Often, industrial facility managers must convince upper management that an investment in system efficiency is worth making. The problem is that sometimes communicating this message can be more difficult than the actual engineering behind the concept. A corporate audience usually responds more readily to cash flow impacts than to a discussion of best efficiency points. By adopting a financial approach, the facility manager can relate system performance and efficiency to corporate goals and “win over” the senior management who make the final decision on capital investments in system upgrades.
In order to overcome the obstacles often encountered in the process of convincing upper management that a given investment in energy efficiency is worth making, you should consider the following points:
1. Gain some insight on/understand corporate priorities
Corporate officers are accountable to a chief executive, a board of directors, and an owner (or shareholders, if the firm is publicly held). These officers must generate revenue that exceeds the cost of owning and operating the facility. Plant equipment—including system components—are assets that must generate an economic return.
Plant capacity regularly has top priority, relate process improvement to capacity increase possibilities.
Finance officers seek investments that are most apt to demonstrate a favourable return on assets. When faced with multiple investment opportunities, these officers will favour options that lead to the largest and fastest returns.
This corporate attitude might lead industrial decision makers to conclude that system efficiency is a luxury that they cannot afford. This difference frequently exists between purchasing (equipment) and plant operation.
Many organisations consider only the initial purchase and installation costs of a system. However, plant designers and managers will benefit from evaluating the life-cycle cost of different solutions before installing major new equipment or carrying out a major overhaul. Plant operations can be a significant source of savings, especially because energy efficient equipment can minimise energy consumption and plant downtime. Make use of the concept of “total costs of ownership”.
It is also important for the company/corporate management to subscribe to Responsible Care/Sustainability principles; to be truly engaged in meeting environmental standards; and to be serious about OSHA aspects, among other things.
2. Measure the cash flow impact of the system efficiency
System efficiency and performance improvement projects can move to the top of the list of corporate priorities if proposals respond to corporate needs. Corporate challenges are many and varied, and this in turn opens up more opportunities to “sell” system efficiency as a solution. Opportunities for upgrading existing systems can be found in the inefficiencies that develop over time—such as changing system requirements, routine wear and tear, and poorly optimised controls. Once selections are made, the task becomes one of communicating the proposals in corporate (cash flow) language.
The first step is to identify and evaluate the total cash flow impact of a system efficiency measure. One proven way to do this is through a life-cycle cost analysis, as stated earlier. The result— a net gain or loss on balance—can be compared with other investment options or with the anticipated outcome of doing nothing.
The various aspects of plant efficiency interrelate. Energy efficiency , degree of automation, operational procedures, yield on raw material and waste production, process control, all these have their own and interrelated impact on plant efficiency. The best projects are those that combine these aspects.
3. Present the finances of system improvements
A simple (and widely used) measure of project economics is the payback period. This is the period of time required for a project to “break even” in terms of costs—the time needed for the net benefits of an investment to accrue to the point where they equal the cost of the initial outlay.
The simple payback equals the initial investment divided by the annual benefit. It is not an exact economic analysis as it doesn’t consider the time value of money, but is easy to use and understand. More sophisticated analyses take into account factors such as discount rates, tax impacts, and the cost of capital. One approach involves calculating the net present value of a project, which is defined in this equation:
Net present value = present worth of benefits – present worth of costs
Another commonly used calculation for determining the economic feasibility of a project is internal rate of return (IRR). This is defined as the discount rate that equates future net benefits (cash) to an initial investment outlay. This discount rate can be compared to the interest rate at which a corporation borrows capital.
Many companies set a threshold (or “hurdle”) rate for projects, which is the minimum required IRR needed for a project to be considered viable (if you don’t know this, it is important to find out before presenting your case for investment). Future benefits are discounted at the threshold rate, and the net present worth of the project must be positive in order for the project to be a “go”.
Besides the payback criteria, other arguments can be used to put a project up for approval, e.g. permit requirements, safety issues, product quality, etc.
4. Relate system efficiency to corporate priorities
Saving money in itself should be a strong incentive for implementing an energy efficiency project. Still, that may not be enough for some corporate decision makers. Some suggestions for interpreting the benefits of energy cost savings include the following:
- A new source of permanent capital: regardless of how the investment is financed—borrowing, retained earnings, or third-party financing—the annual savings will be a continuing source of funds.
- Added shareholder value: shareholder value is the product of two variables: annual earnings and the price-to-earnings (P/E) ratio. Multiplying the earnings increment (annual savings) by the P/E ratio yields the total new shareholder value attributable to the system efficiency improvement.
- Improved reliability and capacity utilisation: the efforts required to achieve and maintain energy efficiency will largely contribute to operating efficiency. By improving system performance, the facility manager can improve the reliability of plant operations.
- Improvement in the bottom line: energy savings are cost reductions and thus improve the operating profits of the company.
A proposal for a system improvement project can be made attractive to corporate decision makers if the facility manager does the following:
- Identifies opportunities for improving system efficiency
- Determines the life-cycle cost of attaining each option and which external requirement will benefit from the action
- Identifies the option(s) with the greatest net benefits or prioritise the options
- Collaborates with financial staff to identify current corporate goals
- Generates a proposal that demonstrates how the energy efficiency benefits will directly respond to current corporate needs
- It will also work the other way around : from the opportunities in the process on one side and the various demands on the other plant manager can choose beforehand which projects they should start giving the available staff and money