First published here.
A few weeks ago I wrote about the need for better business cases for energy efficiency projects. More and more it seems that one of the most effective ways of building better business cases is to identify and value non-energy benefits (NEBs). NEBs are all those benefits that come from an efficiency project that are not energy related, they can include (amongst many others); improved health, reduced absenteeism, better learning outcomes, increased productivity, increased production, and increased asset value. All of these benefits have been identified in specific situations and in most if not all cases have been measured.
The first useful thing about NEBs is that they are usually much more strategic and interesting to decision makers (at all levels from consumers to CFOs) than simple energy cost savings (or even reduction in emissions). This is important because the classical capital allocation model which says that companies should invest in any project that has an IRR greater than the cost of capital just is not how it works in practice. Capital is limited and projects that are considered strategic have higher priority than non-strategic projects. If something is strategic it would be unusual to hear “what is the payback?”. It is strategic because it supports the primary mission of the organisation whatever that is and it is something that usually “has to be done”.
The second thing about NEBs is that they really do have financial value and once they are identified their value can be measured or at least estimated. It has been said that they are hard to measure and sometimes that is true but the reality is that data that can be used to estimate benefits often exists already e.g. absenteeism records. It is just that traditionally energy managers or energy efficiency engineers have not considered the NEBs and their value in their business cases, or gathered data to support the business case. Valuing NEBs is not an exact science but that applies to many things in business, the point is to recognise that they exist and to come up with an agreed estimate of value – however approximate. Once you do that you can often find that the value of the NEBs is far more than the value of the energy cost savings.
So to make better business cases
- Step 1: identify EE project and energy cost savings
- Step 2: identify NEBs
- Step 3: link the NEBs to strategic direction i.e. create strategic value
- Step 4: appraise financial value of NEBs and include in financial evaluation alongside energy cost savings
- Step 5: capture strategic & financial value and include in the business case
To sum up
Financial value of EE + Strategic value of NEBs + Financial value of NEBs = Better Business Cases = More Capital Flow
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About Dr. Steven Fawkes
Steven works on several energy efficiency financing projects around the world including the Investor Confidence Project Europe. He provides strategic and financing advice to energy and clean tech companies and runs the blog OnlyElevenPercent.