The economic value of energy efficiency

Do you get more than 30 per cent interest on your bank account? Well, I don’t either but that kind of rate of return is achievable on energy efficiency investments, so it pays (literally) to take a closer look.

We are all being urged to cut emissions and become greener, but often this is associated with long term investment. Looking at government schemes for promoting on-site renewables like the Feed In Tariffs (FITs), these are based on a Return on Investment (ROI) of just eight per cent so you would be looking at periods of more than ten years to achieve payback. The proposals for the Renewable Heat Incentive (RHI) look a little more generous – the ROI is about 12 per cent – but even here most organisations are unlikely to see a return before the decade is out.

Compare that with energy efficiency investments and the difference is striking. For example, the Carbon Trust, where most of their recommendations have paybacks of less than three years. And where ESTA members are involved in investment proposals, these regularly have an ROI of 30 per cent or more.

A report by the Carbon Trust suggests that all the organisations with an energy bill of over £1 million a year in the UK could save a cumulative total of £1.6 billion a year from energy efficiency. That is a great deal of wasted money.

Underestimating
Another very telling finding in the Carbon Trust report is that chief financial officers (CFOs) consistently underestimate the Internal Rates of Return (IRR) on energy efficiency investments. The average IIR of recommendations made to large organisations by the Trust was 48 per cent.

By contrast, when CFOs were asked to estimate the average IRR of energy efficiency improvements, the average response was just 19 per cent, less than half the real figure. In fact, almost two-thirds thought that returns would be less than 20 per cent. Clearly, if senior financial officers are so unaware of the economic value of energy efficiency they are unlikely to be pre-disposed to requests for investment. This will then impact heavily against energy efficiency when capital programmes are constrained anyway. There will be a pre-disposition against such investments when in reality they offer astoundingly good returns.

The moral from this report: make sure that you have your figures right and be prepared to challenge misconceptions. When evaluating energy efficiency improvements and equally when preparing proposals for senior management, it is essential to have reliable figures on payback, ROI or IRR, depending on the metric used to prioritise spending. Show a comparison with other projects that have been approved. This will make it more difficult to reject projects.

It is also worth looking at the typical rates of return achievable for different technologies. And let us not forgot the most cost-effective (but sometimes the most difficult to maintain) action programmes. These are the ones involving change of behaviour.

Support from Technology
Energy saving campaigns amongst staff are not sufficient on their own – they become far more effective when they are supported with technologies to manage and control consumption. In addition, to be really effective, they need to become embedded into everyday operational practice. However, the big advantage of such campaigns is that the capital cost is virtually zero.

But unless fully embedded in organisational practice and unless continually refreshed, such campaigns can lose their edge. Furthermore, lighting, heating and other technologies need to be optimised and controlled. Getting systems to working most efficiently will require financial investment.

Energy efficiency covers a whole range of technologies and the typical payback periods on the investment vary. Projects can range from simpler measures like the installation of automatic Monitoring & Targeting (aM&T) through lighting controls to major items such as Combined Heat & Power (CHP) and renewable energy.

Monitoring & Targeting systems are essential components of any systematic approach to energy management. Although the exact payback will depend on the size and complexity of the operation, aM&T systems typically have a payback of less than a year in terms of energy costs saved. Lighting controls may take longer to achieve payback – between one and four years – but a comprehensive programme can reduce the energy required for lighting by up to 30 per cent. In many buildings, lighting can in fact be one of the main electrical loads.

Another area where quick and substantial savings can be achieved is in the choice of motors. Many items of equipment have motors and while modern units will have variable speed drives (VSDs) or inverters, older versions may not. VSDs allow motor output to be aligned with load. Motors are traditionally inefficient at part load, yet since most purchases are made on the basis of maximum likely requirement they operate at part load most of the time. So make sure that equipment like air conditioning systems with motor-driven fans are fitted with these devices.

A systematic approach
While individual measures can secure significant cost (and carbon) savings, effective energy management requires a comprehensive approach to the challenge of controlling energy bills. For example, while replacing lamps with low-energy versions will certainly save money, adding controls at the same time to ensure that they are only on when needed will act as savings ‘multiplier’. Reduced electrical loads often results in less heat gain and therefore lower air conditioning requirements. Energy efficiency measures typically open up other opportunities for more savings.

With so many choices available, financial metrics offer a simple way to distinguish which ones will be most cost-effective. The finance department will have its own preferred metric and it is important to take this into account as it will affect the financial attractiveness of different projects.

Finally, a word about renewables. By tackling energy wastage and reducing energy demand, the cost of switching to onsite renewable energy – whether CHP, photovoltaics or windpower – can also be significantly reduced.

Energy efficiency and renewable energy should not be regarded as an either/or choice. But it is important to address them in the right order. Energy efficiency will reduce demand and this means that the size (and cost) of the renewable energy capacity can also be reduced.

FOR MORE INFORMATION
www.esta.org.uk