CFOs Hate Energy Efficiency Project Proposals; Here’s Why
Just last week I heard the words that no homeowner ever wants to hear: “Your AC system needs to be replaced.” With the help of some smelling salts I was able to regain consciousness and sit down with the repairman to discuss the situation.
He presented several different systems, all with different bells and whistles. At the end it came down to the SEER rating of the system. The SEER (seasonal energy efficiency ratio) rating measures how efficient the system is where the higher the SEER rating, the more efficient the system is. (And, here is when I found out why CFOs hate energy efficiency project proposals!)
The different systems were priced from $4,000 to $6,000, mainly determined by the SEER rating. So, I asked what every CFO asks when asked about making an energy efficiency investment: “What savings can I expect/” The repairman made some general assumptions about my utility bill and said that a 16 SEER system will save me about $50 per month over a 13 SEER. Hmmm… Conveniently round numbers. He didn’t look at my utility bill. No measurement of my current heating and cooling load, just $600 per year in savings.
After I realize I must choose, I ask him if there’s any way to finance the new system, since my wife and I had not budgeted for an unanticipated $6,000 cash outlay. He shrugs and tells me he just deals with the systems. Great. Adios, 2013 trip to Disneyland.
So, at this point I’m supposed to say to my wife (our family CFO), “I know we didn’t have this in the budget, but I think we should spend $6,000 on a 16 SEER energy efficient HVAC system. The savings should be around $50 per month according to the repairman who really, really wants us to purchase the more expensive system. And, we have no idea if those estimates are right and he’ll be long-gone by the time we ever stop to figure it out.” We all know how this play ends, right?
Let’s apply this situation to the industrial/commercial sector. To the average CFO, energy efficiency proposals are unanticipated, oftentimes large capital investments supported by fuzzy math to “fix” something that’s not broken. All for savings on a line item that they’ve probably straight-lined out for annual budgeting. It’s no surprise that so many energy efficiency project proposals get turned down or pushed out.
Here at Noesis Energy, we recently surveyed 476 commercial & industrial energy professionals to understand the magnitude of the problem/opportunity. That is, how many projects are getting proposed to CFOs and building owners, what percent get approved and for those that don’t get approved, why. Here’s what we found:
Lots of projects are getting proposed. More than 50 percent of consultants propose 11 or more energy projects per year, with 32 percent pitching 25 or more projects. This compares with 75 percent of energy managers, who propose less than 10 projects per year.
Not many are getting approved. Energy managers have good success rates, with 36 percent of them securing approval for half or more of their projects, and 75 percent getting approval of at least one in four projects. Consultants do not fare so well, even though they are originating more proposals: 50 percent of the consultants surveyed report less than one in four of their projects get the green light.
No budget, no trust are the leading reasons. More than half the time, “Not budgeted” is the reason these projects do not get internal approval. One-quarter of the projects are derailed by a “lack of certainty” of their estimated savings.
No budget? How about financing? Noesis asked whether third-party financing, such as leases or energy savings agreements (ESAs), was included in the proposal. Only 10 percent of consultants include financing all of the time, while 43 percent never include it. Meanwhile, 60 percent of energy managers do not include financing in their proposals.
No financing options? Why not? 56 percent of energy managers say they don’t need it because they aim to fund projects internally. For energy consultants, 68 percent said that they don’t know enough about financing options, or don’t have the time to research and find them.
“Doveryai no proveryai.” The Russian proverb for “trust, yet verify” best illustrates the last finding: the majority of those surveyed require that energy savings after the project is complete be tracked at least some of the time, with 65 percent of energy managers requiring it most or all of the time.
Packaging is key
So, what does this mean for energy professionals out there whose business depends on getting efficiency project proposals approved? My advice is to think about how my HVAC repairman could have presented his proposal:
- Base your proposal on energy and financial analysis that is standards-based, uses historical data and is verified by a third party. Give me numbers I can trust.
- Offer financing options that help me work this into my budget. Maybe it’s a lease. Maybe I want to keep it off my balance sheet. Give me options that remove the “it’s not in the budget” obstacle.
- Trust, yet verify. Tell me you’ll stick around to measure the savings. Assure me that you believe in these forecasts enough that you’ll verify that we’re realizing them. Knowing full well I have no recourse if I don’t, but the willingness to be accountable for the savings – if only by reputation –speaks volumes.
CFOs aren’t bad people. They don’t hate the environment. They have an insatiable appetite for cost savings yet have the discipline to make informed investment decisions based on risk and return. So, make it easy for them to invest in your proposal. Asking for an unbudgeted investment of $200,000 using napkin math to replace something that’s not broken is a fool’s errand. Go in prepared, and come out with an approval.
Dave Jaros is vice president of marketing for Noesis Energy. Dave has worked at several successful software companies, most recently leading worldwide marketing programs and demand generation for SolarWinds (SWI). Prior to that, Dave held marketing leadership positions at Blue Coat Systems and 724 Solutions. Dave has also worked as a management consultant in New York City and got his start as a software developer at Computer Sciences Corporation. Dave graduated from the University of California at Berkeley and received his MBA in Finance from the Wharton School at the University of Pennsylvania.
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