Guest Column: Making a More Compelling Energy Efficiency Case to Management
From the July 1999 issue of Energy Matters
By Miriam Pye and Aimee McKane
Making a compelling case to management begins with a profit motive. Energy efficiency is generally not a primary driver in industrial decision making. Your company's chief executive officer (CEO) and chief financial officer (CFO) are probably much more interested in approaches in which the impact on profit is more apparent, such as productivity enhancements. However, experience shows that an energy efficiency project's non-energy benefits often exceed the value of energy savings. Therefore, your case to management should help them view energy savings more correctly, as part of the total benefits, rather than the focus of the results.
Quantifying the total benefits of energy efficiency projects can help your company understand the financial opportunities of investments in energy-efficient technologies. Whether their perspective is that energy efficiency is a byproduct of productivity gains, or that productivity gains are a byproduct of energy efficiency, generally productivity gains motivate management to take action.
Quantify All Costs and Benefits
Regardless of whether energy efficiency is the driver or the byproduct of a project, management must understand all costs and benefits associated with an investment in efficiency to make decisions that enhance shareholder value. Start by quantifying projected benefits beyond energy savings, which might include:
- Increased productivity
- Reduced costs of environmental compliance
- Reduced production costs
- Reduced waste disposal costs
- Improved product quality
- Improved capacity utilization
- Improved reliability
- Improved worker safety
While estimating energy and non-energy benefits, it is also critical to estimate all incremental costs, including indirect costs. To gain credibility with managers, quantify both the upside and the downside potential of proposed projects. For example, many projects require process line shutdown during implementation, causing production losses.
Use Financial Analyses
The financial analysis of an efficiency project is the basis for making the investment decision. This can range in sophistication from a simple payback (investment/ annual net savings) or rate of return (average annual net savings/total investment) to more accurate calculations, such as net present value (NPV) or internal rate of return (IRR), which take into account the time value of money. Regardless of which calculation is used, the most important part of a financial analysis is the estimation of total incremental project costs and benefits.
As the positive correlation between energy efficiency and productivity becomes more widely understood, businesses will be more motivated to invest in (1) energy-efficient technologies that have productivity benefits and (2) productivity technologies that have energy efficiency benefits.
Cite Examples
Business case studies have been developed with financial analyses for several DOE Motor Challenge Showcase Demonstration projects. The case summarized below shows how one industry has implemented a project with significant benefits beyond energy savings. Such an example could be presented to your CEO or CFO to fully explain a project's potential financial ramifications.
When you, as an efficiency advocate in the company, understand the business decision-making perspective and can communicate with management using financial and strategic arguments, your case for energy efficiency is greatly strengthened. Making business sense of energy efficiency reduces its perceived risk to management, which may, in turn, reduce the hurdle rate (or payback period) that a company requires of an energy efficiency investment. There are no guarantees that management will implement energy efficiency projects even if they make sense from a financial perspective. Other investments or projects may have greater financial returns than energy efficiency projects, capital may be unavailable, or certain projects may not fit with a company's strategic plan. However, if advocates do not make business sense of energy efficiency, it may continue to be perceived by many business people as a warm and fuzzy, but costly and unnecessary extravagance.
The most effective way to get management's attention may be to characterize energy efficiency as "efficiency" or "productivity," which have always had positive connotations in the business community.
This article is taken from Proceedings from the 1999 ACEEE Summer Study on Energy Efficiency in Industry. Washington, D.C.: American Council for an Energy-Efficient Economy.
Contact Aimee McKane at atmckane@lbl.gov.
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