Possibly the greatest thing about energy efficiency is there is no limit to learning. In what other occupation can engineers work with social scientists, urban planners, economists and 16th century Mongolian art majors? Last week I attended a presentation by Christopher Russell, energy efficiency and finance swami, or is it guru? The higher ranking one. Or maybe I should just call him Colonel Russell.
His presentation started with the tale of two college campus facility managers, Doug and Dave as I recall, with names changed to protect the guilty. I’ll call them Dick and Harry for double protection.
It doesn’t happen very often, but every once in a while a person tells an energy efficiency program or project fable that I find myself violently agreeing with. In this case, Doug, er I mean, Dick was presented as an all-too-familiar customer representative/facility manager. His attitude is “energy is a necessary evil, a fixed cost, and not a resource to be harnessed,” and his idea of success is to keep the phone from ringing with problems and complaints. Gee, this sounds just like many HVAC and automatic controls contractors. Just slap it together, stop the phone from ringing, and move on to the next project. I don’t care what the energy consumption looks like, just stop the complaints. Who cares what the energy implications are? But I digress.
Doug Dick is a status quo thinker. He believes the pie is fixed and everyone must fight like a boorish thug for their budget. Then, once his slice sequestered, hoard it, and if necessary, spend it to (god forbid) reduce the budgeting leverage for next year. This is standard practice for government, by the way, including the Navy (at least back when I was there).
Dick Doug is eventually handed a mandate from on high to reduce energy consumption in campus facilities by XX%. Hire an energy efficiency professional to best determine maximum return on investment? Hell no. That would cost a lot of money, make Dick look dumb (he thinks), and the EE pros will recommend a slew of projects that upper management may get their hands on, which results in Dick having to do even more stuff! Rather, Dick decides to be proactive for a change and implement an expensive project that will drag on a couple years to keep the greens off his back. In this two year span, he thinks the fad will blow over… and then it hit me. Dick, the facility manager, is like the Taliban. He is dug in, resistant, and will never surrender. He will weather the storm and wear down his adversaries with brutally intransigent patience.
I have a great deal of passion for energy efficiency or I wouldn’t be in this business for 16 years. Reasons include; non-renewable resource preservation, saving money and increasing profit, risk mitigation, and all that sustainability stuff. However, thanks to Mr. Russell’s analysis and one question I asked, something like a cold fusion miracle occurred. He used an example, but I made up my own. A detailed assessment for a new energy management system has been completed and the project data is shown in the table nearby. I’m not going to puke all that information back at you in words, but I would just point out the lousy 5.8 year simple payback. Most customers would laugh and tell you to get lost because they only do projects with a simple payback of 2.0 years or less. A million years ago, I wrote an Energy Brief explaining why simple payback is a terrible metric to make decisions with. One reason it is lousy, as discussed way back then, was because payback has nothing to do with wealth. For example, what does a 2 year payback tell you about how much working capital the project will generate? I can’t buy lunch with a payback.
The annual cash flow shown includes the 15% down payment the smart guy, Dave, er Harry represents the plunk down of $39,000 for this project. Over the 10 years of the loan there is a positive cash flow (savings greater than payments) of about $2,000-$6,000, depending on the interest paid on debt, which is tax deductable. That looks pretty cool but still not that hot, Jeff.
Then we have the cumulative cash flow, and wow, this is suddenly becoming impressive. At the end of the 20 year life of the project the cumulative cash flow is $360,000 for a not-too-shabby internal rate of return of 18% on the original $39k down payment. Or you can do nothing and destroy $585,000 in capital on wasted energy. Try to get that kind of return in the stock market! Speaking of which, I have that comparison too.
Warning: Place your index and middle fingers over each eye socket before gazing at the chart – to keep your eyeballs from popping out of your skull.
I apologize for the positive message this week. This was a pathetic rant. Next week I will discuss other features and benefits for investing in energy efficiency.