reveal the investment power of energy improvements september 10, 2013 christopher russell, principal...
TRANSCRIPT
REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS
September 10, 2013
Christopher Russell,Principal
Energy PathFINDER .com(443) 636-7746www.energypathfinder.com
TAKE-AWAYS FOR TODAY:
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•Connect the dots between energy solutions and business performance
•You know the technical merits. Now make a strong business case.
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, 2012+
Energy Manager, Howard County, MD, 2010-2012
Director of Industrial Programs, Alliance to Save Energy, 1999-2006
Comm. & Indus. Program Manager, American Gas Association, 1995-1999
MBA, M.A., University of MD; B.A., McGill University
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About Christopher Russell
Energy + Business:A FORCED MARRIAGE
No ENERGY means…No PRODUCTION…and no REVENUE.
End of story.
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ENERGY EXPENSE
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ENERGYEXPENSE
$
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EXPENSES,INTEREST,
ORINFLATION
CAPITAL IS ALWAYS IN MOTION
ECONOMY(opportunity)
PLACE OF LOW
RETURNS
PLACE OF HIGHRETURNS
CAPITAL IS NEVER AT REST
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A BUSINESS FACILITY IS A MICRO ECONOMY
FACILITY(opportunity)
WEALTH INPUTS
WEALTHCREATED
EXPENSES,INTEREST,
ORINFLATION
Who will get superior returns from your facility assets?YOUR BUSINESS or the UTILITY COMPANY?
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So What’s the Point?ECONOMIC OPPORTUNITY IS
PURSUED THROUGH INVESTMENT
1. Benchmark current capital performance2. Perceive opportunities for superior performance3. Estimate investment risk/return 4. Reinvest capital5. Continuous improvement. See Step 1.
For the ECONOMY… For the FACILITY…DYNAMICS ARE THE SAME
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FREE CASH FLOW?
RATE OF RETURN?
COST OF DOING NOTHING?
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What do executives need to know?
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
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FACILITIES: A COST TO MINIMIZE…
…OR A CASH FLOW ATM MACHINE?
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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
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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 BEFORE AFTER
ELEC kWh 5,260,000 4,734,000
GAS therm 2,700,000 2,294,680
Annual O&M $72,000 $42,000
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SIMPLE PAYBACK = 4.6 years.
BAD PROJECT?
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
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Investment Performance Measurement is a PERCENTAGE
How about your 401k?
What simple payback do you get on mutual funds?
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
RATE
OF
RETU
RN (
No
Com
poun
ding
)
SIMPLE PAYBACK (Years)
INVESTMENTDEAD BAND
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SIMPLE PAYBACK VS.RATE OF RETURN
UNDERSTANDING OPERATING MARGINS$1 ENERGY SAVINGS = $1 OPERATING INCOME
INCOME STATEMENTREVENUE $1,000,000 100%
OPERATING EXPENSES $920,000 92%
OPERATING INCOME $80,000 8%
FINANCIAL EXPENSE $20,000 2%
NET INCOME $60,000 6%
REVENUE EQUIVALENT8% operating margin?
Then $12.50 of revenue = $1 of operating income:
REVENUE=
$1=
$12.50OPER. MARGIN 8% $1.00
SAMPLE OPERATING MARGINS BY INDUSTRY
OPERATING MARGIN
REV. EQUIV. OF $1 OF ENERGY SAVINGS
SIMPLE PAYBACK ON CORE BUSINESS
Food Processing 3.02% $33.11 33 YEARS
Retail Store 3.33% $30.03 30 YEARS
Metal Fabricating 7.51% $13.32 13 YEARS
Specialty Chemicals 7.95% $12.58 12 YEARS
Electrical Equipment 9.98% $10.02 10 YEARS
SOURCE: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html
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Is This a Bad Proposal?Simple payback of 4.6 yrs > 2 yr requirement.
• NPV = $2,095,047 thru 25 yearsSum 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/MMBtuCost to buy energy = $5.9064/MMBtu. Ratio = .48
• Capitalized cost of energy waste = $3,023,172This is the “second price tag” …associated with “doing nothing”
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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 discounted @ 8% cost of capital
• Sum of benefits minus sum of costs = NPV$3,395,047 - $1,500,000 - $200,000 = $2,095,047
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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%
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You cannot “walk away” from an energy efficiency investment
22
Purchased Energy
COMMITTEDENERGY VOLUMEAN
NU
AL E
NER
GY
CON
SUM
PTIO
N
CURRENT ALTERNATIVE
ENERGYWASTED
ENERGY AVOIDED
VOLUME AT-RISK:PAY FOR IT EITHER WAY.
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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
$2.84$5.91 = 0.48
42,327 MMBtu (15%) of current annual consumption can be displaced at a cost of $0.48 on the dollar
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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
=$280,000.0926*
$3,023,172
*.0926 = capital recovery factor for 25 years, 8% discount rate
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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% -
4.6-YEAR PAYBACK = 22%
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30% -
40% -
50% -Ex: Boiler Retrofit vs. 2-YR Payback
PRE-TAX INVESTMENT RESULTSCost: $1.5 million, $200,000 rebate
Savings: $250,000/YR, 25-YR Economic Life
50% -
Monetize Energy Solutions:KNOW YOUR INVESTMENT OUTCOMES
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REJECT ACCEPT
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
Annualizedproject cost
-PENALTY +ANNUAL GAIN
FIRST YEAR RESULTSACME INDUSTRIES BOILER UPGRADE
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REJECT ACCEPT
GET $0 $280,000
GIVE UP
$280,000 - $120,403 = $159,597
$120,403
-$159,597 +159,597
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