4 Ways to Avoid Using CapEx for Capital-Intensive Projects

August 24, 2020

Energy or sustainability capital projects with longer paybacks often fail to meet internal requirements to pass the approval hurdle. Far too often, these projects are managed by individual sites or businesses and carried out in siloes without input from other departments which inevitably short changes overall project ROI.

This holds especially true for projects in times of economic uncertainty, which are even more difficult for companies to prioritize today. But when CapEx-funded projects fail to move forward on time, recovering from the resulting performance gap can be more costly than the initial cost of the project itself.

Here are 4 ways to strengthen the business case for capital energy and sustainability projects and ensure key investments move forward as part of a resilient, green recovery.

1. Reinvest efficiency savings onsite DERs

When the business case addresses a portfolio of short-and long-payback projects, OpEx savings can be used to fund larger CapEx distributed energy resource (DER) projects. Think lighting retrofits as a revenue-generator to help pay for fuel cells.

solar panels on top of a shipping and distribution facilityIf some of the outlay can be offset by high-ROI efficiency upgrades, the business case for onsite renewables is much stronger. Using conservation measures to reduce the energy consumption baseline also right-sizes the renewables investment, whether onsite or offsite. The potential for overspending is minimal if a facility or campus is as energy-lean as possible. And, overall, the portfolio of options for hitting targets broadens as a result of a close energy-sustainability partnership.

Rolls Royce used this approach to set and plot a course toward a 30% reduction in energy use and 50% reduction in GHG emissions by 2025. The company has used savings from traditional conservation measures, as well as energy supply management, to help fund two sizeable solar PV installations at its U.K. factories.

Companies often view sustainability and energy management as two separate or loosely connected efforts. But to truly maximize the investment in either, they need to work in tandem. Learn more in this infographic

2. Explore offsite renewable power purchase agreements

Buying renewable energy at utility-scale through a power purchase agreement (PPA) has the potential to stabilize electricity costs, and in a favorable or volatile market, save a company money given the rapidly falling price of wind power and solar power. The money potentially saved through a PPA can be used to jumpstart a GHG-reduction initiative with higher CapEx requirements or longer payback period, such as combined heat and power (CHP) or a microgrid.

wind turbine on a mountain with clouds and a small electricity pylon in the backgroundIn this paradigm, sustainability is no longer a cost center, as is often presumed. And, by combining sustainability and energy efficiency projects under a single investment strategy, businesses are more resilient to market volatility and better positioned to compete in a low-carbon economy. Both are integrated into the corporate strategy, and create a circular, efficient system for carbon and energy management.

But PPAs come with a set of complex risks and may not perform as expected. Buyers must seek legal and financial counsel. Working with an advisor like our Energy & Sustainability Services team can also help companies avoid the potential downsides.

Curious about PPAs? Interested in evaluating your options—with no risk? Qualified commercial & industrial buyers can join our NEO Network at no cost. Visit www.neonetworkexchange.com to get started

3. Utilize demand response

The savings from participating in demand response programs can be big: research has estimated that savings in 2015 exceeded 10% of retail electric sales and could reach more than 20% by 2025. Demand response strategies can also help companies achieve GHG reduction goals, while maintaining reliability in the power grid by avoiding increasingly high peak demand levels.

When paired with energy storage and onsite renewables, companies can take advantage of low-cost, off-peak energy when renewable sources are abundant. Sustainability teams can work with energy management teams to collect and share data on how much grid-sourced power was avoided by using onsite renewable energy and energy storage, facilitated by investment in an enterprise-level software like EcoStruxure Resource Advisor. The resulting savings can be reinvested in the business to help advance other capital-intensive projects.

4. Move capital expense off your balance sheet

Through an Energy-as-a-Service (EaaS) model, companies can partner with solution providers, like Schneider Electric, to manage the company’s energy portfolio and financing. This allows companies to avoid CapEx investment for many energy-related programs, allowing the capital that would have balance sheet with lines for profit and lossbeen used to be reallocated to other business objectives or other energy and sustainability projects. 

For example, a global steel manufacturer implemented variable frequency drives (VFDs) at several of its plants through an EaaS contract which allowed the company to fund the project without CapEx and balance sheet impact. With VFDs, plant operators had more control over the energy consumption of core manufacturing equipment which had previously been a source of significant energy waste. As a result, energy was no longer viewed as a fixed cost center, but rather a lever for improving profitability.

Need more strategies to get capital projects back on track? Register for our webinar on capex alternatives to fund efficiency and sustainability initiatives.

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