Many agribusiness companies are focused on sales growth as a way to boost profits, but energy savings is often an easier and less risky way to boost the bottom line. "If energy savings is $500,000 per year and a company has net earnings at 5 percent of revenue, this is equivalent to increasing revenue by $10 million," according to veteran energy engineer Calvin Wohlert of American Energy.

 

"Not only do energy efficiency projects help the environment, they also increase profitability by reducing waste," he said at last month’s Webinar sponsored by EcoAgri.Biz.

 

The financial impact of energy cost savings can be staggering. For example, a hypothetical agribusiness company with $200 million in annual revenues, cost of goods sold of $160 million, and gross earnings of $40.4 million, has net earnings of $7.75 million, or $1 per share. "If energy spent is about 7 percent of cost or $14 million and we are able to reduce that by 15 percent, that means annual energy savings is $2.1 million, and the company’s earnings per share goes up to $1.27 per share. That is a 27 percent increase."

 

Wohlert added that businesses often miss the big picture and only focus on first costs. With a chiller, for example, 87 percent of owning and operating cost is energy, so small improvements in efficiency, even for a moderate additional cost, can pay off handsomely within a year or two, or even months.

 

Money: the stumbling block

 

The value of energy projects is there, yet most often companies don’t implement them even though the return on investment is good, Wohlert said. "The single largest stumbling block to implementation is money, and the need to push projects through the capital budgeting process." An extensive survey by the Association of Energy Engineers found that nearly 80 percent of businesses listed no capital for energy efficiency investment to be the No. 1 reason for not applying energy efficient technologies in their facilities.

 

One of the other key reasons why energy saving projects don’t get done, Wohlert said, is because they have to compete for capital with process and production expansion projects—those with the potential to grow the business. The simple truth is that these two classes of internal investment options have different parameters and risks and therefore should be evaluated separately.

 

Three finance alternatives

 

As a way to avoid competing for capital, Wohlert offers three financial alternatives: capitalize projects internally; borrow the money; or lease the projects. In comparing capitalizing a project versus leasing, capitalizing comes out on top. For an energy savings project that costs $500,000 with a $150,000 in savings per year (a 3.3-year payback), the project has a net present value of $543,549 over a 10-year period. But by delaying implementation by just one year, the net present value of the project drops to $474,070. Leasing a project over a 10-year period has a net present value of $519,097.

 

There is a real cost of delay associated with energy projects. Just delaying an energy saving project by one year will result in an erosion in net present value of $69,479, he said.

 

In Wohlert’s example, the internal rate of return "is significantly higher than most businesses annual profits," and delaying the project for one year will cost more in lost net present value than an annual lease payment. In addition, he said, "each year, the amount of energy lost is an expense that can never be recovered."

 

Energy savings

 

Looking another way at a company with an energy project with a $59,159 net positive cash flow, a company with a 20 percent rate of profitability would require $295,795 in additional sales to equal the energy savings; a company with 10 percent profitability would need $591,590 more sales; while a company with a 5 percent rate of profitability would need $1,183,180 in additional sales to equal the energy savings.