Brixsus Energy

How to calculate payback – The Case for Energy Efficiency

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Courtesy of Brixsus Energy

With yet another round of government legislation mandating companies to monitor their energy efficiency coming into force this year, are business managers embracing the sustainability agenda being enforced in the UK?

The general industry view appears to be that while companies are doing all they can to comply with an increasingly onerous set of efficiency requirements, there is still a way to go before UK businesses start to view energy saving as a viable route to enhancing company profitability.

In short, the tangible benefits of adopting sustainable energy initiatives are taking a back seat to the view that; the time, effort and cost involved in compliance outweighs the short term benefits.

Why are UK business owners so slow to adopt sustainable initiatives?

It is hard to find fault with the assertion that UK business feel they are being strangled by “Sustainable Red Tape”. Part L Building Regulations, CCL, CRC’s, EPC’s, DEC’s, ESOS have all followed in relatively quick succession.  Each promoting a varied route towards achieving the same aim.

Businesses have to expend time and find the resources to understand monitor and implement all of these measures and if they fail to quantify the costs and benefits of a particular piece of guidance or legislation, this often leads to inertia and a general lack of action.

Companies who have got to grips with their energy efficiency programmes have found that in addition to significant cash savings, there have been ancillary rewards such as increased employee motivation, ability to win new business and enhanced corporate reputation.

However, these returns are impossible to measure and often fail to pass muster with a finance director when he is presented with a six figure capital expenditure budget.

Often, it is the lack of measureable cash returns that prevent widespread adoption.

Promoting cost savings over carbon savings.

The UK government has spearheaded the European Sustainability Agenda. While the various European Directives are aiming to achieve a vital and necessary cause to reduce emissions to combat climate change, this frankly, has not been a primary concern of your typical UK business owner.

Having suffered the worst financial recession in living memory, faced with reduced demand, increasing costs and shrinking margins, most business managers have simply tried to stay afloat rather than safeguard the planet for future generations.

The primary message from Europe has been one of Carbon Reduction, not Cost Reduction. Outside the mandatory compliance regimes imposed on UK businesses this is not something which is taking up a great deal of time in the boardrooms across Britain.

Failing to spot a golden opportunity

If change is not coming from the top of an organisation, then where?

The skillset required to implement a comprehensive energy plan is not one you would typically find in the average UK organisation. In addition to understanding the technical aspects, a proponent of the energy cause needs to understand the strategic and financial drivers of an organisation to be able to get the proposals signed off at board level.

Essentially, your Finance Director and your Facilities Manager can be talking to each other but speaking in different languages all together.

When it all comes together

Without some form of buy in from management, an energy efficiency plan will never gain traction no matter what organisation you are in. Once senior management are prepared to examine the business case for adopting efficiency measures, figures need to be presented in a way which make it easy to obtain sign off.

By starting with small quantifiable objectives with minimal capital expenditure an organisation can focus on those “quick wins”.

When making investment decisions, management will primarily concern themselves with how long the investment will take to pay for itself and how the Internal Rate of Return measures against their benchmark.

Certain opportunities will have shorted payback periods than others. These should be focused on in the first instance.

The plan in action

In 2007, Barts and The London NHS Trust (BLT) commissioned the Carbon Trust to review its Energy Efficiency opportunities. As a consequence, after investing £1.2 million in energy efficiency measures,  annual savings of £800,000 had been generated with a payback period of 18 months!

This process started with smaller capital expenditure requests, with larger requests following once the initial works had started to show positive results.

The success of the project was attributed to the fact that for every element of expenditure a robust business case was provided with a clear payback period.

Conclusion

Energy Saving is never likely to be a core business activity, while it is on the radar of senior management you cannot assume that it is widely understood.

Widespread adoption can only be guaranteed by first building up credibility through delivering effective results.

A clear business case needs to be put forward before adopting energy efficient measures with a focus on real world cost savings. 

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