Why CFOs Need a Financial Strategy for Energy and Carbon

Filed under: 1sdn,Energy Efficiency | |

energy efficieny and CFOsAccording to a report by the independent research firm Verdantix, soaring energy costs, climate change compliance issues and significant untapped cost savings make energy efficiency a new imperative for the CFO.

by Aysu Katun, Green Economy Post

According to the “The Energy Efficiency Imperative: Why CFOs Need a Financial Strategy for Energy and Carbon report released by the independent research firm, Verdantix, increasing oil and electricity prices, the hidden cost of carbon, growing risks from energy supply disruption and board-level climate change compliance issues make energy efficiency a new imperative for the CFO. Verdantix analysis of energy and carbon trends indicates that finance executives need a multi-year energy efficiency plan to maximize cost savings, help the CEO meet carbon reduction goals and make financial decisions based on total cost of ownership.

Verdantix’s study found that the cumulative impact of increasing energy costs, price volatility and carbon compliance risks has put energy back on the agenda. Specialist energy analysts such as the International Energy Agency and Goldman Sachs expect the oil price to reach $80 to $100 a barrel in 2010, while OPEC expects oil to trade between $100 and $150 a barrel in the medium term. Carbon prices are also forecasted to quadruple from 2009 lows. Furthermore, in countries like the UK, tighter emissions caps and more auctioning of CO₂ allowances invisibly flow into higher prices for gas and electricity. To avoid being caught off-guard, the report suggests that CFOs should draft financial plans to ensure robust management of energy and carbon.

Energy management is also becoming a boardroom compliance issue due to regulatory developments. The American Clean Energy and Security Act (also referred to as Waxman-Markey) was passed by the United States House of Representatives on June 26, 2009 and is still in consideration in the Senate. This bill calls for nearly 20 percent carbon emission reductions through cuts of methane and carbon dioxide by 2020. The bill also calls for a cap and trade system for carbon emissions. Furthermore, in many energy and resource industries, the Environment Protection Agency (EPA) requires new carbon emissions disclosures for 2010 to be reported in 2011. In Massachusetts et al. versus the EPA (Case No. 05-1120), the Supreme Court found that the gases that cause global warming are pollutants under the Clean Air Act. Thus the EPA can enact new rules to manage carbon emissions under existing law. There are also strong incentives for the current administration to see new legislation in place before the next Congressional election cycle.

Aside from mandatory compliance, the report suggests that CFOs also need to comply with investor demands for transparency on exposure to carbon costs. Finance teams will need to include the cost of carbon in their financial plans and forecasts.

How should CFOs address these pressing financial issues?

The research conducted by Verdantix with energy managers, finance directors, industry experts and suppliers puts energy efficiency at the top of the action list for an energy and carbon management strategy. When compared to alternative approaches to energy and carbon management such as on-site generation, green electricity and voluntary offsets, energy efficiency is the only approach that accomplishes several concurrent objectives: cost reduction, energy price risk mitigation and alignment with sustainability goals. According to the research CFOs have four main levers to tackle energy efficiency:

  • Optimizing electricity voltage of entire sites: this not only lowers the voltage of electricity supplied to an entire site but also improves supply quality.
  • Applying controls to optimize the energy use of different assets.
  • Altering employee behavior.
  • Replacing inefficient assets with more efficient assets.

The report indicates that to identify the true scale of potential energy efficiency cost savings CFOs should take a strategic program-based approach. This should include an analysis of total cost of ownership of energy consuming assets, not just replacement costs, process re-engineering and alignment of procurement and efficiency objectives. CFOs need to develop multi-year investment plans focused on energy efficiency. This requires investments with a short payback period, such as lighting controls, as well as setting funds aside for bigger energy efficiency projects like voltage power optimization that provide bigger absolute savings measured in cash and carbon.

To simplify the investment decisions facing CFOs, the Verdantix analysis outlines strategic energy efficiency solutions that represent a subset of the myriad solutions available on the market. The research team looked at energy efficiency solutions that:

  • Report and analyze energy consumption
  • Optimize voltage and improve electrical supply quality
  • Increase control of energy consuming assets
  • Improve the energy efficiency of assets, and
  • Consume less energy than the assets they replace.

Analysis of over 30 categories of energy efficiency products and services identified 15 strategic solutions ranging from LED lighting to boiler controls that firms should prioritize for investment. These solutions are evaluated based on solution maturity, business value and sustainability ratings. Proven solutions with the highest business value include voltage power optimization, variable speed drives and intelligent HVAC controls.

Soaring energy costs, compliance requirements and significant untapped cost savings make energy efficiency a priority for investment. The Verdantix report puts forward compelling arguments for the CFO to take ownership of energy and carbon management and execute the alignment of an energy and carbon management strategy with the company’s financial strategy.

© 2010, Aysu Katun. All rights reserved. Do not republish.

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Author: Aysu Katun (18 Articles)

Aysu Katun is an associate editor at the Green Economy Post. She received her MBA degree from The Ohio State University's Fisher College of Business, where she focused on sustainability, marketing and strategy. At Fisher, she was a leading member of Net Impact's OSU chapter, which won the Chapter of the Year Award in 2009 . Before beginning her MBA, Aysu worked at Hewlett Packard in Turkey. A passionate traveler, Aysu has been to 27 countries and worked in three. Due to her international experience, Aysu is able to bring a unique perspective to sustainability issues in business.

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  • Bryan King

    None of these suggestions represent a shift in thinking. Cost minimization doesn’t represent conservation. For instance, voltage optimization reduces electric utility *demand* charges, not consumption.

    CFOs would do well to get ahead of the game by calculating future emissions costs – perhaps by assessing an ‘internal tax’ on present net carbon emissions, before regulators do. Use the savings to drive long-term energy efficiency measures that matter – like fleet reduction, no-fly policies, work-in-place initiatives, on-site generation and co-generation, building retrofits, and so on. Leaders need to face up to the eventuality that carbon taxes *are coming*, and be ready with both a reasonable forecast of future energy costs (which will include emissions), and the means of offsetting those costs in the near-to-medium term.

  • Pingback: Interesting Read: Why CFO's Need a Financial Strategy for Energy and Carbon | energy intel global

  • Alex Sweeny

    At Robinson Solutions we supply building energy management solutions to the restaurant and retail sector in North America and we see a steadily increasing focus by financial executives on the ROI and business impact of investing in reducing consumption and direct utility costs.  The business case consistently supports a proven short term ROI and can be cash flow positive immediately by implementing controls, changing business practices, optimizing equipment maintenance, and adjusting operating procedures.  The key is deriving complete data and information from the facility and its various systems into one integrated view that allows decision support and directs management to savings opportunities.  I agree that to maximize the return, all the four main levers mentioned must be deployed together.  CFO’s who are not aware that proven turnkey options exist need to empower their energy, sustainability or operating facilities groups to choose a vendor partner and get into the game to mitigate the certainty of rising utility rates and future reporting needs on GHG.