Reducing Energy Costs and Increasing Cash Flow
With Energy Budgets at Risk (EBaR)®
Energy Budgets at Risk (EBaR)® is a new quantitative process developed by the author that applies financial risk management to identify energy-efficiency investments that reduce energy costs, increase cash flows and increase the capital value of facilities subject to user-specified risk parameters.
Inspite of large energy cost savings estimates, most organizations are reluctant to invest in energy-efficiency because of the uncertainty and risk associated with these investments. The list of uncertainties is long: an unusually cool summer, actual operating hours that are different than assumed in the engineering estimates, energy prices declines and many more . These factors can potentially turn a profitable investment into a money-losing proposition. As a result most organizations require energy-efficiency investment to provide very short paybacks based on expected engineering estimates of cost savings. However, this payback approach bypasses many profitable investments that can increase cash flows with little or no risk - an especially important consideration given current economic conditions.
EBaR addresses these issues with a quantitative process that determines the range of energy cost savings associated with individual efficiency investments and the risk associated with each savings level. This process is demonstrated with an example analysis of an Austin office building.
EBaR principles are presented in a new book written by energy economist and Texas A&M professor Jerry Jackson. Energy Budgets at Risk (EBaR): A Risk Management Approach to Energy Purchase and Efficiency Choice published by John Wiley and Sons available on Amazon.com. Dr. Jackson is also president of the consulting firm Jackson Associates where he has worked with clients ranging from Tanger Outlets to Toyota and Capital One.
This site presents an introduction to the EBaR process, including an Excel program that demonstrates examples on this site and in the Book. EBaR can be applied by facilities managers, energy engineers, CFOs, financial managers and others associated with energy-efficiency investment decision-making to conduct sound financial analysis of energy efficiency investments. Developed by the author, EBaR is an extension of Value at Risk (VaR), the widely-used financial risk management tool used to evaluate returns and risks associated with financial portfolios.
EBaR provides organizations with the following benefits:
- An energy-efficiency investment analysis based on sound financial risk management principles
- Identification of investments that increase cash flows by providing cost savings greater than investment costs with little or no risk
- The risk associated with individual investments
- Consideration of all important sources of investment uncertainty
- A well-defined quantitative process that provides the basis for each organization's approach to energy-efficiency investments
- A process that translates energy engineering analysis into financial language meaningful to CFOs and financial managers