As businesses increase investment in decarbonization, finance leaders have an important role to play in ensuring capital is directed towards measures that deliver both environmental and commercial value.
For finance leaders, the pressure to balance sustainability commitments with commercial reality is only increasing. Businesses are looking at how they can decarbonize their operations, improve energy efficiency and reduce exposure to volatile energy costs.
At the same time, finance teams are expected to scrutinize capital expenditure, control operating costs and ensure investment delivers an acceptable return. For CFOs, the challenge is ensuring decarbonization investment stacks up commercially as well as environmentally.
When businesses consider how to reduce emissions from their buildings, the conversation can quickly turn to what they need to buy. Heat pumps, solar panels, new heating systems and other low-carbon technologies can all have an important role to play.
However, there is a step that should come before deciding how to generate energy differently: understanding how much energy the business actually needs and where existing demand could first be reduced.
Reducing demand is hardly a new concept. When looking at the energy performance of a building, insulation, glazing and other measures designed to prevent heat loss are well understood.
But the same principle should be applied more broadly. Before committing significant capital to new energy infrastructure, businesses should understand where energy is currently being consumed and wasted, and whether relatively straightforward efficiency measures could reduce that demand.
Hot water provides a useful example. In commercial buildings with high and consistent shower use, such as hotels, gyms, leisure centers, student accommodation, care homes and healthcare facilities, substantial amounts of energy can be used simply heating water.
Once a shower has been used, much of the heat contained within that water is lost down the drain. Waste Water Heat Recovery (WWHR) is one way of addressing this. Heat from used shower water can be transferred through a heat exchanger to incoming cold water, without the two water streams mixing. This reduces the energy subsequently required to produce hot water.
For finance leaders, the important point is not the technology itself. It is what reducing demand can do to the numbers.
The most obvious financial benefit of reducing energy demand is lower operating expenditure, but the business case should not be assessed on energy savings alone.
As with any investment, finance leaders need to understand the capital required, expected annual savings, assumptions behind those savings, payback period, maintenance requirements and whole-life costs.
This is where close collaboration between finance, facilities, energy and sustainability teams becomes important. Technical teams may understand where energy is being lost and which measures could address it, while finance can challenge the assumptions and ensure investment decisions are based on credible operating data.
The strongest business cases will be specific to the building. Usage patterns, existing infrastructure, energy source and installation requirements can all affect the eventual return, so generic savings figures should be treated with caution.
This may not sound radically different from the scrutiny applied to any other capital project. It shouldn’t be. Sustainability investment still needs to compete for capital, and a robust financial case helps businesses prioritize the measures capable of delivering the greatest value.
There is another reason the sequencing of energy investment matters.
If a business is planning a substantial heating or hot-water upgrade, reducing demand before new equipment is designed or specified could affect the capacity required.
Take a heat pump or hot-water cylinder. If energy-efficiency measures can lower the building’s hot-water demand first, it may be possible to specify smaller equipment than would otherwise have been required.
Depending on the project, the financial benefit could then extend beyond the initial purchase price to installation, running and ongoing maintenance costs. The exact impact will always be building-specific, but it illustrates why efficiency measures should be considered before the specification of major new infrastructure is finalized.
This requires finance teams to look at proposed energy investments as a sequence rather than a collection of individual projects.
A measure with a relatively modest capital requirement may appear insignificant alongside a major heating upgrade when considered in isolation. If implementing it first changes the requirements or whole-life cost of that later investment, its financial value looks different.
None of this means businesses should choose energy efficiency instead of low-carbon technologies. Heat pumps, renewable generation and other technologies will be important to the transition towards lower-carbon commercial buildings.
The question is how those investments can work together most effectively.
For CFOs, that means ensuring the right questions are asked before capital is committed.
Where is energy currently being wasted? Which measures could reduce demand?
What evidence supports the projected savings? How long will the investment take to repay?
What are the maintenance and whole-life costs?
Could reducing demand now alter the specification or cost of a larger project planned later?
Those questions don’t undermine sustainability ambitions. They can help businesses achieve them in a more commercially sustainable way.
They can also help avoid the risk of designing new infrastructure around a level of energy demand that could have been reduced first.
The transition to lower-carbon buildings will require significant investment, and finance leaders will increasingly be involved in deciding where that capital should be directed. Treating energy efficiency as part of that investment strategy, rather than simply an operational or sustainability issue, can lead to better-informed decisions.
Sometimes, the strongest business case is not about generating more energy or generating it differently. It is about finding ways for the business to need less in the first place.
