Financial Considerations for Energy Efficiency Upgrades

Article by Constellation

Selling the value of investing in energy efficiency across an organization, especially in competition for precious capital, can be a real challenge. Demonstrating the potential return on the investment (ROI) through long-term cost reduction — combined with quantifying the ancillary benefits associated with infrastructure renewal, such as reduced maintenance expenditures and the financial and operational impact associated with equipment downtime time — plus a life cycle assessment of current infrastructure is paramount when valuing the overall return of an efficiency initiative. In addition to the potential ROI, companies should also explore available funding options – even if the limited available capital is allocated elsewhere, energy efficiency projects can still be executed without it.

Here are a few tips when considering energy efficiency upgrades from a financial perspective:

Focus on Cost Savings, Not Energy Savings

To clarify benefits of an energy efficiency initiative, focus on the financial metrics. Financial analysts may not consider how many kilowatt-hours a given project may save or the intangible benefits of having a more sustainable business. They will, however, consider how much money they can save per month, what long-term expenses they can avoid and how this investment stacks up to others in terms of long-term ROI. There are indirect benefits as well – replacing the heating system may be expensive. Still existing equipment requires maintenance and upkeep costs, and in the case of a breakdown or emergency, those situations can be much more costly than a planned upgrade.

Communicate the Business Benefits

Energy management offers a variety of other far-reaching benefits that will ultimately cut costs. For example, the tools that allow for automation and control also help organizations collect data on energy consumption and pinpoint areas for further savings. Ultimately, better visibility of energy use (and waste) is critical for continuity in a market where more companies prioritize efficiency.

Highlight the Competitive Advantage

Speaking of continuity, energy management is becoming critical for staying on top of competitors. When considering using energy intelligence software, key highlights include productivity increases, waste reduction, and growth in asset values. Learn the metrics most important to the company’s overall goals and tie the specifics with clear financial metrics and visuals.

The Costs of Inaction

Inaction can be just as costly as action – if not more so. The status quo often “feels” less expensive than change, but in an environment of rising energy prices and sustainability-minded competitors, a lack of energy management could be far more costly than an investment in new infrastructure. Without in-depth insights into your company’s energy use, you won’t be able to analyze historical performance, predict demands or accurately estimate future costs. The explosion of Big Data and enterprise-level energy management software, such as Utility Bill Management platforms, is shifting most industries towards three-, five- and even ten-year plans, and those plans are only possible with accurate cost predictions.

Alternatives for Funding Energy Efficiency Projects

Funding is still one of the most critical aspects of energy efficiency projects, and not every company can bring money upfront to finance a project. The energy savings you discuss should eventually balance out your costs, but there are also ways to minimize or even eliminate the need for upfront investment. Constellation offers a number of solutions to fund sustainability initiatives and energy efficiency upgrades, including:

• Performance Contracting: – Performance contracting allows customers to fund building improvements with no upfront capital costs. Instead, the projects are supported entirely by the guaranteed energy savings over time.  A budget neutral financial structure provides customers an avenue for payment and an immediate justification of their investment.
• Capacity Load Response: At times of an electrical grid imbalance, grid operators may need to call for additional capacity to supply the increase in customer demand. By participating in capacity programs, business customers earn financial incentives to reduce their energy usage during high-demand events. Sign up in advance to curtail electricity usage to earn revenue on a monthly or quarterly basis.
• Bidding Program: Based on real-time or day-ahead market costs for electricity, businesses can bid in their proposed energy reductions, committing to curtail usage when hourly prices are high. They benefit by avoiding the cost of usage during peak hours, and they receive additional financial incentives from operators. Your company will ultimately receive payments based on the wholesale electricity price.
• Alternative Financing Vehicles: Many regions offer alternative financing opportunities through local, state, or federal grants and loans to reduce or eliminate upfront costs to the consumer at standard to below average interest rates. These provide a budget neutral financing approach to upgrade their facilities. A great example of a program like this is C-Pace where the financing is added to their annual property tax.

Implementing new energy efficiency initiatives—even on a small scale—can initially sound overwhelming from a cost perspective; however, such an investment can translate into reductions in energy consumption and maintenance expenditures, enhanced system operations and a lower carbon footprint.

To learn more about how our innovative solutions can help you cut costs, mitigate risks and use energy more efficiently, contact us today.

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