Businesses Eager to Introduce Energy Efficiency
Especially for businesses, the cost of energy is an increasingly significant issue. In a survey conducted by the Organization for Economic Co-operation and Development (OECD) on business energy consumption in its member countries (e.g. France, Spain, India, USA, Russia, Poland, UK, Germany) in 2010, 96 percent of participating (large) businesses indicated that they had started implementing energy-saving measures. Moreover, when asked about their motivations to reduce energy consumption, respondents cited “reduce energy costs” as their most important driver.
However, one must be aware that the turn towards energy-efficiency is a challenging issue. It involves vast investment sums and thorny issues around planning and community relations. Thus the current reduced access to capital puts an important barrier in the way of investing in energy-efficient equipment: Bank credit is tight in mature economies. It is expected to remain so in the near-term in an atmosphere of slow economic growth and concerns about stability in the Eurozone. Furthermore, governments in key emerging markets such as China are restricting credit availability, in order to guard against inflation.
Innovative Financing Methods in Need
Businesses are therefore seeking alternatives to standard bank credit in order to finance energy-efficient investments. Innovative financing methods are thus coming to market which offset the energy-efficient investment costs against energy savings across the financing term. Within this, they effectively provide a zero-net-cost investment technique.
In fact, two related forms of equipment finance are coming to the fore: First is an equipment financing arrangement where the energy savings offset the cost of the investment. Second is “performance contracting” where the facilities management of, for example, a building, is financed through energy cost savings – guaranteed within the financing agreement.
On the one hand, in the framework of an equipment financing arrangement, businesses lease energy-efficient equipment and the energy savings so realized pay for the investment. Payments are designed to be equal to, or lower than, the energy savings. They often deliver savings and net positive cash-flow immediately. A finance agreement under this kind of integrated scheme has the advantage of tax efficient, fixed payments for the agreement term, which are calculated taking into account expected working life of the leased equipment and the business’s individual circumstances. Thus there is the specific reassurance that tailored finance payments can be offset against the expected energy savings.
On the other hand, “performance contracting” solutions allow facility and capital improvements to be made and funded through energy savings achieved within the facility. With the procedure of leasing, payments commence once the component technology has been acquired. In comparison to that, “energy performance contracting” will usually arrange the finance to cover the set-up and installation period, starting payments from the point that the enhanced facility is beginning to generate energy cost savings. This adds a cash flow benefit to the fact that performance risk is born by the supplier.
Energy Saving Potential in the Industrial Realm
Whether making individual energy-efficient equipment investments or engaging in a “whole facility” performance contracting arrangement, businesses have a necessity. They need an awareness of which key areas of their infrastructure are most susceptible to, and have the greatest payback on, energy-efficiency initiatives. Let me give you two examples of areas where major energy-reduction can be achieved.
First of all, major savings can be realized when businesses start relying on onsite solar and wind power. In fact, the business case for installing renewable energy technologies, such as solar panels or small scale wind turbines, is getting steadily stronger. Research by the Carbon Trust, a non-profit company set up by the UK government, suggests that annual return of over 10 percent can be gained from the installation of such onsite renewable energy systems. The increasing demand for smaller solar and wind power generation units is now beginning to industrialize their scale of production. They reduce price per unit and improve manufacturing consistency.
Secondly, businesses can also save energy – and consequently reduce their costs – when installing biomass production of space or process heating. In fact, biomass heating is becoming increasingly popular amongst manufacturing, processing and agricultural organizations. Organic materials, including virgin wood, energy crops, and uncontaminated industrial residues are put through a combustion process to heat water or air. The system will consist of a biomass boiler plant, a heat transfer network, and a method of receiving, storing and feeding fuel to the boiler.
Biomass boilers work best when they run continuously. And broadly speaking, the longer the annual run hours, the more cost effective the system will be. Typical payback periods are three to nine years. Nevertheless fuel costs are effectively zero if the business produces a combustible by-product.
With steadily rising energy prices, businesses across the world are eager to invest in energy- efficient, and thus environmentally friendly, equipment. However vast investment sums are needed to realize the switch towards energy-efficient businesses; at the same time, access to capital worldwide is highly restricted. Yet, as innovative financing methods providing an alternative to standard bank borrowing appear, business energy-efficiency now seems to be in reach.
Roland W. Chalons-Browne is President and CEO of Siemens Financial Services GmbH; Munich. Based in Munich, he is responsible for leading Siemens Financial Services business worldwide. Roland has been CEO of Siemens Financial Services Inc. in the US since October 2005. Based in Iselin, New Jersey, he was responsible for leading commercial finance and leasing business across North America. The Financial Services unit of Siemens is an international provider of financial solutions in the business-to-business area. The international network of financial companies coordinated by Siemens Financial Services GmbH in Munich, comprises more than 2,500 employees worldwide. Financial Services supports Siemens as well as other companies, with a particular focus on the Sectors of Energy, Industry and Healthcare. The unit finances infrastructure, equipment and working capital and acts as an expert manager of financial risks within Siemens. End of June 2011 the total assets amounted to EUR 12.8 billion. For more information see: www.siemens.com/finance