Energy managers must build better business cases if they are to succeed in getting energy efficiency projects signed off by their boards, according to the Green Investment Bank. Meanwhile, firms that cherry pick only short term payback solutions risk pricing themselves out of more substantial savings.
A recent survey by The Energyst found that finance was one of the biggest barriers to energy efficiency. Readers also suggested that board directors had other priorities than energy.
But Miles Alexander, director of energy efficiency at the Green Investment Bank, disagrees that projects are failing for lack of finance. He believes they fail because the business case for energy efficiency is not being presented sufficiently strongly. He also thinks board-level apathy is not the issue.
“Finance isn’t a barrier because there is plenty of capital out there, both within companies and externally,” says Alexander.
“Often people say they can’t get financing. But actually they can’t get financing because they haven’t necessarily put forward the right business case. For example, one that can compete internally against a plant manager in China who is putting in a request to central office for £10m to build out a new plant. Unless those projects are packaged up into – not just megawatt hours or tonnes of carbon dioxide saved – but in financial terms to a CFO, then that project is going to lose out to the plant. People are going to say, ‘that plant is core business’.”
Alexander sees leadership around energy efficiency as the crux of the issue.
“It is not that CEOs and board members don’t get it, they do,” he says. “But they don’t necessarily dedicate someone to focus on it full time with the skillset to understand about the energy side as well as build the business case, work through contracts and basically be a champion for pushing projects forward.”
Think beyond lighting
The Green Investment Bank has commissioned a quarterly report via Bloomberg New Energy Finance and EEVS Insight. The most recent report confirms similar data from Energyst Media’s reader survey that lighting and building management systems are the most popular choices for energy efficiency investments. It also confirms that many firms will not commit to projects with payback periods longer than two or three years.
Alexander says that short term view is myopic.
“You can’t get a two or three year payback on CHP. For LED lighting, yes you can. But if you are doing it that way you are only doing the simple decarbonisation.
“It is really important that companies look across their portfolio and at what improvements they could make to their business that would save costs, make their business more robust and at the same time has a sustainability positive impact,” says Alexander.
Businesses have to take that approach and look long term – and not purely at payback, says Alexander, because it is the “wrong measurement” to use for energy efficiency. He says Internal Rate of Return (IRR) is more appropriate.
“If it is a positive rate of return, then they should be going ahead with it. If it doesn’t reach their internal criteria on IRRs then that is a different story and they can get third party financing in.”
Small wins may be big losses
Companies that select only the low hanging fruit such as lighting and BMS projects also risk making bigger savings unobtainable later, warns Alexander.
“It is important to bundle technologies across the spectrum taking in the short term and long term return so you can average that down. Companies shouldn’t just be cherry picking and saying that ‘I will only do everything under two years [payback]’. Otherwise they are making it harder to do the longer term ones which somebody else [e.g. an Esco] would pick up if they could also do the shorter term measures [as part of a package].”
If businesses think more strategically and businesses cases can be presented effectively, taking up third party financing should be a straightforward decision, says Alexander.
“Companies should basically be investing into their core business. Energy efficiency isn’t part of that. Therefore it would be better to get third parties to finance energy efficiency so they can reinvest the capital they do have into their core business.”
Find out what other financiers believe to be the barriers to scaling the energy efficiency market, plus the views of energy managers, consultants and Escos in the free, 32 page Financing Energy Efficiency report. Download it here.