Energy Expenditure and Consumption Expressed as a Function of Key Performance Indicators
February 22nd, 2010
By: Pat Ferguson
In today’s difficult market environment business decisions are being weighed more carefully than ever. Typical project valuation indicators such as ROI and simple payback times are no longer good enough. Savings from energy efficiency projects can be lost in the fog of obfuscating external factors. The focus is now on reducing carbon footprints and, by direct relationship, energy consumption. Too many high level executives can’t rationalize what 100,000 kilowatt hours of savings means to them and their business. In this context, it has become extremely useful to model energy consumption in terms of each firm’s unique key performance indicators.
If you are a restaurant it may be the number of meals you serve, if you are a retirement home it may be the number beds you have occupied, if you are an industrial manufacturer it is the number of widgets you make; establishing an energy cost-per-output is the first step in the process and is unique to every business model. Typically organizations expend vast resources to measure the cost of their inputs per unit of output yet ignore energy, a fundamental input into any business process output unless you’re output is giving advice such as a psychologist, even then, giving advice in the dark is disturbing, you’ve got to keep the lights on.
Defining your energy costs of production is an essential step to understanding how energy affects your productivity and profit margin. The most important action is to generate a baseline of energy cost-per-KPI. Once you know that you are using 40 kWh of electricity per widget you can effectively compare your energy efficiency across time in a way that is meaningful to every member of the organization. Too often energy expenditure is considered by a select few operational employees. Expressing energy in a metric everyone can understand aligns the interests of the entire organization and can act as a measuring stick for different business units. Doing this allows you to track the effect each business unit is having on the company-wide energy cost-per-KPI and reward performance accordingly. Eventually, once most business are measuring energy cost and consumption as a function of production levels these key metrics will provide important benchmarking applications to measure comparative performance among competitors as well. This, of course, depends upon impending energy and environment disclosure requirements.
A considerable benefit of expressing energy consumption in terms of KPI’s is the identification of major energy cost drivers. Developing an energy management plan is not overly useful if you don’t know what is driving your energy costs and what level of impact they have on your final output. By finding out which of your business processes have the highest cost per KPI you can then focus on improving the energy efficiency of those processes. In many cases the processes that can have the most impact are often the last to be considered if the cost-per-KPI data has not pointed you in the right direction.
Any business that wants to stay profitable must grow. Forecasting the costs associated with growth has long been a terribly inconsistent and difficult task to perform. In respect to energy costs this can be especially complex if costs-per-KPI have not been evaluated. With an energy cost-per-KPI metric the forecasting of future energy costs becomes a simpler exercise. The cost-per-KPI function can easily be reversed to determine what energy costs would be for varying levels of output. Production levels can then be forecasted and a sensitivity analysis can be performed to estimate the future cost of energy with various production levels. Similarly, a consumption-per-KPI calculation can be reversed to determine energy consumption requirements for certain levels of production; this will come in handy when planning energy infrastructure during facility expansion. At this point it helps to classify which energy costs are variable and which are fixed. It may be helpful to go so far as to determine variable-cost-per-KPI and fixed-cost-per-KPI functions separately. This information will also aid your organization while developing hedging strategies to reduce exposure. The forecasts can be used to determine how much energy will be required and, as a result, how large purchasing deals must be to guarantee adequate energy at a reliable price point in the future.
The evaluation of energy efficiency projects can also be made clearer through the use of cost-per-KPI metrics. ROI’s and simple paybacks do not tell the whole story. It can often be beneficial to examine how each measure may impact the cost-per-KPI metric. In this way the business impact of energy reduction projects can be evaluated next to labour-related and financing measures which are typically measured against your key performance indicators already. Measuring against KPI’s can also clarify the interrelationship between projects implemented concurrently. Typically, deriving the impact that a single project has on costs or consumption is impossible when multiple projects have been implemented at the same time. Measuring against KPI’s and drilling these values down to business units or cost centers help to clarify the impact each measure has on the company’s overall performance.
All companies may see value in diffusing energy related information in terms the entire organization can understand, however implementing this process requires a great deal of focus on gathering and maintaining effective and up to date datasets. Measurements against KPI’s are only as good as the data that is being used. Developing and implementing a comprehensive data plan focusing on accuracy is fundamental to effective measurement. The best KPI’s are leading indicators; keeping this information up to date is essential and crucial for effective reporting.
Using a cost-per-KPI metric will increase the clarity and effectiveness of communications throughout the business units of your company. When everyone can see the impact energy costs have on their business process they align themselves to manage the impact their individual business unit has on the company as a whole. The use of consumption-per-KPI metrics are invaluable when forecasting future energy requirements and developing hedging strategies. Cost-per-KPI metrics can be used as performance indicators themselves and can be used to compare the viability of energy projects as well as the performance of business units.
The old adage says “you can’t manage what you don’t measure”. Expressing energy as a per-KPI metric ensures that a firm is not only measuring the impact energy has on its operations, but that it is being measured in a meaningful way to all the firm’s stakeholders and decision makers.
Pat Ferguson is a business strategy and energy trend analyst developing analytics and corporate energy management programs for Energy Advantage Inc.
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Categories: Energy Efficiency
Sounds like a good game plan, but I am still having trouble with which KPI’s you are talking about. Seems to me a treasurer will still think about payback and ROI, the accounting crowd will want everything in strictly earnings KPIs but the operational team still wants a KPI metric for their production line or office space. Can you deliver whatever KPI’s we want? And I guess I would also want to think that you have comparables to show us so we can see where we fit in our industry? Otherwise, I don’t see us getting motivated.
I thinks thats fantastic just because you can well better manage your energy expenditure. They are already some appliances very similar to this that save up on electricity bills in properties, offices and many businesses. Good to know that posts like these are spreading the word on how to reduce our carbon footprint and raising the awareness of changing consumer behaviour and corporate social responsability. Cheer Pat, will recomment it.
Tom, Thank you for the comments.
As for your concerns, the KPI’s that should be used are the ones that make the most sense to each unique organization. There is no limit to how many different ways you can express energy expenditure. For a diverse organization with several outputs this may mean that energy cost and consumption are expressed in several KPI’s, each of which will have a different meaning to different revenue centres within the company. Certianly ROI, payback, and earnings must still be considered when making capital decisions, however the challenge lies in communicating the benefits of these capital changes in a way that motivates and empowers employees.
The idea is to get everyone thinking on the same page. Establishing a universal KPI for evaluating energy costs may be required or may not depending on the unique situation of your organization. Establishing at least one KPI to benchmark your energy consumption against is fundamental to any strong communication plan.
The short answeres to your questions, are: Yes we can deliver whatever KPI’s you want as long as you can provide us with the base data set. As the practice grows and industry standards emerge then comparability will rise also. Currently KPI standards are emerging in several industries, some examples being health care, restaurants, and data centres which provide a clear comparison between different organizations.
Cheers,
Pat
@British Gas Energy Smart,
I agree entirely, it’s the thinking and behaviours that need to change to allow an organization to really take command of their energy consumption and carbon footprint.
New ideas are emerging every day that help us acheive this goal, and by increasing the communicability of results we can get more and more people on board.
Cheers, and thanks for the comments, they are appreaciated!
Pat.
Are you strongly suggesting that every company has to rally around a company-centric KPI, probably based on units of company output, in order to get in the game? So probably the CEO drives this, or it is not really sufficiently strategic? Does your experience facilitate this process, which could be a dog-fight in many companies?