A short guide to building a successful business case for energy efficiency investments and how to finance them.
Before reading the tips below, I recommend starting with our Preparation guide to get the right groundwork in place for implementing successful energy saving initiatives.
Many energy efficiency projects will require capital investment in one form or another, but you shouldn’t consider this a barrier. The return on investment (ROI) for many energy saving measures is now very fast (if your energy costs have doubled, so have the potential savings from energy efficiency).
However, even measures with longer payback periods of a few years are still worth exploring. Energy costs are not currently forecast to return to pre-2021 levels this decade and cashflow-positive finance packages are now widely available.
Here are our tips for building a strong business case to take to your finance director or decision maker:
1. UPDATE YOUR NUMBERS
You may have looked at projects in the past to change your lighting, replace inefficient equipment, or install solar PV on your rooftop, and decided at the time the ROI wasn’t good enough.
It’s now time to reappraise these projects. The fact that energy costs have rocketed upwards, combined with the significant reduction in the cost of green technologies in recent years, means the economics are now much more likely to stack up in your favour.
Take LED lighting, for example – one of the most popular capex measures to improve energy efficiency. Something in the region of a two-year payback was generally a safe assumption in the past, but now in most cases it will pay back in less than a year.
Solar PV is another good example. A year or two ago, typical rooftop solar PV projects had around a 6-7-year payback (or 14-16% ROI). Today it’s significantly less; possibility as low as two years (50% ROI) for many businesses.
For businesses that use a lot of energy during the day, like manufacturers, the payback can sometimes be even better. One manufacturer in Bolton recently told us that they were looking at a payback of just 20 months, based on projected energy prices without the Energy Bill Relief Scheme.
Remember: energy prices will remain elevated for the foreseeable future so the goal is not just to reduce energy costs in the near-term, but the long-term as well.
2. TAKE A LIFETIME COSTS APPROACH
When faced with the need to upgrade or replace equipment, choosing the lowest cost option always seems more attractive in the moment, especially when budgets are under pressure.
Don’t give into that feeling. What you don’t see on that purchase price is the massive cost that is swallowed up by additional energy needed run the asset over its lifetime compared to a more efficient alternative.
Instead of focusing on the initial upfront cost, build your business case based on whole life costs by including the running costs in your calculations. For most types of equipment, particularly those with a long lifespan, the running costs will be far greater than the purchase price – as the below example of a typical compressor demonstrates (this breakdown is based on pre-crisis prices, so the energy component will be even higher today):
The marginal cost difference of choosing the next or most efficient model will often pay for itself within a matter of weeks in lower energy consumption, so you get that initial additional outlay back incredibly quickly.
Calculating running costs
Always take a closer look at the energy label, which run on a scale of A to G, for a general comparison of running costs.
Another way of getting a rough comparison between options is to take the product’s kilowatt rating (which should be provided in the technical specs) and multiply it by the number of hours it will be running for, which provides you with a kWh figure. You can then multiply this by the price you pay per kWh of electricity or gas for a good indication of running costs.
1. IT’S NOT JUST ABOUT COST SAVINGS
When preparing a business case to present to a decision maker, it pays to take into account both the financial and non-financial benefits.
Decision makers are now much more likely to prick up their ears when they hear that an investment will save energy and pay back quickly, but that’s only the tip of the iceberg:
- Reduced carbon emissions and liabilities: Consuming less energy directly lowers your carbon footprint and environmental impact, providing knock-on benefits in the form of brand value, competitiveness and complying with existing or future regulations or customer requirements
- Increased resilience to price volatility: Drawing less energy from the grid means you are less exposed to future spikes in energy prices, which makes budget planning easier
- Reduced maintenance costs and longer replacement cycles: More efficient equipment (and the efficient use of it) usually results in a longer lifespan, increased reliability, slower depreciation and lower maintenance costs. LED lights, for example, last much longer than older forms of lighting
- Improved comfort, wellbeing and productivity: Heating improvements will improve comfort for staff and LED lighting improves light quality, which will increase wellbeing and may result in reduced quality rejects
- Increased property value: If you own your building, making energy efficient improvements to the building fabric and building services may increase its value.
These are all examples of additional ammunition you can bring to decision makers to persuade them of the business case.
Using the right language
The benefits you lean on most will depend on the person you’re talking to. If you’re speaking to your finance director, it makes sense to focus on the cost savings, financial resilience and extended lifespan benefits.
If you’re speaking to a production manager or operations director, it may be more beneficial to focus on how the new equipment will make their life easier through improved reliability, reduced maintenance requirements and improved comfort and productivity.
If you’re speaking to a sales director or sustainability manager, you could focus more on the carbon footprint benefits.
2. FINANCE OPTIONS
The financing options available for energy efficiency investments will depend on the specific technology and the circumstances within your business. However, generally speaking it can be more straightforward than you might think:
- High street lenders: Most banks have now got some form of dedicated ‘green loan’ scheme in place for SMEs. Lenders have a growing appetite to finance green technology projects partly to support their own sustainability objectives, but also because they can see the returns – energy efficiency measures are reliable investments that will also improve your resilience, which makes you more lendable. Different banks will have different criteria for eligible technologies, but they generally cover most standard energy efficiency measures and renewables like solar PV
- Asset finance: Technology providers themselves are often able to offer you a tailored asset finance solution that allows you to pay as you save
- Grants: There are sometimes grants available for green technology projects from local business support organisations. Speak to us, your local Chamber of Commerce or local authority to check if there is any support available.
The important thing when weighing up your options is to make sure the monthly cost savings from the technology are higher than the cost of repayments (ideally by a 20-30% margin, to allow for variabilities in real-life performance). This will mean your investment is effectively ‘cashflow positive’ from day one, with that margin going straight into your pocket every month until the investment is paid off in full.
3. DON’T GET CAUGHT IN THE QUEUE
If you’re looking to install popular energy saving technologies such as LED lighting or solar PV, bear in mind that they are now in very high demand and installers are extremely busy. For example, solar PV suppliers in Greater Manchester are already telling us that the commissioning process for solar panel systems is currently taking between 4-6 months.
Waiting lists are growing, so time is of the essence – especially if you are planning large energy investments.
It’s important to tackle your energy use now rather than burying your head in the sand and thinking energy prices will drop back to what they used to be – they won’t.
- Explore our other How to Save Energy guides
- Watch our webinars on Understanding the Energy Challenge and What your business can do to reduce energy costs
- SMEs in Greater Manchester can access fully funded support on energy efficiency from our expert Sustainability and Net Zero team
- Energy efficiency is also a key element of our popular Journey to Net Zero programme for Greater Manchester SMEs. Visit businessgrowthhub.com/netzero
- If you are planning to install green or energy saving technologies, use our sister Green Economy service to find a reputable local supplier