Cost of Energy and Payback Periods

I am often amazed about the responses I receive when I speak with people, from different parts of the world, about the differing costs of energy. Not that I am surprised, having been in the industry for well over 20 years (closer to 25 now), and having travelled in many countries. I have done projects in a few, and I am well aware of the cost of energy in different parts of the world. Where some people are paying a low $0.08 per kWh of electricity, other countries are paying over four times that. It is; therefore, a safe assumption that not only does the cost of electricity that varies from place to place. Most products and services will as well.

Where I do get amazed, is when we do energy-saving simulations, and we get to the payback period. For example, if you have a project with a payback of two years, this is considered a relatively good payback (depending of course what the project itself is). On average; however, paybacks of two years are considered good. Energy (more precisely electricity) in my geographic location is approximately $0.09 per kWh for medium sized enterprises. Take the same project and apply it in Europe, where the cost is often three times that, and now the same project has a payback of eight months. The same project just went from having a good payback to a great payback. There are not many places where you could place your money and expect to get it back within eight months (Vegas might be one, but the risks are a little higher also).

I was in the lobby of a downtown hotel a few days ago, and we were having a meeting with a friend from France. He is a contractor and does turnkey projects (mainly in the health sector), but he also owns and operates health clinics. He was explaining to us how the cost of energy varies during the day.

The cost of energy fluctuating during the day is nothing new. For many years, people would have timers on their washers and dryers so they can delay their start until the night, when electricity was cheaper. We talked about energy-saving projects, and he (the contractor) was telling us how few energy measures they were doing. I maintained my surprise by the fact that he knew what types and timing of energy was so expensive, and yet, he did not implement any energy-saving measures.

I could not help but wonder when he would decide that energy costs are already high enough to justify looking into saving energy. There is a folk saying that if we put a frog in hot water he will jump right out, put if we put the same frog in cold water and heat up the water; the frog will remain in the water until it boils. I obviously never tried that (nor did I ever meet anyone that did in fact), but I like the analogy with my friend and his energy costs. I guess if the price of energy would jump 300 percent, most people would react and jump out of the water. However, if the energy increases by two, three, or even four percent a year, some consultants will just remain in the water as it starts to boil.

When I was in the corporate environment, virtually any project that had a two-year or less payback would normally be approved easily. Well, let me rephrase that, nothing is easy when you are trying to get companies to spend capital, but with the right arguments, let us say I managed to get the majority of our projects approved.

For longer paybacks, we had to justify the project a little more. I do; however, remember getting projects of five years or more approved. Actually, some were even over eight years. I cannot help but think that even the eight-year projects were only approved after some serious justification, which often took months. It would probably have been much easier to justify if our cost of energy was three or four times higher. Even projects with longer paybacks in my region, would have had their paybacks reduced to less than two years where the cost of energy were higher.

As energy prices increase, companies will be looking for ways to reduce their utility costs. In addition to this, if companies are forced to pay some kind of penalty for carbon emissions at one point, there might be an added interest in implementing energy savings. The sad truth is that one does not get to be an expert at saving energy overnight, and companies cannot expect to hit home runs the first time they step at the plate. Like everything, it takes time and practice.

Most companies that have great success in saving energy, today, often started out by going after easy low hanging fruit. Then, in time, started to do simple projects with short paybacks; and only then migrated towards larger retrofit projects with longer paybacks. It is a natural process, but many of these companies are now well equipped to search and implement all kinds of energy-saving measures.

Companies that have not started to implement an energy-saving program/process might be in for a wake-up call when energy prices start to ramp up. In addition, we know that at one point, the prices will indeed ramp up and other costs (such as carbon emissions) might be added to the monthly bills. Companies with no plan and no energy-saving experience will find themselves scrambling to catch up. The good news is that it is never really too late to start.