Energy Management, CFO Style

01/21/2009 | By Richard Lubinski

Some people mistakenly believe that energy costs are fixed – a fact of life – and that nothing can be done about them. This myth has been proven wrong millions of times by progressive businesses and government agencies. Energy costs are controllable, although controlling the cost of energy (rates and fuel costs) is a separate issue. Unfortunately, for most firms, natural gas and electricity cost increases weren’t expected and, therefore, weren’t covered in operating budgets. Now, finally, the C-suite executives (CEOs and CFOs) are paying attention to energy costs.

Supply-Side vs. Demand-Side Energy Management
Energy management can be broken into supply-side energy management and demand-side energy management. Since supply-side energy management doesn’t require any capital investment, many companies start here. In regulated and deregulated electricity and natural-gas markets, utility rates are increasing by double digits each year. Hundreds of billions of dollars in extra expenses are hitting building owners. The first step in supply-side energy management is to purchase the energy commodities at a price less than the “shopping credit” (price to compare) for energy commodities. With the help of an independent energy consultant, electricity generation and natural-gas commodities can provide some relief against increasing rates. The result can be a net cost increase, but there is still avoided cost (i.e. savings) by buying energy commodities at a lower price in deregulated markets. In some cases, the states with traditional regulated energy markets have seen higher rate increases than those in deregulated markets. Everyone is paying more for energy, even when their consumption is the same year over year.

Supply-side energy management may lead progressive companies to start to track energy cost and consumption(by using a utility accounting system). Internal accounting systems can be expanded to serve this purpose, or the process of utility-bill payment and administration can be outsourced. The outsourcing approach generally results in a Web-based database complete with charts and PDFs of actual utility bills. Payments to the utility can be paid on time to avoid paying 12- to 36-percent annual interest for late fees on utility bills.

Eventually, companies mature to the point where they realize the need for demand-side energy management or the need to reduce energy consumption. This type of energy management can be considered permanent energy savings, since it will provide cost savings for many years. Investments in cost-cutting programs like energy management are evaluated by a CFO, just like any other investment. The CFO could care less about the technical merits of an energy-management project – only that it makes sound financial sense. The CFO starts with simple payback period, then return on investment (ROI), and then net present value (NPV). The NPV is a capital-planning tool that determines if the planned investment beats the company’s internal rate of return (hurdle rate). If the NPV of a proposed energy-management project generates a positive NPV dollar value, then it should be considered. The CFO doesn’t care about BTUs, kilowatt-hours (kWhs), dekatherms (Dths), quality of light, lumen maintenance curves, etc. As Jerry Maguire made famous, “SHOW ME THE MONEY!”

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