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By: Peter Rowles

In my experience, the greatest challenge facing energy champions in an organization is not identifying good energy savings projects; it’s the frustration of getting financial approval from senior management. My opinion is that there is no point in spending a lot of time and effort developing an energy management program if the resources are not in place to ensure its success. The Golden Rule that applies to energy projects is that “he who has the gold rules”. Therefore, very early in the energy management process, an energy champion should be asking his superiors to “show me the money”. 

Calculating Financial Parameters

It’s widely known that it takes money to make money, but even if we know the money is there, how do we access those financial resources? First we need to know what the financial parameters are that matter most to the company. As you get closer to the top of the company, into the “C” level, you find that the drivers are tied to increasing the value of the company, especially in this new era of sustainability.

However, calculating the increase in value of a company is a little more complicated than simple payback. There are tools to help you in this process. The U.S Energy Star program, Financial Value Calculator is a tool that helps you speak the “C” level language.  It translates energy efficiency initiatives into impact on corporate financial value, increases in earnings/share, and price to earnings ratio. This calculator helps you understand how a sound energy efficiency program can add value to the company and communicate these benefits to senior management.

Another useful tool for project evaluation is Life Cycle Cost Benefit Analysis (LCCBA). Life Cycle Cost Analysis provides a sophisticated financial analysis that considers financing costs, energy costs, and replacement costs, as well as operating and maintenance costs over the life of the project.  Opportunity costs for money (discount rates) and the impacts of inflation on the economics of the project are included.  Non-energy-related benefits, such as improved productivity and environmental impact can be included.

The simple payback method typically ignores all costs and savings occurring after the point in time in which payback is reached.  It does not differentiate between project alternatives having different service lives, and ignores the time-value of money when comparing the future stream of savings against the initial investment cost.  Decisions based on simple payback criteria tend to undervalue the benefits of energy efficiency projects.

Financing the Energy Management Program

The Financial Value Calculator and Life Cycle Cost Benefit Analysis allow an energy management team to understand and capture all the available benefits. This is essential to understanding how to finance the program. There are many options and many variations on the different themes of financing including third party, shared savings, off balance sheet and “outside the fence”. Regardless of whether the company uses its own capital or borrows funds, there is always a cost of money. Savings from an energy management program must be sufficient to pay for the cost of the program, including the cost of money.

Simple rule to remember: CFOs are not interested in small projects. It is better to roll-up your projects into bigger package than to try to get approval separately for a bunch of smaller individual projects.

Many energy champions get frustrated with the approval process and opt to go the shared savings route. This is also known as the performance contracting or guaranteed savings approach offered by many Energy Service Companies (ESCOs). These approaches are fundamentally good and have evolved in response to the challenge of getting projects approved at the “C” level.

When the great industrialist and philanthropist John D. Rockefeller was asked “How much money is enough?” He responded: “Just a little more than you have.” I will address this situation in the next article when I cover government and utility incentives.

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Peter is entrepreneurial energy engineer with over 20 years of experience in the energy industry. Peter is responsible for new business developments for Energy Advantage Inc. in British Columbia.