Monetizing Energy Solutions

Abstract

Potential energy efficiency solutions are routinely identified by
commercial and industrial energy programs across North America. While
these recommendations can be impressive for their technical content,
they often have disappointing implementation rates. One reason may
be a failure to accurately demonstrate the business performance of these
improvements. Such a discussion would require thinking of energy ef-
ficiency improvements not as “projects,” but as investments.
Investment analysis seeks capital recovery as its goal. In simple
terms, capital recovery is the result of wealth creating wealth; it describes
how well assets work at creating new income. The fundamental metric
for capital recovery measurement is the rate of return on capital. But that’s
not all. Rates of return can also describe the destruction of wealth. This is
exactly what happens when a proposed investment in energy efficiency
is rejected, allowing energy waste to accrue. The result is capital recovery
in reverse.
Rates of return are used to measure the investment performance of
most assets, including stocks, bonds, and mutual funds, as well as the
cost of borrowing money. However, custom dictates that energy efficiency
proposals are evaluated by simple payback, even for recommendations
that involve thousands or even millions of dollars. When corporations
ponder their capital investment options, proposals that rely on simple
payback measures may be at a disadvantage because their performance is
not measured by the same yardstick used for other investment opportu-
nities. Think of it this way: Who evaluates a mutual fund’s performance
by its simple payback?