Innovation

Energy efficiency: Beat the bust by going green

Written by Jim Harris

They might not say it out loud. But many CEOs quietly believe that adopting eco-friendly business tools and practices is a luxury they simply can’t afford in today’s economy.

Here’s why they’re mistaken: an important aspect of going green is all about eliminating waste. And a recession is the ideal time to strip unnecessary costs out of your operations.

Energy-efficiency projects typically offer an impressive ROI that easily tops most other investments. You can measure this using the internal rate of return (IRR), the annual payback per dollar invested. For instance, if you were to invest $200,000 in a project with an IRR of 17%, you’d generate savings of $34,000 per year and recover your outlay in six years—and thereafter make a profit of $34,000 a year, forever. A 17% IRR is New York-based management consultancy McKinsey & Co.’s estimate of the average return over the next decade of a vast array of energy-efficiency initiatives it studied. This far surpasses the average long-term IRR for the stock market of about 10%.

And many energy-efficiency projects offer a far higher IRR—anywhere from 25% to 1,000%. One North American bank that had been leaving its PCs on all night for automatic software updates is spending US$100,000 on a system that will automatically turn its computers off after the updates. It will save at least US$1 million per year in power costs. That’s an IRR of 1,000%, for a payback period of just over five weeks.

Not all IRRs are this spectacular. Yet energy waste is so rampant that low-hanging fruit exists in almost every firm. Another McKinsey report estimated that almost 40% of the strategies for meeting targets of the Kyoto treaty on climate change can be achieved at a profit.

Furthermore, the IRR from adopting energy-efficiency measures will escalate sharply as energy prices inevitably rebound from their current slump-induced lows. The recession has sent oil prices plummeting from last July’s peak of US$147 a barrel to below US$50. But Jeff Rubin, Toronto-based chief economist at CIBC World Markets Inc., warned last December that “supply destruction, including cancellations in the Canadian oilsands and offshore projects around the world, will see crude soar back to triple-digit territory” toward the end of 2009 and into 2010. Rubin’s past predictions about oil prices have proven to be deadly accurate: he was the economist who predicted that prices at the pump would hit $1.50 a litre last summer.

How can your company identify its own easy energy wins? You’ll first need an energy audit to determine where you’ll get the best IRR. The Office of Energy Efficiency (OEE) at the federal ministry Natural Resources Canada (NRCan) will reimburse you for up to half the cost of an audit. You can use NRCan’s website to search for a contractor by city and industrial sector. Be careful to hire someone who has wide experience in the energy systems you now use and isn’t tied to recommending any one solution.

Greg Allen, one of Canada’s leading energy-efficiency specialists, says if you have 20,000 square feet of facilities, you’ll likely pay less than $1 per square foot for the simplest energy audit and up to $1.50 for the most comprehensive. This could reveal energy savings of 50¢ to $2 per square foot per year, says Allen, president of Toronto-based Sustainable Edge Ltd.

All three levels of government, as well as natural gas and electrical utilities, offer financial support to businesses for energy-efficiency upgrades. The OEE’s ecoENERGY Retrofit program, for instance, provides grants of up to $50,000 to SMEs for 25% of the cost of building retrofits. Many provincial and municipal programs exist as well. The OEE section of NRCan’s site offers a handy “Grants and Incentives” page with links to dozens of programs across Canada.

No one approach is right for every firm. You might find significant savings simply from turning off electronic devices after work hours, as did the bank cited above. A study by 1E Ltd., a U.K.-based specialist in reducing the cost of Windows-based computers, estimates the average PC left on at night in the U.S. wastes almost US$60 per year worth of electricity. Add in all the printers and other devices running outside work hours, and the savings can mount quickly.

Lighting can also offer an enticing IRR. An example from Wal-Mart—which is spending US$500 million on energy-efficiency projects with a payback of four years or less—shows that immediate electricity savings are often just the tip of the iceberg. The retail giant is replacing varous types of lighting in its freezer cases with higher-priced LEDs that use 97% less power than incandescent bulbs do. Your firm likely doesn’t run thousands of freezer cases. But if you install energy-efficient bulbs for the lighting that you do have, you’ll benefit in two other ways that helped persuade Wal-Mart to make the switch: the power savings will continue year after year, and the replacement bulbs will last for decades, dramatically reducing maintenance costs.

High-usage vehicles are another potential area of big savings. Most firms provide their sales reps with a company car, or provide a car allowance or reimbursed mileage. The average rep drives 48,000 kilometres per year, triple the distance of the average vehicle, estimates the U.S.-based National Alliance of Sales Representatives Associations. If she’s driving,say, a mid-sized Chevrolet Malibu, which burns 12.2 litres of gas for every 100 km, she’ll rack up fuel costs of $4,980 annually with gas at just 85¢ a litre. But look at how much you’ll gain if, when it’s time to replace her car, you switch her to the hybrid version of the Malibu, which burns 7.9 litres per 100 km—not even a particularly impressive rate for a hybrid. Fuel costs will drop to $3,220, for net annual savings of $1,760.

True, a hybrid will cost a bit more: its list price is $28,300, vs. $24,000 for the standard Malibu. But in Ontario, you’ll get a $2,000 tax credit on the hybrid. So, you’ll save $1,760 per year on fuel from a net additional outlay of $2,300. That’s an IRR of 77%. And it will jump to 103% if gas prices rebound modestly to $1.15 a litre. Just the sort of bottom-line booster to help get you through tough times.

Jim Harris (jimh@jimharris.com) is the principal of Strategic Advantage, a Toronto-based management consultancy whose specialties include green business strategies. He is the former leader of the Green Party of Canada and author of Blindsided and The 100 Best Companies to Work for in Canada.

Originally appeared on PROFITguide.com