eceee 2011 presentation 1-476 - cooremans - investment in ee do the characteristics of investment...

Investment in energy-efficiency:

Do the characteristics

ECEEE 2011 Summer Study Panel 1

Catherine Cooremans − ECEEE Summer Study − June 8, 2011

of investments

matter?

Catherine Cooremans, MBA, PhD

• Context

• Conceptual framework

• Empirical study

Outline


• Empirical study

- General investment behavior- Energy-efficiency investment behavior

• Conclusion: implications of the findings

• Why an energy-efficiency gap? • What are the factors explaining firms’ EE

investment decisions?

Context


Energy-efficiency

investmentdecision

??

??

x?

x

Neo-classical finance answer:

An investment decision is the result of a technical evaluation. Profitability is the key.

Context


Investment

decision

Capital budgeting analysis

Not confirmed empirically

• Any investment with a profitability higher than the cost of capital for a

Capital investment theory:

Context


company should be decided upon.

• In case of competition between investments the one with the highest return should be decided upon.

• Context


• Empirical study

Outline


• Empirical study



Decision-making in organisations:

• To decide means "making a choice between different projects and to translate this choice into action"(Mintzberg, Raisinghani and Theoret, 1976).

Conceptual framework


(Mintzberg, Raisinghani and Theoret, 1976).

Decision-making is a behavior of choice.

• A decision must be understood as a process in context (Pettigrew, 1990), influenced by the actors involved and by the characteristics of the decision to be made.

Evaluation Build up

The investment processImplemen

Internal context Organizational factors

External context Environmental factors


Evaluation

& Choice

Build up

solutionsDiagnosisInitial idea

Implemen

-tation

Actors Individual factors

Investment characteristics

Investment characteristics:

• Content/scope: functional, replacement, capacity, diversification, etc.



diversification, etc.

• Analytical characteristics: stimulus, uncertainty, complexity, solutions, impact, controllability of action.

• Nature: strategic or non strategic.

Competitive dimension of decision-making



Langley et al. (1995)

Interwoven streams of issues competing for resources.Non (or less) strategic issues loose the competition.

• Context


• Empirical study

Outline


• Empirical study



Data collection

Empirical study

• 35 firms / 60 sites (≥1 GWh). • Energy & finance managers.•


• Some questions identical in both questionnaires in order to check for different views on the same issues.

• 18 “finance questionnaires” collected.

Sample

• Nationality : 28 CH, 5 US, 1 GB, 1 F

• Size : micro (<10) 0, small (<50) 3, medium (<250) 9, big 23 (of which 7 < 1000, 5 < 5000, 11 > 5000).

• Sector: primary 19, secondary 16.

Empirical study


• Sector: primary 19, secondary 16.

• Geographical scope: international 23, national 10, regional 1, local 1.

• Ownership : listed 11, family business 12, Ltd company 7, public 3, coop 2.

• Decision-making power in Geneva : 18

Main findings:

• Profitability plays an important but not decisive role in investment decision-making.

Empirical study results1. General investment behavior


• Investment categorization.

• Diagnostic phase is crucial.

• Competition between investment projects.

• Projects which are considered as more strategic are chosen.

Profitability plays an important role :

• Profitability analysis is mandatory for an



investment project irrespective of category.

• 75% of managers disagree with the assertion that “financial evaluation of the investments has a small influence on the decision”.

Profitability plays an important but not decisive role in investment decision-making:



• "Profitability of an investment is not sufficient to entail a positive decision“ (37/44 – 15/17)

• “A project can be realized even if it is not profitable” (10/17)

Investment categorization:

• Almost all companies (87%) classify investment projects according to a pre-existing typology.



projects according to a pre-existing typology.

• Categories most frequently used by companies are categories related to core business.

• Energy-efficiency investments exist as a category for less than 50% of companies surveyed (8 out of 18 respondents in our sample)

Investment amount and category influence:

• Procedure.• Type of analysis applied.



• Type of analysis applied.• capital budgeting tools used.• Profitability requirements.• Steps the investment process has to follow.• Resort to external financing.• Champion.

Important role of issue diagnosis :

• Investments project result more often from opportunities perceived at the operational



opportunities perceived at the operational level than from a systematic search for a relationship with a company’s goal.

• In the majority of cases, budgets are not defined in advance, but only after identification of investment opportunities.

Strategic investments win the competition

• “Existence of other more important investments” = 1st barrier to energy-efficiency investments for finance managers.



finance managers.• “More important investments” are those directly

linked with a company’s core business, i.e. more strategic investments.

• “Above all, a project must contribute to the realization of the company’s strategic goals” (16/17 – 40/44)


Lack of conformity with capital investment theory prescriptions:

• Discount rate.


• Time value of money.• Risk.• Time horizon : strong pressure of short term.• Outside financing and leverage: a large majority

of companies are self-financed and are not interested by loan at a reduced interest rate.

CONCLUSIONS:

• Financial logic not decisive



• Financial logic not decisive

• Strategic logic more important

in businesses’ investment choices

Empirical study results2. Strategic nature measurement

• An investment is strategic if it contributes to create, maintain or develop a sustainable competitive advantage.


sustainable competitive advantage.

• An investment is not strategic or not strategic

• The more strategic a decision is, the more it contributes to competitive advantage, the more important is to a firm’s performance or even survival.

Value


Which a firm is able to create for its customers.


Costs Risks

3 dimensions of competitive advantage

customers.

of creating this value.

“Do you think that the adoption of energy-efficient technologies is important [for your company] for the following reasons ?”

� Risks reduction



� Risks reduction� Costs reduction� Products value increase

Classify in ascending orders (1 = the least important - 5 = the most important)

By aggregating the answers, a scale of interval was built, allowing measurement of the strategic dimension of an EE investment, which is thus spread out from a min of 10 to a max of 15.

Empirical study results2. EE investment behavior

Main findings:

• Energy-efficiency investments are perceived as non to moderately strategic by respondents.


non to moderately strategic by respondents.

• Of the 3 variables which compose strategic character of an investment, the variable “cost” is considered most important.

• Variety of answers (between companies and within companies).


Low strategic importance:

• Contribution of EE investments to improving their company’s competitive position is considered as


company’s competitive position is considered as not important by managers.

• Importance of EE investments for the corporate image is considered as moderately important by energy managers (3.1/5 – 35 answers) and as of rather low importance by finance managers (2,6/5 – 15 answers).

• Context


• Empirical study

Outline


• Empirical study



Conclusion: next steps

Different and unfavorable treatment applied against energy-efficiency investment with

General investment behavior vs. energy-efficiency investment behavior ??


against energy-efficiency investment with regard to:

• Investment duration?• Profitability requirement?• Outside financing?

More research is needed !!

The (absence of a) link between an energy-efficiency investment and a company's core

Energy-efficiency investment decision-making literature review

Conclusion: implication of the findings


efficiency investment and a company's core business is often mentioned as playing an important negative role on EE investment decision-making.de Groot et al., 2001; Harris et al., 2000; Parker et al., 2000; Sardianou, 2007; Sandberg and Söderström, 2003; Sorrel, 2000; Velthuijsen, 1993; Weber, 2000; Weber 1997.

The decision process

EE investment characteristics: Low strategic value. Low stimulus. High uncertainty.



EvaluationBuild up solutions

Bad diagnosisInitial idea

No or negative choice

Decision-makers:Upper management not involved.Investments championed by low power managers.

‘Hidden’ Barrier

‘Symptom’

‘Real’ Barrier

Redesigning the market barriers concept:



‘Base’ Barrier

‘Symptom’ Barriers

Barrier

No strategicdimension

Cultural dimension

Hidden costsAccess to capitalRisk, etc.Information

Subsidies & information not the right way.

A triple approach is needed to positively influence firms’ energy-efficiency investment decision-making:

•

Conclusion: implications of the findings


• Customized: < firms diversity.

• Systemic: develop energy-efficiency culture at organization level.

• Strategic: make it strategic!

eceee 2011 presentation 1-476 - cooremans - investment in ee do the characteristics of investment...

Business

summer study panel

behavior of choice

energyefficiency gap

x energy

efficiency x

context pettigrew

energy finance managers

strategic issues