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ROI alone will not sell your energy plan

July 7, 2021
Peter Garforth says to get your plan approved, make sure you communicate the value it adds across all organizational goals.

Most corporate energy managers are familiar with the inevitable pushback that comes whenever significant investments are proposed to make a plant perform at higher levels of energy efficiency with lower greenhouse gas emissions.  The cited reasons usually fall into predictable categories.

Energy Expert

This article is part of our monthly Energy Expert column. Read more from Peter Garforth.

The return on investment (ROI), often expressed as simple payback, is deemed to be too low. While worthwhile, the view may be that there are other, higher priority demands on resources. The implementation may be seen as too disruptive to normal operations. There may be pushback on the value of efforts to reduce a plant’s carbon footprint. Rather than wait for these objections to surface, a well-prepared energy plan embraces them and proactively categorizes and quantifies the benefits.

Energy plan ROI

The topic of an energy plan’s ROI could fill a book in and of itself. Unlike most investments, energy investments are often judged based on simple payback calculated on short-term energy costs saving, with between one to three years payback as the typical hurdle. Expressing this in ROI terms of between 30% and 100%, it is clear these expectations are a deterrent to a rational decision on improving the longer-term productivity of the plant. The energy manager should proactively embrace a realistic hurdle rate and clearly quantify how it will be met. What is realistic will differ from company to company, but something at, or above, the company’s target for the business is a good place to start.

The technical outcomes of most energy investments are highly predictable. The range of future energy prices can be bracketed and supported from credible external sources. The future range of cost of carbon emissions, whether in the form of a penalty on the company or an uplift on energy pricing, is increasingly predictable in many parts of the world. The cost of capital remains low.

These parameters are sufficient to calculate a minimum ROI, based purely on the energy and emissions flows. They are also enough to estimate an “upside” ROI if the upper ranges of energy and emissions prices become the reality. The former is the basis for the approval request; the latter is the quantified missed opportunity (aka risk!) if the plan is not approved.

Company priorities

Next the energy manager will need to address where the investments fit in the company’s other priorities. This is an area where internal competition for resources often misses bigger benefits. The cost and reliability of energy pervades all activities, both current and future. By its very nature, energy will have a direct impact on all other investment and business priorities. Rather than positioning the energy plan as a “stand-alone” initiative, it should be positioned as a supporting layer of other initiatives and priorities.

This approach will underline the collateral cost and productivity benefits energy can bring to the company’s overall business strategy. It will be the basis for quantifying multiple collateral benefits, which often exceed those based purely on avoided energy costs. These can include reduced production downtime and material waste from increased energy reliability. For new products, there will be the opportunity to apply transformative energy approaches, giving them enhanced competitiveness in the market. In all areas of the company’s activities, the energy plan can deliver cost savings, risk avoidance, and targeted transformative opportunities.

Energy and climate management value

Rather than feeling limited by the competition for resources from other priorities areas within the company, the energy manager should view each of these areas as an opportunity to demonstrate the real value energy and climate management brings. Interestingly when viewed through this lens, the senior management challenge often flips to being whether more should be invested in the energy plans to accelerate the capture of collateral benefits.

There is no question that some energy projects can be disruptive. In many cases the disruption can be reduced with collaborative implementation planning. Each production line change over is an obvious moment to implement energy-related actions. Early participation in the production and distribution system planning for new products is a must. Being part of the fleet and transportation management decisions is key. By quantifying the collateral benefits to each major activity of the business, it becomes clear why the energy management team needs to be an integral member of many other teams to gain mutual benefits.

Last, but in many cases not least, there can be the perception from some decision makers that the sole benefit of rigorous energy management is the greater societal good and is really not core to the company’s strategy and competitiveness. In one sense this is at least partially true. However, national and regional policy is globally aligning around decarbonizing the energy systems of the planet. This includes both incentives and penalties, in turn enhancing the ROI of action and increasing the risk of inaction-yet one more tangible upside to the energy plan. Even without incentives, rigorous quantification of the direct and collateral benefits really render this objection moot.

The benefits of energy productivity affect all aspects of a company’s current and future performance. The sooner energy management is embedded in all other planning areas, and not just a series of standalone projects, the quicker those benefits will accrue to the business.

This story originally appeared in the July 2021 issue of Plant Services. Subscribe to Plant Services here.

About the Author: Peter Garforth

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