The Importance of Measuring Building Energy Use
When the monthly utility bill comes, the CFO simply sees is another bill to be paid. Energy is just another operating expense...or is it?
An increasing number of international companies are measuring performance on a triple bottom line of organizational success, environmental success and economic success, and finding that adding social and environmental actions to daily practices can deliver a significant return on investment.
When it comes to understanding the true impact of energy and the environment, only limited data is available to CFOs. They still need that data translated into information to make informed decisions about their business.
CFOs who are determined to truly understand and reduce environmental costs of their business can take a huge step in that direction by understanding the entire environmental impact of their facility. In addition to energy usage and costs, environmental accounting looks at the total cost of production, distribution, use and waste of a product. This process, known as Lifecycle Assessment, charts the entire lifecycle of a company's operations: from raw materials to suppliers to manufacturing, distribution, use, and disposal. To fully complete the assessments, the processes and environmental impact involved in the company's day-to-day operations are charted within five environmental categories:
An increasing number of international companies are measuring performance on a triple bottom line of organizational success, environmental success and economic success, and finding that adding social and environmental actions to daily practices can deliver a significant return on investment.
When it comes to understanding the true impact of energy and the environment, only limited data is available to CFOs. They still need that data translated into information to make informed decisions about their business.
CFOs who are determined to truly understand and reduce environmental costs of their business can take a huge step in that direction by understanding the entire environmental impact of their facility. In addition to energy usage and costs, environmental accounting looks at the total cost of production, distribution, use and waste of a product. This process, known as Lifecycle Assessment, charts the entire lifecycle of a company's operations: from raw materials to suppliers to manufacturing, distribution, use, and disposal. To fully complete the assessments, the processes and environmental impact involved in the company's day-to-day operations are charted within five environmental categories:
- Energy
- Water
- Air
- Waste
- Compliance
Developing the metrics to track processes and bring that information to the CFO level is crucial. In fact, many enterprise level resource planning software packages include a new environmental resource planning software add-on that financial executives can use to track pertinent environmental health and safety information.
By far, the environmental impact or "eco metric" most easily measured, monitored and reduced is energy. The U.S. Green Buildings Council estimates that commercial office buildings use 20 percent more energy on average than necessary.
As energy bills continue to rise and become a larger part of the business operating budget, financial executives are driven to act and reduce cost. One CFO found that energy costs had increased from 12% of annual facility expenses to 17% in one year! This resulted in a 40% year to year increase. The question then arises, how does a CFO obtain the information needed to understand the cost of energy and how to reduce it.
While total cost of energy use can be extremely valuable to C-level executives, the capability to evaluate and utilize the information may not exist. The data may be available, but is not presented in a way that enables CFOs to make improvements that can deliver an acceptable return on investment. Partnering with a professional energy firm can prove to be a major benefit to CFOs.
By partnering with an energy specialist, the CFO can get actionable information to reduce operating expenses. Energy projects will have the added benefits of improving the facilities and reducing operating expenses while positively affecting the social bottom line and the impact on the environment. Armed with more information about the company's costs and risk, C-level executives can make decisions with tangible and intangible benefits. Table 2 outlines many of the benefits of energy related facility improvements.
The United States is facing a dilemma. Energy prices are escalating, dependency is increasing and energy sources are becoming scarcer. Although current energy prices are reasonable, Americans have seen this trend at the gas pump in the past three years. The same phenomenon is occurring with electricity, natural gas, propane, steam and all other facility energy sources.
When considering the energy balance of a building, one must consider the energy put into the building: what is lost and what is used. Typically, equipment efficiency can be improved to limit the use or consumption of energy. The facility itself can be improved and controls utilized to limit the loss of energy and conserve electricity. Reducing use of energy as well as its loss can significantly impact the cost of energy required to run a facility.
To a CFO, any reduction in operating expenses can be added to the budget to fund strategic initiatives and create growth for the company. To any other C-level executive, these budget dollars can be used to improve business performance - and that is the bottom line.
To wrap up, one story serves as a good example of the potential benefits of managing a building's energy balace. In the extremely competitive environment of luxury resorts, the Westin Macau in China must create a superior guest experience while aggressively monitoring gross operating profit (GOP). The key metric for this upscale hotel is occupancy and the facility's chief engineer closely monitors the energy use of unoccupied areas.
Even with the impact of dramatic weather fluctuations and the resort's focus on a very high level of guest comfort, the TAC Solution has delivered between the equivalent of US $200,000 and US $250,000 in energy savings annually since its installation in 1995. Monitoring, control and management of the Westin Macau's energy use and loss have added to the resort's GOP in dollar amounts the Westin's CFO can see. The measures have also increased the ease of operating the resort for the staff, which in turn has led to a decrease in the number of guest complaints and an increase in guest comfort.
Economics Basics: Conclusion
ReplyDeleteWe hope that this has given you some insight to the market and, in turn, your investment strategies. Let's recap what we've learned in this tutorial:
Economics is best described as the study of humans behaving in response to having only limited resources to fulfill unlimited wants and needs.
Scarcity refers to the limited resources in an economy. Macroeconomics is the study of the economy as a whole. Microeconomics analyzes the individual people and companies that make up the greater economy.
The Production Possibility Frontier (PPF) allows us to determine how an economy can allocate its resources in order to achieve optimal output. Knowing this will lead countries to specialize and trade products amongst each other rather than each producing all the products it needs.
Demand and supply refer to the relationship price has with the quantity consumers demand and the quantity supplied by producers. As price increases, quantity demanded decreases and quantity supplied increases.
Elasticity tells us how much quantity demanded or supplied changes when there is a change in price. The more the quantity changes, the more elastic the good or service. Products whose quantity supplied or demanded does not change much with a change in price are considered inelastic.
Utility is the amount of benefit a consumer receives from a given good or service. Economists use utility to determine how an individual can get the most satisfaction out of his or her available resources.
Market economies are assumed to have many buyers and sellers, high competition and many substitutes. Monopolies characterize industries in which the supplier determines prices and high barriers prevent any competitors from entering the market. Oligopolies are industries with a few interdependent companies. Perfect competition represents an economy with many businesses competing with one another for consumer interest and profits.
Economics Basics: Utility
ReplyDeleteWe have already seen that the focus of economics is to understand the problem of scarcity: the problem of fulfilling the unlimited wants of humankind with limited and/or scarce resources. Because of scarcity, economies need to allocate their resources efficiently. Underlying the laws of demand and supply is the concept of utility, which represents the advantage or fulfillment a person receives from consuming a good or service. Utility, then, explains how individuals and economies aim to gain optimal satisfaction in dealing with scarcity.
Utility is an abstract concept rather than a concrete, observable quantity. The units to which we assign an “amount” of utility, therefore, are arbitrary, representing a relative value. Total utility is the aggregate sum of satisfaction or benefit that an individual gains from consuming a given amount of goods or services in an economy. The amount of a person's total utility corresponds to the person's level of consumption. Usually, the more the person consumes, the larger his or her total utility will be. Marginal utility is the additional satisfaction, or amount of utility, gained from each extra unit of consumption.
Although total utility usually increases as more of a good is consumed, marginal utility usually decreases with each additional increase in the consumption of a good. This decrease demonstrates the law of diminishing marginal utility. Because there is a certain threshold of satisfaction, the consumer will no longer receive the same pleasure from consumption once that threshold is crossed. In other words, total utility will increase at a slower pace as an individual increases the quantity consumed.
Take, for example, a chocolate bar. Let's say that after eating one chocolate bar your sweet tooth has been satisfied. Your marginal utility (and total utility) after eating one chocolate bar will be quite high. But if you eat more chocolate bars, the pleasure of each additional chocolate bar will be less than the pleasure you received from eating the one before - probably because you are starting to feel full or you have had too many sweets for one day.
This table shows that total utility will increase at a much slower rate as marginal utility diminishes with each additional bar. Notice how the first chocolate bar gives a total utility of 70 but the next three chocolate bars together increase total utility by only 18 additional units.
The law of diminishing marginal utility helps economists understand the law of demand and the negative sloping demand curve. The less of something you have, the more satisfaction you gain from each additional unit you consume; the marginal utility you gain from that product is therefore higher, giving you a higher willingness to pay more for it. Prices are lower at a higher quantity demanded because your additional satisfaction diminishes as you demand more.
In order to determine what a consumer's utility and total utility are, economists turn to consumer demand theory, which studies consumer behavior and satisfaction. Economists assume the consumer is rational and will thus maximize his or her total utility by purchasing a combination of different products rather than more of one particular product. Thus, instead of spending all of your money on three chocolate bars, which has a total utility of 85, you should instead purchase the one chocolate bar, which has a utility of 70, and perhaps a glass of milk, which has a utility of 50. This combination will give you a maximized total utility of 120 but at the same cost as the three chocolate bars.