fleet management vendor (like GE Fleet Services, Telogis, etc.) that provides subscription-based fleet tracking / route optimization software. Essentially, these SaaS (Software as a Service) models result in significantly increased fleet MPG, allowing the software implementation and maintenance to be funded by the monthly fuel savings. The program may even be able to generate additional returns by selling greenhouse gas offsets through programs such as the one established by the Climate Trust.
- Use the savings from one project to fund the next. The CFO I mentioned was able to work with one vendor to reduce their spend on printing, paying the vendor a portion of that savings – and now she has the option to use the remainder of those savings to fund additional efficiency projects. This approach is referred to as “pairing,” and can also be a highly effective way to get funding for projects that have a great sustainability impact, but a relatively low ROI.
The bottom line is that you can find ways to save money without spending (much) money. So I recommend that you get started, build some initial successes to gain traction for your sustainability program; and then, the next challenge will be to move beyond these eco/energy-efficiency initiatives towards a more transformative implementation of sustainability. (Read more on the difference between eco-efficiency and sustainability strategy here.)
What kind of experiences have you had in funding energy efficiency projects?
(image gratefully borrowed from nature.com)
FairRidge Group is a team of management, strategy, and change experts focused on business transformation through the practical application of sustainability for operational improvement and strategic innovation. FairRidge brings a new framework for sustainability management that integrates strategy, operations, branding, measurement and organizational development to drive profitable business transformation.
Scott Johnson is a Principal at FairRidge Group, with over 20 years of management consulting experience, working at Andersen Consulting, Axiom Management Consulting and Cambridge Technology Partners. He has worked with clients such as Caterpillar, CSAA, Levi Strauss & Co., and Motorola. Scott holds an MBA in Operations Management from Purdue University.