INVESTMENT ANALYSIS: PROPER RISK EVALUATION MAKES CONSERVATION PROJECTS THE RIGHT CHOICE

摘要

Business analysts measure investment opportunities basedrnon the predicted risk of future cash flow and the expectedrnmagnitude of said future cash flow. As energy engineersrnand managers, our task is to generate projects withrnsufficient credibility to warrant investment. These analystsrnare accustomed to evaluating projects using metricsrnincluding IRR, NPV, ROI and other more sophisticatedrndecision tools such as the Capital Asset Pricing Model.rnWe as energy engineers are accustomed to conversing inrnbtus, kWh, therms, Quads, and tons of cooling. Our role isrnto be the translator from expected energy impact in btus,rnkWh, and other units into credible expected dollars.rnFailure to do this consistently, while delivering costrnavoidance as predicted is the daily challenge we face as werncompete with other investment opportunities for projectrnfunds.rnThe ongoing challenge faced by Facility Managers andrnEnergy Engineers is how to get conservation projectsrnfunded when competing against emerging generationrntechnology and price hedging. In most cases, particularlyrnin periods of rapid energy unit cost escalation, thernmagnitude of the predicted return is not the impediment. Itrnis the perceived relative risk of the conservation projectsrncompared against either internal investment, or generationrntechnology. When a financial manager can refer to arnmeasurement and verification plan which was done on anrnexisting project that was properly prepared and executed,rnsubstantiates project performance, or lack of performance,rnalong with the necessary and appropriate adjustments orrncauses of non performance, the likelihood of considerationrnof future projects increases dramatically. In contrast, if arnfinancial manager has no substantiation of past projectrnperformance of previously funded projects, the prospectsrnof continued funding decreases simply because there is norncredible data to evaluate risk.rnTherefore if we want to get more projects funded, we needrnto document our successes (or failures) and explain whyrneither happened. This is no different than building a creditrnhistory. The only indicator of future performance is pastrnperformance. That’s what financial analysts look at. Wernaudit, identify, engineer and propose projects to ourrnmanagers – only to have them turned down. Why?rnOften, it’s not that the customer does not understand, doesrnnot care, or dislikes saving money. Where we seernopportunity, financial managers see risk! Based on the pastrnperformance of some contractors, this perception of risk isrnjustifiable.rnThe first rule – you need to learn the common language.rnThe Cash Flow Tools: Net Present Value, Internal Rate ofrnReturn, Savings to Investment Ratio, etc. It is imperativernthat we speak the language of the people holding therninvestment purse strings. Once you know the language,rneverything gets easier. Ever been in a non Englishrnspeaking country where you don’t know the language?rnTry to order breakfast. Better yet, try and convince yourrnhosts to invest in a nebulous series of cash flows basedrnupon some indecipherable calculation constructed in arnforeign language. Learn the language: Savings torninvestment ratio, Net Present Value, Internal Rate ofrnReturn, Discount Rate, etc. Remember, in most casesrnselling btus, Megawatts, Negawatts, therms, Mlbs, andrnTons of cooling to individuals who speak in dollars andrncents will not work very well.