The Strengthening Case for Investment in Efficiency and Renewable Resources
Comprehensive studies by
Industry Leaders Are Ramping Up Implementation
In recent years a group of leading US corporations have significantly increased their implementation of efficiency and renewable energy resources. Among the S&P500 companies that report their investments to CDP, the leaders invested far more than the average of their peers—by margins of 3- to 5-fold and higher.
Also, this new data shows that companies are harvesting very high returns on their investments in efficiency and renewable energy resources. We analyzed the project investments and returns reported by companies and estimate an average internal-rate-of-return (IRR) of 42 percent on $2.6B recently invested by 150 S&P500 companies.
Over the course of multiple interviews conducted for our research, managers at these leading companies described a common theme—once they recognized the scale of their opportunity they retooled continuous improvement programs to overcome traditional barriers and accelerated implementation.
Engaging Innovation To Grow New Opportunity
Our research also highlights that some companies are investing well beyond incremental savings. These efforts include improving their capability to apply high-impact next generation technologies, designing breakthrough efficiency into new facilities, and developing new products and services to reduce their customers’ resource costs and risks. These investments feed companies with profitable new applications to harvest. Companies as diverse as Walmart, Rio Tinto and UPS have developed internal teams to adapt and apply new cost-effective technologies in their operations—driving down costs and risks before scaling up application. Further, innovative designs for whole-facility efficiency have demonstrated deeper savings and lower upfront costs than previously considered possible. Texas Instruments’ RFAB facility, Frito-Lay’s Casa Grande plant and a recent retrofit of the Empire State Building are important examples of this approach.
Increasing Onsite Power Generation
The historic drop in prices for natural gas and photovoltaic energy resources have upended the financial case for onsite power generation, particularly in North America. US government statistics show that installations at corporate and industrial sites have quadrupled since 2006. Corporate operations tend to have a consistent demand for power, place a high value on reliability and they have ability to finance the initial capital investment. Multiple companies have cited “locking-in” energy prices or boosting reliability as primary motivations behind significant investments in onsite power generation.
Addressing Other Crucial Resources: Water and Materials
Energy and closely related greenhouse-gas (GHG) emissions tend to be the pioneers for new approaches to corporate resource management. However companies depend on many natural resources and are extending capabilities developed to address energy and GHGs to reduce costs and risks of other crucial resources. Water management is technically similar to energy and is a common analog for companies, especially among those dependent on it, such as, food, beverage and mining companies. Market-traded commodities such as steel, aluminum, palm oil, plastic, corn, chocolate, and many others are economically similar to energy and companies can derive similar benefits from comprehensive investments in efficiency, renewable and recycled opportunities for these resources.
A New Paradigm for Sustainable Resource Management
The developments described above suggest two emerging challenges for corporate resource managers, first to estimate the true size of their profitable investment opportunity and then to expand their programs to take advantage of it.
Retooling Continuous Improvement
Upgrading continuous improvement programs to address resources is critical to achieve high rates of profitable investment across a company. At the minimum, resource managers are equipping continuous improvement teams with consumption data and specialized knowledge of efficiency and renewable technologies and techniques. In some cases they are establishing and leading “centers-of-excellence” to provide specialized support directly to site-level teams. Given the broad range of capabilities required, companies often find it impractical to maintain technical expertise in all aspects of efficiency and renewable resources. Managers have responded by developing greater competency for entering into and managing deep collaborations with technical service providers such as ESCOs and increasingly, their local utilities.
Making the Case to Finance
Many resource mangers have learned how to improve the case for investment they present to their companies’ financial officers. One proven strategy is to increase the scale and relevance of budget proposals by bundling projects into comprehensive portfolios. Resource managers have also found they need to improve the quality of the financial metrics and analytics to address the unique challenges of efficiency and renewable resources. Our research indicates two crucial improvements: 1) to present projects and portfolios using two financial dimensions, IRR and total investment (Exibit 2); and, 2) to clearly articulate hedge value by quantifying commodity price and interruption risk—especially for investments such as onsite power and water efficiency that may significantly reduce the costs and risks of business interruption.
Creating Collaborative Innovation
Companies that have significantly increased investment are finding ways to maintain momentum by growing their pipeline of new opportunities. Resource managers in these companies are expanding their role to identify and drive adoption of new efficiency and renewable technologies, manage technical innovation programs, and also to play a significant role in the development and marketing of green products. Many of these managers have engaged experienced innovators and cultivated new relationships with internal engineering, design, and project management and also outside vendors to help them grow new opportunities.
Building an Integrated Program
A key challenge for resource managers is building and communicating the case for investment across a full portfolio of initiatives that meets overarching corporate goals. In many cases this requires companies to collaborate across supply-chains and with other industry players. Also, companies are leveraging public investment, for example, by applying for government research funds or grants from utilities to implement efficiency projects. Successful managers have adopted comprehensive frameworks to help them pull together their wide variety of initiatives and partners into coherent and effective programs.
As knowledge of this business case spreads among a company’s top managers resource strategy takes on elevated importance and visibility. Also, with the recession ending and plans for capital investment moving forward, companies have a limited window to design potentially large gains in efficiency and renewable resources in to new facilities and product lines. In response, we see resource managers adopting new tools, techniques and building capacity to duplicate the achievements of leading companies and to match their competitors.
All companies can accelerate the cycle of growth and harvest that we have observed in leading companies. Can companies’ ingenuity and drive for profit employ this cycle to achieve sustainability for our most limited natural resources? Whatever the answer to this question, clearly there’s plenty of profit left to harvest.
1 For example see: United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models: Rockefeller Foundation and Deutsche Bank Group, March 2012; Unlocking Energy Efficiency in the U.S. Economy: McKinsey&Company, July 2009; Assessment of Achievable Potential from Energy Efficiency and Demand Response Programs in the U.S. (2010–2030): Electric Power Research Institute, January 2009