EBaR Insights

What Exactly is EBaR Analysis?

EBaR analysis develops and applies a series of equations describing your facility's energy use and operating characteristics. These equations are combined with weather data and energy price forecasts with a widely used software process called Monte Carlo analysis. Graphical and tabular outputs provide representations of risks and returns for any energy efficiency investment. EBaR analysis also incorporates energy purchase options for facilities in competitive energy markets.

How Much Can I Save?

A brief detour to the Appendix of Energy Budgets at Risk: A Risk Management Approach to Energy Purchase and Efficiency Choices (John Wiley , March 2008) provides information to assess potential energy and financial benefits of an EBaR analysis. The appendix provides excerpts from MAISY ® facility energy use data (http://www.maisy.com) on more than one million business, institutional, and government buildings. Data are detailed by business type and operating hours. Using these data, readers can calculate several energy use statistics for their facility and compare them to data on similar facilities to see how much energy use can be reduced. Applying your electric prices and natural gas prices provides a general indication of the financial rewards associated with an EBaR strategy. While these calculations are only general estimates, they provide a reasonable basis for determining the value of an EBaR application at your facility.

Detailed Case Study Examples

All concepts and applications are illustrated in the book with a detailed case study application to an Austin, Texas office building. Monthly facility energy use data, Austin weather data, and other facility data are used to illustrate concepts, data development, equation parameter estimation, and application in EBaR analysis. Readers can substitute data for their facilities and use each of the steps in Chapters 8–10 as a template for their own EBaR analysis.

What Software Is Required?

Excel software was used to develop all required data relationships and characterizations in the book. Each of the data development steps is described in detail in Chapter 8 along with documentation of required Excel menu options.

Monte Carlo software applies the relationships and data developed with Excel software to generate distributions of efficiency investment risks and returns. Monte Carlo software is used in all financial risk management applications and is available in a variety of commercial software packages.

The Monte Carlo process is described in Chapter 7. Many of these software packages are Excel add-ins, permitting Excel to serve as the software platform for the data development,Monte Carlo analysis, and output tables and graphs.

All of the tables and graphs used in Chapters 9 through 12 to present the case study results were developed using Excel.

EBaR Energy risk management software customized to support all aspects of EBaR analysis is also available at this site.

Is an EBaR Strategy Right for Your Organization?

EBaR is a compelling application. Common sense says that managing risks is a more profitable strategy than avoiding risks. Incorporating risk in traditional investment analysis by using short paybacks or high internal rate of return thresholds avoids rather than manages risk. The evidence is overwhelming that nearly every business, institution, and government agency can reduce energy bills with cost-effective energy-efficiency investments.

Is It Worth the Effort?

Every new initiative incurs a cost. Is developing an EBaR analysis and strategy likely to be a good investment of time and resources for your organization?

Energy Savings. As indicated in the previous section, the book's Appendix, which provides information on energy use characteristics of over one million facilities,can be used to benchmark your current energy use to other facilities in your business and operating hours category. Your energy use compared to the more efficient facilities represented in the tables provides a good indication of potential efficiency savings.

Efficiency Investments as a New Revenue Source. Energy savings developed from information in the Appendix are multiplied by the average price of electricity and natural gas to estimate potential savings in energy costs. When the cost of the investment is amortized over the lifetime of the equipment, these investments nearly always increase cash flow. That is, the value of energy savings more than offsets the cost of financing.

Efficiency investments can be viewed as generating a new revenue or income stream. Lease and lease purchase financing offered by energy service companies, manufacturers and financial organizations described in Chapter 3 support this income-enhancing strategy.

Is My Facility Big Enough? Because EBaR is a scalable application, the answer to this question is an unequivocal yes. Anyone considering reading this book is concerned enough about energy costs to invest at least a minimal effort to manage those costs. EBaR scalability means that small organizations can apply the process to evaluate the simplest and most promising efficiency investments first and then extend the analysis over time.

Organization Type. Organizations differ in their management and decision-making structure, budget flexibility, and risk tolerance. Commercial, institutional, industrial, and government agencies face different constraints and options in considering energy budget risks, efficiency investments, and energy purchase decisions. The EBaR framework applies equally to all organization types. Budget flexibility and risk tolerance are parameters of the analysis specified by users. EBaR strategic choices reflect budget and risk characteristics of individual users.

From Do-It-Yourself to Turnkey Projects. EBaR analysis provides value regardless of the extent to which efficiency projects are self-performed by an organization. Organizations who conduct their own analysis, make their own equipment purchases, and self-perform or contract for installation should certainly have a detailed understanding of EBaR concepts and applications.

Organizations at the other end of the spectrum, who contract out analysis, engineering, financing, and other efficiency tasks, should have an equally thorough understanding of EBaR. For instance, performance contracts require energy service companies to conduct all tasks associated with energy-efficiency investments—from analysis to monitoring savings of the installed equipment. Performance contracts also guarantee energy savings and commit energy service companies to make reimbursements for savings that fall short of the guaranteed amount. While this approach would seem to offer a risk-free option to achieve improved energy efficiency, performance contracts can suffer from either underinvestment or overinvestment in efficient technologies. In addition, efficiency improvements achieved under performance contracts may do little to reduce energy budget volatility—an important consideration for government agencies and institutions whose only option to addressing higher energy costs is to reduce services.

Energy managers or contract officers with responsibility for performance contractor selection and contract negotiation should conduct their own energy risk management analysis or require vendors to present the results of EBaR analysis to evaluate competing bids and to insure that contractors meet the needs of the organization.

Going Green, Carbon Foot-prints and EBaR

The list of companies, municipalities, institutions, and other organizations publicly committing to carbon reductions and other green policies is growing by the day. The primary opportunity to meet these environmental goals is through energy efficiency investments that reduce energy use.

Many organizations reluctant to undertake carbon-reducing initiatives assume these actions will increase operating costs, resulting in reduced earnings or, for government and nonprofit organizations, a reduced level of services. Energy Budgets at Risk shows that carbon and other greenhouse gas emissions can be reduced with energy cost savings more than offsetting the cost of energy-efficiency investments. Thus, achieving carbon-reducing goals with EBaR analysis can add to the financial bottom line.

New carbon-trading mechanisms established both by government and private interests and the growing use of "efficiency certificates" in individual states pass incentives to reduce energy use through to individual facility owners. For instance, efficiency certificates permit individual facility owners to sell efficiency improvement credits to utilities who are required to meet requirements of "efficiency portfolio standards." These market mechanisms provide additional financial incentives to invest in energy efficiency.

The EBaR analytical framework is ideally suited to integrate carbon reduction and other green objectives in a capital budgeting approach that comprehensively considers benefits, costs, and risks associated with energy efficiency investments.