REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal Energy PathFINDER.com (443) 636-7746

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:

2 ©2013 Energy PathFINDER.com

•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


About Christopher Russell

Energy + Business:A FORCED MARRIAGE

No ENERGY means…No PRODUCTION…and no REVENUE.

End of story.


ENERGY EXPENSE


ENERGYEXPENSE

$


EXPENSES,INTEREST,

ORINFLATION

CAPITAL IS ALWAYS IN MOTION

ECONOMY(opportunity)

PLACE OF LOW

RETURNS

PLACE OF HIGHRETURNS

CAPITAL IS NEVER AT REST


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?


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


FREE CASH FLOW?

RATE OF RETURN?

COST OF DOING NOTHING?

10©2013 Energy PathFINDER.com

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


FACILITIES: A COST TO MINIMIZE…

…OR A CASH FLOW ATM MACHINE?


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


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


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


Investment Performance Measurement is a PERCENTAGE

How about your 401k?

What simple payback do you get on mutual funds?


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


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


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”


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


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%


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.

©2013 Energy PathFINDER.com

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


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


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%

©2013 Energy PathFINDER.com

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


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


REJECT ACCEPT

GET $0 $280,000

GIVE UP

$280,000 - $120,403 = $159,597

$120,403

-$159,597 +159,597

xcelenergy.com

Christopher Russell

@ENERGYpathfndr

THANK YOU!

[email protected]

http://www.energypathfinder.com/

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REVEAL THE INVESTMENT POWER OF ENERGY IMPROVEMENTS September 10, 2013 Christopher Russell, Principal Energy PathFINDER.com (443) 636-7746