Energy Efficiency is a Profit Center for Your Business

Don’t think of energy efficiency as Savings… Think of it as Profits.

By Michael Denby, J.D., Principal, Denby Energy, LLC www.denbyenergy.com

Saving businesses money by reducing energy use has significant rewards, but they are often overlooked in favor of more immediate, tangible returns. One of the overlooked benefits of energy savings programs is that they rarely have a one year return, but instead generate bottom line profits year after year.

Often company executives are in the dark when it comes to understanding the amount of money they actually pay for energy. They know with great certainty exactly how much they pay for each component that is used to create the widgets they sell, but they don’t know how much power their buildings and processes consume. And that is a significant gap in their business model.

This article shows how, by investing in energy savings, a business can make significant returns to the bottom line, year after year.

For purposes of this article, let’s assume that you own a small business with average energy bill of approximately $15,000 a year. If your business could reduce that energy bill by 30% by investing $4,000 in energy efficiency would it be worth it?

First, let’s look at the simple payback method. At $15,000 a year, a 30% savings would generate $4,500 in yearly savings. And if you were spending $4,000 to get that energy savings, you would have a simple payback period of .88 years, or about 10 and ½ months. For virtually all businesses, that is a very acceptable return on investment.

Second, let’s look beyond the simple payback method. Let’s look at the investment return over the life of the investment and see what it can do for us. For simplicity, let’s assume that the investments made to increase energy efficiency had a life of 7 years. The initial investment would have been paid off in 10 ½ months, but the benefit (profits) from that investment (returns) continue for the next 7 years. That means after the first year, the business will have 6 more years of those improvements generating a $4,500 return each and every year. The result?

Well since this is a Series question we input $4,500 a year as our “A”, with 6 years as our “n” and 5% as our “i”. The answer comes out to $30,608.55 in total returns(profits) over those 7 years.

Now, let’s look at one alternative – instead of investing back into their business, the owner takes that $4,000 as a payout and puts it into her retirement account. For purposes of this example, let’s assume her retirement account is earning a really strong return of 10% (despite the economic turndown). The $4,000 is a one-time investment, so it runs as a Single Sum Series. After 7 years she would have a total of $7,794. That means she would have left $22,814 on the table. Or better defined, she would have paid the local utility companies $22,814 more than she paid herself for the privilege of wasting energy.

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