Energy Monitoring – Analysing the Investment Proposition

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Energy Monitoring – Analysing the Investment Proposition

The Financial Value Proposition for Investing in Commercial Electrical Energy Monitoring & Sub-Metering

The “2-Year” Problem

It’s amazing how many commercial organisations you speak to that need a 2-year payback to look at anything that is “non-core” to their business – even when it comes to energy monitoring, sustainability and environmental projects that will benefit them as a business.

This is even harder, when you try to help businesses understand the value of energy monitoring which does not have a defined “energy reduction” property.  The key value from energy monitoring is the data and analysis which then provides a business with the knowledge to drive energy reduction actions.

This is in contrast to, say, lighting where you can develop a very defined investment case because you know that you are, for example, replacing a bulb rated at X watts with one which is rated at Y watts – so your power reduction is 1 – (Y / X) and energy reduction is [1 – (Y/X)] x time used.

The Purpose of this Blog

So, first up – full disclosure. I co-run an energy monitoring & data analytics business and have been working with businesses for the last 4 years to help them understand how energy monitoring systems can help them to collect, manage & analyse energy data to help drive investment decisions in behaviour, efficiency & generation projects.  The key thing we have found as a business is that businesses, generally, find it very difficult to make the investment case for energy monitoring due to this disconnect between cost and no specific defined reduction calculation.

So, the purpose of this blog is to take you through my thought process on developing the investment returns analysis for energy monitoring. Predominantly to see if 2-year paybacks are actually possible for energy monitoring in terms of presenting it in an honest and research-backed way to a financial director. And specifically, to find a way to present the high-level sensitivities to the level of annual spend on energy at the business and the number of sub-meters being analysed through energy monitoring to drive actions.

Specifically, in this blog, I’m going to look at the returns from just behaviour change which do not need substantial capital investments yet are related to changes in low or no-cost actions.

The Research

As such, we need to look at the evidence for the returns possible from energy monitoring and the resultant behaviour change actions.

Analysis from the European Environment Agency’s (EEA) report from 2013 entitled “Achieving Energy Efficiency through Behaviour Change” (see http://www.eea.europa.eu/publications/achieving-energy-efficiency-through-behaviour) states that energy reductions in the range of between 5 – 15% (figure 1 below) should be expected from “smart metering” which we define as real / near-time energy monitoring (30 minute data.) This aligns with the Carbon Trust findings that energy / carbon savings of 13% are possible on average to determine from energy monitoring for business – of which, on average, 7% are actually implemented.

Figure 1: EEA High-Level Results (2013, page 5)

EEA behaviour research

The Scenarios

So, with these numbers in hand, I am now going to look at 3 scenarios which are as follows:

  • Scenario 1: Client does not have any meters on their main electrical distribution board
  • Scenario 2: Client has meters on their main electrical distribution board but they cannot communicate i.e. speak a protocol language that will enable data extraction in real-time
  • Scenario 3: Client has meters on their main electrical distribution board that can communicate & enable real-time data extraction easily.

Existing Client Physical & Data Issues

I just want to say something in relation to scenarios 2 & 3. It is interesting how many client sites we go to where there has been a substantial investment in metering yet they are not connected to any communication infrastructure to extract the relevant data at regular intervals. Typically, we’ll find a board with 20 to 30 Schneider power & energy monitoring meters (incredibly powerful metering units) and yet management has asked the health & safety / environmental team to read the meters manually each week – entering the readings into a spreadsheet, sending this their head office, from where basic analysis is undertaken.

Another scenario is that all this data is channelled to the Building Management System (BMS) which, typically, a single person only knows how to use so it is incredibly inaccessible.

The upshot is that very little useful data makes it back to the people that can make a difference.

The key is that with a relatively small investment , all the scenarios (2 & 3 more so) are in a very good position to radically transform the data available for management through energy monitoring which will enable them to make substantial energy cost reductions from behaviour decisions.

The Investment

So, the focus of this blog is on electrical energy monitoring – particularly where a client has the potential to monitor many circuits from a single distribution system i.e. on a client’s main distribution board, for the 3 scenarios above.

Let’s just look at the key assumptions we’re going to make. I should add that these are based on real-life projects:

1. Energy Savings from Energy Monitoring & Behaviour Change

  • Using the research noted above, we assume 5% savings are possible from energy monitoring at 1 meter
  • These savings increase by 0.3% per additional sub-meter that we can get data for
  • This is then capped at 15% i.e. a total of 30 sub-meters maximum – a typical number of sub-meters in commercial / industrial switch rooms

2. Tax Breaks

  • The energy monitoring system that we design, build & install will be eligible for Enhanced Capital Allowances (ECA) which means that the business can depreciate 100% of the capital cost in year 1 – which at the time of writing will save them 20% of this energy monitoring cost in year 1.

3. Replacement Meters & CTs

  • If we replace electrical meters they are at a cost of £275 / meter for the hardware which includes setup in a data analytics platform (such as Argand’s Energy Lenz platform)
  • If the client needs current transformers (CTs, scenario 1) they are at a cost of £105 for a set of 3.
  • The cost of labour (probably the client’s internal electrical engineering team) to put each new meter into the distribution board is £50 / meter if there is an existing non-communicating type, and
  • £100 / new meter when there is no meter already there and installed.

4. Communications Infrastructure Costs

  • We are going to put a cost of £5,500 to design, build & install the communications infrastructure to bring the data out from all meters at regular 30 minute intervals.
  • This assumes a complex, industrial grade switch room.

5. Software Costs

  • Ongoing software costs are 1% of annual energy spend for energy data & associated analytics.

6. Analytics Costs

  • Analysing the data for behavioural opportunities is not zero-cost. Hence, we have to apply a cost to look at the data.
  • In the analysis, the costs allocated to someone looking at the data to develop behavioural change opportunities is 2% of the annual energy costs.

7. Inflation & Discount Rates

  • Inflation is 5%.
  • Discounting (for NPV) is done at 10%.

Payback Analysis

Using the assumptions above, and running the financial analysis, the numbers show that to achieve a minimum 2-year payback you have to bring in energy monitoring on sub-meters from your electrical distribution system – simply sticking with a single meter is not going to cut the mustard.

In other words, if you are only thinking about making your main incoming meter smart by connecting it to industrial grade communications infrastructure to give you real-time energy monitoring data – you’re probably not going to get it passed by an FD with sub 2-years as her target.

Whereas, the benefits of energy monitoring at the sub-meter level can bring the required annual electrical energy spend down to nearer £30,000.

The outcome is that any business looking to achieve non-core returns with sub-2 year paybacks really needs to be looking to liberate energy data from multiple sub-meters as opposed to looking at a single meter solution.

Table 1: Minimum electrical spend numbers for energy monitoring 2-year payback with 1 or 30 meters

table 1 blog

For a bit more context, the chart below (figure 2) shows the full sensitivity analysis by number of meters and annual spend.

Figure 2: Sensitivity of payback energy monitoring investment to number of sub-meters and annual spend on electricity using scenario 1 (worst case)

Energy Monitoring - Payback Sensitivity

The point to draw from this simple approach is that to achieve this golden target of a 2-year payback from an investment in energy monitoring, and using verified research from the EU and the UK’s main sustainability agencies, there is substantial sensitivity to the number of sub-meters installed implying that any business that is working to these tight financial hurdles should only be looking at sub-metering strategies.

If we look at typical electricity spends by industry below, we can see that the spends are generally too low for a single metering solution to make financial sense (sub 2-year payback.)

  • many secondary schools spend £100,000 plus on electricity
  • a typical dairy farmer will typically spend £50,000 per year on electricity.
  • a commercial office building with more than 10,000 m2 will spend in excess of £50,000 per year.

There are not many industries that spend more than £500,000 per year on electricity per building / location.

Net Present Value Analysis

Some financial directors will want you to show them the net present value (NPV) of a project.

Ive comleted this analysis as well and the results are shown in figure 3 for the worst case scenario (1).

In brief, what it shows, (as an example) is that if you spend £500,000 a year on electricity and install energy monitoring with sub-metering on 30 circuits to drive annual savings of 15% – this equates to a NPV over 20 years of over £475,000.

In fact, the chart shows that the NPV of such a strategy is equal to approximately 95% of the annual energy spend today and that this works at all scales (approximately.)

Convinced yet?

Figure 3: Sensitivity analysis of Energy Monitoring NPV to number of meters and annual spend (worst case scenario 1)

Energy Monitoring - NPV Sensitivity

So, what are you waiting for?

If you spend over £30,000 per year on electricity or you know someone who does then energy monitoring at the sub-meter level can give you the returns that might enable your finance director to invest and enable you to deliver real value to the business.

If you can get the investment based on behaviour change, you’ll then get the data that will support all of the investment in energy efficiency & generation which will require real data to support an investment.

Give us a call and let’s see if we can help them meet their investment hurdle goals and start a data-led low carbon investment strategy using sub-metering.

Speak soon.

Fraser Durham

Commercial Director

O: 01803-864706

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