How to make the business case for funding in new energy solutions.
Any increase in investment has to be justified — and quite rightly so. With so many operational opportunities for improvement, why would you choose to invest in energy?
According to research conducted by Centrica Business Solutions, organisations investing in local energy solutions (also known as distributed energy) are already seeing benefits. 41% have benefitted from “significantly reduced energy costs”. What does that mean in real terms? It is no coincidence that the most advanced businesses (“energy leaders”) are 2.5x as likely to be achieving strong financial performance as the least advanced.
A third (35%) report they are benefitting from greater control and visibility of their energy use. These energy insights can then be applied to further reducing energy costs as part of a systematic cycle of continuous improvement.
The returns go way beyond cost savings. One quarter (24%) of businesses say investing in distributed energy solutions has improved their reputation. Similar numbers report improved compliance with regulations and legislation, and in meeting environmental targets.
Improved energy management provisions have also helped around a quarter of organisations achieve key digital transformation targets. They report that advanced energy solutions have helped enable new, flexible ways of working.
By exercising foresight in energy management, these organisations are getting more control over energy use, strengthening their brands and, in some cases, gaining a new revenue stream.
Most organisations start their energy journeys by introducing measures that will help them deliver energy efficiency improvements to their buildings, these include HVAC optimisation and energy-efficient lighting. These solutions are easy to understand, straightforward to specify, and offer the clearest and quickest ROI. Around half (52%) of all businesses surveyed are implementing energy efficiency measures.
40% of businesses are investing in energy insights, providing end-to-end visibility of power consumption. These insights can then be applied to create new efficiencies — and save businesses even more money.
For businesses which have already implemented these efficiency measures, there are other opportunities to consider. Integrated heat and power systems make good economic sense for businesses with high thermal loads (e.g. hot water, steam, chilled water or hot air) and where electricity costs are high. By recovering and recycling energy, these integrated heat and power systems provide a way to reduce bills — and reduce the environmental impact of operations.
Regardless of industry, energy also presents the potential for new revenue streams. Solutions such as battery storage units and demand response measures can open the door to energy monetisation. Nearly all companies surveyed are aware that they could get paid for selling power to the grid at times of peak demand and that there are incentives to flex their power use based on demand on the grid. Over 50% are already, or considering, selling excess capacity back to the grid, participating in supply-side incentives or demand-side incentives.
Your business should also consider whether on-site renewables have a role to play. Physical considerations and availability of incentives are key factors and, in some cases, collaboration can make renewables an attractive option. Almost three-quarters of businesses surveyed see there is significant potential value in partnerships that share energy, infrastructure and generation assets.
Currently, traditional funding options are most prevalent. Two-fifths (40%) of companies have funded initiatives themselves and a third have used government schemes (36%) and bank loans (34%). Around a third of all businesses have funded energy projects using loans direct from their solution provider.
Other funding methods are starting to be gain in popularity, such as shared risk models that reduce exposure. Payback financing, for example, is a model where investments are funded by a third-party — typically a supplier — and paid for out of ongoing energy savings or increased revenue, reducing the capex burden on the company.
Energy leaders (businesses that excel in both the execution and vision of their energy strategies) are also more likely to use operational expenditure (Opex) models than their less well-prepared competitors. These businesses are twice as likely to adopt leasing and “as a Service” arrangements to fund energy investments. We expect to see more organisations choosing to fund energy investments through Opex as they observe the successes of early adopters.
Directing investment — and releasing funds for investment — will depend on your corporate energy strategy. To make the case for increased spend and to ensure that money is spent correctly you need to establish the business case.
The key to building a strong business case is to demonstrate how it supports the overall business strategy. While lots of companies are still primarily focused on managing costs, resilience may be a growing priority, or the need to demonstrate your corporate social responsibility (CSR) credentials.
Your business case also needs to be based on a thorough understanding of wider business plans. Without this, it can prove difficult to estimate the size of a project accurately. The wrong solution will not scale as your business grows or shrinks for instance. A failure to understand existing energy use will make the task of specifying a system even harder.
The ROI of investing in energy can be hard to explain, creating uncertainty. Like many other investments, the payback can take time, but the benefits can be substantial and long-lasting — and can extend far beyond things you can easily put a figure on. Energy investments can help you be more flexible, support growth and protect you from market volatility.
Instead, try translating your savings into meaningful metrics that resonate with decision- makers — for a hospital, for example, the energy savings from installing a CHP system could enable it to employ many more nurses. You could also demonstrate how ROI could be used to fund other parts of your energy strategy — for example, a reduction in energy costs could fund LED lighting.
There is growing uncertainty and risk around energy supply, especially now that half of a business’s energy bill comprises non-commodity costs. Having a strong procurement team can only go so far in protecting you from increasing energy prices. Moving away from a centralised model provides greater resilience to changes in the future price of energy — as well as to outages and equipment failure.
There are other risks too. Many large organisations are now bound by regulation and industry standards. Those that fail to comply with these could face financial penalties and damage their CSR credentials.
In the UK, for example, the Energy Savings Opportunity Scheme (ESOS) requires that qualifying companies carry out an audit of energy use by their buildings, industrial processes and transport every four years, and identify cost-effective energy saving measures. The compliance period for phase 2 of ESOS is already underway — the deadline is 5 December 2019. This presents a real opportunity for businesses to make the case for change.
Business leaders like to be presented with options — for example, options that provide a different balance between emissions and financial targets. This demonstrates to them that your business case has been thoroughly evaluated and helps to show why you’ve made certain recommendations.
You should also address the different funding options available. Advanced energy solutions are still often self-funded — but there are an increasing range of different options available through larger energy solution providers such as Centrica Business Solutions.
Balancing your energy sources with distributed energy solutions must be a strategic priority for your business moving forwards. Investment in local solutions will provide cost savings in both short and long term, and they will be essential for achieving the flexibility you need to meet future energy challenges.
As the experiences of early adopters has shown, distributed energy solutions have the potential to de-risk energy supply, increase sustainability and create new revenue streams.
Discover the ways in which you can invest in energy, the finance options that are available and the results you can expect to see. Download The Energy Advantage Report today.
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