Thursday, January 16, 2014

How to make the financial case for sustainability

Barriers are often found to the implementation of sustainability measures in persuading senior management to make investments and commit to projects. These can include a lack of understanding, conflicting priorities, misaligned financial incentives, hassle cost and lack of financial backing. Managers fighting for sustainability have to master successful tactics to overcome them. Here are a couple of ways of presenting and comparing the financial case for different measures.

Marginal abatement cost curves

A marginal abatement cost curve (MACC) is a helpful, visual aid to providing an idea of the annual potential to reduce emissions and the average costs of doing so for a wide variety of technologies. We first met them in the Introduction. MACCs are a useful tool for cost-effectiveness analysis. But how are they compiled?

In Britain, the Committee on Climate Change (CCC) has produced several MACCs for energy efficiency that incorporate research generated by three other important models:

  • BREDEM (the Building Research Establishment’s Domestic Energy Model);

  • N-DEEM (the Non-Domestic buildings Energy and Emissions Model), which is based on detailed assessments of energy use in around 700 buildings, since they are extremely diverse in nature; and 

  • ENUSIM (the Industrial Energy End Use Simulation Model), originally designed to model industrial energy use by considering the take up of energy saving technologies in industry.

MACC curve

Source: CCC A marginal abatement cost curve (MACC) illustrating the technical potential for improvements in the non—domestic sector. Each column represents a particular measure. The vertical axis represents the cost per megaton of carbon dioxide saved. The horizontal axis represents megatons of carbon dioxide saved throughout the lifetime of the measure. Measures to be taken on the left of the graph with columns descending beneath the horizontal axis have a negative cost; i.e., they save money. The ones on the right with columns are sending above the horizontal axis have a net cost; i.e., they cost more than they save. The further right that a measure is positioned, the greater its lifetime cost. All energy management measures have a negative cost and save money, as do many efficient heating and cooling methods.

The MACC for the non-domestic sector is illustrated above. The CCC concludes that, for the UK as a whole, there is “a very significant contribution from improved energy management. These measures include turning monitors off at night, adjusting heating times or adding improved controls to lighting. These measures are almost entirely low cost measures with the potential to save over £800m countrywide per year for firms with very little (if any) up front expenditure. They could save over 8 MtCO2 per year. “

MACC curve for CHP

Source: CCC A marginal abatement cost curve (MACC) illustrating the potential for CHP (combined heat and power) in different sectors. It shows that even within a sector, whether is a particular project is cost-effective depends on individual conditions. This is why, for each sector, there are different instances (illustrated by columns of the same colour), some of which are above the line (net cost) and some below the line (net benefit).

Estimating payback

MACCs are arrived at by calculating the payback for various measures. Projects are usually sold to management on the basis of return on investment. This can be expressed in two ways: as an effective interest rate, based on the net present value; and as a payback period, i.e. the length of time it takes for the initial investment to be recouped by the savings earned or income generated.

Simple payback

The most basic of these is simple payback. However, it does not always illustrate the true benefits of an investment. Suppose an organisation demands a two-year payback period from any investment. Then, as the following example shows, it would miss out on the benefits of a project with a six-year payback period that actually had a better return on investment.

A project costing £60,000 which receives £30,000 in benefit per year following completion but which only lasts for three years would yield a total of £90,000. A project which costs the same amount, but only yields £22,000 per year, yet lasts for six years would give a total of £132,000. However if it were only evaluated on a two-year basis, it would lose out to the three-year project.

A project which repays its cost every three years is demonstrably better than one which promises to return the investment in three years. To help establish this, the concept of Discounted Cash Flow is introduced.

Discounted Cash Flow (DCF)

Discounted Cash Flow provides a more realistic way of establishing payback. There are three stages for estimating DCF:

  1. Estimate the resulting cash flow;

  2. Apply the discount rate;

  3. Calculate the end value (net present value).

The cash flow is taken from the estimated savings in energy cost resulting from the measure taken. This will depend upon projections of future energy cost. For example, energy prices over the last three years can be projected on a median basis into the future. But this will then need to be discounted at a discount rate to be chosen. Discount rates are a function of the rate of inflation and represent what one unit of currency will be worth in a year's or 10 years' time. An average price [P] is calculated this way for each year of the projected lifetime [L] of the project. Each of these figures is then multiplied by the amount of energy [E] expected to be saved every year.

The lifetime period chosen for the project will depend upon the expected lifetime of the technology. If it were a boiler, for example, it could be 15 years. Should it be an insulation measure, it could be 30 years. The total cost savings [S] generated by energy not used compared to not doing the project, over the lifetime of the project will then be:

S = E x [P(year 1)] + E x [P(year 2)] + E x [P(year 3)] ... E x [P(year L)]

What discount rate should be chosen? The industrial model ENUSIM uses private fuel prices and a 10% discount rate to reflect the incentives faced by firms. Some UK organisations adopt the rate used in the UK government Treasury's Green Book, that sets out the framework for the evaluation of all policies and projects, which is 3.5%. Others simply adopt the current rate of inflation, or interest rate on a loan taken out for the purpose of the measure that would need to be repaid. It is useful to run the calculation several times with different discount rates.

Net Present Value (NPV)

The figure for the total cost savings, [S], is not the final step in our calculation. We now need to deduct the cost [C] of taking the measure, which gives us a figure called the net present value [NPV] of the project. This is the value in today's money of all of the net profit that will be generated from taking this measure. It is the most useful way of comparing the value of different measures. It takes account of the full value of the project and presents it in easily comparable form. The net present value is therefore:

NPV = S - C

This is how all of the figures were arrived at that are represented in the MACC graphs above. Applying this to the two projects above, with a 10% discount rate, lets us see the following:

Project 1 yields:

£30,000 (year 1) + £27,000 (year 2) + £24,300 (year 3) = £81,300, not £90,000

Project 2 yields:

£22,000 (year 1) + £19,800 (year 2) + £17,820 (year 3) + £16,038 (year 4) + 14,434.20 (year 5) + £12,990.78 (year 6) = £103,082.98, not £132,000

Both projects cost the same, £60,000. Subtracting this from the cost savings reveals that the NPV of the first is just £21,300, while that of the second is £43,082.98, over double.

Internal rate of return (IRR)

The NPV can also let the projects be compared to what would happen to the same amount of money were it to be invested in a bank account with the same interest rate as the discount rate chosen. This is done by calculating the internal rate of return (IRR), or the interest rate on the investment, and is easily accomplished using Microsoft Excel as follows (and the figure below):

  1. The initial expenditure is typed into a cell on a spreadsheet.  This must be a negative number.  Using our original example, –60,000 would be typed into the A1 cell;

  2. The subsequent discounted cash return figures above for each year are entered into the cells directly under the first one.  Following the example in Project 1, this would mean typing 30,000 into cell A2, 27,000 into cell A3, etc.;

  3. The IRR is then revealed by typing into the next cell beneath all the values the function command "=IRR(A1:A4)" and pressing the enter key. In this case, the IRR value, 18%, is then displayed in that cell.

internal rate of return

Using Microsoft Excel to calculate the internal rate of return of an investment. The formula in the field at the top is entered into cell A5 and yields the percentage rate based on the figures above.

The IRR of the second project, calculated by the same method, is 20%, and so provides a better rate of return. It is relatively easy to set up a template in Microsoft Excel to enable the performance of a similar calculation for any capital investment project. Further costs that are unique in any given year can be added, such as figures for additional maintenance, additions or repairs, and, at the end of the project, a figure for resale of any equipment, for example its scrap value.

Earthscan Expert Guide to Energy Management in Buildings

Presenting projects in such a way to senior management will allow them to compare their value with other projects they may be considering, as well as enabling the energy manager herself or himself to prioritise projects.
This article is an extract from my new book, the Earthscan Expert Guide to Energy Management in Buildings published this month by Earthscan. This comprehensive book covers how to:

  • conduct an energy audit

  • plan a monitoring and verification strategy

  • make any energy-saving campaign successful

  • evaluate and make the financial case for energy-saving measures

  • make use of free energy for lighting and managing heat loss and gain.

Monday, January 06, 2014

Energy managers: the hidden army that toils to save the planet

The Scottish Parliament building in Edinburgh was designed to minimise energy use
The Scottish Parliament building in Edinburgh was designed to minimise energy use.


An army of secret warriors is being deployed increasingly by cities and managers of the built environment around the world. Their vital task is to make visible where energy is being wasted, saving carbon and money for everyone. 

They are energy managers are the hidden footsoldiers of the twenty-first century's war against climate change, a foremost phalanx amongst those professions that are struggling to make urban environments more sustainable.

For the most part unseen and unnoticed by the public, they toil in buildings everywhere, from hospitals to hotels, factories to data centres, from office blocks to leisure centres. After all, the energy used in buildings forms about 40% of all energy used and 36% of the world's CO2 emissions. 

Their training leads them to sense the hidden flows of energy as it courses through pipes, wires, spaces and materials. They don't perceive a static situation, such as a boiler switched on, a light glowing, the window open, a tap dripping. They see this as part of a set of processes through time, visualising it as a series of transformations from one type of energy to another, such as, to take the example of a motor, from electricity to kinetic energy to dissipated heat energy.

For them, saving energy is eternal delight, in an evolution of the visionary poet William Blake's famous aphorism, "energy is eternal delight". Consequently these heroes are constantly struggling against the limits of the second law of thermodynamics, striving to prevent useful thermal or electrical energy from being dissipated irreversibly.

Their catechism derives solely from the primum movens that "No process is possible in which the sole result is the absorption of heat from a reservoir and its complete conversion into work".

Energy efficiency

Energy efficiency is frequently described as the “low hanging fruit”. The sector is expanding at a rate of 5% per year. It is estimated that the global market value of innovative products in this sector could reach around £488 billion by 2050, and that on average, most organisations can easily save at least 28% of their energy costs with low-cost actions. 

In the UK, innovative energy saving measures in non-domestic buildings could save 18Mt CO2 by 2020 and 86 MtCO2 by 2050, depending upon the rate at which the measures can be deployed. [i]

In the USA, American Energy Manufacturing Technical Corrections Act was passed at the end of 2012, a modification of the Enabling Energy Savings Innovations Act. This promises to produce a boom in the sector. The U.S. market for energy efficiency and services topped $5.1 billion in 2011, according to Pike Research, and is now expected to reach $16 billion in sales by 2020. 

The need for energy managers

For city management, measuring sustainability, of which energy use and therefore carbon emissions form a great part, is becoming a way of measuring the quality of management overall. For a city to be truly sustainable it must totally transform the way it works, with its employees, citizens, investors and its supply chains.

This effect has yet to filter down. Nevertheless, for city executives to have appointed energy managers signifies that they have acknowledged the importance of sustainable energy use.

Then there are the tens of thousands of building managers and facility managers in urban environments, only part of whose responsibilities includes being responsible for energy management. With their labour, management often saves a considerable amount of money, more than enough to pay their salary, and reduces the risk exposure to volatile energy price increases. 

But it is not just money they save, although that may be their employer's primary motivation. They are also saving carbon, which is increasingly a quantified activity featuring in company annual reports, and as such doing their bit to challenge the advance of global warming and promote the good reputation of the company for sustainable housekeeping.

The UK Government’s 2020 Energy Efficiency Marginal Abatement Cost Curve.

The UK Government’s 2020 Energy Efficiency Marginal Abatement Cost Curve. The graph quantifies the lifetime cost-benefits of various energy efficiency measures across different sectors, and is discussed in more detail in Chapter 10. The y-axis represents the cost effectiveness of a measure, each of which is represented by an individual coloured bar. Any measure which costs more than it saves over its lifetime is represented by a bar which goes over the horizontal axis. The overall message is that the vast majority save money over their lifetime. The net present values are calculated in 2012 terms. The EE-MACC is based on an estimate of the feasible rollout of energy efficiency measures and takes into account supply constraints for energy efficient products, only including technology that is already available in the market.

Legal requirements

In the USA, there is no nationwide law governing the energy efficiency of existing buildings. Little has been done in this sector and there is huge potential for savings, despite the encouragement of the Energy Independence and Security Act of 2007 (EISA), and the American Recovery and Reinvestment Act of 2009. These have provided finance for improvements, for instance under the Energy Efficiency and Conservation Block Grant (EECBG) Program. The building sector is the largest consumer of energy in the United States, around 41% of total US energy use; the industrial sector is also responsible for 20% of energy use.

LEED  certificateThe LEED (Leadership in Energy and Environmental Design) Green Building Rating System is a voluntary standard for sustainable buildings. An example of a certificate is on the right. LEED includes a standard of measurement for defining a 'green building', and achieving LEED certification is a means of recognising environmental leadership in the building industry and raising awareness of the benefits of environmental building.

It is based on well-founded scientific standards and incorporates sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.  Mandatory Residential and Commercial Energy Conservation Ordinances (RECOs and CECOs) have been implemented by a handful of municipalities as a way to bring the existing building stock closer in line with the energy code requirements for newer buildings.

In 2009, President Obama mandated federal agencies to make significant reductions in energy consumption, hoping that government would "lead by example" by upgrading many of its facilities. Two years later, the administration tried to jumpstart that work by setting a goal for federal agencies to enter into at least $2 billion of energy efficiency projects within two years. In President Obama's second term, this trend is likely to be accelerated.

In Europe, the EU’s Energy Efficiency Directive has a target of 20% energy savings for the EU as a whole by 2020. It mandates energy audits and energy management by large firms, and stipulates that 3% of public buildings that are owned and occupied by central government must be renovated every year.

The recast EU's Energy Performance of Buildings Directive (EPBD) was transposed into national legislation in 2012. Member States are required to set energy use at cost-optimal level, and be measured for a whole system, (such as a heating system) rather than at a product level, such as a boiler. This will have to be proven by the installer or designer.

 Display Energy CertificateIn the UK, energy performance standards are set for new buildings and benchmarks for existing buildings. 'Consequential improvements'  are required to the energy efficiency of buildings undergoing refurbishment, and all buildings must have an Energy Performance Certificate (EPC) available when offered for sale or rent. A small number of buildings are exempt (e.g. some heritage buildings). The EPCs of large buildings to which the public has access must be displayed in the form of Display Energy Certificates, pictured right.

The UK's Energy Efficiency Strategy hopes to achieve 196 TWh of energy savings in 2020, with a reduction of around 11% over the business-as-usual baseline, and a reduction in carbon emissions of 41 MtCO2. The Energy Management Alliance, a forum for the UK’s energy management companies and industry bodies, foresees a huge growth in the sector as a result. However, recent political infighting may dampen this expectation.

Barriers to energy efficiency

Changing to LED street lighting can save<br /> a lot of energy and maintenance costs.

Changing to LED street lighting can save
a lot of energy and maintenance costs.
If energy efficiency is such a good idea, why is it not practiced more widely? The UK’s Energy Efficiency Strategy has identified several barriers:

  1. Misaligned financial incentives: the person responsible for making energy efficiency improvements is not always the one who will receive the benefits of these actions;
  1. Lack of management buy-in: boards may think that energy lacks strategic importance, in comparison to other imperatives, especially if energy costs are a small proportion of overall business costs;
  1. Hassle costs: perceived disruption caused by making the improvements, for example building works or production lines halted;
  1. Lack of awareness: many people are unaware of just how much can be saved by taking even simple measures. There is a lack of access to trusted and appropriate information, especially at key decision-making times. Even when present, information may only be generic and not specific and tailored to the situation;
  1. Lack of supply: the energy efficiency market itself is under developed, with a supply chain that is still gaining maturity in some areas;
  1. Lack of financial support: often financiers fail to appreciate the benefits of investment in energy efficiency, especially if the financial argument is complex. Companies are often reluctant to invest in energy efficiency, seeking short payback times, even if a project is cost-effective at usual interest rates, or on a life-cycle basis.

This article is an extract from my new book, the Earthscan Expert Guide to Energy Management in Buildings Earthscan Expert Guide to Energy Management in Buildings, published this month by Earthscan. This comprehensive book covers how to:

  • conduct an energy audit
  • plan a monitoring and verification strategy
  • make any energy-saving campaign successful
  • evaluate and make the financial case for energy-saving measures
  • make use of free energy for lighting and managing heat loss and gain.

It also contains special chapters on:

  • ventilation, heating and cooling
  • demand management through automated systems
  • lighting
  • most requirements of industrial facilities
  • regulatory requirements in Britain, Europe and the United States
  • the use of smart meters and monitoring
  • how to achieve zero energy buildings
  • the use of renewable energy.

I wrote it to be of assistance for all professional energy, building and facilities managers, energy consultants, students, trainees and academics. It takes you from basic concepts to the latest advanced thinking, with principles applicable anywhere in the world and in any climate.

‘Provides a complete introduction to the subject of energy management, and will, I’m sure, be useful to both trainees and novices and industry veterans seeking an updating of their knowledge with the latest developments. David is a clear writer, who manages to make the most technical subjects accessible. He has a clear overview of all sectors and technologies.’ —Nick Bent, Editor of Energy Focus Magazine

[i]  UK Energy Efficiency Strategy, Department of Energy and Climate Change, November 2012

Thursday, January 02, 2014

At last: the affordable solar house that makes a profit for residents

The solar house with solar farm behind

Glen Peters is a man with a mission to show how truly sustainable and affordable housing can be a solution to the housing crisis. Having made a good profit from a solar farm in his field (seen behind the house in the picture above) he's putting it to good use and demonstrating a new model for sustainable housing.

The solar house from the frontWorking with a team of architects and designers he has produced a prototype two-storey detached three bedroomed house with a radical new take on passive house principles. Called Ty Solar (Solar House in Welsh) it is of timber frame construction and insulated with blown cellulose; and is potentially able to export more electricity to the grid than it consumes itself in a given year.

The larch used for the frame and cladding is sourced locally and assembled to specifications that are beyond those required by Building Regulations, giving it a Code for Sustainable Homes 5 rating (out of a maximum of 6). But this doesn't tell the whole story by any means.

By using recycled newsprint (the blown cellulose) as the only insulant around the entire building envelope and local timber, the house is locking up atmospheric carbon in its structure for an indefinite period, unlike buildings that use fossil fuel-based insulants that have emitted carbon during their manufacture.

Hallway of the solar house

The embodied energy of the house is therefore already very low, an important factor given that for normal buildings between 10 and 20% of their life-cycle energy consumption is used during the phase of extraction of raw materials and construction.

The final purchase price has been set at a maximum of £75,000. The principal watchword throughout the design process that has enabled this to be possible has been simplicity.

Almost heretically for passive house construction it eschews ventilation and heat recovery, and the only source of energy is solar: both passive solar through the abundance of south-facing windows and active through reliance on solar photovoltaic panels for electricity and top-up space and domestic water heating.

The demonstration house includes lithium iron batteries to store 12 kWh of power but is also grid connected to enable the export of unused electricity and the use of the grid as a backup at other times.

The battery bank is optional and really only for stand-alone houses. Glen says: “A group of 10 or more houses generating in tandem with a local smart grid could form a miniature power station and generate a considerable income, perhaps £1000 per year, for each of the households, or the power could be used to charge electric vehicles which could be shared between them."

Research commissioned by the Welsh Government estimates that over 14,000 new homes are needed every year in Wales for the next 15 years.

The hunger for affordable housing is reflected in lengthy waiting lists and increasing official homelessness figures. Wales' Minister for sustainable development has made the provision of affordable housing a high priority during his tenure.

The kitchen of the solar houseAll of this highlights the urgent need for houses of this nature. As Glen Peters says: "The bulk housing providers in the construction industry are ignoring affordable housing. They say that it doesn't work for them. I say they are missing a trick. We've proved it is perfectly possible to build low carbon housing that is truly affordable and that gives occupants zero energy bills."

With energy bills so high on the public agenda it is hard to see how local authorities and housing associations can ignore the potential that this house demonstrates.

Low embodied energy

This successful and attractive-looking house goes against the grain in terms of many of the current developments in sustainable housing.

Electric radiator for heating in solar house with simple controlsCompared to the Mark Group's demonstration house in Nottingham, BRE’s ‘Smart Home’, in Watford, and Velux’ CarbonLight demonstration home in Rothwell near Kettering, it scores very favorably on local sourcing, embodied energy, embodied carbon and simplicity of use. Above all it compares well on price.

All of these three supposedly cutting-edge demonstration homes contain extreme amounts of technology and sophisticated materials.

They represent corporate attempts to capture a high-end market in low or zero carbon housing.

The first utilizes an incredibly energy intensive over specified steel frame.

The second uses occupation sensors to control heating, lighting, ventilation, water and security, as well as heat pumps, solar thermal and PV.

The third is designed to be iconic in its extremely unusual shape and therefore expensive to reproduce. All of them make heavy use of smart electronics. And this is what puts up their price.

Simple controls for the solar house occupantsBut although they may score highly on low operational energy use this does not make them necessarily sustainable.

The real target of sustainable housing should be overall life-cycle impact. This means that in fact small homes that are zero carbon in operation, whose materials are sourced locally and are of low embodied energy, preferably built in bulk and perhaps in a compact urban terrace or block, will be inherently more sustainable than stand-alone large homes packed with different technologies and comprising a high embodied energy.

This makes Ty Solar's closest antecedent perhaps the ecological evolution of Walter Segal Method timber frame construction, as pioneered at the Centre for Alternative Technology. The Segal Method was, pointedly, devised by its architect to produce affordable homes.

Even the low pitch of the roof is designed to minimize the heated but unnecessary interior loft space and increased requirement for materials that are result of higher pitched roofs, while still permitting the solar panels which the roof supports to take advantage of solar radiation.

The larch cladding will protect the building for years to come with minimum need for maintenance. The fact that it is screwed on in panels also makes it easier to access the interior of the walls if needed.

The Passivhaus certified windows and doors are even made locally rather than in Germany.

The house sits on footings raised slightly above the ground to remove the need for unnecessary concrete in foundations.

Footings for the solar house“Gareth, Jens and I come from very different worlds but we're united in our goal to be a disruptive influence of traditional thinking about building homes. In this, manufacturing becomes a key component and we see ourselves as manufacturers rather than builders,” says Glen. “We have created a lot of goodwill in our community and hope to continue to do so as we expand, creating local jobs, sourcing locally and above all keeping things small."

The test is whether day-to-day the homes do result in their occupants reducing their energy use and bills. This depends on their habits.

To this end simple controls will be easier to manage (see picture above right).

Some developers seem to believe that the occupants need a degree in energy management in order to keep down their running energy and carbon costs. Utility rooms contain a bank of sails and buttons worthy of the cockpit of the Star Ship Enterprise.

Ty Solar, by contrast, scores highly on ease of use since ventilation is controlled just by opening windows when required, and space and water heating is controlled in the traditional way, with thermostats. There are no other controls.

Passivhaus certified windows made in WalesThe house has not been formally tested for Passivhaus criteria, nor does it mean to be. It has also yet to be independently pressure tested.

It is a trial house that will be monitored for one year. However, with two floors each of 44.16 square meters and a volume of 254 m³ it has achieved a SAP rated figure of 0.12 air changes per hour.

This compares very favorably to the Passivhaus standard of 0.6 a change as per hour or a permeability rate of 3.0 m3/m2h. Over a 200-day heating period, a typical British house with eight air changes per hour and a 100m2 floor area, heated to 20°C, will cost thirty times more to heat than an equivalent house with 0.3 air changes per hour, according to an energy calculator (SIGA). The SAP-rated space heating requirement of this house is just 32.39kWh/m²/year.

This high performance is shown by the U-values, which are as follows:


Average / Highest W/m2K

Maximum permitted W/m2K

Passivhaus standard

External wall
















It can therefore be seen that the house, according to the SAP ratings, compares favourably with Passivhaus.

LED lights are fitted throughout, making the annual lighting consumption just 371.49kWh. With no pumps or fans, there are no further electricity requirements over and above that which is used in day-to-day living by a family in any home – for appliances and gadgets. It is therefore predicted by the SAP rating to have a negative energy use of -3253.56kWh (minus appliance use) and negative carbon dioxide emissions of -596.92 kg/year.

All of this means that the Energy Efficiency Rating on the EPC goes off the scale at 107, with an Environmental Impact (CO2) rating of 108. In the Code for Sustainable Homes assessment it reaches Level 5. The SAP Assessment also predicts that there will be only a medium likelihood of a high internal temperature, or overheating, in July and August, which can easily be catered for by opening the windows.

"We've just bought a 400m2 cow shed to convert into our factory so we intend to minimize the impact on the land. We turned down offers of a brand new shed on a business park,” adds Glen.

Future houses could be semi-detached or terraced, and have one, two or three bedrooms, as demand dictates and housing associations or local authorities wish.

Clearly, Glen Peters is a man with an eye on the future - a sustainable future.