May 11, 2016

Why Do We Keep Underinvesting in Energy Savings?

By Edison Energy

Two statistics struck me when I reviewed recent market research done on our behalf by ReD and Associates on the largest users of energy in the commercial and industrial sector:

  • Only 6% of companies think they have realized all the energy savings available to them; and,
  • 38% of the companies say they have not made any notable progress on saving energy.

Given all the publicity around the potential for energy savings, the continual commentary on sustainability and market pressures forcing every company to reduce expenses, I was struck with the realization that the very companies in the commercial and industrial sector with the most to gain are underinvesting in energy savings. Energy is now one of the top 5 expenses for the Fortune 500 yet there is significant evidence of underinvestment. It leads to an obvious question: why are these companies underinvesting in energy savings?

That market research together with some observations of the market would indicate the answer appears to be four-fold.

Uncertainty

First, the research indicates that most companies do not feel they have the right information to make the best informed energy decisions. Energy has become complex with ever changing technologies, volatile pricing and a utility-biased vocabulary.

  • 67% of companies cited either the lack of a credible partner to guide them on energy initiatives or the lack of internal resources and expertise as significant barriers to investing in new energy-related projects.

The average energy team for most commercial and industrial companies is small with limited capacity to procure and manage energy across the breadth of their enterprise. The team is often overwhelmed in simply trying to determine what the actual energy spend is with assets in multiple locations served by different utilities with varying regulations across North America. Few teams have the deep expertise across all the areas needed to manage a complex energy program: procurement, technologies, market dynamics, vendors and policy. Potential energy partners appear to be challenged by their own goals to promote specific products, biased work and narrow focus (few suppliers are covering supply and demand nationally). In other words, underinvestment is driven by uncertainty about the right path forward.

Internal Investment Rules:

Second, the internal rules companies use to make capital expenditure (CAPEX) decisions artificially constrain investment. Many companies have a demanding standard of just a 3 to 5 year payback period that they apply across all potential CAPEX projects. These “tight” payback thresholds may work for many CAPEX requirements but often does not effectively support long term energy projects. Rooftop solar, Combined Heat and Power (CHP) and even LED lighting systems often require longer runways for payback given their longterm operating lives.

Focus elsewhere.

Third, internal CAPEX planning processes position energy projects against other potential investments across the company. Many of those other projects are perceived as having more strategic value. For example, manufacturers typically want to invest in process equipment rather than energy assets. The result is that even when energy projects achieve the required payback goals, they are still not funded because other projects are prioritized higher. In fact, our market research has found an interesting dilemma that many of those interviewed recognized: energy savings are there to be realized but the finance team does not want to invest in energy assets.

Difficulty in financing new technologies

The pace of technological change in energy is impressive. The downside of that pace is that the “bankability” of these technologies may not keep up with the accelerating pace of change. One of the key reasons solar has taken off in the US over the last few years is that commercial projects became “bankable” because of improvements in solar panel conversion efficiency, lower balance of systems costs, favorable regulations and attractive tax and market incentives. These factors help to lower system installed costs and reduce the riskiness of ongoing cash flow streams, allowing for more “bankable” projects when power is sold under longterm power purchase agreements. Yet the pace of technological innovation isn’t slowing down and with each new product innovation — such as Microgrids and storage — new risks are introduced that can constrain investment.

These are the four primary reasons we see over and over in the market today. It suggests that a new business model may be required if we are really going to realize all the potential energy savings that are needed to improve our bottom lines and achieve our sustainability goals.

We would love to hear your opinion about the underinvestment in energy.

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