28 Jul What the Savvy CFO Needs to Know about Energy Efficiency
As a CFO, every now and then your facility manager or your energy manager will come to you asking you for money, claiming they will reduce the company’s energy bills, “Chris, our HVAC system is inefficient, we need to replace it. And take a look at this new lighting system which could save us money”…
Fifteen minutes later your head of business development calls you about an exciting opportunity to target a new market. All it requires is £500k investment…While you’re on the phone, you see an email come through from the marketing director with the proposed marketing budget for the quarter.
You’re being pulled in all directions and it’s your responsibility to make the decisions that are best for the company, both financially and strategically…no pressure 😉
So…why on Earth should you care as CFO about energy efficiency?
Why a CFO needs to care about energy
Energy represents the third biggest expense of a business.
Energy powers your business – your buildings, IT, transport. But it doesn’t come cheap. Energy represents on average the third highest expense item of a business.
If you want to make overall savings to your bottom line and stay competitive, you can’t afford not to be energy efficient.
Do you know which parts of your business are consuming the most energy? It’s important to be able to have a birdseye view of your energy consumption over time and be proactive about finding opportunities to cut costs.
Energy prices are unpredictable.
It’s an unregulated market where energy suppliers can set their own prices. Energy prices are also dependent on external factors such as the climate and volatile markets, which you have no power over. So how can you take back some control?
Ensure you’re making informed decisions about energy suppliers and not paying more than you should – you’ll need your team to perform an ongoing review of the energy market, providers, prices and trends to avoid wasted money and any nasty surprises.
Energy efficiency is not a cost, but an investment
With a smart plan you can cut your energy costs by up to one third. If you have a long-term perspective on energy projects, the energy strategy can become an investment, rather than a cost. What is the life-cycle cost of the project? Are there operational, maintenance, perhaps staff savings?
And you don’t necessarily have to wait long to see that ROI, if you look out for large energy-saving opportunities.
What’s more, behavioural energy saving measures in the workplace can start working from day one. But for this, you’ll need an accurate overview of where and when your energy is being used.
The Brexit challenge
As the UK is trying to come to terms with the consequences of its exit from the EU, there are some major questions for the energy sector:
- Will imported energy be more expensive?
- Will the UK still have to meet the same energy efficiency targets, now it’s not tied to the EU?
- How will my company’s compliance and reporting requirements be affected?
According to the fifth carbon budget, approved by the UK Government just a few days after the Brexit vote, the UK is remaining committed to its emissions goals. You’ll need to stay on top of your energy efficiency strategy and action plan, especially in these times of uncertainty.
3 Things the CFO needs to know about energy efficiency
1. What is energy efficiency?
In simple words: it’s about using less energy to provide the same service. We all want to be more efficient and avoid wasting energy, money and precious resources.
Energy efficiency is a process. Implementing energy efficiency in your organisation is not a one-off event; rather it should be a core element of your business strategy. From changing employee habits and energy use, to structural improvements and future goals, energy needs to be a long-term strategic consideration.
The goal of energy efficiency is to reduce energy costs, which in turn has knock-on effects:
- The savings generated could be used to support your business growth.
- Factories, for example, can reduce their price per unit produced (this means more gross margin for you!).
2. How much would it cost?
How long is a piece of string? Of course there are huge variations in the scale and cost of energy projects. The bigger the scale, the bigger the ROI. Energy efficiency measures normally need upfront investment (e.g. new lighting, boilers, refrigeration etc). This is an issue for all companies, particularly SMEs, so it’s important to work out the long-term investment.
Based on more than 1,000 projects, you only need to invest 5% of your energy bill to be energy efficient. True story.
To help with this investment, get informed about the environmental taxes, and tax relief schemes that your organisation may be eligible for. Some financing schemes exist in the UK to help with energy investments, such as the Non-Domestic Green Deal, The Carbon Trust Energy Efficiency Financing Scheme and the Green Investment Bank.
3. How much would I save?
Normally companies that provide energy efficiency services tell you that you can save between 10% to 30%…hmm…that’s pretty vague. How can you make a smart decision based on this huge range?
You need to have a clear and accurate picture of your energy savings potential. The amount of savings depends on your strategy, which will be defined by how much budget you invest in the project.
Keep reading, we will give you a key tool that hundreds of CFOs are currently using to get accurate figures of their energy savings potential.
Energy Efficiency: a 4-step process
An energy efficiency project comes together through 4 stages: awareness; monitoring; analysis; control.
You need to kick off by understanding where you are now (current energy consumption and costs), where you need to go (projections and targets) and what you need to get there (budget required).
- Potential energy savings can be calculated (in units of energy and price) by using tools such as the Energy Grader.
- Second, we need data. This involves installing an energy management system to monitor and track energy use over time.
- Once we’ve got the data, now we need insights – by analysing the data using customised reporting.
- Finally, to put the plan into action, the final stage involves implementation of an action plan with specific targeted actions to cut energy consumption and costs across the organisation.
What a CFO needs to know and do at each stage of the process:
Step 1: Awareness
At this stage you need to get a clear picture of what the energy project will involve.
Therefore, ask your energy manager to give you:
- A detailed description of current problems.
- A precise budget needed to invest in order to make real energy savings.
- A complete, accurate and customised report with the savings potential.
The best way to do this is by using a tool that automates and customises an energy savings potential analysis for your company.
You can do that with the Energy Grader. Just send your energy manager or your facility manager your recent electricity bills. Just one will be fine, but you will get more accurate results if you use around 12 bills.
Your team can use the online tool to upload their bills and in return you get a complete and customised report, like this one:
With a report like this you have the clear picture that you need in the awareness stage of any energy efficiency project.
Step 2: Monitor
At this stage you, as the CFO, need to make sure you are getting a clear idea from your energy manager of how the improvements are going to be measured and tracked.
This stage normally involves installing hardware for measure energy efficiency or improving the one already in the buildings.
Hardware is expensive. Sorry, we can’t deny it.
But hardware is extremely useful because the better measurement system you implement, the more and better data you get, allowing your team a better analysis to go further with savings. Hardware allows you to verify the energy savings achieved, and we know how much verification matters to CFOs.
And, good news: it’s a one-time investment! Some years ago hardware was not as robust and trustable as it is today. Your equipment can last around 30 years.
Step 3: Analyse
The energy management project is up and running. Now you need real insights and information from your energy manager:
- Where and how can you make the biggest savings?
- How might these actions impact other areas of the company? For example, would you need to invest in a training plan for employees to implement the changes?
Step 4: Control
The final stage of the process is the control phase. Once an action plan and targeted initiatives are in place, you’ll need regular reporting from your energy manager with accurate data throughout the project, using measurement and verification (M&V).
This way you can track the savings in numbers (and ££) and flag any deviation from the targets. You’ll also need to take into consideration how any unforeseen events or external factors such as energy prices impact on your energy plan and bottom line.
When your energy team is asking you for money for new tools, you need to ask them to choose platforms with measurement and verification features.
M&V means that your energy tracking business unit will be able to provide you detailed figures of:
- Progress of each area of the energy savings
- Results versus goals
- Verified savings.
Efficiency is doing things right; effectiveness is doing the right thing
Every organisation needs to be on top of their energy efficiency. Aside from environmental responsibility and regulatory compliance, there are real cost savings to be made.
Depending on your current levels of efficiency, there can be immediate savings which you can’t afford to overlook.
When many competing interests are vying for investment, you can’t possibly keep everyone happy. But you can make the best possible decisions for the company, and for that you need information and insights. So, the next time you are presented with a potential energy project, make an informed decision, based on data and long-term and lifecycle costs.