C cooremans categorizing non-energy benefits of ee - iea roundtable - jan. 27, 2014
1. CAPTURING THE MULTIPLE BENEFITS
OF ENERGY EFFICIENCY
IEA Roundtable on Industrial Productivity
& Competitiveness Impact
Categorizing
non-energy benefits
of energy efficiency
in strategic terms
in order to boost
investment
Catherine Cooremans
MBA, PhD
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
2. CONTEXT
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
3. Context - Investment decision-making
Research finding 1:
• Financial logic not decisive
• Strategic logic more important
in businesses’ investment choices
Research finding 2:
• A huge diversity is observed between
companies’ situations and behaviors
• even within the same industry
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
4. Context - Investment decision-making
An analytical tool is needed, capable to:
• Translate any investment project in
strategic terms
• Bridging and unifying strategy and
finance languages
• Apply to any industry or company
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
6. Conceptual framework
Definitions:
• An investment is strategic if it contributes
to create, maintain or develop a sustainable
competitive advantage (Cooremans, 2011)
• Competitive advantage is a threedimensional concept, formed of three interrelated constituents: value, costs and risks
(Porter, 1985; Cooremans, 2011)
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
7. Conceptual framework
Two theoretical approaches on the sources of
competitive advantage:
• ResourceBased View
(RBV)
approach
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
8. Conceptual framework
Two theoretical approaches on the sources of
competitive advantage:
• Activities
approach
The value chain analysis
(Porter, 1987)
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
9. Conceptual framework
• = value
a firm is able
to create for
its customers
• The higher
the value
the higher
the sales
Supported
to create
and deliver
the value
proposal
Measuring strategicity
Value
Costs
Risks
3 dimensions of
competitive advantage
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
supported
to create
and deliver
the value
proposal
10. For many companies, strategic advantage is
based on a “superior value” stemming from
providing unique benefits and not for offering
lower prices.
As emphasized by Michael Porter:
“value, instead of cost, must be used to
assess competitive position since firms often
deliberately raise their cost in order to
command a premium price via differentiation”
(Porter, 1985:38).
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
11. Influencing investment decision-making
Make it
strategic!
•
•
•
•
Value
of the
offer
Costs
• ↓ Raw materials
• ↓ Maintenance costs
• ↓ Equipment oversizing
• Employees’ loyalty
• Etc.
Product quality
Product reliability
Facilities security
Etc.
Risks
• ↓ Commercial risk
• ↓ Equipment breakdown
• ↓ Legal risks
• Etc.
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
12. Conceptual framework
This competitive advantage analytical tool
enables to:
• Take into account not only cost reductions
but also a possible increase in sales (higher
quantity and/or price premium)
• Take into account risk (qualitative analysis)
• Translate the strategic benefits of energyefficiency projects into financial calculations
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
14. Conceptual framework
Bridging strategicity with financial analysis
(quantitative):
SANTA CLARA UNIVERSITY
Lighting project
Proj.
Year 0
Proj.
Proj.
Proj.
Proj.
Year 1
Year 2
Year 3
Year 4
Year 5
(% or thousand of USDOL)
Revenues
Energy benefits - Financial savings from energy consumption reduction
Non-energy benefits 1 - Impact on maintenance
Non-energy benefits 2 - ….
Non-energy benefits 3 - ….
Total gross revenues
Lamps furniture
Depreciation
Net income before taxes
Taxes
Net income after taxes
Depreciation
Net income
11'169
2'366
0
0
13'535
2'700
850
9'985
2'396
7'589
850
8'439
11'169
2'366
0
0
13'535
2'700
850
9'985
2'396
7'589
850
8'439
11'169
2'366
0
0
13'535
2'700
850
9'985
2'396
7'589
850
8'439
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
11'169
2'366
0
0
13'535
2'700
0
10'835
2'600
8'235
0
8'235
11'169
2'366
0
0
13'535
2'700
0
10'835
2'600
8'235
0
8'235
15. Conceptual framework
Bridging strategicity with financial analysis
(quantitative):
SANTA CLARA UNIVERSITY
Lighting project
Proj.
Year 0
Net income
Capital expenditure
Terminal value before taxes
Terminal value after taxes
2'550
Free Cash-Flows
-2'550
Year 1
Proj.
Proj.
Proj.
Proj.
Year 2 Year 3 Year 4
(% or thousand of USDOL)
Year 5
8'439
0
0
0
8'439
0
0
0
8'439
0
0
0
8'235
0
0
0
8'235
0
0
0
8'439
8'439
8'439
8'235
8'235
NPV (NET PRESENT VALUE)
15%
9%
PAY-BACK TIME
29'996
5%
IRR (INTERNAL RATE OF RETURN)
11'169
33'657
311%
0.30
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
16. Metal alloy industry
Oven change
Project
Category
of benefits
Strategic
Benefit
Production
Production improvements
Product quality
Product reliability
Plant capital
Operation
Maintenance labor costs
& Maintenance
Evaluating strategicity: contribution of the project
to value increase, risks decrease & cost decrease
yes
yes
yes
no
3
4
4
0
yes
yes
yes
yes
3
1
3
1
yes
yes
yes
yes
TOTAL
+5 max. = 15
for each line
3
9
4
9
4
11
1
2
no
0
no
0
yes
2
Impact
-5
on value
Impact
+5
-5
on risk
Impact
+5
-5
on cost
2
Site Environmental
yes
2
X
2
-1
5
quality
Working
Worker health
no
0
yes
5
yes
2
7
Environment & safety
Worker
yes
2
yes
4
yes
3
9
loyalty
Corporate
Reputation & image
yes
4
yes
3
yes
0
7
brand
Local or regional
Environmental
yes
4
yes
4
yes
2
10
emissions
NB: "yes" means impact, which can be negative (from -5 to -1) or positive (from 1 to 5)
- "no" means no impact
Evaluating contribution to competitive advantage:
an example
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
17. Conclusion
A comprehensive analysis to build up the business
case of energy-efficiency investment projects
SANTA CLARA UNIVERSITY
Lighting project
Proj.
Year 0
Net income
Capital expenditure
Terminal value before taxes
Terminal value after taxes
2'550
Free Cash-Flows
-2'550
Year 1
Proj.
Proj.
Year 2 Year 3 Year 4
(% or thousand of USDOL)
Proj.
Proj.
Year 5
8'439
0
0
0
8'439
0
0
0
8'439
0
0
0
8'235
0
0
0
Value of
the offer
8'439
8'439
8'439
8'235
8'235
8'235
0
0
0
NPV (NET PRESENT VALUE)
15%
29'996
5%
IRR (INTERNAL RATE OF RETURN)
11'169
9%
33'657
311%
PAY-BACK TIME
0.30
Quantitative
analysis
Costs
Risks
Qualitative
analysis
Strategicity
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
19. References
•
•
•
•
Cooremans, C. 2011. Make it strategic! Financial investment logic is not
enough, Energy Efficiency Journal, 4(4): 473-492.
Cooremans, C. 2012. Investment in energy-efficiency: do the characteristics
of investments matter? Energy Efficiency. 5, 497–518.
Fragnière, E., Sullivan G. 2007. Risk Management Safeguarding Company
Assets, Axzo Press.
Porter, M. E. 1985. Competitive advantage. New York: Free Press
Catherine Cooremans – IEA Roundtable on Industrial Productivity &Competitiveness Impact of EE – Jan. 27, 2014
