Why Math Is Important: Separating the Wheat from The Chaff

transcript

Why Math Is Important:Separating the Wheat from The Chaff

2013 AASHE ConferenceJim Stephens & Elizabeth Swiman

PresentersJim StephensActing Director of Utilities & Engineering Services

Elizabeth SwimanDirector of Sustainability

Decisions, Decisions, Decisions? Life is full of decisions, but before the decision should come questions.

Decisions, Decisions, Decisions? Life is full of decisions, but before the decision should come a question.

What will be the real impact of my decision?

What will be the real impact of my decision?Will our decision make a

tangible difference?

Do our decisions reflect sustainable values?

In life there are many ideas, concepts, and promises. How do we separate the wheat from

the chaff?

Savings

Benefits

Analyze, Then Decide While you cannot put a number on every activity in life, there are many things that can be analyzed.

Understanding the variables required for a project, coupled with appropriate mathematical review, can assist in selecting projects with the greatest impact.

Sustainability & Energy ManagementA comprehensive sustainability and energy management program achieves the maximum result in greenhouse gas reduction and energy consumption reduction when combined with aggressive financial criteria for project approval and a reinvestment strategy. That

Sounds Hard!

But First – Would You Like to Play A Game? .

Exercise – Part 1 We need five volunteer project

managers.

Choose from the list of potential energy related sustainability projects.

Exercise – Part 1

At your request, the university has invested $1 million dollars in your

project of choice.

Why Math Is Important?

Limited Financial Resources

Competing Needs

Financial Accountability

We need to be able to compare projects and select the best – Separate the wheat from the chaff.

Not Good Enough

Project Ranking – Why It Matters

Good financial performing projects MAXIMIZE your efforts towards energy conservation and greenhouse gas reduction. -Projects may not be glamorous or exciting, but the return on investment is generally short. -Capital is available for reinvestment.

Poor financial performing projects often MINIMIZE results.- Drain needed capital from projects that have a greater impact on energy conservation and greenhouse gas reduction.

IMPORTANT POINT: Each organization sets their own goals and defines what is deemed a “successful project”.

Math, when accurately used, can better measure a precise metric. Generally, it is measured in dollars, GHG reduction, etc.

Other important factors

- Competing priorities

- Administrative support

- Research

- Regional variations in cost and/or available resources

Our Process – Rules of Thumb

1. We want to prioritize high return projects ahead of low

return projects

2. High capital, low return projects are highly scrutinized.

3. Low capital, high return projects are pushed forward.

4. In all cases, our energy related sustainability projects are required to have a 7 year or less payback based on energy savings alone.

What About Alternative Energy?

We wholeheartedly support alternative energy, but the same

rules apply.

Case In Point

Solar Thermal at our Leach Student Recreation Center for pool heatingCost: $168,000 Annual Savings: ~ $30k per year with NO REBATES

Alternative Energy?

1. Alternative energy projects CAN meet the criteria, but you must be careful to select the right projects.

2. Don’t get too excited about a specific project until you do the math.

3. Everybody loves alternative energy projects that have a good payback!

Exercise – Part 2•Project Manager Reports

•Project Discussion

•Reinvest in new projects

Calculating a Project Return

Simple is usually better – We recommend using the simple payback method

Return =Total $ Cost__________

Total $ Savings

Life Cycle Analysis…can include a variety of assumptions.

Even a simple payback calculation uses some assumptions.

The trick is understanding how to select good assumptions (or estimates) in your model.

Cost Considerations That Must Be Included

•How much will it cost to maintain the system?•Does the vendor estimate include installation?•Will I have to add staff to support the project long term?•How reliable is the system? How much savings will I lose related to downtime?•How much of the actual work to implement the project is provided by the customer? Research time? Data Entry? Data Collection? System integration? Very, very important for software related projects.

Understand Savings Assumptions

•Vendors often overstate savings. Be sure you understand the real savings of the project.

•Vendors often include inflator figures to make the savings appear larger. These include cost multipliers over time for energy rates. Are these realistic? You must understand where rates are going to understand your long term project savings?

Well do I have a deal for you!!!

•Projects savings often include cost of money assumptions that are high, particularly for life cycle analysis.•Vendors often count soft savings, such as behavioral changes as hard savings. Your results may or may not relate to these activities. Soft savings should generally be counted on as a fringe benefit, not the hard savings.

•Does the real project savings pay for the true cost of the project within the rated equipment life?

The real goal of your project return calculation is for you to be sure that your organization can achieve the returns promised by the project.

ACCURACY is the key

Exercise – Part 3

•Project Manager Reports•Project Discussion•Reinvest in new projects

Reinvesting Savings

At Florida State University, we use a 7 year payback for energy projects. The benefits include:

•Long enough to support some in depth projects, but short enough to return funding for future projects.

•For ever 1 million dollars spent, we return no less than $142,000 per year back to the University.

•Our savings are in both dollars and greenhouse gas production.

Accumulation Examples – Year 1

Project Portfolio A•Avg return = 5 years•Investment value = $1,000,000•Annual return back to fund = $200,000

Project Portfolio B•Avg return = 20 years•Investment value = $1,000,000•Annual return back to fund = $50,000

Accumulation Examples

Project Portfolio A•Avg return = 5 years•Investment value = $1,000,000•Annual return back to fund = $200,000

Project Portfolio B•Avg return = 20 years•Investment value = $1,000,000•Annual return back to fund = $50,000

Year 5 Savings: $1,488,320Year 10 Savings: $5,191,736Year 20 Savings: $37,337,600

Year 5 Savings: $276,282Year 10 Savings: $628,895Year 20 Savings: $1,653,298

In a 20 year span, the high return project portfolio returned more than 22 times the low return portfolio.

Exercise – Part 4 (Final)

•Project Manager Reports

•Project Discussion

•Reinvest in new projects

Conclusion

Each organization may have different goals. Regardless of the types of project preferred, high return projects save more energy and reduce more greenhouse gases than low return projects. An understanding of how to leverage energy and sustainability funding can have a compounding impact over a long period of time.

Conclusion

Don’t just follow the herd. Do the math. Separate the wheat from the chaff and you will push forward the best projects to meet your goals.

Questions?

Why Math Is Important: Separating the Wheat from The Chaff

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