By Pablo Päster
Energy efficiency projects are often sidelined in favor of investments in manufacturing equipment or other capital investments that will allow a company to expand. This is not only frustrating for the energy manager but also detrimental to long-term competitiveness and shareholder value. It is vital to separate energy efficiency projects from capital budgets for several reasons. Doing so will allow the company to thrive as it effectively manages its energy costs and risk.
What are Capital Budgets?
Capital Expenditure (CapEx) budgets are pools of money that have been set aside for investment in physical equipment, facilities, and other major acquisitions. The incurred debt is expected to be repaid over several years; investments are therefore typically evaluated based on financial metrics such as net present value (NPV) and return on investment (ROI). Competition for the limited budget is often fierce and energy efficiency projects are often pushed aside in favor of a new production line.
What are Operating Budgets?
Operating expenditure (OpEx) budgets are pools of money intended to pay for operating expenses incurred within a single period. These expenses include salaries, maintenance operations, office supplies, interest payments, and energy. Operating budgets are funded by revenue and directly cut into profits. A highly volatile commodity like natural gas, or unexpected equipment maintenance has the ability to wipe out profits entirely in energy-intense low-margin businesses, introducing the additional cost associated with risk. Avoiding CapEx efficiency improvements can therefore increase OpEx costs. Also, work process changes such as hours of operation and maintenance staffing are also solid levers for decreasing energy-related OpEx costs.
The Fallacy of Funding Energy Efficiency with Capital Budgets
Attempting to fund energy efficiency projects through capital budgets puts them up against projects that are more attractive to CFOs and may have executive backing. The common practice of using ROI calculations to evaluate projects only values energy efficiency projects over the period of their ROI (a $100,000 project with a 1-year ROI is seen as having a savings of $100,000), but neglects their very real impact on reducing the operating budget (an absolute annual reduction of $100,000).
Strategies for Success
Funding energy efficiency projects through operating budgets can be achieved through financing. This financing can come in the form of leasing or a performance-based contract but generally replaces a portion of the operating budget that was previously spent on energy with an interest payment and capital pay-down, simultaneously reducing the company’s risk exposure. Once the project has been paid off, the savings can either go to company profits, be used to hedge remaining price risks, or can be directly reinvested into energy efficiency projects.
Rather than proposing individual projects and funding them based on ROI or some other metric, projects can be “bundled” so they provide attractive metrics but also include projects that have little or no return, yet are vital to funding further energy efficiency improvements. Data logging and sub-metering infrastructure are examples of such projects that will allow the identification and evaluation of further savings. By bundling and reinvesting savings, companies achieve continuous improvement in cost savings and steadily reduce their energy use, cost, and associated risk.
Hara’s enterprise software platform for energy and sustainability management dramatically reduces energy costs and risks to substantially improve operating profits and enhance sustainability. Hara’s more than 50 customers span global multi-national and public sector organizations including: Aflac, Alcatel-Lucent, Avaya, Dell, Diebold, Bloomberg, eBay, Harvard University, HP, Hasbro, Intuit, News Corporation, Safeway, Tishman Speyer, Union Bank, U.S. Bank and the cities of Las Vegas, Palo Alto and Philadelphia.
[Image Credit: Claudio Schwarz, Flickr]