Saturday, July 20, 2024

Seven tips for energy transformation business cases

By Rosa Rotko, Energy Transformation Specialist, Mott MacDonald

Energy and carbon managers might wish for unlimited funds to tackle the challenges of net zero, but they are competing for limited investment resources against many corporate priorities.

According to a poll conducted by Mott MacDonald among ports and shipping industry professionals, 39% found it challenging to secure committed plans and budget for their carbon management projects.

It’s an issue found across sectors. In my role I engage with a range of large energy users, such as airports, manufacturing firms, water companies and hospitals. A common problem is building business cases for energy transformation and net zero programmes when the costs and benefits fall across the business.

To gain the full picture it is necessary to engage with a wide range of internal stakeholders, including colleagues working in operations, facilities, fleets, commercial, finance, and sustainability. Likewise, some of the costs might be borne by, or benefits accrue to, external stakeholders such as tenants or service providers at the site. 

Here are some tips that may help you draw up a comprehensive and persuasive business case.

  1. Capture all potential revenues. Stacking the full range of revenue potential arising from any investment is a powerful tool. For example, energy generation and storage assets can offer new revenue streams through private wire sales or offering ancillary services to the grid. Emissions reduction initiatives might be monetisable as carbon credits.  Earnings from additional service provision, such as electric vehicle charging or low carbon shore power, might need extra consideration across the business because of the different business models involved. Finally, one should count the increase in customer usage of facilities and additional non-energy related income (such as regulatory revenues linked to utilisation, ability to increase rent or earn commission).
  2. Offset cost savings. Pay-back periods are normally calculated by looking at how long it takes for the net cash inflows from an investment to equal the initial cost. However, it is also important to look at cost savings or avoided costs elsewhere in the business. These could include operational savings (e.g. reduced maintenance of the heating system, fleets or machinery); avoided costs related to grid capacity reinforcement (due to investment in flexibility); and the avoided costs of carbon offsetting in the future, in the absence of investment in emissions reduction. Remember to consider forecasts for wholesale costs and non-commodity costs over the duration of the investment, as energy price assumptions make a huge difference.
  3. Demonstrate the value of price certainty. Reducing price volatility and being able to accurately estimate energy costs is a huge benefit. Being exposed to volatile national and global energy prices increases hedging costs and forecasting risk. This exposure can be mitigated through self-generation, demand reduction or load shifting initiatives. It is important to articulate the value of price certainty, how it feeds into long-term budgets (perhaps linked to a regulatory cycle) and how it affects others such as tenants.
  4. Ask to recycle energy cost savings into further programmes. Some organisations are not allowed to recycle OPEX savings due to regulatory reasons, but others have a practice of ‘returning’ any savings to the overall budget. For net zero related initiatives, where there is an ongoing investment need for decades, it would make sense to recycle any resulting energy savings into new measures to cut bills and carbon even further.
  5. Show the full range of co-benefits. Beyond the direct costs and revenues, any decarbonisation measures have a wider range of co-benefits which sometimes are equally, if not more, important in driving action.
    On the financial side, there might be a positive impact on real estate value arising from energy efficiency or provision of new services such as charging infrastructure. For listed companies, investor perception and impact on share price is an important consideration.
    Customer satisfaction is another important metric. Corporates are looking at emissions in their supply chain, and assuming their partners will contribute positively. There is an increasing expectation of access to low carbon electricity and cleaner fuels at sites like transport hubs.
    Reputation with consumers, employees, local authorities and politicians can sometimes be the make-or-break issue for decarbonisation investment: action could determine the ability to grow, while inaction could risk protest by environmental groups.
    There are many other intangible variables. For example, some organisations may be influenced by the requirements of accreditations or certifications they are working towards, or by their regulatory or public interest regime.
  6. Engage with partners who benefit and could contribute to the cost. A particular problem for organisations is coordinating carbon management activity across multiple stakeholders who benefit from efforts at the same site. These include landowners, operators, tenants and service providers.
    It could be necessary to appoint a project manager with a remit to engage with stakeholders, and to build up a coordinated programme with supporting funding commitments. Identify who makes investment decisions for each party, and what drives them; it would be useful to learn how partners’ business models work, to understand how they can contribute to carbon reduction and the funding of projects. The business case needs to be translated into language which those decision makers can understand – for example, spelling out the impact on rent for tenants, or the impact on utilisation rates for operations.
  7. Show potential funding sources. A big question is how to balance the financing of capital costs between borrowing, grants, third-party investments and your own balance sheet.

A useful first step is to build an energy transformation roadmap, showing when investment is likely to be made and the expected payback periods. Then it will be easier to consider whether investments can be made on your own balance sheet or in partnership with others such as energy solution providers.

This needs to be overlaid with other capital programmes, to understand where related funding pots might sit: for example, a building modernisation programme could also include energy efficiency or heating upgrades.

It is always handy to have some ‘shovel ready’ project briefs written up, in case there are underspends elsewhere or a relevant grant funding round or loan funding scheme opens up. This can sometimes be a fast-moving space, so keep abreast of developments by subscribing to alerts from the Government, relevant local authorities, the UK Infrastructure Bank and others with an interest in your sector.

Hopefully this article raises some points that might be useful for building a business case for energy transformation and net zero programmes. It might trigger you to think of how to consider the potential benefits holistically, including intangible benefits. There are likely to be other factors within your organisation that can be added to this mix, to make an argument for further investment which helps to tackle climate change.

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This article appeared in the May 2024 issue of Energy Manager magazine. Subscribe here.

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