The financial case for energy efficiency: knowledge is profit

The financial case for energy efficiency: knowledge is profit

Investing in energy efficiency offers huge environmental benefits as well as significant long-term savings. Despite this, the adoption of the well-proven technology has been uneven. The key is ensuring that businesses look at the total cost of ownership to fully understand how it can contribute to their bottom-line performance and CSR objectives, suggests Tarak Mehta, President of ABB’s Motion business.

Energy efficiency – using less energy to produce the same result – is essential to reaching Net Zero globally by 2050. The International Energy Agency (IEA) calls it “the first fuel – the fuel you do not have to use”, for exactly this reason. While progress in the adoption of energy-efficient technology has been impressive, there is room for every business to go further.

ABB’s March 2023 Energy Insights report investigated the perceived obstacles that businesses face when investing in energy efficiency. The most common were cost (a concern for 33 percent of the 2,300 business leaders surveyed), Covid-19 (27 percent), and the energy crisis (25 percent), among others.

The energy crisis threatens to delay progress toward Net Zero. Almost all business leaders, 92 percent, believe that energy costs and instability threaten their decarbonization efforts. In fact, a majority of 58 percent report that high energy prices could delay their emission reduction efforts by between one and five years. We cannot afford this delay.

Underlying each of these obstacles is a lack of knowledge. Some businesses believe that energy efficiency upgrades are a financial burden, when they are a valuable investment guaranteed to produce significant savings in addition to move the needle on corporate social responsibilities (CSR) targets. Others are ready to invest but don’t know how. Ensuring that decision makers understand the benefits of energy efficiency is key to remaining on track to reach Net Zero – and improving a business’s competitive edge.

What the CFO should know

Electric motors are everywhere, and they are critical to the society we live in today. For example, they pump clean water to our taps and drive fans that cool and heat our homes. The electric motor is also a basic building block for industrial facilities of all kinds – where motors power fans, pumps, conveyors, mixers, and all sorts of other machines. They are so common that motors alone account for approximately 45 percent of all electricity consumed worldwide in buildings and industry.

Unfortunately, most of the world’s motors are older, significantly less efficient models, meaning that they waste power unnecessarily. From a financial perspective, this needlessly drives up a business’s operating expenditure (OpEx), especially when electricity prices are high.

The good news is that technology has advanced at a remarkable pace. Even motors from as recently as five to ten years ago are significantly less efficient than today’s top models. High-efficiency motors are the natural choice for new installations – but rapid developments in efficiency mean that upgrading existing motors is also a worthwhile consideration.

Looking at the total cost of ownership shows the best return on investment

Some decision makers are turned away by the upfront cost of upgrading a facility’s motors. However, this approach misses the big picture. The upfront cost of high-efficiency motors is undoubtedly slightly higher than older, less efficient models – but the total cost of ownership (TCO) is far lower. This is because the upfront cost of a motor accounts for just 2 percent of its TCO. Maintenance accounts for 1 percent and the remainder, an overwhelming 97 percent, pays for the electricity required to run the motor.

For example, the most efficient motors on the market – IE5 class motors – offer energy losses 40 percent lower than commonly-used IE3 motors. With high energy costs in many countries, the initial capital expenditure (CapEx) involved in purchasing a new motor can now be recouped in a matter of months.

Another issue is that most of the world’s electric motors are not operated efficiently. A motor will run at its maximum speed unless it is plugged into a variable speed drive (VSD). VSDs allow you to change the speed of the motor to the exact requirements of the process, presenting a significant opportunity for increasing a motor’s energy efficiency. In intensive applications where a motor is in constant use, VSDs can produce energy savings of 25 percent or more.

Competition and collaboration

Market competition has many positive effects, but it does not eliminate the need for collaboration – especially on global challenges like reaching Net Zero. Businesses must step forward to share information and publicly commit to change. To create a forum for this, ABB founded the Energy Efficiency Movement in 2021.

The movement aims to close the knowledge gap that holds industrial businesses back from fully embracing energy efficiency. To join, an organization simply needs to be willing to share best practice and make a specific commitment to improving energy efficiency.

In the two years since the movement’s launch, almost 350 businesses – some of them direct competitors – from across the globe have joined, including industry leaders like Alfa Laval, Danfoss, DHL, Honeywell, and Microsoft.

Collaboration doesn’t eliminate the potential for competition. Businesses that are fast to embrace the latest, most efficient technology will see savings sooner and have lower TCO than their competitors. With full access to knowledge about efficiency, competition drives financial benefits for the business and environmental benefits for everyone.

Now you know, it’s time to get started

Many businesses still incorrectly believe planet and profit are at odds when it comes to energy efficiency. By making it clear that efficiency has both financial and sustainability benefits, we can take important steps toward Net Zero – in other words, it is in everyone’s interest to spread the word about the value of energy efficiency.

Learn more about the Energy Efficiency Movement.