Understanding Investment in Energy Efficiency

31st January 2018

The Department for Business, Energy and Industrial Strategy (BEIS) has published a Eunomia report investigating the total costs to businesses of investing in energy efficiency measures.

The UK Government’s Clean Growth Strategy aims to help protect the climate and environment while increase productivity, creating jobs, and boosting earning power. Central to this is delivering affordable, clean energy for all through cost effective emissions reductions. When BEIS wanted to understand the barriers to uptake of cleaner energy within businesses, it turned to Eunomia.

Together with Verco Advisory Services Ltd (Verco) and the Centre for Sustainable Energy (CSE), Eunomia was commissioned to research the non-capital or ‘hidden’ costs associated with investment in energy efficiency and low carbon technology. Non-capital costs were defined as general overhead costs of energy management, costs involved in individual technology decisions and loss of benefits in individual technology decisions. As the scale of these costs has not been well understood, it has been unclear to what extent they may inhibit businesses from investing in energy efficiency measures. Interviews were held with 30 organisations from a range of industrial sectors including food & drink, automotive, chemicals and metals. Alongside the interviews, participants were also asked to share any business case data available relating to energy efficiency investments.

The research focussed on developing a better understanding of:

  • The size and scale of non-capital costs compared to capital costs that businesses usually consider as part of their appraisal of energy efficiency and low carbon investments;
  • Businesses’ approaches to project risk, including cost contingencies, discounting and payback periods; and
  • The decision making process businesses go through and how energy efficiency investments are assessed against other potential investments to determine commercial viability.

The report found that there is a strong diversity of attitudes regarding investment in energy efficiency measures. However, a consistent process exists to identify, appraise and approve energy efficiency investments with common actors and responsibilities within organisations. The interviews revealed that investment frameworks typically relate to requests for capital, with measures appraised based on simple pay-back calculations. These investments are often competing with other high-priority business demands. From our research, non-capital costs were found to relate to only a small proportion of the total costs of investment. Out of the 21 businesses which discussed whether non-capital costs where prohibitive to investment in energy efficiency, 18 (86%) suggested that they were not.

Organisations were found to be typically risk averse, with the result that there is commonly only investment in low risk measures – with installation often planned to coincide with production shutdown periods to minimise disruption. Indeed, the greatest risk cited by participants was the potential for any detrimental impact of energy efficiency measures upon production or quality of products. The research also found that non-capital costs are not often captured separately within business cases, but when represented they typically form 2% to 50% of total estimated costs.

Rob Reid Senior Consultant at Eunomia who worked on the project said:

“In its Industrial Strategy and Clean Growth Strategy, the UK Government emphasised that it has prioritised lowering the cost of decarbonisation for businesses. Our research has contributed towards broadening the government’s understanding of the type and scale of costs considered by businesses and the investment frameworks used when appraising energy efficiency projects. The government’s carbon emission reduction targets are ambitious, and as a result, it is all the more important that these are achieved in the most cost effective way possible.”