Many companies seeking to reduce their overall energy expenses turn to green technologies — LED light bulbs, solar panels, building envelope improvements. But reducing consumption through technology may be a costly solution.
“The first and easiest step toward reducing your energy expenses is to reduce the cost of the power you’re using today,” says Roger Zona, president and founder of TPI Efficiency Consulting. “Companies can reduce their overall costs for energy by 5 to 20 percent simply by negotiating a favorable rate and term.”
Understanding the true baseline of overall energy expenses, he says, is a prerequisite to calculating the potential return on investment (ROI) of green technologies and energy efficiency investments.
Smart Business spoke with Zona about understanding and negotiating operating expenses.
What’s the first step for companies exploring energy efficiency projects?
The first step should always be to clearly define your goals for the project. While reducing consumption may reduce operating expenses — paying for fewer kilowatt hours (kWh) will reduce monthly expenses — it doesn’t account for the cost to implement green technologies, which are great for sustainability efforts but won’t always lead to cost savings.
Even if greater sustainability is the mission, companies are missing a key component in determining which products make the most sense if they don’t first review and make choices that reduce their base energy costs. Once a company’s energy costs are the lowest they can be, then it can be determined which technologies make sense to accomplish company goals.
How are baseline costs established?
Establishing accurate baseline costs can be tricky and time consuming. It requires identifying accurate hours of operation for each facility, a general understanding of how much energy each facility’s fixtures and appliances should be consuming based on operating specifications, a concrete knowledge of the company’s energy rates and all its components, and the energy contract terms and conditions. All of these items can be hard to define and sometimes complicated to interpret, which is why businesses typically utilize a consultant when developing these baseline figures.
The most important information to define with electricity before evaluating the financial viability of energy efficiency technologies is the ‘all in’ cost per kWh. That’s done by taking the total electricity invoice charges divided by the number of kWhs used in that particular billing cycle.
Why is establishing this baseline through the examination period so significant?
Companies should not commit to an investment in efficiency technologies without knowing they’re being as efficient as possible. Faster-evolving technologies require a shorter ROI period. LED lighting technology, for instance, is changing about as fast as the next version of the iPhone. If the ROI periods are longer than five years, the technology will have improved greatly in that time, which will reduce the relative cost effectiveness of the investment.
How can companies align green technology investments with their businesses goals?
When an organization is reviewing energy solutions with the goal of reducing overall expenses, green technology investments tend to jump out as a quick fix. If a company is paying 14 cents per kWh, solar panels may reduce consumption enough to become a viable solution for reducing total energy expenses long term. But if a company could simply reduce the cost per kWh to 10 cents or less, solar paneling may no longer make sense if overall cost reduction is the only goal.
What should companies understand before making an investment in green technologies?
Companies that have green initiatives as part of their company mission may have a different threshold on ROI than companies simply looking to reduce operational expense. It’s never wasteful, however, to reduce operating expense before determining which green technology to invest in.
Insights Energy Solutions is brought to you by TPI Efficiency Consulting