Viewpoint -- The Secret Benefits of Energy Conservation: Beyond the Utility

Conservation programs are worth 18% to your business -- and that's a conservative estimate.

In addition to saving energy and reducing utility expenses, there are additional and often unreported benefits from conserving energy. These non-utility benefits contribute value worth an additional 18 to 50 percent of the energy savings.

Non-utility benefits can be expressed many ways, but generally fall into the following four quantifiable categories:

A. extended equipment life;
B. reduced maintenance costs;
C. reduced risk to energy supply price spikes; and
D. the ability to sell carbon credits.

In addition, there are strategic benefits (which are site-specific and not quantified here):

E. enhanced public image; and
F. reduced risk to environmental/legal costs.

A Simple Illustration of These "Secret Benefits"

For this example, consider a large facility with 10,000 light fixtures. Through a variety of energy conservation measures, it is common to reduce consumption by 25%. First, we will calculate the dollar savings from electricity conservation. Then, we will show the secret benefits, which have impacts beyond the utility budget.

Assume the fluorescent lights are relatively new and consume 60 watts per 2-lamp fixture and operate 5,000 hours per year. Our baseline energy consumption is:

= (5,000 hrs/year)(.060 kW/fix)(10,000 fix.)
= 3,000,000 kWh/year

If the school pays approximately $.08/kwh, then the dollars spent on electricity for this lighting system:

= $240,000/year.

Thus, a 25% reduction from the baseline usage would equal: 750,000 kWh/year, or $60,000/year in savings.

Benefit A: The Value of Extended Equipment Lives (reducing capital budgets)

If lights are used 25% less, the lighting system (ballasts) should last about 25% longer. A lighting ballast is rated for 60,000 hours of operation. If the school operates the lights 5,000 hours per year, they would need to replace the ballasts at the 12th year and dispose of the old ballasts. If there are 5,000 ballasts, each costing $25 to $55 (material, installation and disposal costs vary by geographic location), the replacement cost (minimum) at the 12th year would be:

= ($25/ballast)(5,000 ballasts)
= $125,000

Annualized replacement cost would be:

= $125,000)(1/12 years)
= $10,417/year

With a use rate of only 3,750 hours/year (a 25% reduction), the ballasts should last 16 years. This would reduce the annualized replacement cost to:

= ($125,000)(1/16 years)
= $7,813/year

Thus, the Annualized Savings, (calculated as the difference between the original replacement cost minus the reduced replacement cost) are:

= $10,417/year - $7,813/year
= $2,604/year (at $25 per ballast)

Using the same equations, at $55/ballast, the annualized savings, (from replacing at 16 years instead of 12 years) would be:

= $5,729 per year.

Thus, due to extended equipment life, we have reduced the annualized replacement cost by a minimum of $2,604/year to a maximum of $5,729/year.

Benefit B: The Value of Reduced Maintenance Costs (operating expenses)

If the lights are used 25% less, the lamps should last about 25% longer. A typical fluorescent lamp life is 20,000 hours. With a use rate of 5,000 hours per year, the school would need to replace lamps at the 4th year. If there are 10,000 lamps, each costing $3 to $5 (material, installation and disposal costs vary by location), the replacement cost (minimum) at the 4th year would be:

= ($3/lamp)(10,000 lamps)
= $30,000

Annualized replacement cost would be $30,000/4 = $7,500.

With a use rate of only 3,750 hours, the lamps should last 5.3 years, thereby reducing the annualized replacement cost to:

= $30,000/5.3 years
= $5,660/year

Thus, Annualized Savings are:

= $7,500 - $5,660/year
= $1,840 per year (at $3/lamp)

Using the same equations, at $5/lamp, the re-lamping cost would be $50,000 and the annualized savings from replacing at 5.3 years instead of at 4 years would be

= $3,066 per year.

Thus, due to extended lamp life, we have reduced the annualized maintenance cost by a minimum of $1,840/year to a maximum of $3,066/year.

Benefit C: The Value of Reduced Risk to Energy Supply Price Spikes

If less energy is consumed; the operational budget is less vulnerable when electric/gas/heating oil prices hit their seasonal spikes. The avoided costs can be worth millions to a large organization.

Assume that on average, for 1 quarter of the year, energy prices are 25% to 50% higher ($.02 to $.04 more per kWh) due to seasonal/supply spikes.

If we are using less energy, we will pay less of a premium for the price spike. The avoided price spike premium is equal to:

=(price premium)(kWh saved)(premium period)
=($.02/kWh)(750,000 kWh/yr)(1/4)
= $ 3,750/year

Using the same equations, a 50% price spike would represent an avoided premium worth:

=(price premium)(kWh saved)(premium period)
=($.04/kWh)(750,000 kWh/yr)(1/4)
= $7,500/year

Thus, due to reduced risk from price spikes, the avoided premiums are $3,750 to $7,500 per year.

Benefit D: The Value of Carbon Credits

Organizations can claim emissions reductions from energy conservation. There are environmental markets where "emissions credits" (from energy conservation) can be sold, generating revenue for an organization. These markets are already liquid in Europe (and are motivated by carbon-related legislation). California and other states already require emissions reporting and reductions, and federal regulations are in process that will open the door to a similar trading environment in the United States.

According to the EPA, 1.37 lbs of CO2 are created for every kWh burned. So if we are saving 750,000 kWh/year, the avoided power plant emissions would be equivalent to:

=(750,000 kWh saved)(1.37 lbs of CO2/kWh)
= 1,027,500 lbs of CO2 saved per year

Translating lbs to Metric Tons:

=(1,027,500 lbs CO2)(.000454 Metric Tons/lb)
= 466.5 Metric Tons of CO2 saved per year

These avoided power plant emissions could be claimed as "carbon credits" and sold to another party who wants to buy carbon credits.

Assuming a market price of $6 per metric ton, the additional revenue generated by selling the carbon credits would be:

=(466 Metric Tons of CO2/year)($6/M-Ton)
= $ 2,799 per year

Using the same equations, at $30 per metric ton, the additional revenue generated by selling the carbon credits would be:

=(466 Metric Tons of CO2/year)($30/M-Ton)
= $ 13,980 per year

Thus, due to the carbon market, there is a possible additional revenue stream worth a minimum of $2,799 to a maximum of $13,980 per year from selling carbon credits. In addition as carbon prices go higher... so does the value of this new revenue stream.

Benefit E: The Value of Enhanced Public Image

Organizations that conserve/manage energy (thereby reducing emissions) can differentiate themselves as "environmentally-friendly" and "good" members of a community. This can have tremendous political, strategic, competitive and morale-building value for organizational leaders. Many benefits (such as attracting and retaining better employees, faculty, students, clients, suppliers, etc.) result from being the "leader" in your field.

Although calculation of this value is difficult and is not generalized here, it can be far greater than any of the benefits mentioned previously. In today's "green-minded" economy, many organizations have used "green" programs as a very effective marketing tool to differentiate themselves from the competition, achieve business objectives, secure and retain talent, improve productivity and capture a greater market share.

Energy saved can be translated into "equivalent environmental benefits" from avoided power plant emissions. These reductions/benefits can be published in various places to improve the organization's green image with employees, clients, students, suppliers, distributors, shareholders and other groups relevant to the success of an organization.

Thus, due to energy conservation program, the facility can claim environmental benefits equivalent to removing 1,008 cars off the road, thereby improving the school's public image. (Editor's note: A calculator that estimates the equivalent environmental benefits can be downloaded at ProfitableGreenSolutions.com under the "articles and resources" tab.)

Benefit F: The Value of Reduced Risk of Environmental/Legal Costs

If assets are replaced less frequently, an organization will generate less waste and be less vulnerable to environmental regulations governing disposal. Greater environmental regulations are inevitable and unforeseen legal costs can pose a significant expense and political risk.

Although calculation of this value is also difficult and is not generalized here, it can be very significant. The risk is real, but unknown. This is demonstrated by environmental disasters at Union Carbide, Exxon etc.. It is also interesting to note that Exxon's penalties and fees were 4 times the actual clean-up costs for the Valdez oil spill.

Conclusion: The "Secret" Is Out

This article has presented some additional and often unreported (hence, "secret") benefits from energy conservation. The example described an energy conservation project that was achieving a 25% reduction in electrical consumption from the lighting system. Beyond obvious energy savings, the "secret benefits" A through F yield additional value worth $10,993 to $30,275 per year. This is equivalent to a minimum 18% improvement from the original estimated savings of $60,000 per year. In other words, if we value the secret benefits as worth only an additional $10,993 this represents a minimum improvement of 18% to our energy savings of $60,000.

All estimates in this article only included the quantifiable "secret benefits" (benefits A though D). Actual values could be much higher when accounting for enhanced public image and a reduction in legal and environmental risks (benefits E and F).

Eric A. Woodroof, Ph.D, CEM is the founder of www.ProfitableGreenSolutions.com, a training organization that offers a 300% Guarantee to help organizations become more profitable and green. He is widely recognized for helping energy and environmental projects get approved and implemented. His focus is to help clients make more money and simultaneously help the environment. Dr. Woodroof has over 15 years of experience, 20 publications and has identified profit-improvement strategies at over 200 facilities. He has also been a Board Member of the Certified Energy Manager Program since 1999, and is now the Chairman of the Certified Carbon Reduction Manager Program. Dr. Woodroof has worked with the U.S. Public Health Service, Ford, GM, Hertz, Johnson Controls, Southwestern Bell, Tulsa International Airport and many others. He is friends with many of the top minds in energy, environment, finance and marketing. His email address is eric@profitablegreensolutions.com

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