Up to 30 percent higher earnings for companies that invest in energy efficiency

Energy conservation measures have a significant positive impact on the earnings (EBIT) and the return on equity (RoE) of European energy-intensive companies. That is a conclusion of a study in four energy-intensive sectors, conducted by 3E Energy Consultants and commissioned by the Copper Alliance. 3E developed a user friendly spreadsheet tool that calculates the impact of concrete energy efficiency measures on the short, mid and long-term financial accounts of a company.

Speeding up investments

Industry accounts for 27% of the total energy consumption in the EU-27. Energy-intensive sectors and industries for which energy represents a major share in the total production costs, are subjected to substantial exposure to energy price inflation and carbon liabilities. Energy conservation has been a focus in these companies for many years and significant progress has been made. However the savings potential is far from being exhausted—as shown by several benchmarking exercises. This raises the question of what is holding industry back from further investment in energy efficiency?

The reason is certainly not technical. Technologies that enable further reduction in a company’s energy costs and greenhouse gas emissions do exist. The most obvious barrier for implementing energy efficiency measures is a limited access to capital. Senior management at group-level often gives other areas priority for capital investments because they are not convinced of an adequate return on investment. This turns out to be a mistaken perception of the actual reality.

High ROI, hedged against risks

The study clearly shows that most energy conservation measures immediately pay off in financial return, without compromising the long-term growth of a company. Financial modelling based on facts collected for four energy-intensive industries (iron and steel, paper and printing, non-ferrous metals, and refineries) reveal an increase in the EBIT (earnings before interest and taxes) of 30% and more. This increase is seen from the first year after investment in all sectors except refineries. As a consequence, the RoE (return on equity) grows. The company’s solvency decreases—but only slightly—and for no longer than five years.

Investing in energy efficiency hedges against future energy price inflation and carbon liabilities (irrespective the economic conjuncture). On the other hand, the debt-to-equity ratio (D/E) increases. Firms concerned about this increased risk profile could consider financing the investment in part with equity. It also presents opportunities for third party or Energy Service Company (ESCO) financing mechanisms. At present, such mechanisms are infrequently used for industrial energy conservation projects.

Simulation model for industry

Energy efficiency programmes should be tailored because they are heavily linked to a company’s core processes. 3E developed a spreadsheet model which enables companies to calculate the impact of energy conservation on their short, mid, and long term financial accounts. Decision makers in industry can now assess the impact of various energy conservation measures.

The database underpinning the model utilizes applicable facts and figures from the income statements and balance sheets of the selected sectors as well as built-in data on energy savings, capital expenditures, and additional operational expenditures for pre-defined sector-specific measures. Users can select the measures they want to implement on the tool’s dashboard. The model then visualizes the effect of their choice on the most important financial performance ratios over the next ten years. The user can also perform sensitivity analyses, such as those for energy inflation or the cost of carbon liabilities. The model is not limited to the pre-defined sectors and measures, but leaves room for adaptations and new input data by the user.

Log in to post comments

Follow us