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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)

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, Energy Manager, Howard County, MD, Director of Industrial Programs, Alliance to Save Energy, Comm. & Indus. Program Manager, American Gas Association, 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, ©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 $1 OF ENERGY SAVINGS SIMPLE PAYBACK ON CORE BUSINESS Food Processing3.02%$ YEARS Retail Store3.33%$ YEARS Metal Fabricating7.51%$ YEARS Specialty Chemicals7.95%$ YEARS Electrical Equipment9.98%$ YEARS SOURCE: 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 8% cost of capital Sum of benefits minus sum of costs = NPV $3,395,047 - $1,500,000 - $200,000 = $2,095, ©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 = ,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, * $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% 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

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32 Christopher THANK YOU!


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