Energy efficiency: a profit center for companies!

Catherine Cooremans − DSMU Webinar May 12th, 2016
Energy Efficiency: A Profit
Center for Companies!
Catherine Cooremans, MBA, PhD

• Context
• Energy efficiency: a profit center
for companies!
– concept
– examples
– Toolbox
• Task 26 Multiple benefits
of energy efficiency
• Conclusion
Plan

Context

Source: Philippe Benoît, Several IEA strategic actions to increase
energy-efficiency, EEMR 2015 and Multiple Benefits, ECEEE
workshop, Brussels, October 21, 2014.
A huge energy-efficiency potential remains untapped:
in the business-as-usual scenario, “two-thirds of the
economic potential to improve energy efficiency remain
untapped in the period to 2015.”
Context I – Energy-efficiency gap

Research finding 1:
• Financial logic is not decisive
• Strategic logic is more important
in businesses’ investment choices
Context II - Investment decision-making
Research finding 2:
• A huge diversity is observed between
companies’ situations and behaviors
• even within the same industry

Strategy:
“a balance between
internal resources
and external factors
in order to build a
durable competitive
advantage, through
resources
allocation”.
(Johnson & Scholes, 1999)
Internalresources
External factors
competitive
advantage
Goal :
3 dimensions of strategy
Strategic logic

An investment is strategic
if it contributes to create, maintain or develop a
sustainable competitive advantage (Cooremans, 2011).
Definition
Strategic logic

The classical engineering “technico-
economic” approach…
… does not work (well enough).
Investment
decision-
making
Energy
savings
Financial
savings

Definition:
all the benefits entailed by an energy
performance action which are not specifically
energy benefits (i.e. energy savings
translated into monetary savings) in and of
themselves.
Terminology:
Multiple benefits, ancillary benefits,
secondary benefits
Multiple impacts
Non-energy benefits of Energy Efficiency
Context III - NEBs

International Energy Agency (IEA):
Capturing the multiple benefits of energy-
efficiency, Paris, September 2014

Energy efficiency:
A profit center
I. The concept

Profit ?
Costs
Turnover
Risks
How to increase sales?

Costs
Value
proposition
Risks
The 3 dimensions of
competitive advantage
The value
for
customers
Borne to
create the
value
proposition “Strategicity”
Borne to
create the
value
proposition
Turnover

“a set of
benefits
that a
product (or
a service)
promises to
deliver”
Kotler, 1999
Competitive advantage
Value proposition first!

For many companies, strategic advantage is
based on a “superior value” stemming from
providing unique benefits and not for offering
lower prices.
As emphasized by Michael Porter:
“value, instead of cost, must be used to
assess competitive position since firms often
deliberately raise their cost in order to
command a premium price via differentiation”
(Porter, 1985:38).

Categorizing companies on a “value-cost” scale
to understand the main source of their
competitive advantage
Out of a
sample of
20 Swiss
companies:
Value
proposition
Costs
14
4
2
Source: Canton de Vaud,
Programme Energy Audits Large-
Scale Consumers, 2014-2018

• Examples of positive characteristics (benefits of
use for customers) attached to companies’ value
proposition: quality, purity, reliability, precision,
versatility, efficiency, design, innovation, diversity,
availability, service, technical support, prestige.
• Companies: for many of them, value proposition
is the main source of their competitive advantage
(and thus of their sales).
• Energy services are often key to guarantee the
value proposition.

Energy efficiency
a profit center
II. Examples

• 4.5-star hotel: window replacement
• Municipality: replacement of pumps in a
sewage pumping station.
• Building: boilers replacement
• Beverage industry: filling line replacement

Example 1 - 4.5-star hotel: window replacement
Description of the current situation and its weaknesses:
• The single window glazing no longer meets the new
legal standards.
• Half of the rooms are over-heated by the sun in the
afternoon.
• The traffic noise is a real bother.
Description of the energy efficiency action:
•Replacing existing windows with double-glazed windows.

Costs
Value
proposi
tion
Risks
• Improved products quality
• Enhanced image and brand
stronger
• Customer loyalty up
• Increased product
attractiveness
• Reduced commercial risk
• Reduced CO2 risk• Reduced energy costs
• Reduced CO2 costs

Ex. 2 - Municipality: improvement of a sewage
pumping station performance Source: Pye and McKane, 2000
• Twin pumps (40-hp direct drive, wound rotor motor) handle
340 000 gallons of raw sewage per day.
• One pump handled the entire peak flow under normal
operation, while the second pump kicked in only in extreme
conditions.
• The system experienced frequent breakdowns, occasional
flooding and sewage spills.
•A smaller, 10-hp pump with direct online motor starters and a
level control system with float switches is added. The new pump
handles the same volume as the original pumps during non-
peak periods, but runs for longer periods of time. The old pumps
handle infrequent peak flows.

Costs
Value
proposi
tion
Risks
• Better service quality (less
noise for residents)
• Better service reliability
• Better image
• Higher customer and
employee loyalty
• Lower flooding risk
• Lower break-down risk
• Lower energy costs
• Lower maintenance costs
• Longer equipment lifetime
• Pumping capacity increased
(by 25%)
Source: Pye and McKane, 2000
• Lower legal risk

Ex. 3 – Commercial building: boilers replacement
• The two current boilers, in the basement, are over-sized
and outdated.
• Maintenance costs are high.
• One new, more energy-efficient, boiler is installed.
• It is sized according to real needs.
• 2 additional parking places are created in the space
saved.
• The storage rooms for bicycles is enlarged.

Costs
Value
proposi
tion
Risks
• Higher product quality
• Higher product reliability
• Stronger image & branding
• Higher customer loyalty
• Higher product attractiveness
• Occupancy rate up
• Lower vacancy risk
(boiler)
• Lower CO2 risk
• Lower energy costs
• Lower maintenance costs
• Leasing income up
• Additional income (parking)
• Lower “brown” risk• Lower CO2 costs

Ex. 4 – Beverage industry: filling line replacement
Source: Marina Santoro, Samuel Gerber & Team, Lucerne University of Applied
Sciences and Arts - School of Engineering and Architecture
•Bottle filling line for multiple types of bottles and
beverages can’t meet production requirements over the
whole year and must be compensated with overtime on
Sunday.
•The system is outdated.
• A new filling line is installed with faster filling speeds,
reduced working hours for the same productivity,
reduced cleaning need & reduced water & energy
consumption.

Costs
Value
proposi
tion
Risks
• Higher product quality
• Higher product reliability
• Stronger image and
branding
• Higher employees’ &
customers’ loyalty
• Higher product attractiveness
• Lower accident risk
• Lower commercial risk
• Lower legal risk
• Lower CO2 risk
• Lower energy & CO2 costs
• Maintenance costs down 45%
• Rejection rate down
• Reduced water needs
• Staff costs down (automation + no Sundays)
• Reduced chemicals needs

BEVERAGE INDUSTRY Proj. Proj. Proj. Proj. Proj. rorororororororororororororo Proj.
Investment project "replacement filling line" Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 aaaaarararararararararar Year 20
Investment flows
Cash-flow after taxes 216'537 216'537 216'537 216'537 216'537 216'537
Capital expenditure -5'600'000 0 0 0 0 0 0
Terminal value 0
Terminal value after taxes 0
Investment flows "Replacement filling line" -5'600'000 216'537 216'537 216'537 216'537 216'537 216'537
Discount rate 6%
ANALYSIS OF THE FLOWS WITHOUT LOAN
NPV 20 years @ 6% -3'116'334
IRR -2.3%
Pay-back time (years and months) 25.86
(CHF)
Evaluation of project financial attractiveness:
energy cost reductions only
NPV heavily negative: -3.1 millions CHF –
IRR negative: -2.3% – Simple pay-back time > 25 years
Source of the figures:
Marina Santoro, Samuel Gerber & team, Lucerne University of Applied Sciences and Arts - School of Engineering and
Architecture

Revenues
Revenues
Energy benefits - Financial savings from electricity consumption reduction 186'600 186'600 186'600 186'600 186'600 186'600
Energy benefits - Financial savings from natural gas consumption reduction 29'937 29'937 29'937 29'937 29'937 29'937
Non-energy benefits 1 - Maintenance cost reduction 225'000 225'000 225'000 225'000 225'000 225'000
Non-energy benefits 2 - Material cost reduction 115'000 115'000 115'000 115'000 115'000 115'000
Non-energy benefits 3 - Staff cost reduction 550'000 550'000 550'000 550'000 550'000 550'000
Non-energy benefits 4 - Reduction of product losses 90'000 90'000 90'000 90'000 90'000 90'000
Non-energy benefits 5 - Reduction of special equipment 10'000 10'000 10'000 10'000 10'000 10'000
Total gross revenues 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537
Depreciation 0 0 0 0 0 0
Net income before taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537
Taxes 0 0 0 0 0 0
Net income after taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537
Depreciation 0 0 0 0 0 0
Free cash-flows after taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537
(CHF)
Including multiple benefits
in the financial analysis
Marina Santoro, Samuel Gerber & team, Lucerne University of Applied Sciences and Arts - School of Engineering and Architecture

NPV highly positive: 8,2 millions CHF
IRR 21.1% – Simple pay-back time 4.6 years
Marina Santoro & team, Lucerne University of Applied Sciences and Arts - School of Engineering and Architecture
Evaluation of project financial attractiveness:
energy cost + other cost reductions
Investment flows
Cash-flow after taxes 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537
Capital expenditure -5'600'000 0 0 0 0 0 0
Terminal value 0
Terminal value after taxes 0
Investment free cash-flows "Replacement filling line" -5'600'000 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537 1'206'537
Discount rate 6%
Free cash-flows analysis:
NPV 20 years @ 6% 8'238'888
IRR 21.1%
Pay-back time (years and months) 4.6
(CHF)

Energy efficiency
a profit center
III. Toolbox

“The value chain disaggregates a firm into its strategically relevant
activities in order to understand the behavior of costs and the
existing and potential sources of differentiation” (Porter, 1985:37)
Value process mapping
The Generic Value Chain (Porter, 1985)
At the
company level:
the value
chain

At operational level:
process mapping
Process mapping (George, et al., 2005:40)

Aluminum foil production process map
Process
supplier
casting
Pusher
furnace
Cold mill
Thermal
treatment
Hot mill
Process
customer
“Safety is always the priority issue. Secondly, product quality,
reliability and energy are other important criteria”.
Mr Germanier, Novelis Switzerland, Energy & Project Manager, 18 March 2015
Operational analysis

Process mapping & energy services
Combustible fuel
(diesel fuel for worklift)
Natural gas
Low-voltage electricity
Medium-voltage electricity
High-voltage electricity
Compressed air
Water
ENERGY CARRIERS
Primary / secondary
Casting
Pusher
furnace
Hot mill Cold mill
Thermal
treatment
Air conditioning x x x x x
Automation (electronic regulation) x x x x x
Atomization -- -- -- -- --
Cleaning -- -- -- -- --
Electric induction -- -- -- -- --
Electrolysis -- -- -- -- --
Heat - low temperature -- -- -- -- --
Heat - medium temperature -- x -- -- x
Heat - High temperature x -- -- -- --
Humidification -- -- -- -- --
Hydration -- -- -- -- --
Lighting x x x x x
Motive power - fixed (propulsion, electric drive system) -- -- x x --
Motive power - mobile x x x x x
Refrigeration - positive cold x x x x x
Refrigeration - negative cold -- -- -- -- --
Ventilation x x x x x
VALUE CHAIN ACTIVITIES OF ALUMINUMFOIL PRODUCTION
ENERGY SERVICES

Process mapping & energy services

Energy services key contributions to process:
security (critical values) - quality, quantity

• Manufacturing of blades for the paper industry:
strategic risk of temperature drift in warehouses and
production area.
• Production of motion sensors for aeronautics:
importance of strict climatic conditions in production areas.
• Industrial bakery: cooling units production influences
product quality (cold chain stability & reliability) and the time
between processes (water cooler and fermentation
chamber).
Examples of key energy services and
related constraints in industrial operations:

In order to assess the contribution of an energy-efficiency
project to a company process, the following elements have
to be analyzed:
• Security
• Products (goods & services – quantity & quality)
• Energy services
• Time (speed of production process)
• Flexibility
• Consumables (energy carriers, lubricants, etc.)
• Waste and emissions (by-products)
1. Operational analysis

3 methods to define magnitude:
• Estimation
• Calculation
• Measure
Benefits (or impacts) of energy-efficiency
projects are quantifiable!
Information does exist in companies:
you just have to ask the right people!
2. Financial analysis

Stronger competitiveness
Higher profitability
Lower
costs
Lower
risks
Value
proposition
more
attractive
• Higher quantities
sold
and / or
• Higher unitary price
= higher turnover
• Higher turnover
• Lower costs
= Higher profit
3. Strategic analysis

Task 26
Multiple Benefits of
energy efficiency

Why Task 26 ?
Research has demonstrated MBs for 20 years:
• Europe: Cooremans, Dahlgren, Fawkes, Fawcett,
Gudjberg, Nehler, Ottosson, Rasmussen, Rohrer,
Santoro, Schumacher, Thomas, Sandberg, Thollander,
Worrell, Weinsziehr
• United States: Abdou, Baatz, Caron, Davis, Cooney,
Finman, Katz, and Laitner, Leach, Lilly and Pearson;
Lung, Marsh, McKane, Mills et al., 2008; Pearson, Pye,
Rathbun, Robinson, Rosenfeld, Skumatz, Stevens,
Russell.
• Elsewhere?
• Amsterdam Conference IEPPEC June 7–9, 2016
http://www.ieppec.org/

Why Task 26 ?
According to M_Key research project, out of 140
answers to our survey, 55% of companies rarely or
never include NEBs in their investment calculations:
• 15%: never
• 40,7%: yes, sometimes
• 31,4%: very often
• 14.3%: always or almost always
M_Key (“Management as a Key Driver of Energy Performance”) research project is part of
the National Research Programme "Managing Energy Consumption" (NRP 71) of the
Swiss National Science Foundation (SNSF). Further information on the National Research
Programme can be found at www.nrp71.ch.

Why Task 26:
two different and parallel business cultures
and interests:
Energy people who
care about:
• Energy consumption of
facilities and equipment
Production people who
care about:
• Product quality
& reliability
• Safety of process
& facilities
• Flexibility
• Production time
• (Environmental impact)
• (Energy costs)

STRATEGIC
LEVEL
Top
management
OPERATIONAL
LEVEL
Middle &
front-line
management
PRODUCTION
FINANCE
DPT
ENERGY
MGT
CEO
• Energy is considered non-core business,
non-strategic, thus a secondary issue.
• Energy manager has difficulty accessing and
communicating with top management and production.

Task 26 - why ?
The non-energy benefits of energy efficiency
have to be:
• analyzed ex ante (i.e. before projects
start), at project level, with convenient
analytical tools
• better documented and quantified
• communicated in a convincing way to
stakeholders

Task 26 - why ?
Bringing concrete and applicable solutions to
several important needs:
• Need to enlarge the usual technical approach applied to
energy-efficiency projects.
• Need to propose training to engineers working on energy-
efficiency projects & to supply them with MBs data.
• Need to attract businesses attention to the decisive
contribution of energy services to their core business.
• Need to bridge energy and climate communities.

• Tool box conception: an analytical tool to be used
ex ante to better identifying and assessing MBs related
to energy-efficiency projects.
• Tool box delivery:
– conception and realization of templates for
workshops in participating countries.
– marketing & communication campaign.
• Learning base: conception and development of a
learning base containing data on MBs, organized by
business activity & municipality type, energy-efficiency
measure type and geographical location.
• Dissemination: one-day “Toolbox Training Sessions”,
webinars & online courses.
Task 26 - what:

Macroeconomics
Societal level
Microeconomics
Individual - project level
Supply
side
Demand
side
Energy delivery
Energy delivery
Health & well-being
Industrial
productivity
Public budget
Households
Municipalities Commercial
companies
Residential
buildings
Industrial
companies

• June 2016 – May 2019
• 4 expert workshops:
Nov. 2016 – May 2017 - Sept. 2017 – March 2019
Task 26 - when:

Conclusion

BEVERAGE INDUSTRY
Investment project "Replacement filling line" Year 0
Investment flows
Cash-flow after taxes
Capital expenditure -5'600'000
Terminal value
Terminal value after taxes
Investment flows "Replacement filling line" -5'600'000
Discount rate 6%
ANALYSIS OF THE FREE CASH-FLOWS
NPV 20 years @ 6% -3'116'334
IRR -2.3%
Simple pay-back time (years and months) 25.9
Integrating the multiple benefits of energy-efficiency:
a multi-level and comprehensive analysis to raise
strategic and financial attractiveness
of energy-efficiency investment projects
Costs
Value
propositi-
on
Risks
Financial analysis Risk analysis
Operational & strategic analysis

IEA DSM / IETS TAKS 26
Multiple Benefits of Energy Efficiency :
• We most welcome new collaborations and partners.
• Please contact me or Maja Dahlgren (co-project leader), from
the Swedish Energy Agency, in case of interest or for
information regarding this project:
cooremans@ecodiagnostic.ch
maja.dahlgren@energimyndigheten.se
Thank you for your attention!

Liste de références:
• Cooremans, C. (2012). Investment in energy-efficiency: do the
characteristics of investments matter? Energy Efficiency Journal,
DOI: 10.1007/s12053-012.
• Cooremans, C. (2011). Make it strategic! Financial investment logic
is not enough, Energy Efficiency Journal, 4(4), 473-492.
• George, M.L. Rowlands, D., Price, M., Maxey, J. (2005). Lean Six
Sigma Pocket Tool Box. Mc Graw-Hill, New-York.
• IEA (International Energy Agency) (2014). Capturing the multiple
benefits of energy efficiency. OECD/IEA, Paris.
• Kotler, P. (1999). Kotler on marketing. How to create, win and
dominate markets. New York: Free Press.
• Porter, M. E. (1985). Competitive advantage. New York: Free Press.
• Pye, M. and McKane, A. (2000). Making a stronger case for
industrial energy efficiency by quantifying non-energy benefits.
Resources, Conservation and Recycling, 28(3-4): 171-183.

Energy efficiency: a profit center for companies!

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