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Part 1: Six Steps Help Justify Building Energy Upgrades
By Richard G. Lubinski
December 2013 -
American businesses sometimes get so focused on the short-term they can lose focus on the big picture — long-term success. Corporations that focus on monthly and quarterly profit alone can miss legitimate investment opportunities available through utility cost control. Some unknown person in corporate America decided years ago the simple paybacks for energy management projects had to be two years or less. With the banks paying less than 1 percent return on investment (i.e., interest), doesn't it make sense to consider an energy management project with a three-year simple payback, which offers a 33 percent ROI?
To get top executives to buy into the value of energy efficiency, facility managers have to take a long-term perspective on energy projects. It may take time, but facility managers who take six proven steps can build a successful energy management strategy for the long haul.
1. Include IRR and NPV in project proposals. Energy management investments need to be viewed the same as any other investments. Since simple payback is a very limited tool, most companies look at internal rate of return (IRR) and better yet the investment's net present value (NPV). Facility managers are missing a big opportunity if they do not include IRR and NPV calculations as part of every energy management project justification. While company CFOs will likely run their own calculations, a facility manager's preliminary analysis is incomplete if it only shows simple payback.
The energy management project needs to compete with hundreds of other potential investment ideas presented to the company. Does the lighting retrofit or controls project offer better NPV than competing projects like buying more production equipment or expanded sales and marketing efforts? If facility managers think of their energy management projects as investments, they and their companies will be more successful.
2. Bundle energy projects. There is a tendency to cherry pick the projects that have the best ROI and neglect the balance of the project or other projects. While line-item ROI is legitimate, so is the bundling of several energy conservation measures. Why not have the retrocommissioning, lighting, and controls projects help pay for the replacement chiller, boiler, or air-handling units? There can be a merger of standard ROI projects with capital projects to get more done.
While replacing a 25-year-old chiller may not be popular, it becomes a necessity over time. If the chiller is replaced with premium efficiency chiller, then its ROI and NPV become more attractive as an investment. If the chiller replacement is bundled with other energy conservation measures, the combined package yields attractive investment return while also delivering lower energy cost, lower maintenance and repair cost, fewer performance issues, and better comfort.
Facility managers who want to win funds for energy efficiency projects would do well to think like a CFO. That means paying attention to some basic things like utility incentives, the scale of the potential savings, and the long term cash flow.
Justifying Energy Upgrades
Part 2: To Win Funding For Energy Efficiency Projects, Think Like A CFO
Part 3: M&V Done Right: Tips For Measuring And Reporting Energy Efficiency Results
Part 4: Facility Energy Management Produces Real Financial Benefits