reveal the investment power of energy … · comm. & indus. program manager, american ......

REVEAL THE INVESTMENT POWER OF

ENERGY IMPROVEMENTSSeptember 10, 2013

Christopher Russell,

Principal

Energy PathFINDER .com(443) 636-7746

www.energypathfinder.com

TAKE-AWAYS FOR

TODAY:

4©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

$


Which Sounds Better?

• “Reduce utility bills”

• “Generate new cash flows”

– To create new working capital

– To subsidize other capital investments

– Improve the overall rate of return on invested

capital


FACILITIES: A COST TO MINIMIZE…

…OR A CASH FLOW ATM MACHINE?


EXPENSES,

INTEREST,

OR

INFLATION

CAPITAL IS ALWAYS IN MOTION

ECONOMY

(opportunity)

PLACE

OF LOW

RETURNS

PLACE

OF HIGH

RETURNS

CAPITAL IS NEVER AT REST


A BUSINESS FACILITY

IS A MICRO ECONOMY

FACILITY

(opportunity)

WEALTH

INPUTS

WEALTH

CREATED

EXPENSES,

INTEREST,

OR

INFLATION

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 performance

2. Perceive opportunities for superior performance

3. Estimate investment risk/return

4. Reinvest capital

5. 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?


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


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

RA

TE O

F R

ETU

RN

(N

o C

om

po

un

din

g)

SIMPLE PAYBACK (Years)

INVESTMENT

DEAD BAND


SIMPLE PAYBACK VS.

RATE OF RETURN

UNDERSTANDING OPERATING MARGINS$1 ENERGY SAVINGS = $1 OPERATING INCOME

INCOME STATEMENT

REVENUE $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=

$12.50

OPER. MARGIN 8% $1.00

AVERGE 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 years

Sum 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/MMBtu

Cost to buy energy = $5.9064/MMBtu. Ratio = .48

• Capitalized cost of energy waste = $3,023,172

This 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

94

Purchased Energy

COMMITTED

ENERGY VOLUMEAN

NU

AL

EN

ER

GY

CO

NSU

MP

TIO

N

CURRENT ALTERNATIVE

ENERGY

WASTED

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


Cost to Save vs. Cost to BuyPer MMBtu

100

Purchased Energy

COMMITTED

ENERGY VOLUMEAN

NU

AL

EN

ER

GY

CO

NSU

MP

TIO

N

CURRENT ALTERNATIVE

$5.91 $2.84VOLUME AT-

RISK:

PAY FOR IT

EITHER WAY.


$5.91 $5.91

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% -

110

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%


30% -

40% -

50% - Ex: Boiler Retrofit vs. 2-YR PaybackPRE-TAX INVESTMENT RESULTS

Cost: $1.5 million, $200,000 rebate

Savings: $250,000/YR, 25-YR Economic Life

50% -

Monetize Energy Solutions:

KNOW YOUR INVESTMENT OUTCOMES


REJECT ACCEPT

GETSatisfaction of no

capital expenditure?Gross energy savings + net change in O&M

GIVE UP

Gross annual savings forfeited minus

annualized capital cost saved

Annualized

project 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

One Tab = One Page = One Metric� GREEN TABS:Calculated result, cash flow, formula, discussion of pros and cons

•Simple payback

•Accounting ROI

•Life cycle cost (+ pie chart)

� RED TABS:Calculated result, cash flow, formula, discussion of pros and cons

•NPV

•IRR

� BLUE TABS:•Cost to save vs cost to buy metric

•Energy At-Risk Business Proposition: GET vs. GIVE UP, Accept or Reject

•Break Even: “Second Price Tag”

•Outcomes: results at a glance


Coming Soon from Xcel Energy:

• Monthly Webinar (~60 min.)

• One investment analysis per event

• Review business/management background

• Leverage the metrics to make a hard-hitting business case

• SUBMIT YOUR EXAMPLE FOR REVIEW


THANK YOU, Xcel Energy

• Jeff Jackson, Trade Relations Manager

• Tom Santori, Marketing Assistant

Christopher Russell

@ENERGYpathfndr

THANK YOU!

www.energypathfinder.com

[email protected]

Trade and Program UpdatesTrade and Program Updates

September 10, 2013September 10, 2013

Jeff Jackson, Trade Relations Manager

Trade SupportTrade Support

�� Energy Efficiency Specialists in the Business Energy Efficiency Specialists in the Business Solutions Center 1Solutions Center 1--800800--481481--47004700

--Project supportProject support

--Rebate qualificationsRebate qualifications

--Rebate amountsRebate amounts

--Customer eligibilityCustomer eligibility

--Energy at risk toolEnergy at risk tool

--Trade incentivesTrade incentives

Trade Program Management and TrainingTrade Program Management and Training

�� Jeff JacksonJeff Jackson

--LightingLighting

--Compressed Air and Fluid SystemsCompressed Air and Fluid Systems

--Recommissioning and Controls RebatesRecommissioning and Controls Rebates

--Data CentersData Centers

�� Pat BergerPat Berger

--CoolingCooling

--HeatingHeating

--Motors/VFDsMotors/VFDs

--Custom RebatesCustom Rebates

Current Trade IncentivesCurrent Trade Incentives

Cooling EfficiencyCooling Efficiency

DX units/economizers:DX units/economizers: 5% of customer5% of customer’’s rebate for DX units, s rebate for DX units,

or 10% when DX unit and economizer are included on the same rebaor 10% when DX unit and economizer are included on the same rebate te applicationapplication

Custom EfficiencyCustom Efficiency**

10% of customer10% of customer’’s rebate s rebate

Efficiency ControlsEfficiency Controls**

10% of customer10% of customer’’s rebates rebate

*Both are paid at project completion*Both are paid at project completion


Fluid System OptimizationFluid System Optimization

�� Efficiency Improvements: Varies by measure identified from conduEfficiency Improvements: Varies by measure identified from conducting a cting a supplysupply--side compressed air studyside compressed air study

�� Approved Compressed Air System projects: $150Approved Compressed Air System projects: $150

�� Rejected Compressed Air System projects: $50Rejected Compressed Air System projects: $50

Heating EfficiencyHeating Efficiency

�� Boiler TuneBoiler Tune--Ups: $25/building boiler system tuneUps: $25/building boiler system tune--up (limit one per site, every up (limit one per site, every other year) other year)

�� Boiler TuneBoiler Tune--Up Plus: $150 for systems Up Plus: $150 for systems ≤≤ 1 MMBTUH; $300 for systems > 1 1 MMBTUH; $300 for systems > 1 MMBTUHMMBTUH

�� HeatingHeating--efficiency equipment/improvements: 10% of the customerefficiency equipment/improvements: 10% of the customer’’s rebate for s rebate for all qualifying efficiency projects (excluding tuneall qualifying efficiency projects (excluding tune--ups and Tuneups and Tune--Up Plus)Up Plus)


RecommissioningRecommissioning

�� Recommissioning projects: $2 per 1,000 kWh of savingsRecommissioning projects: $2 per 1,000 kWh of savings

—— Need to achieve 8% or 10% savings thresholdNeed to achieve 8% or 10% savings threshold

�� ““Fast TrackFast Track”” projects: $250 per approved project projects: $250 per approved project

2013 Trade Incentive Summaryxcelenergy.com/TradePartners

(It is in the upper right corner)

Trade Incentive ProcessTrade Incentive Process

Tax ImplicationsTax Implications

We send Form 1099 if over $600We send Form 1099 if over $600

W9 and Trade Partner ID Request FormW9 and Trade Partner ID Request Form

Found on Found on xcelenergy.com/TradePartnersxcelenergy.com/TradePartners

Checks can be made out to an individual or a companyChecks can be made out to an individual or a company


Trade Partner ID # is emailed to youTrade Partner ID # is emailed to you

•• Andy RyanAndy Ryan

•• ““AA”” followed by 4 digitsfollowed by 4 digits

Residential ID is not sufficientResidential ID is not sufficient

•• Will not have an Will not have an ““AA””

•• This means W9 paperwork is not doneThis means W9 paperwork is not done


Trade Partner (Ally) ID must be written on the application at thTrade Partner (Ally) ID must be written on the application at the time of:e time of:

•• Preapproval submission (Custom and Efficiency Controls)Preapproval submission (Custom and Efficiency Controls)

•• Prescriptive Rebate SubmissionPrescriptive Rebate Submission

Contact InformationContact Information

Trade Partners Website Trade Partners Website

xcelenergy.com/TradePartnersxcelenergy.com/TradePartners

Energy Efficiency Specialists Energy Efficiency Specialists

•• 11--800800--481481--47004700

•• At prompts, dial 2, 3, 1At prompts, dial 2, 3, 1

Trade Relations ManagersTrade Relations Managers

•• Jeff Jackson 612Jeff Jackson 612--330330--77497749

•• [email protected]@xcelenergy.com

•• Pat Berger 612Pat Berger 612--330330--62136213

•• [email protected]@xcelenergy.com

reveal the investment power of energy … · comm. & indus. program manager, american ......

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