Cost benefits of energy management
Energy management is critical for a sustainablebalance sheet. But making it a CSR project is the wrong approach,says Martin Blake
10 Oct 2011 By Martin Blake, Carbon ZeroSolutions
ALL TOO OFTEN, energy management programmes aredevoid of what finance professionals are looking for: a positiveimpact on the balance sheet. Worse still, energy management hasbeen bound up in sustainability programmes, which is usuallyadvocated by CSR and CSO professionals whose vision tends to bemore focused by environmental concerns than monetary businessgoals.
Finance professionals understand capital; theirpriorities are activities and strategies that stimulate businessgrowth or manage bottom-line performance. The general view ofenergy management is that it is costly, difficult to implement andan issue of forced compliance. However, carbon and energymanagement programmes are now as vital to the health of thecorporate balance sheet as debtor days and foreign exchangefluctuations. Why? Because there can be a dramatic cost saving foryour organisation and a revenue stream to add to your bottomline.
But where do you start when you speak a differentlanguage to your CSR colleagues? Firstly, it's critical tounderstand the difference between corporate social responsibility(CSR) and performance-managing energy reduction. If you allowenergy reduction to be attacked as a badge of socialresponsibility, you are likely to limit the benefits by choosingprojects that have visible PR. This is the wrong way to go aboutit.
Corporate responsibility needs separating fromsocial responsibility. Both are important, but the former isconcerned with the efficient running of the business, while thelatter is regenerative at best.
In my experience, organisations that haveimplemented energy management programmes are realising dramaticcost savings, between 20% and 40%. For example, we reduced ourannual energy bill by £30m at Royal Mail. If you can do thesame, these programmes can pay back within your investmenttimeframe and meet your internal rate of return.
An as you are very much aware, we are notoperating from a business as usual standpoint anymore. Youunderstand the irreversible trend of increasing energy prices andtax rises driven by the government's response to climate change. Acomprehensive energy programme can protect your organisation fromthese rising operating costs.
There is huge potential for energy managementprogrammes from a finance perspective, but why should finance leadthe energy charge? To answer this question, you need to take a stepback and look at the bigger corporate picture.
Whether it's keeping transport fleets on theroads, sustaining a large building estate or powering the ITsystems in your datacentre, does your organisation measure itsenergy usage and flows in appropriate disaggregated detail? Doesyour organisation know how efficient it is?
In the majority of cases, organisations havefailed to fully examine their energy usage and find it difficult toproject efficiencies or cost savings. This is where yourorganisation needs to gather good qualitative and quantitative dataacross its energy use. Many organisations don't do this and, ifthey are honest, are not sure where to look for the data in thefirst place.
There are strong arguments for finance to be thedepartment to do this. After all, what group is better equipped tocollate and evaluate this type of complex data? Most organisationsfail to run long-term and successful energy management programmesbecause they enter them blindly and motivated by the wrongdrivers.
If you don't have the data, you don't know howefficient you are. So how can you accurately quantify any savingsand choose between rapid payback and positive NPV projects from PReco-bling projects that are often a waste of resources.
With accurate data management and appropriatehigh-level analysis and modelling, the cost benefit of variousrelevant carbon reduction strategies can be compared andquantified. However, this is not a job for somebody who cannot findtheir way around numbers. You will need to look deeply into complexareas, both physical such as buildings as well as upstream anddownstream along your supply chain. If you can't do the sums,you'll never realise the potential.
During my time at Royal Mail, our focus was tobuild a compelling business case for our long-term energymanagement programme. My team had to look across the wholebusiness, into areas where they had no previous expertise or othershad already assumed things were running at maximum efficiency. Youwon't be surprised to hear that, while the board was concernedabout CSR, it was the £30m saving figure that got theirattention.
But we had to gather and evaluate the data andcompeting technology options, and then compare and build businessor investment case. We built credibility through being considered,but also by being single-minded about what would save the businessmoney.
Ultimately, reducing your energy bills, creatingsmarter buildings, reducing transport costs, and bringing carbonefficiency to your supply chain will be a programme that bringstogether expertise from all parts of your business. It will engagea broad tapestry of disciplines, from the number-crunching skillsof finance to the people and education skills of HR.
However, if your organisation can achievetriple-digit rates of return from energy management, you have tomanage your programme with a determination never to accept anythingother than bottom-line savings. On balance, who better than financeto become the new carbon management leaders of the future? Afterall, what have you got to lose?
Martin Blake is chairman of Carbon Zero Solutionsand the former head of sustainability at the Royal Mail Group