energy efficiency: a profit center for companies!

Catherine Cooremans − DSMU Webinar May 12th, 2016

Energy Efficiency: A Profit Center for Companies!

Catherine Cooremans, MBA, PhD


• Context

• Energy efficiency: a profit center for companies! – concept– examples– Toolbox

• Task 26 Multiple benefits of energy efficiency

• Conclusion

Plan


Context


Source: Philippe Benoît, Several IEA strategic actions to increase energy-efficiency, EEMR 2015 and Multiple Benefits, ECEEE workshop, Brussels, October 21, 2014.

A huge energy-efficiency potential remains untapped:

in the business-as-usual scenario, “two-thirds of the economic potential to improve energy efficiency remain untapped in the period to 2015.”

Context I – Energy-efficiency gap


Research finding 1:

• Financial logic is not decisive• Strategic logic is more important

in businesses’ investment choices

Context II - Investment decision-making

Research finding 2:

• A huge diversity is observed between companies’ situations and behaviors

• even within the same industry


Strategy: “a balance between internal resources and external factors in order to build a durable competitive advantage, through resources allocation”. (Johnson & Scholes, 1999)

Inte

rnal

reso

urce

s

External factors

competitive advantage

Goal :

3 dimensions of strategy

Strategic logic


An investment is strategic if it contributes to create, maintain or develop a sustainable competitive advantage (Cooremans, 2011).

Definition

Strategic logic


The classical engineering “technico-economic” approach…

… does not work (well enough).

Investment decision-making

Energy savings

Financial savings


Definition:all the benefits entailed by an energy performance action which are not specifically energy benefits (i.e. energy savings translated into monetary savings) in and of themselves.Terminology: Multiple benefits, ancillary benefits, secondary benefitsMultiple impacts

Non-energy benefits of Energy Efficiency

Context III - NEBs


International Energy Agency (IEA):Capturing the multiple benefits of energy-efficiency, Paris, September 2014


Energy efficiency:A profit centerI. The concept


Profit ?

Costs

Turnover

Risks

How to increase sales?


Costs

Value proposition

Risks

The 3 dimensions of competitive advantage

The value for customers

Borne to create the value proposition “Strategicity”

Borne to create the value proposition

Turnover


“a set of benefits that a product (or a service) promises to deliver”Kotler, 1999

Competitive advantage

Value proposition first!

http://www.google.ch/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.forum-auto.com/automobile-pratique/modelisme-modeles-reduits/sujet9711-70.htm&ei=_k1aVMC-DpHoaIqUgaAD&bvm=bv.78677474,d.d2s&psig=AFQjCNFJOF_VFKnO4nyByX-Wtook0p4V6Q&ust=1415290432527143


For many companies, strategic advantage is based on a “superior value” stemming from providing unique benefits and not for offering lower prices.

As emphasized by Michael Porter:

“value, instead of cost, must be used to assess competitive position since firms often deliberately raise their cost in order to command a premium price via differentiation” (Porter, 1985:38).


Categorizing companies on a “value-cost” scale to understand the main source of their competitive advantage

Out of a sample of 20 Swiss companies:

Value proposition

Costs

14

4

2

Source: Canton de Vaud, Programme Energy Audits Large-Scale Consumers, 2014-2018


• Examples of positive characteristics (benefits of use for customers) attached to companies’ value proposition: quality, purity, reliability, precision, versatility, efficiency, design, innovation, diversity, availability, service, technical support, prestige.

• Companies: for many of them, value proposition is the main source of their competitive advantage (and thus of their sales).

• Energy services are often key to guarantee the value proposition.


Energy efficiency a profit centerII. Examples


• 4.5-star hotel: window replacement

• Municipality: replacement of pumps in a sewage pumping station.

• Building: boilers replacement

• Beverage industry: filling line replacement


Example 1 - 4.5-star hotel: window replacement

Description of the current situation and its weaknesses:• The single window glazing no longer meets the new

legal standards.• Half of the rooms are over-heated by the sun in the

afternoon.• The traffic noise is a real bother.

Description of the energy efficiency action:•Replacing existing windows with double-glazed windows.


Costs

Value proposi

tion

Risks

• Improved products quality

• Enhanced image and brand stronger

• Customer loyalty up• Increased product

attractiveness

• Reduced commercial risk

• Reduced CO2 risk• Reduced energy costs• Reduced CO2 costs


Ex. 2 - Municipality: improvement of a sewage pumping station performance Source: Pye and McKane, 2000

Description of the current situation and its weaknesses:• Twin pumps (40-hp direct drive, wound rotor motor) handle

340 000 gallons of raw sewage per day.• One pump handled the entire peak flow under normal

operation, while the second pump kicked in only in extreme conditions.

• The system experienced frequent breakdowns, occasional flooding and sewage spills.

Description of the energy efficiency action:•A smaller, 10-hp pump with direct online motor starters and a level control system with float switches is added. The new pump handles the same volume as the original pumps during non-peak periods, but runs for longer periods of time. The old pumps handle infrequent peak flows.


Costs

Value proposi

tion

Risks

• Better service quality (less noise for residents)

• Better service reliability• Better image• Higher customer and

employee loyalty

• Lower flooding risk• Lower break-down risk

• Lower energy costs• Lower maintenance costs• Longer equipment lifetime• Pumping capacity increased

(by 25%)

Source: Pye and McKane, 2000

• Lower legal risk


Ex. 3 – Commercial building: boilers replacement

Description of the current situation and its weaknesses:• The two current boilers, in the basement, are over-sized

and outdated.• Maintenance costs are high.

Description of the energy efficiency action:• One new, more energy-efficient, boiler is installed.• It is sized according to real needs.• 2 additional parking places are created in the space

saved.• The storage rooms for bicycles is enlarged.


Costs

Value proposi

tion

Risks

• Higher product quality• Higher product reliability• Stronger image & branding• Higher customer loyalty• Higher product attractiveness• Occupancy rate up

• Lower vacancy risk• Lower break-down risk

(boiler)• Lower CO2 risk

• Lower energy costs• Lower maintenance costs

• Leasing income up• Additional income (parking)

• Lower “brown” risk• Lower CO2 costs


Ex. 4 – Beverage industry: filling line replacementSource: Marina Santoro, Samuel Gerber & Team, Lucerne University of Applied Sciences and Arts - School of Engineering and Architecture

Description of the current situation and its weaknesses:•Bottle filling line for multiple types of bottles and beverages can’t meet production requirements over the whole year and must be compensated with overtime on Sunday.•The system is outdated.

Description of the energy efficiency action:• A new filling line is installed with faster filling speeds,

reduced working hours for the same productivity, reduced cleaning need & reduced water & energy consumption.


Costs

Value proposi

tion

Risks

• Higher product quality• Higher product reliability• Stronger image and

branding• Higher employees’ &

customers’ loyalty• Higher product attractiveness

• Lower accident risk• Lower commercial risk• Lower break-down risk• Lower legal risk• Lower CO2 risk

• Lower energy & CO2 costs• Maintenance costs down 45%• Rejection rate down• Reduced water needs

• Staff costs down (automation + no Sundays)• Reduced chemicals needs


BEVERAGE INDUSTRY Proj. Proj. Proj. Proj. Proj. rorororororororororororororo Proj.Investment project "replacement filling line" Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 a a a a ar ar ar ar ar ar ar ar ar ar Year 20Investment flows

Cash-flow after taxes 216'537 216'537 216'537 216'537 216'537 216'537 Capital expenditure -5'600'000 0 0 0 0 0 0 Terminal value 0

Terminal value after taxes 0

Investment flows "Replacement filling line" -5'600'000 216'537 216'537 216'537 216'537 216'537 216'537

Discount rate 6%

ANALYSIS OF THE FLOWS WITHOUT LOANNPV 20 years @ 6% -3'116'334

IRR -2.3%

Pay-back time (years and months) 25.86

(CHF)

Evaluation of project financial attractiveness: energy cost reductions only

NPV heavily negative: -3.1 millions CHF –IRR negative: -2.3% – Simple pay-back time > 25 years

Source of the figures: Marina Santoro, Samuel Gerber & team, Lucerne University of Applied Sciences and Arts - School of Engineering and Architecture


BEVERAGE INDUSTRY Proj. Proj. Proj. Proj. Proj. rorororororororororororororo Proj.Investment project "replacement filling line" Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 a a a a ar ar ar ar ar ar ar ar ar ar Year 20Revenues

RevenuesEnergy benefits - Financial savings from electricity consumption reduction 186'600 186'600 186'600 186'600 186'600 186'600Energy benefits - Financial savings from natural gas consumption reduction 29'937 29'937 29'937 29'937 29'937 29'937Non-energy benefits 1 - Maintenance cost reduction 225'000 225'000 225'000 225'000 225'000 225'000Non-energy benefits 2 - Material cost reduction 115'000 115'000 115'000 115'000 115'000 115'000Non-energy benefits 3 - Staff cost reduction 550'000 550'000 550'000 550'000 550'000 550'000Non-energy benefits 4 - Reduction of product losses 90'000 90'000 90'000 90'000 90'000 90'000Non-energy benefits 5 - Reduction of special equipment 10'000 10'000 10'000 10'000 10'000 10'000

Total gross revenues 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537Depreciation 0 0 0 0 0 0Net income before taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537

Taxes 0 0 0 0 0 0Net income after taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537Depreciation 0 0 0 0 0 0

Free cash-flows after taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537

(CHF)

Including multiple benefits in the financial analysis

Source of the figures:Marina Santoro, Samuel Gerber & team, Lucerne University of Applied Sciences and Arts - School of Engineering and Architecture


NPV highly positive: 8,2 millions CHF IRR 21.1% – Simple pay-back time 4.6 years

Source of the figures: Marina Santoro & team, Lucerne University of Applied Sciences and Arts - School of Engineering and Architecture

Evaluation of project financial attractiveness: energy cost + other cost reductions

BEVERAGE INDUSTRY Proj. Proj. Proj. Proj. Proj. rorororororororororororororo Proj.Investment project "replacement filling line" Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 a a a a ar ar ar ar ar ar ar ar ar ar Year 20Investment flows

Cash-flow after taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 Capital expenditure -5'600'000 0 0 0 0 0 0 Terminal value 0

Terminal value after taxes 0

Investment free cash-flows "Replacement filling line" -5'600'000 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537

Discount rate 6%

Free cash-flows analysis:NPV 20 years @ 6% 8'238'888

IRR 21.1%

Pay-back time (years and months) 4.6

(CHF)


Energy efficiency a profit center

III. Toolbox


“The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation” (Porter, 1985:37)

Value process mapping

The Generic Value Chain (Porter, 1985)

At the company level: the value chain


At operational level: process mapping

Process mapping (George, et al., 2005:40)


Aluminum foil production process map

Process supplier casting Pusher

furnace Cold mill Thermal treatmentHot mill Process

customer

“Safety is always the priority issue. Secondly, product quality, reliability and energy are other important criteria”. Mr Germanier, Novelis Switzerland, Energy & Project Manager, 18 March 2015

Operational analysis


Process mapping & energy services

Combustible fuel (diesel fuel for worklift)Natural gasLow-voltage electricityMedium-voltage electricityHigh-voltage electricity Compressed airWater

ENERGY CARRIERSPrimary / secondary

CastingPusherfurnace

Hot mill Cold millThermal

treatment

Air conditioning x x x x xAutomation (electronic regulation) x x x x xAtomization -- -- -- -- --Cleaning -- -- -- -- --Electric induction -- -- -- -- --Electrolysis -- -- -- -- --Heat - low temperature -- -- -- -- --Heat - medium temperature -- x -- -- xHeat - High temperature x -- -- -- --Humidification -- -- -- -- --Hydration -- -- -- -- --Lighting x x x x xMotive power - fixed (propulsion, electric drive system) -- -- x x --Motive power - mobile x x x x xRefrigeration - positive cold x x x x xRefrigeration - negative cold -- -- -- -- --Ventilation x x x x x

VALUE CHAIN ACTIVITIES OF ALUMINUM FOIL PRODUCTION

ENERGY SERVICES


Process mapping & energy services


Energy services key contributions to process:security (critical values) - quality, quantity


• Manufacturing of blades for the paper industry: strategic risk of temperature drift in warehouses and production area.

• Production of motion sensors for aeronautics: importance of strict climatic conditions in production areas.

• Industrial bakery: cooling units production influences product quality (cold chain stability & reliability) and the time between processes (water cooler and fermentation chamber).

Examples of key energy services and related constraints in industrial operations:


In order to assess the contribution of an energy-efficiency project to a company process, the following elements have to be analyzed: • Security• Products (goods & services – quantity & quality)• Energy services• Time (speed of production process)• Flexibility• Consumables (energy carriers, lubricants, etc.)• Waste and emissions (by-products)

1. Operational analysis


3 methods to define magnitude:• Estimation• Calculation• Measure

Benefits (or impacts) of energy-efficiency projects are quantifiable!

Information does exist in companies: you just have to ask the right people!

2. Financial analysis


Stronger competitivenessHigher profitability

Lower costs

Lower risks

Value proposition

more attractive

• Higher quantities soldand / or

• Higher unitary price

= higher turnover

• Higher turnover• Lower costs

= Higher profit

3. Strategic analysis


Task 26Multiple Benefits of energy efficiency


Why Task 26 ?Research has demonstrated MBs for 20 years:• Europe: Cooremans, Dahlgren, Fawkes, Fawcett,

Gudjberg, Nehler, Ottosson, Rasmussen, Rohrer, Santoro, Schumacher, Thomas, Sandberg, Thollander, Worrell, Weinsziehr

• United States: Abdou, Baatz, Caron, Davis, Cooney, Finman, Katz, and Laitner, Leach, Lilly and Pearson; Lung, Marsh, McKane, Mills et al., 2008; Pearson, Pye, Rathbun, Robinson, Rosenfeld, Skumatz, Stevens, Russell.

• Elsewhere?• Amsterdam Conference IEPPEC June 7–9, 2016

http://www.ieppec.org/

http://www.ieppec.org/


Why Task 26 ?

According to M_Key research project, out of 140 answers to our survey, 55% of companies rarely or never include NEBs in their investment calculations:• 15%: never• 40,7%: yes, sometimes• 31,4%: very often• 14.3%: always or almost always

M_Key (“Management as a Key Driver of Energy Performance”) research project is part of the National Research Programme "Managing Energy Consumption" (NRP 71) of the Swiss National Science Foundation (SNSF). Further information on the National Research Programme can be found at www.nrp71.ch.

http://www.nrp71.ch/


Why Task 26: two different and parallel business cultures and interests:

Energy people who care about:• Energy consumption of

facilities and equipment

Production people who care about:• Product quality

& reliability

• Safety of process & facilities

• Flexibility

• Production time

• (Environmental impact)

• (Energy costs)


STRATEGIC LEVEL

Top management

OPERATIONAL LEVEL

Middle & front-line

management

PRODUCTION

FINANCE DPT

ENERGY MGT

CEO

• Energy is considered non-core business, non-strategic, thus a secondary issue.

• Energy manager has difficulty accessing and communicating with top management and production.


Task 26 - why ?The non-energy benefits of energy efficiency have to be:• analyzed ex ante (i.e. before projects

start), at project level, with convenient analytical tools

• better documented and quantified• communicated in a convincing way to

stakeholders


Task 26 - why ?

Bringing concrete and applicable solutions to several important needs:

• Need to enlarge the usual technical approach applied to energy-efficiency projects.

• Need to propose training to engineers working on energy-efficiency projects & to supply them with MBs data.

• Need to attract businesses attention to the decisive contribution of energy services to their core business.

• Need to bridge energy and climate communities.


• Tool box conception: an analytical tool to be used ex ante to better identifying and assessing MBs related to energy-efficiency projects.

• Tool box delivery: – conception and realization of templates for

workshops in participating countries. – marketing & communication campaign.

• Learning base: conception and development of a learning base containing data on MBs, organized by business activity & municipality type, energy-efficiency measure type and geographical location.

• Dissemination: one-day “Toolbox Training Sessions”, webinars & online courses.

Task 26 - what:


MacroeconomicsSocietal level

MicroeconomicsIndividual - project level

Supply side

Demand side

Energy delivery

Energy delivery

Health & well-being

Industrial productivity

Public budget

HouseholdsMunicipalities Commercial

companies

Residential buildings

Industrial companies


• June 2016 – May 2019• 4 expert workshops:

Nov. 2016 – May 2017 - Sept. 2017 – March 2019

Task 26 - when:


Conclusion


BEVERAGE INDUSTRYInvestment project "Replacement filling line" Year 0Investment flows

Cash-flow after taxes Capital expenditure -5'600'000 Terminal value

Terminal value after taxes

Investment flows "Replacement filling line" -5'600'000

Discount rate 6%

ANALYSIS OF THE FREE CASH-FLOWS NPV 20 years @ 6% -3'116'334

IRR -2.3%

Simple pay-back time (years and months) 25.9

Integrating the multiple benefits of energy-efficiency:a multi-level and comprehensive analysis to raise

strategic and financial attractiveness of energy-efficiency investment projects

Costs

Value propositi-

on

Risks

Financial analysis Risk analysis

Operational & strategic analysis

IEA DSM / IETS TAKS 26 Multiple Benefits of Energy Efficiency :

• We most welcome new collaborations and partners.

• Please contact me or Maja Dahlgren (co-project leader), from the Swedish Energy Agency, in case of interest or for information regarding this project:

[email protected]

[email protected]

Thank you for your attention!

mailto:[email protected]

mailto:[email protected]

Liste de références:

• Cooremans, C. (2012). Investment in energy-efficiency: do the characteristics of investments matter? Energy Efficiency Journal, DOI: 10.1007/s12053-012.

• Cooremans, C. (2011). Make it strategic! Financial investment logic is not enough, Energy Efficiency Journal, 4(4), 473-492.

• George, M.L. Rowlands, D., Price, M., Maxey, J. (2005). Lean Six Sigma Pocket Tool Box. Mc Graw-Hill, New-York.

• IEA (International Energy Agency) (2014). Capturing the multiple benefits of energy efficiency. OECD/IEA, Paris.

• Kotler, P. (1999). Kotler on marketing. How to create, win and dominate markets. New York: Free Press.

• Porter, M. E. (1985). Competitive advantage. New York: Free Press.

• Pye, M. and McKane, A. (2000). Making a stronger case for industrial energy efficiency by quantifying non-energy benefits. Resources, Conservation and Recycling, 28(3-4): 171-183.

energy efficiency: a profit center for companies!

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