Energy At Risk presentation

Economic Metrics• Simple Payback • Return on Investment • Life Cycle Cost • Net Present Value • Internal Rate of Return • Ratio: Conserve or Buy?. Simple PaybackCONS • Measures TIME, doe

Energy Cost Control:

Show Me the Money!

About Christopher Russell, C.E.M., C.R.M.

 Energy Manager, Howard County

Maryland

 Independent consulting since 2006

Principal, Energy Pathfinder

 Director of Industrial Programs,

Alliance to Save Energy, 1999-2006

 MBA, M.A., University of MD;

B.A., McGill University

Published November 2009

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Use the Top Manager’s Language!

OUTLINE FOR TODAY

ONSITE DISTRIBUTION LOSS

CENTRAL PLANT LOSS

$0.05

$0.28

GENERATION, TRANSMISSION, DISTRIBUTION

LOSSES

PRIOR TO DELIVERY

CHALLENGE FOR FACILITY MANAGERS

 Facilities at the end of the budget “food chain”

 Limited staff, resources, analytical capability

 Evaluating 21st century energy improvements

with 1920s investment analysis techniques!

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ABOUT ENERGY IMPROVEMENTS:

What do business leaders want to know?

• What’s the benefit?

– How many dollars?

– How quickly do the dollars accrue?

– What’s the risk of investing?

– What’s the risk of NOT investing?

• What’s the most that I should pay for it?

…per current investment criteria

• How does this compare to other ways to use

money?

OUTLINE FOR TODAY

ENERGY AT-RISK MODEL:

•Excel Spreadsheet provided by Xcel Energy

•You plug in project budget

•Model produces economic metrics

•Choose the best metric(s) for your audience

•Print results with your label/logo

Before: Annual overhaul costs @ $10,000

After: Annual overhaul costs @ $ 3,340

EXAMPLE:

Pump Optimization City of Milford, CT

SOURCE: http://www1.eere.energy.gov/industry/bestpractices/pdfs/milford.pdf 10

Economic Metrics

• Simple Payback

• Return on Investment

• Life Cycle Cost

• Net Present Value

• Internal Rate of Return

• Ratio: Conserve or Buy?

• Cost of Doing Nothing

SIMPLE SOPHISTICATED INTEGRATIVE

Data Entry

YELLOW TABS

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YELLOW TAB DEMO

Simple Metrics

GREEN TABS

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Simple Payback

CONS

• Measures TIME, does NOT measure profitability or full value created

• Fails to account for benefits accruing after payback period is achieved

• Analysis does not clearly isolate the impact of individual variables

• Poor indication of risk (variability of results)

• Difficult to accommodate future investments (like overhauls)

• Fails to measure the cost of NOT doing the project

Total cost to install Annual operating

savings

Simple Payback =

FAILS TO MEET TARGET

• If a 12-month payback is better than 24 months…

• Then a 6-month payback is better than 12 months…

• So a zero-month payback must be best!

• Because there’s no wait to get the money back!

If getting the money back is a concern, then there’s no reason to make the investment.

PROBLEMS WITH “PAYBACK”

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• Does not discriminate the value of returns from different years

• ROI is confined to the project only; contribution to overall profitability or

wealth is not measured

• Analysis does not clearly isolate the impact of individual variables

• Fails to measure the cost of NOT doing the project

Nominal Average Annual Return Total Nominal Investment ROI =

Life-Cycle Cost

CONS

• Difficult to implement as a practical management metric; no single person

of department clearly “owns” responsibility for life-cycle costs

• No indication of wealth created by the project or variability in profitability

• Not useful for comparing dissimilar projects

• Fails to measure the cost of NOT doing the project

Total cost of ownership, including capital, operating costs and energy

consumption.

PROS

• Good for comparing the total

ownership for two or more similar

purpose projects

Capital (2%)

Energy (97%)

Maintenance (1%)

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GREEN TAB DEMO

Sophisticated Metrics

RED TABS

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Net Present Value

(NPV)

CONS

• Entire calculation relies on a series of guesses about future returns

• Analysis fails isolate variables that can be linked to specific responsibilities

• Fails to measure the cost of NOT doing the project

PROS

• Captures full measure of value added by the project’s returns

• Reflects risk by incorporating the time-value of money

• Excellent tool for ranking two or more options by the value they generate

Annual Cash Flowt

∑25

Internal Rate

of Return

CONS

• Fails to measure the absolute value of wealth created

• Entire calculation relies on a series of guesses about future returns

• Analysis fails isolate variables that can be linked to specific responsibilities

• Fails to measure the cost of NOT doing the project

PROS

• Measures rate of return for this project relative to any benchmark

• Reflects risk by incorporating the time-value of money

• Excellent tool for ranking two or more options by the value they generate

Cash Flowt(1+r) t

Where “T” = economic life of the project in years

“t” represents each individual year in the project’s economic life

∑ indicates summation across all “t” years

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RED TAB DEMO

Integrative Metrics

BLUE TABS

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Annual energy use,

an energy-efficient alternative

COMMITTED ENERGY VOLUME:

Buy & use

Buy & waste or

Pay to avoid buying PAY FOR IT

EITHER WAY.

• Continue to BUY energy at-risk from the market?

– Remain exposed to constant price volatility

• CONSERVE energy by reducing the volume at-risk?

– Do projects when cost to conserve a unit of energy is less

than the price to buy it

– Annualized cost stays fixed over the economic life of the

project

CONSERVE or BUY?

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Before: Annual overhaul costs @ $10,000

After: Annual overhaul costs @ $ 3,340

EXAMPLE:

Pump Optimization City of Milford, CT

i = cost of capital or discount rate on future cash flows

n = economic life (years) of remedy (energy improvement project)

CAPITAL RECOVERY FACTOR (CRF) = (i/12)*(1+i/12) n*12

[(1+i/12) n*12 ]-1

• Operating budgets are ANNUAL

• Energy savings are accounted ANNUALLY

• Compare ANNUAL cost to ANNUAL benefit

• Compare 3-yr project to 10-year or 5-year

CAPITAL RECOVERY FACTOR

X 12

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PUMP OPTIMIZATION EXAMPLE:

Annualized Project Cost Per kWhSaved

ANNUALIZED

PROJECT COST =

UP-FRONT PROJECT COST

Annual energy use,

$23.45

per MMBtu wasted

$10.75

per MMBtu avoided

Committed Energy

Energy put to work as intended

ACCEPT THE IMPROVEMENT

PUMP OPTIMIZATION EXAMPLE

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This project allows the investor to pay

$0.46 to avoid buying $1.00’s worth of energy

INTERPRETING ANNUALIZED COST ANALYSIS

ANNUAL EXPENDITURE

COMMITTED EXPENDITURE

ANNUALIZED PROJECT COST

ANNUAL

GROSS

ENERGY

SAVINGS

Annualized net savings

Annualized penalty for

COST OF DOING NOTHING

= AnnualizedPenalty for

- x Volume ofavoidable

energy purchases

USING THE PUMP OPTIMIZATION EXAMPLE:

• Assumes energy prices and cost of money stay constant

• Penalty for doing nothing goes up:

as energy prices rise and as interest rates fall

Net annual improvement

in O&M expenses

+

BREAK-EVEN POINT

What’s the MAXIMUM ACCEPTABLE project cost,

given certain investment criteria?

UNITS OF AVOIDED ENERGY CONSUMPTION

NOTE: CRF = 0.0848 when n=25 and i=7%

ONE PROJECT, TWO PRICE TAGS

Pump Optimization Project

BLUE TAB DEMO

OUTLINE FOR TODAY

Still Need to Use Simple Payback?

• Pass up a good energy saving project?

• Add the capitalized value of energy waste to

the new core-business project

• A “good” core-business project is one that

pays for itself plus the energy waste

IMPROVE YOUR CAPITAL BUDGET

REQUESTS

• “Package” your energy project with a core-business initiative

• Facilities provides a free cash flow subsidy to the core-business project

• At capital budget time, the core-business project manager becomes your

ally, not your competitor

• Same energy project, different title You choose:

– “Pump Optimization Project”

– “$8,000 Free Cash Flow for 25 Years”

• Show TWO PRICE TAGS:

– Cost to accept, cost to reject

• Show the cash flow lost to rejecting or delaying your proposal

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From Shop Floor to Top Floor

Best Practices in Corporate Energy Management

Chicago, April 6-7 http://www.pewclimate.org/energy-efficiency/conference

Christopher Russell

crussell@energypathfinder.com

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