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REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal Energy PathFINDER.com (443) 636-7746 www.energypathfinder.com.

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Presentation on theme: "REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal Energy PathFINDER.com (443) 636-7746 www.energypathfinder.com."— Presentation transcript:

1 REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal Energy PathFINDER.com (443) 636-7746 www.energypathfinder.com

2 TAKE-AWAYS FOR TODAY: 2 ©2013 Energy PathFINDER.com Connect the dots between energy solutions and business performance You know the technical merits. Now make a strong business case.

3 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 3 ©2013 Energy PathFINDER.com About Christopher Russell

4 Energy + Business: A FORCED MARRIAGE No ENERGY means… No PRODUCTION… and no REVENUE. End of story. 4 ©2013 Energy PathFINDER.com

5 ENERGYEXPENSE 5 ©2013 Energy PathFINDER.com

6 ENERGY EXPENSE $ 6 ©2013 Energy PathFINDER.com

7 EXPENSES, INTEREST, OR INFLATION CAPITAL IS ALWAYS IN MOTION ECONOMY (opportunity) PLACE OF LOW RETURNS PLACE OF HIGH RETURNS CAPITAL IS NEVER AT REST 7 ©2013 Energy PathFINDER.com

8 A BUSINESS FACILITY IS A MICRO ECONOMY FACILITY (opportunity) WEALTH INPUTS WEALTH CREATED EXPENSES, INTEREST, OR INFLATION Who will get superior returns from your facility assets? YOUR BUSINESS or the UTILITY COMPANY? 8 ©2013 Energy PathFINDER.com

9 So What’s the Point? ECONOMIC OPPORTUNITY IS PURSUED THROUGH INVESTMENT 1.Benchmark current capital performance 2.Perceive opportunities for superior performance 3.Estimate investment risk/return 4.Reinvest capital 5.Continuous improvement. See Step 1. For the ECONOMY… For the FACILITY… DYNAMICS ARE THE SAME 9 ©2013 Energy PathFINDER.com

10 FREE CASH FLOW? RATE OF RETURN? COST OF DOING NOTHING? 10 ©2013 Energy PathFINDER.com What do executives need to know?

11 Think INVESTMENT, Not PROJECT 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 11 ©2013 Energy PathFINDER.com

12 FACILITIES: A COST TO MINIMIZE… …OR A CASH FLOW ATM MACHINE? 12 ©2013 Energy PathFINDER.com

13 CASE STUDY: ACME INDUSTRIES Core business has 8% operating margin $0.92 of inputs  $1.00 of revenue Current boiler not broken, but inefficient Potential to save $250,000/yr in energy Improvement costs $1,500,000 Investment criteria: 2-yr simple payback or better 13 ©2013 Energy PathFINDER.com

14 INVESTMENT ANALYSIS: Boiler Upgrade $1,500,000 cost $200,000 rebate (YR1) Cost of capital = 8% 25 YR economic life 1.5%/yr energy price escalation $0.50/therm natural gas $0.09/kWh electricity $30,000 O&M saving/yr BEFOREAFTER ELEC kWh5,260,0004,734,000 GAS therm2,700,0002,294,680 Annual O&M$72,000$42,000 14 ©2013 Energy PathFINDER.com SIMPLE PAYBACK = 4.6 years. BAD PROJECT?

15 What IS Simple Payback? A measure of time, not a rate of return Describes time for an operating budget to replenish itself A pre-tax number Relative to operations, not investment Has no connection to business profitability Fails to indicate rate of return on an investment relative to other alternatives 15 ©2013 Energy PathFINDER.com

16 Investment Performance Measurement is a PERCENTAGE How about your 401k? What simple payback do you get on mutual funds? 16 ©2013 Energy PathFINDER.com

17 INVESTMENT DEAD BAND 17 ©2013 Energy PathFINDER.com SIMPLE PAYBACK VS. RATE OF RETURN

18 UNDERSTANDING OPERATING MARGINS $1 ENERGY SAVINGS = $1 OPERATING INCOME INCOME STATEMENT REVENUE$1,000,000100% OPERATING EXPENSES$920,00092% OPERATING INCOME$80,0008% FINANCIAL EXPENSE$20,0002% NET INCOME$60,0006% REVENUE EQUIVALENT 8% operating margin? Then $12.50 of revenue = $1 of operating income: REVENUE = $1 = $12.50 OPER. MARGIN8%$1.00 SAMPLE OPERATING MARGINS BY INDUSTRY OPERATING MARGIN REV. EQUIV. OF $1 OF ENERGY SAVINGS SIMPLE PAYBACK ON CORE BUSINESS Food Processing3.02%$33.1133 YEARS Retail Store3.33%$30.0330 YEARS Metal Fabricating7.51%$13.3213 YEARS Specialty Chemicals7.95%$12.5812 YEARS Electrical Equipment9.98%$10.0210 YEARS SOURCE: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html 18 ©2013 Energy PathFINDER.com

19 Is This a Bad Proposal? Simple payback of 4.6 yrs > 2 yr requirement. NPV = $2,095,047 thru 25 years Sum of all benefits minus sum of all costs (discounted CF) IRR = 23% Core business provides only 8% Cost to save energy (gas+elec) = $2.84/MMBtu Cost to buy energy = $5.9064/MMBtu. Ratio =.48 Capitalized cost of energy waste = $3,023,172 This is the “second price tag” …associated with “doing nothing” 19 ©2013 Energy PathFINDER.com

20 Net Present Value (NPV) Annual savings = $250,000 energy + $30,000 O&M in year 1. Allow for 1.5% annual energy price escalation Total savings over 25 years = $8,417,647 undiscounted $3,395,047 discounted @ 8% cost of capital Sum of benefits minus sum of costs = NPV $3,395,047 - $1,500,000 - $200,000 = $2,095,047 20 ©2013 Energy PathFINDER.com

21 Internal Rate of Return (IRR) Compares cash flow to investment amount Describes “how hard the investment works” in a relative (percentage) measure IRR is the rate that discounts future cash flows so that their sum just equals the investment outlay For this example: 23% Compare to core business: 8% 21 ©2013 Energy PathFINDER.com

22 You cannot “walk away” from an energy efficiency investment 22 Purchased Energy COMMITTED ENERGY VOLUME ANNUAL ENERGY CONSUMPTION CURRENT ALTERNATIVE ENERGY WASTED ENERGY AVOIDED VOLUME AT-RISK: PAY FOR IT EITHER WAY. ©2013 Energy PathFINDER.com

23 Cost to Save vs. Cost to Buy Cost to buy = $5.91/MMBtu (elec & gas) delivered price from utility Cost to save = $2.84 (annualized cost of improvement) / (annual volume of MMBtu saved) ($1,300,000 x.0926) ÷ 42,327 MMBtu = $2.84 $5.91 = 0.48 42,327 MMBtu (15%) of current annual consumption can be displaced at a cost of $0.48 on the dollar 23 ©2013 Energy PathFINDER.com

24 Break-Even Price for the Improvement Improvement should cost no more than the value it saves This project: $280,000 savings in first year Capitalize the annual result: Project price tag: $1,500,000 - $200,000 = $1,300,000 Alternative price tag (when “doing nothing”) = $3,023,172 $3,023,172 = the present value of forfeited savings over 25 years = $280,000.0926* $3,023,172 *.0926 = capital recovery factor for 25 years, 8% discount rate 24 ©2013 Energy PathFINDER.com

25 0% - 20% - 25 ENERGY PROPOSAL IRR = 23% thru 25 yrs PRE-TAX MUTUAL FUNDS = 3% COST TO BORROW = 4% CURRENT RoR ON CORE BUSINESS = 8% 10% - 4.6-YEAR PAYBACK = 22% ©2013 Energy PathFINDER.com 30% - 40% - 50% - Ex: Boiler Retrofit vs. 2-YR Payback PRE-TAX INVESTMENT RESULTS Cost: $1.5 million, $200,000 rebate Savings: $250,000/YR, 25-YR Economic Life 50% -

26 Monetize Energy Solutions: KNOW YOUR INVESTMENT OUTCOMES 26 ©2013 Energy PathFINDER.com REJECTACCEPT GET Satisfaction of no capital expenditure? Gross energy savings + net change in O&M GIVE UP Gross annual savings forfeited minus annualized capital cost saved Annualized project cost -PENALTY+ANNUAL GAIN

27 FIRST YEAR RESULTS ACME INDUSTRIES BOILER UPGRADE 27 ©2013 Energy PathFINDER.com REJECTACCEPT GET $0$280,000 GIVE UP $280,000 - $120,403 = $159,597 $120,403 -$159,597+159,597

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32 Christopher Russell @ENERGYpathfndr THANK YOU! www.energypathfinder.com info@energypathfinder.com


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