Energy Cost Control: Show Me the Money! A Financial Calculator Christopher Russell Energy PathFINDER www.energypathfinder.com (443) 636-7746 crussell@energypathfinder.com 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 Use the Top Manager’s Language! OUTLINE FOR TODAY • PART 1: Economic Justification • PART 2: Economic Metrics • PART 3: “Making the Case” to Upper Management U.S INDUSTRY AVERAGE ENERGY DOLLAR BREAKDOWN OF PRIMARY ENERGY SUPPLY PLANT BOUNDARY $0.49 $0.12 $0.05 $0.05 $0.28 NET APPLIED TO WORK CONVERSION LOSS ONSITE DISTRIBUTION LOSS CENTRAL PLANT LOSS (c)2009 Energy Pathfinder Mangement Consulting, LLC SOURCE: http://www1.eere.energy.gov/industry/energy_systems/ www.energypathfinder.com GENERATION, TRANSMISSION, DISTRIBUTION LOSSES PRIOR TO DELIVERY 5 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! ABOUT ENERGY IMPROVEMENTS: What business leaders want to know? • What’s the benefit? – How many dollars? – How quickly 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 • PART 1: Economic Justification • PART 2: Economic Metrics • PART 3: “Making the Case” to Upper Management 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 • CONSTRUCTION BUDGET: Project Cost: $16,000 Economic life: 25 years Cost of Capital: 7% TARGET: 1-YEAR PAYBACK • ANNUAL CONSUMPTION: Before: 246,667 kWh After: 209,667 kWh Elec @ $0.08/kWh EXAMPLE: • MAINTENANCE COSTS: Pump Optimization Before: Annual overhaul costs @ $10,000 City of Milford, CT After: Annual overhaul costs @ $ 3,340 SOURCE: http://www1.eere.energy.gov/industry/bestpractices/pdfs/milford.pdf 10 • CONSTRUCTION BUDGET: Project Cost: $16,000 Economic life: 25 years Cost of Capital: 7% TARGET: 1-YEAR PAYBACK • ANNUAL CONSUMPTION: Before: 842 MMBtu After: 715 MMBtu Elec @ $23.45/MMBtu • EXAMPLE: Pump Optimization MAINTENANCE COSTS: City of Milford, CT Before: Annual overhaul costs @ $10,000 After: Annual overhaul costs @ $ 3,340 SOURCE: http://www1.eere.energy.gov/industry/bestpractices/pdfs/milford.pdf 27 UP-FRONT CAPITAL PROJECT RECOVERY COST FACTOR vs A = B x C CAPITAL RECOVERY FACTOR (CRF) = A= B C (i/12)*(1+i/12)n*12 [(1+i/12) ]-1 Where: i = cost of capital or discount rate on future cash flows n = economic life (years) of remedy (energy improvement project) • WHY • ANNUALIZE? • • n*12 X 12 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 projects… 28 PUMP OPTIMIZATION EXAMPLE: Annualized Project Cost Per kWhSaved ANNUALIZED = PROJECT COST UP-FRONT PROJECT x COST CAPITAL RECOVERY FACTOR = $16,000 x 0848 ANNUALIZED PROJECT COST = PER ANNUAL MMBtu SAVINGS $1,357 126 = $10.75 $1,357 29 PUMP OPTIMIZATION EXAMPLE ANNUAL ENERGY CONSUMPTION REJECT THE ACCEPT THE IMPROVEMENT IMPROVEMENT $23.45 $10.75 per MMBtu wasted per MMBtu avoided $23.45 $23.45 per MMBtu consumed per MMBtu consumed Annual energy use, current application in-place Annual energy use, efficient alternative Energy At-Risk: You will pay for it either way Committed Energy Energy put to work as intended 30 COST-BENEFIT RATIO COST TO CONSERVE PER MMBtu PRICE TO BUY PER MMBtu = $10.75 $23.45 = 0.46 This project allows the investor to pay $0.46 to avoid buying $1.00’s worth of energy 31 INTERPRETING ANNUALIZED COST ANALYSIS ANNUAL GROSS ENERGY SAVINGS ? ANNUALIZED PROJECT COST COMMITTED EXPENDITURE ANNUAL EXPENDITURE Annualized net savings Annualized penalty for DOING NOTHING Free cash flow to: • Working capital (finance your operations) Or • Investment capital (finance your asset base) 32 COST OF DOING NOTHING Price per unit to buy energy - Annualized cost to avoid purchasing a unit of energy x Volume of avoidable energy purchases + Net annual improvement in O&M expenses = + $6,660 = Annualized Penalty for Doing Nothing USING THE PUMP OPTIMIZATION EXAMPLE: $23.45 per MMBtu - $10.75 per MMBtu x 126 MMBtu $8,263 $8,263 = annual premium paid over the 25-year economic life of the proposed improvement • Assumes energy prices and cost of money stay constant • Penalty for doing nothing goes up: as energy prices rise and as interest rates fall 33 BREAK-EVEN POINT MAXIMUM ANNUALIZED PROJECT COST ANNUAL VALUE SHOULD BE OF AVOIDED ENERGY NO MORE THAN PURCHASES What’s the MAXIMUM ACCEPTABLE project cost, given certain investment criteria? 34 BREAK-EVEN CALCULATION: Pump Optimization Example MAXIMUM ACCEPTABLE UP-FRONT PROJECT COST DELIVERED = x PRICE PER UNIT OF ENERGY UNITS OF AVOIDED ENERGY = CONSUMPTION BREAK-EVEN PROJECT COST CRF MAXIMUM ACCEPTABLE UP-FRONT PROJECT COST = $23.45 x 126 0.0848 = $34,900 NOTE: CRF = 0.0848 when n=25 and i=7% Actual cost is only $16,000… definitely worth it 35 ONE PROJECT, TWO PRICE TAGS Pump Optimization Project ACCEPT PROJECT REJECT PROJECT GROSS ANNUAL SAVINGS $9,620 $0 ANNUAL PAYOUT FOR ENERGY AT-RISK Annualized project cost (capital + interest) Annual expenditure for energy waste $1,357 $2,960 “PRICE TAG”: CAPITALIZED ANNUAL PAYOUT $16,000 $34,900 ($1,357/CRF*) ($2,960/CRF*) $8,263 -$8,263 ANNUAL FREE CASH FLOW *CRF: = [i(1+i)^n]/[((1+i)^n)-1] NOTE: CRF = 0.0848 when n=25 and i=7% 36 BLUE TAB DEMO 37 OUTLINE FOR TODAY • PART 1: Economic Justification • PART 2: Economic Metrics • PART 3: “Making the Case” to Upper Management 38 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 39 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 40 THANK YOU! The discussion never ends BLOG: http://energypathfinder.blogspot.com 41