Creating the business case for energy efficiency investment
A poor business case is one of the biggest obstacles to the uptake of low carbon solutions for unless it can survive close scrutiny, the idea will be thrown out, no matter how good it is
Report from – Dr Andy Lewry
5 Pancras-Square (Credit John-Sturrock)
One of the major disconnections that exist in organisations is that between the technical departments and the management board. Rarely do the benefits of energy savings alone justify investment in energy efficient technologies and energy management initiatives. However, this is starting to change due to 10% year-on-year increases in energy prices. Energy is now a significant cost even in an office-based environment, especially with the ever expanding use of IT and office equipment. However, reduced maintenance and increased productivity need to be factored in if the business case is to stack up.
Technical staff need to be able to speak the same language as their financial counterparts and understand the importance of the ‘do-nothing’ scenario. This highlights the risk to the business as well as putting the potential benefits into context.
When making the ‘pitch’ clear messages need to be made in the first three minutes – the critical moment in which to ‘hook’ the client. The presenter must keep to a clear message without getting caught up in details, something that is always a temptation for technical staff because it is in their comfort zone.
As with the BBC2 Dragons’ Den television programme, excellent presentational skills are needed to capture the audience immediately, get a strong concise message over initially, and then have background facts strong enough to withstand intense scrutiny.
The importance of the business case
There are a number of key reasons to reduce energy:
- Save costs
- Comply with legislation
- Manage risk.
The rising cost of energy in the UK since 2000 has highlighted the need for improved management of this resource. The Department of Energy and Climate Change (DECC) updates its predictions of fossil fuel prices annually, and its modelling of gas prices, is based on three scenarios. The worst of these scenarios predicts a 17% increase in prices over the six years from 2013, i.e. about 3% per annum. However, the rise from 2013 to 2014 was 16%, which suggests that the model could be a conservative estimate. Several pundits are predicting an average 10% year-on-year increase.
As well as rising prices, security of energy supply has also become an issue, particularly since the UK changed from being a net exporter of gas to being a net importer in 2004. In December 2006 the UK government’s Joint Energy Security of Supply working group predicted that UK production would satisfy only about 40% of our demand in 2015.
Legislation is another major driver. This can be well-established, as in the case of the Climate Change Levy (CCL); Climate Change Agreements (CCAs) with DECC; and Industrial Emissions Directive legislation and Environmental Permitting Regulations, which mainly cover industrial and manufacturing organisations. The CRC energy efficiency scheme (formerly known as the carbon reduction commitment) is a mandatory scheme, run by DECC, to improve energy efficiency and thereby cut CO2 emissions in large public and private sector organisations. These organisations have to purchase allowances to cover their emissions each year and this gives them a strong incentive to reduce their energy usage.
From 1 October 2013 the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 required all UK quoted companies to report on their greenhouse gas emissions as part of their annual Directors’ Report.
In addressing risk to the business, first consider the ‘do nothing’ scenario, but, in a world of increasing energy prices and security of supply issues, this is not a realistic option. Increased prices can have a dramatic effect on the cost base of organisations, leading to reduced competitiveness and a need for a drive for greater efficiency. Security of supply issues require the protection of essential services, for example, installing on-site generation for computer servers to prevent the potential loss of data. To mitigate these risks, organisations now need to understand how they use their energy, manage it and then invest in its reduction.
Getting the facts right
When managing energy one has to overcome the false perception that it is a fixed cost to business and can be reduced only by tariff negotiation. Considering energy as a variable and controllable cost to a business provides the opportunity to discover the size of the potential savings. UK businesses spend £2.4bn on energy annually, of which 21% is wasted.
The energy budget has four main component variables, each of which is manageable for organisations if they have the appropriate dedicated capacity and capability. In some organisations, where the only performance indicator for the energy budget is overall cost, the driving factors behind the budget are masked. Transparency of these component variables at senior level can be achieved through simple performance indicators, which allow non-energy specialists to build insight into drivers, opportunities and risks for each aspect of the budget.
This is essential for good energy management, as it allows decision makers to understand the success of internal programmes and the influence of the external operating environment. Ultimately, this can build a platform for good practice management and investment decisions; this is an important precursor to business cases for investment in energy efficiency or generation projects.
An essential step in producing a business case is to baseline your organisation and the following aspects should be investigated:
- Energy management - it is easier to and this is easier to baseline organisations that have adopted an energy management system.
- Monitoring and Targeting (M&T) - the old adage ”if you cannot measure it you cannot manage” also holds in the production of business cases. If the underlying data cannot be trusted, nor will the business case; M&T will provide the underpinning data.
- Energy audits - M&T will provide the data but “energy wastage” and “what can be done about it” call for an energy audit [ref 8]. Audits address where energy was used and by what, then investigate energy wastage and solutions.
- The Green Deal Tool - useful for looking at the performance of buildings and considering possible energy-saving measures [ref 9]. This tool can provide a snapshot of a building’s quality as an asset and how well it is operated; it then produces a report that reflects the potential operational savings and the measures needed to realise them.
- Other factors – timing, marginal costs, reduced maintenance and increased productivity.
Producing the business case
In producing the business case the technical staff must understand their financial counterparts and take into account the following:
- Management risk
- Options to manage risk
- The ‘do nothing’ scenario – what are the consequences?
- Financial metrics – what do they mean and which ones are used
- Know the rules of the game – what type of projects are acceptable to the organisation? And how are projects assessed?
- KISS – Keep It Short and Simple. Limit the proposal and business case to one page of A4
- What are the benefits?
- Present options including the do nothing scenario –have more than one
Good presentation skills are essential because in general you have a minute to make a sale, so you have to get your message over quickly and this would include the following:
- Simple messaging
- Know the audience
- Pick the appropriate media
- Make it sharp and to the point
- Remember the “punch line”
- Success stories
- Know your stuff
In conclusion, like Dragons Den you get only one chance; you must talk their language; use their currency; produce a transparent case that stacks up including a “do-nothing” scenario; e ready to answer questions on the spot – do your homework – and have more than one option with reasons for the preferred option
Dr Andy Lewry is a principal consultant at BRE and author of its new guide, “Bridging the performance gap” – Understanding predicted and actual building operational energy” on which this article is based. The full publication is available from www.brebookshop.com. Quote reference “PerfGap” for a 20% discount.
He will also be speaking on these topics at the Eco Technology Show in Brighton on 11-12 June, 2015. More information on this event covering solutions for sustainable energy, build, transport, innovation and resource efficiency can be found here www.ecotechnologyshow.co.uk.