Sustainable business and energy management are some of the hottest buzzwords in business today. Everyone wants to be able to say their business is "green" or "environmentally friendly."
What most companies miss are the financial reasons to go green.
Where do you see your energy expenses going over the next few years? Unless you are burying your head in the sand, it's pretty obvious that the long term trend is for rising energy costs. With no alternatives on the immediate horizon, our energy prices are tied to fossil fuels, and all trends point to higher prices. Add in unrest in the Middle East, a weakening dollar, and tighter regulation, and it isn't unreasonable to expect energy expenses to skyrocket.
How will that affect your profits? How will you deal with that?
There are a ton of companies out there with different solutions. Some companies push for automated control of your energy use. Other companies push more efficient technologies. Several examples you will see are:
- Energy Automation
- Demand Response
- Energy Assessments
- High Efficiency Equipment
- Load Leveling
All can help cut your energy spending. The real question is: Are they the right business decision for you?
In business, it comes down to a few core criteria: profits, ROI, and risk.
What is Energy Management?
Everyone seems to have a different definition. The definition we use is "The process of monitoring, controlling, and conserving energy to maximize profits and minimize risk."
Energy management doesn't rely on any one technology, technique, or tactic. It is an overall strategy that starts with top down leadership and commitment. It consists of assessing your company's energy use, developing a plan, implementing change, and verifying that the changes meet expectations.
The final aspect of energy management, and the one that is most often overlooked, is putting in place measures that monitor your energy consumption and ensure that your company doesn't see the energy savings erode over time.
Profit Improvement Magnified by Your Energy Spending
When you look at the impact on your profit margin, it becomes apparent that this can have a profound impact on your bottom line. Let's look at a hypothetical manufacturer looking to grow their profits.
- The average manufacturer has a 6.2% profit margin (Census Bureau).
- The average manufacturer spends 3.1% of sales on energy (Department of Energy).
- Energy audits typically save a manufacturer 10%-40%, with 20% being the average (Department of Energy).
- 3.1% X 20% = 0.62% reduction in expenses. That doesn't sound like much until you look at it in terms of your profit margin.
- Profit margin improvement = PMfinal / PMinitial = 6.82%/6.2% = a 10% profit margin improvement.
As good as these savings are the improvements are magnified in high energy industries. A similar effect is observed when energy costs increase dramatically.
- High energy industries (Aluminum, Steel, Chemicals, petroleum refining, forest products, glass, metal casting, mining, etc...) spend significantly more on energy. According to the Department of Energy, 30%+ of their expenses are due to energy spending.
- 30% X 20% = 6% reduction in expenses. When you look at it in terms of profit margins, it is amazing.
- Profit margin improvement = PMfinal / PMinitial = 12.2%/6.2% = a 97% profit margin improvement.
One important thing to remember is that these improvements are observed year after year. This is why monitoring energy spending and implementing measures to prevent savings erosion is so important.
Energy Management Project: High ROI with Minimal Risk
Energy conservation projects are often put on the back burner. Let's face it, unlike growth and productivity projects they just aren't sexy. Growth projects are exciting, and it our current corporate environment it is much more glamorous to grow sales than to control expenses. Unfortunately, growth projects also carry a high risk, and the cost of failure (or underperformance) is high both financially and politically.
Energy management projects are not tied to growth projections and are often overlooked. This is usually a mistake, both for their value when the economy is strong and when business is slow.
- In boom times they make all other projects more profitable. They also minimize expansion costs because they free up resources that can be used in the expansion.
- In a slow economy, energy management makes your company more profitable. Lower expenses help you stay in business, and help you gain a competitive edge.
Conservation projects in general have a high ROI and minimal risk. Using a simple payback (project cost / annual savings) these projects are extremely attractive:
- 80% of the projects pay for themselves in a year or less.
- 90% of the projects pay for themselves in less than 2 years.
- 95% of the projects pay for themselves in less than 3 years.
This leaves you a fertile group of projects with a high degree of certainty. Each will pay for themselves quickly which minimizes your risk.
But not all energy management projects are risk free. The keys to eliminating risk are:
- Accurate data: if your project decisions are based on faulty data, there is a high probability that the project savings will be less than expected, and that the ROI will not meet expectations. The only way to get good data is to perform an energy audit.
- Execution: Even with accurate data, poor project execution is costly. This is magnified if project execution affects current production.
- Maintaining the conservation measures: energy savings tend to erode over time. This is a natural effect, and unless you implement measures and policies to maintain (or improve) your energy saving efforts you will see your benefits dwindle.
At the End of the Day, It Comes Down to Profits, Risk, and ROI
Yes, there are other benefits to being green, but what matters most is whether the savings are worth the investment. What is the ROI? How certain are we that the desired savings will be achieved? How will it affect my bottom line?
Not all energy saving measures are created equal. Some are free or inexpensive and should be implemented immediately. Others are expensive, and their implementation should be evaluated based on the payback realized.
Brandt Smith is vice president and senior energy consultant for Industrial Energy Audit Services, a provider of energy consulting and energy management.