Before signing off major energy investment, CFOs should ask: can we reduce demand first?
By Ian Jackson, Financial Controller at Showersave
For finance directors, the pressure to balance sustainability commitments with commercial reality is only increasing. Businesses are looking at how they can decarbonise their operations, improve energy efficiency and reduce exposure to volatile energy costs.
At the same time, finance teams are expected to scrutinise capital expenditure, control operating costs and ensure investment delivers an acceptable return. For CFOs, the challenge is ensuring decarbonisation investment stacks up commercially as well as environmentally.
When businesses consider decarbonisation, the conversation can quickly turn to what they need to buy: heat pumps, solar panels, new heating systems or other renewable technologies.
But before approving significant capital expenditure on generating energy differently, CFOs should be asking a more fundamental question: can we reduce the amount of energy the business needs in the first place?
Demand before generation
Reducing demand is hardly a new concept. When looking at the energy performance of a building, insulation, glazing and other measures designed to prevent heat loss are well understood.
When businesses look to reduce the energy associated with hot water, the focus is often on using less of it – for example, by reducing shower flow rates, which can compromise the user experience. But this overlooks another opportunity: recovering the heat from the water before it disappears down the drain.
For commercial buildings with high and consistent shower use – including hotels, gyms, spas, leisure centres, student accommodation, care homes and healthcare facilities, as well as offices providing showers for employees – that wasted heat can represent a significant source of energy loss.
Waste Water Heat Recovery (WWHR) provides one example of how businesses can tackle that waste. The principle is relatively straightforward: heat from used shower water is transferred to incoming cold water through a heat exchanger, without the two water streams mixing, meaning less energy is subsequently required to produce hot water.
For a CFO, however, the interesting part isn’t necessarily the technology itself. It’s what demand reduction can do to the numbers.
Look beyond the energy bill
The most obvious financial benefit of reducing energy demand is lower operating expenditure.
The economics naturally become more compelling as utilisation increases. As an illustration, one calculation undertaken using Showersave’s energy savings tool for a commercial installation serving 100 10-minute showers per day indicated potential annual savings in excess of £8,000 across nearly all fuel types assessed, with a payback period of less than six months.*
That won’t be the result for every building. Energy source, shower usage, water temperatures, system configuration and installation costs all influence the eventual business case. Nevertheless, it demonstrates why relatively straightforward efficiency measures deserve consideration at finance level rather than being viewed purely as an engineering or sustainability issue.
But the financial argument doesn’t end with the energy bill. CFOs should also consider what reducing demand could mean for the capital expenditure that follows.
If a business is already planning substantial investment in new heating or hot-water infrastructure, reducing demand before that system is designed or specified may affect the capacity required.
Take a new heat pump or hot-water cylinder, for example. If measures such as WWHR can reduce hot-water energy demand before that equipment is specified, it may be possible to install a smaller heat pump or cylinder than would otherwise have been required.
The financial benefit could then extend beyond the initial purchase price. Smaller equipment may also mean lower installation, delivery, running and ongoing maintenance costs over its lifetime. The precise impact will always be project-specific, but the principle is important: reduce demand first, then size the new infrastructure around what the building actually needs.
For CFOs scrutinising a major capital investment, that should be part of the conversation.
Don’t overlook the simpler measures
Not every decarbonisation measure needs to involve major disruption, behavioural change or a long and complicated return on investment. That’s another reason finance leaders should ensure that demand-reduction opportunities are being identified before larger investment decisions are made.
This means working with facilities, energy and sustainability teams to understand where energy is being wasted and which measures could reduce demand without requiring significant changes in behaviour. Maintenance requirements and whole-life costs should form part of that assessment too, alongside the expected return compared with larger investments being considered.
The objective shouldn’t be to choose between energy efficiency and renewable technology. In many cases, the two should complement each other.
Reducing demand first can make the building more efficient today, while potentially reducing the scale and whole-life cost of future heating and hot-water systems.
Put sustainability through the same financial scrutiny
There can still be a tendency to treat sustainability expenditure differently from other investment. Yet a measure that cuts energy consumption, reduces operating expenditure and delivers an attractive return should be assessed on those commercial merits as well as its environmental benefits.
Equally, not every sustainability measure will stack up financially. CFOs have an important role to play in challenging assumptions, interrogating predicted savings and making sure proposed investments are supported by credible data.
That means applying fairly conventional financial scrutiny: looking at initial capital cost, expected annual savings, the assumptions behind them, payback periods and ongoing maintenance expenditure. The potential impact on other planned capital expenditure should form part of that assessment too.
Those questions don’t undermine a company’s sustainability ambitions; they can help make them more achievable.
The transition towards lower-carbon commercial buildings will inevitably require investment, and technologies such as heat pumps and renewable energy generation will have an important role to play. But the answer isn’t always to start by generating more or generating differently.
Sometimes, one of the best investments a business can make is simply to need less in the first place. For CFOs deciding where the next pound of decarbonisation capital should go, that’s an opportunity worth looking for.