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CPA Australia NSW Branch CSR Discussion Group Presentation

24 February 2012

Leadership & Change for Energy Efficiency in Accounting & Management: Management accounting in a low-carbon economy

Disclaimer

> This presentation presents the views of the authors, and not the views of UTS, or any other party.

> This presentation is for educational purposes only and does not contain specific or general advice.

> Please seek appropriate advice before making any financial decisions.

> Reference list is provided at the end of the presentation

Referencing this material

> This material has been developed by UTS Business School as part of a project funded by the Office of Environment & Heritage NSW under the Energy Efficiency Training Program.

> If using this material please acknowledge as follows:– Benn, S., Brown, D., Brown, P., Crittenden, P., and Krithinakis, A.,

2012. Leadership & Change for Energy Efficiency in Accounting & Management, CPA Australia NSW Branch CSR Discussion Group presentation. 24 February 2012. The project is funded by the Office of Environment & Heritage, Department of Premier and Cabinet, NSW.

Interactive Seminar - Aim

> Practical examples of how accountants can show leadership to deliver business value in the transition to a low carbon economy

> Highlight the role that you can play in managing risk and delivering opportunities through energy efficiency

> Encourage you to get more involved with energy efficiency in your organisation!

Interactive seminar - outline

> Background on our Energy Efficiency project> Energy efficiency business case proposals – critical

success factors> Practical examples of how accountants can show

leadership to deliver business value in the transition to a low carbon economy

> Improving the effectiveness of Marginal Abatement Cost Curves

> Panel session

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About the project: Leadership & Change for Energy Efficiency in Accounting & Management

‘Leadership & Change for Energy Efficiency in Accounting & Management’ Project funding

> Office of Environment & Heritage NSW funding

> The ‘Energy Efficiency Training Program’ aims to supports the development and delivery of higher education courses that enhance energy efficiency knowledge and practice.

> All project materials will be made available

Key Project Partners

> UTS Business School> Ernst & Young> Chartered Institute of Management Accountants

(CIMA)> Westpac> TAFE NSW, Sydney Institute

Project Overview

Training Needs Analysis – Key Themes

> Organisational response to energy efficiency needs to be cross-disciplinary– Accountant as business partner

> Soft skills as well as analytical/ technical skills are important– Communication– Influencing others– Partnering– Change management– Team building– Problem solving

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Energy Efficiency – Critical success factors

Patrick Crittenden

Sustainable Business Pty Ltd

What is Energy Efficiency?

> Energy efficiency primarily refers to end-use efficiency.

> It involves delivering equal or greater levels of “energy services” with less energy supply.

> Energy services include cooling, heating, lighting, driving motors, operating equipment and appliances.

Dunstan et al. 2011, p.10

Electricity generation by fuel type in Australia

Source: Geoscience Australia 2010 p34

The boundary

The electricity supply chain

2 units of light energy delivered

100 units of energy input

The boundary

The electricity supply chain

2 units of light energy delivered

100 units of energy input

62 units lost2 units lost

34 units lost

The boundary

80% saving in energy end use delivers

benefits across the electricity supply chain

Key reasons for management accountants to get involved with energy efficiency

> Rising and fluctuating energy costs> Carbon pricing> Compliance with legislation> Licence to operate> Your competitors are doing it> Ethical considerations

‘The Business Case and Beyond’ project

Companies involved:

> Australia Post> Centennial Coal Co.> Downer EDI Mining> Foster’s Group> Linfox> National Australia Bank> New Hope Corporation> Newmont Asia Pacific

> Rio Tinto Iron Ore> Ron Finemore

Transport> Simplot Australia> Spotless Group> Sydney Water> The GPT Group> Woolworths

Note: These slides on the ‘The Business Case and Beyond’ project have been adapted from a presentation first developed by Patrick Crittenden for the Energy Efficiency Opportunities Workshops in September 2011.Case studies and other material on the ‘The Business Case and Beyond’ project are available at www.eex.gov.au.

The question…

What do you do that helps get support and resources for energy efficiency projects?

> Piggyback on whatever is ‘hot’ in the business right now

> Solve an existing problem through your ‘energy efficiency project’

> Use compliance requirements to drive change

1. Link your project to business priorities

The GPT Group:530 Collins St Melbourne Upgrade

The GPT Group:530 Collins St Melbourne Upgrade (cont.)

The GPT Group:530 Collins St Melbourne Upgrade (cont.)

You can’t work in silos. Get the right people with different expertise involved.

It is the only way to build a credible business case for a project .

2. Involve the right people

Ron Finemore Transport:Modification of trailers on bulk tipper trucks

Benefits:> The same amount of product is transported with 74

fewer truck trips/annum, resulting in 72,000 avoided truck kilometres travelled

> 38,000 litres of fuel saved per annum> Shared financial benefits for the customer and Ron

Finemore Transport> Reduction in greenhouse gas emissions of 103

tonnes CO2e-/per annum> Benefits to the community through fewer truck

movements.

> Use existing communication forums such as management meetings

> Use the right ‘business speak’> Use clear and focused messages and

questions

3. Communicate with decision makers early

4. Identify and manage project risks

Thinking about a project from a risk perspective helps you reduce the chance of unforeseen things happening…it demonstrates

that you have thoroughly thought the project through

5. Consider all business costs and benefits

> Cost reduction> Salvage value > Maintenance

benefits> Deferred

CAPEX> Productivity

> Product quality> Greenhouse

gas reductions> OH&S> Corporate

reputation

> R&D tax breaks> Government funding> Energy performance contracting> Internal energy funds

6. Identify funding options

Six key strategies

Some unexpected answers

This is what we do to influence our company culture, systems and processes to improve the success-rate of future projects…

> Budget for monitoring & verification as part of the the business case proposal

> Leave room to deliver more than you promise

> Make sure the right people know what has been achieved and keep it on record

1. Monitor, verify and promote success

> Business drivers, risks and opportunities change – keep managers informed

> Communicate information about what your competitors are doing (or not!)

> Use relevant graphs and statistics – for example, how well you are tracking towards targets

2. Regularly brief management

Consider:> Combining smaller projects into one larger

project> Establishing an internal fund for energy

efficiency projects> Adding questions on energy impacts to

capital expenditure approval processes

3. Adapt project approval processes

An important message…

Get the technical detail right

(engineering and accounting)

AND

Develop strategies to

“win friends and influence people”

(getting support and resources for anything

is a political process!)

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Practical examples of how accountants can show leadership to deliver business value in the transition to a low carbon economy

Dr. Paul J Brown

UTS Business School

Practical examples of how accountants can show leadership to deliver business value in the transition to a low carbon economy

> Outcome of our Training Needs Analysis> Establishing your base case> Applying the control cycle to Energy Efficiency

– Energy budgeting and control> Building the Business Case

– Brown Marginal Abatement Cashflow Curve

Training Needs Analysis – Key Themes

> Organisational response to energy efficiency needs to be cross-disciplinary– Accountant as business partner

> Soft skills as well as analytical/ technical skills are important– Communication– Influencing others– Partnering– Change management– Team building– Problem solving

Training Needs Analysis - Skills

Energy Efficiency Fundamentals:Establish your energy base case

> Not just the level of energy> It is the expected level of energy, for an expected

level of activity> Expected Energy = Fixed energy + Variable Energy * Activity

> How is this different from estimating ‘pre-determined overhead rates’?– Units are different ($ and kilowatt-hours or Giga

Joules)– Energy complies with the laws of thermodynamics

(unlike people)

Energy Efficiency Fundamentals:Establish your energy base case (cont.)

> Estimation methods are similar to cost accounting:– Regression Analysis– Modelling / simulation (like input /output analysis)– Short term metering– Long term metering (important for energy

management)

> Engineering models and equipment are used, so work with a specialist– e.g. consider the effect of weather on demand for energy

For example

> A building in NT implemented a range of EE projectsTotal Annual Consumption for 04/05 in kWh: 1,605,138

Total Annual Consumption for 05/06 in kWh: 1,597,135

Naive Energy Saving in kWh: 8,003

> Linear regression was used to control for differences in weather (the base year had a cool summer)

Total Annual Consumption for 04/05 in kWh: 1,775,546

Total Annual Consumption for 05/06 in kWh: 1,597,135

Energy Saving in kWh: 178,411

Difference is a 10% saving vs a 0.5% saving in energy

Hints

> Start simply, and do something:

– Find out what is happening in your organisation

– Review electricity statements for different facilities

– Review energy supply contracts

Some suggested places to start

> Revisit your energy accounting system– http://www.ret.gov.au/energy/efficiency/eeo/resmaterial/esmg/Pages/default.a

spx

> Set up a register and systems to identify and manage energy efficiency opportunities– http://www.ret.gov.au/energy/efficiency/eeo/resmaterial/csm/Pages/default.as

px

> Obtain subsidised energy audits (for some NSW firms)– http://www.environment.nsw.gov.au/sustainbus/energyauditing.htm

> Visit our website– http://www.business.uts.edu.au/energyefficiency

Hints

> Organise data to match current reporting systems– e.g. batch vs process costing; KPIs

> Let people know what you are doing and make data transparent

Hints (cont.)

> Conduct an energy information audit: – Ensures your organisation captures new

knowledge

> Find champions in each major facility and department and let them loose with some decision making rights

Controlling performance using budgets

Environmental and social performance can be controlled using standard MA technology such as budgets, in the same way as economic performance is controlled

Project evaluation budget: Economic, social and environmental impacts of possible projects are identified and considered during project evaluation. This involves doing a forecast and budget, and consideration of the strategic value of each project.

Formal budget: Once projects have been selected, a formal budget is prepared, this includes who is responsible for which tasks.

Project enacted: The project is enacted, and data is collected to allow management to track progress

Variance analysis: At intervals (monthly, quarterly, yearly), the budget is compared to actual results using variance analysis. Variances are investigated and action taken to enhance performance.

Developing an energy budget using multiple regression

Example: Using multiple regression, Coles has identified that total energy usage is distributed between three main activities with the following activity drivers:

Therefore, the multiple regression model is: Total Electricity Usage (kwh) = 52,121 +

558 x Selling area (m2) + 852 x Cool with no doors (m2) +

922 x Frozen with doors (m2) +719,103 x No entrance air lock

Kwh per Activity Activity Activity Driver

52,121 Fixed Usage -

558 Lighting Selling area (m2)

852 Refrigeration Volume Cool with no doors(m2)

922 Refrigeration Volume Frozen with doors (m2)

719,103 Air conditioning No entrance air lock

Example based on: Department of Resources, Energy and Tourism (RET). 2010. Energy Efficiency Opportunities: Representative Assessment Guide.

Example (cont’d)Coles wishes to assess the total electricity usage of store 2 using the following information:

Selling area (m2) = 3500Cool with no doors (m2) = 650Frozen with doors (m2) = 340No entrance air lock = False (0)

Calculate the total electricity usage for the Coles Gisborne branch.

Total Electricity Usage (kwh) = 52,121 + 558 x 3500 + 852 x 510 + 922 x 310 + 719,103 x 0 = 2,872,401 kwh

Therefore, if energy costs were expected to be 20c per kwh for the next year, the budget for store 2 would be: $545,092 (2,725,461*0.2)

Source: Australian Government: Department of Resources, Energy and Tourism, 2011, Energy Efficiency Opportunities: Representative Assessment Guide

Variance Analysis using dollars

> Construct an energy budget model– Probably with some engineering assistance

> Apply well known variance analysis formulae

Energy Price Variance = Actual kwh*(Actual Price – Standard Price)

Energy Variance = Standard Price*( Actual kwh – Budgeted kwh)

> Standard price is your budgeted price

Developing the business case for an energy efficiency project

> Clear identification of the costs and benefit– Translated into NPV, IRR, Payback, EAC etc– Opportunity cost

> Identifying direct costs and cost savings may rely on engineering analysis, as well as cost analysis– e.g. a process change effect on your base case

and on demand for labour > All costs and benefits should be included

– Information value, strategic value

Building the Business Case - BMACC

> There are a number of problems with how some organisations evaluate energy efficiency projects– Exclusion of relevant cost and benefits

• Lack of education• Difficulty in assessing

– Not making the link between the project and the firm’s strategy

– Risk of project is not assessed/ presented well• Using firm level hurdle rates (rather than risk adjusted)• Consider best vs. worst case

– Using payback period as a key decision tool

Information useful in preparing the business case

> To assist in the identification of benefits, we have provided a checklist:– the six key drivers of energy efficiency discussed

earlier in the presentation– a list of benefits identified in reviews of the

literature (Worrell et al 2003; Cooremans, 2011)• See additional slides at end of presentation

What is wrong with payback and NPV?

Project Scenario: A B C D EInitial Investment $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 Life of project (years) 10 10 15 15 15 First year cash profit $ 25,000 $ 25,000 $ 25,000 $ 17,500 $ 17,500 Yearly growth rate for cash profit

0% 0% 0% 5.0% 5.0%Hurdle Rate 15% 8% 15% 15% 8%Payback Period (years) 4.00 4.00 4.00 5.20 5.20 Net Present value (NPV) $ 25,469 $ 67,752 $ 46,184 $ 30,289 $ 101,037 Equivalent Annual Cashflow (EAC)

$ 5,075 $ 10,097 $ 7,898 $ 5,180 $ 11,804

Mutually Exclusive Projects with Unequal Lives

In many cases a choice will need to be made between projects that have differing lives.

The Equivalent Annual Cashflow method (EAC)Equivalent annual cashflow (EAC) is the calculation of an annuity value having the same term, rate of return and net present value as the project that it represents.

To determine the Equivalent Annual Cashflow (EAC) of a project:

1. Calculate the NPV of the project’s cashflows.2. Divide the NPV by the annuity factor relating to the time in years

and the relevant Discount Factor to determine an annual cashflow figure.

That is, the EAC of a project is calculated by dividing the NPV of the project by the annuity factor, relevant to the project life and the company’s cost of capital (refer to the calculation of the ‘PMT’, i.e. Payment, function using Excel).

Source: Pazmandy, G. and Brown, P. J. (Ed), 2008, Readings in Business Analysis, 2nd Edition, McGraw Hill Custom Publishing.

Illustrative Example - EACUsing two projects, Project A has a life of 2 years, and Project B with a life of 3 years. The company’s cost of capital is 10%. Cash flows are as follows:

Project A Project BInitial Cost -$4,800 -$8,200Annual After Tax Cash Inflows:

Year 1 +$3,000 +$3,500Year 2 +$3,000 +$3,500Year 3 +$0 +$3,500

Cost of Capital 10%

Solution to Illustrative Example - EAC:To select the most profitable project, they will need to be transformed to a uniform time period to enable the comparison to be effected.

Step 1 Calculate the Net Present Value of the Project Project A Project B

Project Net Present Value = +$406.61 +$503.98

The above NPVs are not comparable as Project A is for 2 years, whereas Project B has a 3 year life. To enable the comparison, the NPV has to be converted to an Equivalent ANNUAL amount.

Source: Pazmandy, G. and Brown, P. J. (Ed), 2008, Readings in Business Analysis, 2nd Edition, McGraw Hill Custom Publishing.

Illustrative Example – EAC (cont’d)

Step 2 Convert the Net Present Value to an Equivalent Annual Cashflow amount using the PMT (Payment) function in Excel or the formula

• Equivalent Annual Cashflow = NPV/ Annuity PV Factor• Project A has a useful life of 2 years

– The Annuity PV factor for 2 years is 1.7355– Therefore: 406.61 / 1.7355 = 234.29

• Project B has a useful life of 3 years.– The Annuity PV factor for 3 years is 2.4869– Therefore: 503.98 / 2.4869 = 202.66

Project AProject B

Equivalent Annual Cashflow = $234.29$202.66

Using the equivalent annual cashflow method Project A has the higher positive EAC and would be accepted in preference to Project B. Note that this is consistent with the decision made using the lowest common multiple time period method. Source: Pazmandy, G. and Brown, P. J. (Ed), 2008, Readings in Business Analysis, 2nd Edition, McGraw Hill Custom Publishing.

BMACC

> The Brown Marginal Abatement Cashflow Curve> Extends the MACCs, such as the McKinsey MACC, which we

have seen used in practice> Different (better) to other MACCs:

– Uses Equivalent Annual Cashflow, not NPV or payback – Includes a risk distribution– Includes unique colour coding scheme– Includes other information

> Pending Creative Commons licence

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Source: Brown, P. J., Brown Marginal Abatement Cashflow Curve (BMACC), UTS Business School, URL:

http://www.business.uts.edu.au/energyefficiency/project-material.html'

BMACC (cont.)

Where to find helpful information about energy efficiency

> NSW and Federal Governments provide training and education materials.– For example, see:

www.environment.nsw.gov.auwww.energyefficiencyopportunities.gov.au

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Panel Discussion

Thank you

> Thankyou for sharing your insights> Please complete the evaluation form. Consider:

– Are there any ‘energy efficiency’ related actions you plan to take following this seminar?

– Can we follow up with you next year as part of our evaluation?

> Please discuss with us any further ideas you have about the project

Contact Details

Professor Suzanne Benn

Professor of Sustainable Enterprise

UTS Business School

Suzanne.Benn@uts.edu.au 

Ph +61 2 9514 3621

For further information and updates on the Leadership & Change for Energy Efficiency in Accounting & Management project go to:

http://www.business.uts.edu.au/energyefficiency

 

References> Bureau of Meteorology & CSIRO. 2010. "State of the Climate ".> Cooremans, C, 2011, Make it strategic! Financial investment logic is not enough, Energy Efficiency.> Dunstan, Chris, Katie Ross, and Nicole Ghiotto. 2011. "Barriers to Demand Management: A Survey of Stakeholder

Perceptions." Prepared for the Australian Alliance to Save Energy by the Institute for Sustainable Futures, University of Technology, Sydney.

> Geoscience Australia. 2010. "Australian Energy Resource Assessment." Commonwealth of Australia.> International Energy Agency. 2011. "World Energy Outlook ”.> Linfox Energy Efficiency Opportunities Public Report 2010. Accessed from www.linfox.com/~/

media/Documents/PDF/Linfox_EEO%20Act%20PR%202010%20Appendix%20small.ashx> Pazmandy, G. and Brown, P. J. (Ed), 2008, Readings in Business Analysis, 2nd Edition, McGraw Hill Custom Publishing.> Porter, M. E., 1985, Competitive advantage. New York: Free.> Department of Resources, Energy and Tourism (RET). 2011. "Continuing opportunities. Energy Efficiency Opportunities

program - 2010 report. A look at results for the EEO program 2006 - 2010." Australian Government Department of Resources, Energy & Tourism (RET).

> Department of Resources, Energy and Tourism (RET). 2008. Energy Savings Measurement Guide.> Sustainability Victoria. 2010. "Energy Efficiency Best Practice Guide Lighting.”> The GPT Group Sustainability Report. Accessed 6/9/11 www.gpt.com.au/content.aspx?urlkey=Energy> Total Environment Centre. 2010. "Demand management and energy policy development: A case study of New South

Wales.”> World Business Council for Sustainable Development (WBCSD). 2004. "Facts and trends to 2050.”> World Business Council for Sustainable Development (WBCSD). 2009. “Transforming the Market: Energy Efficiency in

Buildings.”> World Economic Forum. 2010. "Energy Vision Update 2010. Towards a more energy efficiency world.".> Worrell, E., Laitner, J., Ruth, M., & Finman, H., 2003, Productivity benefits of industrial energy efficiency measures, Energy,

28(11), 1081–1098.

Developing the business case for an energy efficiency project

> Reduced Cost> Improved

temperature control> Increased reliability

in production> Improved product

quality

> Reduced Risk> Greenhouse gas

reductions> Improved reputation> Safety

Include all business costs and benefits to increase the chance of

success

Some sources of competitive advantage from EE: REDUCED RISKS (from Worrell et al 2003 and Cooremans, 2011)

> Reduced hazardous waste> Reduced dust emissions> Reduced CO, CO2, NOx, SOx emissions> Increased facility reliability> Reduced wear and tear on equipment/ machinery> Decreased liability> Legal risks> Carbon and energy price risks> Disruption of energy supply> Commercial risk

Some sources of competitive advantage from EE: REDUCED COSTS (from Worrell et al 2003 and Cooremans, 2011) (cont.)

> Use of waste fuels> Reduced product waste> Reduced waste water> Materials reduction> Increased product yield> Improved equipment performance> Shorter process cycle time> Reduced dust emissions> Reduced CO, CO2, NOx, SOx emissions> Reduced wear and tear on equipment/ machinery

Some sources of competitive advantage from EE: REDUCED COSTS (from Worrell et al 2003 and Cooremans, 2011) (cont.)

> Decreased liability> Reduced need for personal protective equipment> Improved lighting> Reduced turnover, absenteeism and health costs

(improved worker morale, reduced noise, improved air quality and temperature control)

> Reduced needs for engineering controls> Lowered cooling requirements> Reductions for labor requirements> Delaying or reducing capital expenditures> Additional space