Describe and quantify all business costs and benefits

The normal internal hurdle rate for projects is 2-3 years, although there is some flexibility within Foster’s to consider a payback over 3 years for energy efficiency projects. That’s because there are often multiple drivers, including energy reduction targets, environmental benefits and corporate reputation.

- Olivia Tyler, Global Manager, Environment, Foster’s Group Limited

Your aim is to establish a compelling financial case that is supported by a description of all project costs and benefits.

Where benefits are difficult to quantify or cannot be easily be translated into financial savings, describe them as clearly as you can. Including all of the benefits in your business case proposal can have a significant influence on whether you obtain support for your project.   As well as fully describing the benefits from the project, you are demonstrating that you are considering the project from a ‘whole of business’ perspective rather than a narrow focus on energy costs and benefits.

Possible project costs and benefits

In a study reported in 2003, more than 50 industrial energy efficiency case studies that were available on public databases such as those hosted by the US EPA were analysed. It was found that if energy savings were the only benefits considered in the projects then the average simple payback was 4.2 years. However, by including full productivity benefits the average simple payback fell to 1.9 years.¹

Start by considering the full range of possible project costs and benefits. These may include:

• cost reductions – as well as energy, consider costs and benefits associated with repairs and maintenance, reduced water use, reduced waste charges, material inputs or labour costs
• salvage value of surplus assets – if equipment is  no longer required and can be sold
• avoided or deferred capital expenditure – in cases where reduced energy consumption creates spare capacity
• productivity improvements – where energy supply is a constraining factor, or if modifications increase plant output
• product quality improvements – for example where the project reduces variability in production or improves comfort levels in a building
• greenhouse gas emission reductions

There may also be other benefits that are important but more difficult to quantify, such as:

• occupational health and safety improvement– examples include reducing heat or steam from processes or improving access to daylight and natural ventilation in buildings
• increased security of supply – minimising reliance on external fuel supplies or site-based generation
• regulatory approvals – energy efficiency improvements can demonstrate that the organisation has sound processes in place
• corporate reputation with external stakeholders – energy efficiency projects provide a clear demonstration of commitment to reducing greenhouse gas emissions and can help to achieve greenhouse gas reduction targets
• improved staff morale – energy efficiency projects can generate benefits for employee satisfaction, improve the ability to attract and retain employees and achieve ‘employer of choice’ status.

You can click on each of these benefits to see a worked example from the Energy Savings Measurement Guide. A more extensive list of whole-of-business benefits is provided in the Table below (Worrell et al 2003).

Non-energy (Whole-of-business) benefits from efficiency improvements²

After listing and describing all of the benefits, quantify as many of these as possible.

Financial measures

Financial measures are particularly valuable because these are used to calculate the payback period for the opportunity. Estimates of costs and savings need to be prepared to a level of accuracy and detail that allows investment decisions to be made and is commensurate with the scale of the project. Make sure that you have confidence in the numbers that you present – a robust financial case is essential for credibility.

Non-financial measures

Relevant non-financial measures should also be included in the business case. These provide further justification for the project and link it to other business priorities such as productivity, OH&S, competitiveness, corporate reputation etc.

The table below provides some examples of non-financial measures that you might use to highlight the benefits of your project.

Tips for quantifying business costs and benefits

• Ensure that projects are commercially viable and have strong business benefits. Energy and greenhouse impacts should be calculated and included in the business case, but these should be regarded as supplementary benefits. In other words, argue that ‘this is a business proposal with environmental benefits’
• Highlight the cost of energy including current prices and projected increases in energy costs
• If you are unsure how to quantify certain business costs or benefits, consult with personnel that may have been involved in similar business case proposals. For example, business improvement personnel can help with quantifying productivity benefits, OHS personnel with safety etc.
• Include the assumptions and any calculations as attachments to your main business case proposal for both financial and non-financial measures
• Include accurate data and modeling, e.g. to show current performance and likely impact of the project on KPIs and targets
• Highlight the benefits for performance, process control and long term strategy to the business, i.e. use a business improvement rather than an environmental management approach
• It is important to include both direct and indirect costs and benefits. The size and complexity of the project will determine how much detail is provided in the main proposal. In all cases assumptions and detailed working should be either attached to the proposal or easily accessible, should they be requested by those involved in assessing the proposal.

Tools and resources that you might find useful

• Review the project whole of business’ benefits checklist early in the development of your business case proposal. Consider the benefits and how you can measure them.
• Use this website and the Energy Savings Measurement Guide to get more detail on how you can calculate whole of business costs and benefits.

 Case studies that you might find helpful

• The Foster’s Group: Boiler upgrade at Cascade Brewery

  The payback period for this project was outside the normal financial hurdle rate for capital funds. Including the full-range of project benefits in the business case proposal (increased reliability, increased capacity, OH&S and reputational benefits) helped to get this project approved.

• GPT: Energy performance contracting for cogeneration and energy efficiency initiatives at 530 Collins St Melbourne

  The sustainability manager used a non-quantitative measure (‘decline’, ‘maintain’ or ‘improve’) to show how each option for an upgrade of 530 Collins Street related to business priorities.

• Spotless Group: Approach to energy efficiency

  Projects are more likely to be supported if they are explicitly aligned with the client’s targets and priorities, such as environmental sustainability, risk management or occupational health & safety.

• Ron Finemore Transport: Increasing payload capacity on bulk tipper trucks

  This project resulted in the same amount of product being transported with 74 fewer truck trips/annum, resulting in 72,000 avoided truck kilometres travelled. Whole of business benefits included fuel savings, reduced greenhouse gas emissions and reduced labour costs.