HECM Phase 6 Cost and Prioritisation Workshop 24 th September 2010

Agenda Session 1: Introduction and context –Timeline –Where are we now? –HEFCE Guide –The Carbon Management Plan (CMP) –Estimating Capital Cost of Projects –Understanding Financial and Carbon Metrics Session 2: Prioritising and the CMPR –Prioritising Projects Using Combined Carbon & Financial Metrics –Getting to Grips with the CMPR –Recap Progress Against Target –Next steps

Timeline

HECM6 – the timeline We are here November

Where are we now? Key Statistics Baseline 2008/ tonnes 2005 Baseline – tonnes Target 2008 to 2015 – 35% Target 2008 to 2020 – 45% Total Carbon To Identify in CMP (to 2015)–14.85 tonnes

Projected emissions in 2020 Target Year – xxx tonnes Emissions in 2005/06 Baseline Year xxx tonnes Emissions in 2009/10 xxx tonnes Difference between 2009/10 emissions and projected 2020 emissions (Percentage Reduction – xx %) Difference between emissions in 2005/06 and projected 2020 emissions (Percentage Reduction – XX%) Projected emissions in 2014/15 xx tonnes Where are we now?

Current Projects Number of Projects Total Carbon Identified Who is responsible for each project? How close do these projects bring you to your target? Are there any current projects we’ve missed? Target 35% Current Projects xx% RAP Projects YY% RAP Projects YY% Opps Workshop Projects YY% Opps Workshop Projects YY% Gap

Projects from the Opportunities Workshop Number of Projects Total Carbon Identified So Far Which projects are you investigating? Who is responsible for each project? How close do these projects bring you to your target? Target 35% Current Projects xx% RAP Projects YY% RAP Projects YY% Opps Workshop Projects YY% Opps Workshop Projects YY% Gap

RAP Tool Projects Top 10 RAP Tool Projects Total Carbon Identified So Far Who is responsible for each project? How close do these projects bring you to your target? Target 35% Current Projects xx% RAP Projects YY% RAP Projects YY% Opps Workshop Projects YY% Opps Workshop Projects YY% Gap

Closing the Gap What actions need to be completed to close the gap? Target 35% Current Projects xx% RAP Projects YY% RAP Projects YY% Opps Workshop Projects YY% Opps Workshop Projects YY% Gap

HEFCE Guide

Alignment with CIF2

HEFCE Good Practice Guide Costing –CAPEX, OPEX –Need for life-cycle costing –Established investment appraisal protocols and procedures need to be applied –Simple payback as a minimum, need for NPV for larger projects –Need also to look at cost of inaction Prioritisation –Need internally agreed criteria –Need to consider cost/affordability and impact/savings –Overlap and interaction with other strategies and priorities –MACC

The Carbon Management Plan (CMP)

The Carbon Management Plan (CMP) Section 4 - Projects

2009/102010/112011/122012/132013/142014/152015/16TOTAL Annual cost saving £0£0 £ 215,743 £ 384,936 £ 434,897 £ 442,473 £ 450,047 £ 843,991 £ 2,772,087 Annual tCO 2 saving 1132,5103,4354,1714,2425,9757,92328,369 % of baseline CO 2 saving /092009/102010/112011/122012/132013/142014/152015/16TOTAL Annual costs: £ 1,114,032 £ 65,590 £ 858,613 £ 858,962 £ 178,096 £0£0 £0£0 £0£0 £ 3,075,293 Committed funding: £ 1,114,032 £ 65,590 £ 670,034 £ 783,096 £ 178,096 £0£0 £0 £0 £0£0 £ 2,810,848 Unallocated funding £ 0 £ 188,579 £ 75,866 £ 0 £0 £0 £0£0 £ 264,445 Savings Funding The Carbon Management Plan (CMP) Section 5 - Financing

CMPR flowchart

Estimating capital costs

Estimating Costs of Projects RAP tool Salix Rules of Thumb Carbon Trust Surveys Organisation’s own experience – use your team Quotes from suppliers

Understanding financial and carbon metrics

Metrics for analysing project effectiveness Initial Analysis –Simple payback –Salix £/tonne CO 2 lifetime Advanced Analysis –Net present cost –Cost effectiveness ratio (£/tonne CO 2 ) –Internal rate of return (IRR) Use to…….1. establish financial case 2. prioritise projects

Costs Capex – capital expenditure/costs –Single one off costs in year 0, usually includes design, materials, technologies, installation, commissioning etc. Opex – Operational expenditure/costs –Usually annual costs for running a project, e.g. maintenance and servicing, lease costs or staff resource costs. Does not normally include energy costs for carbon reduction projects as these are accounted for in the savings data –There may also be opex savings through some projects

Basic metrics CO 2 savings in year 1 (tCO 2 or kgCO 2 ) –The amount of carbon savings expected from a project in the first full year of operation. Simple Payback (yrs) –How long a project takes to pay the Capex back through the financial savings achieved (yrs) Capex(£) Annual financial savings (£/yr) – Opex (£/yr)

Simple payback Best outputValue tends to zero Worst outputDoes not pay back – savings not realised during the lifetime of project No financial savings – need to update p/kWh costs in the Conversion Assistant tab.

Exercise 1

Payback exercise ProjectCapexOpex£ Savings (gross) Payback (yrs) Secondary glazing - Offices £450,000 £8,010 Voltage optimisation - Block A £90,000 £24,440 Cavity wall insulation - Research Centre £100,000 £15,000 Upgrade to condensing boilers - Swimming pool hall £200,000 £22,291 Video and web conferencing £9,000£2,049 £6,058 Automatic Meter Reading£90,000£28,545 £123,484 Lighting upgrades - Residential Hall A £100,000 £90,000

Examples ProjectCapexOpex£ Savings (gross) Payback (yrs) Secondary glazing - Offices £450,000 £8,010 does not payback in project lifetime (25 yrs) Voltage optimisation - Block A £90,000 £24, Cavity wall insulation - Research Centre £100,000 £15, Upgrade to condensing boilers - Swimming pool £200,000 £22, Video and web conferencing £9,000£2,049 £6, Automatic Meter Reading£90,000£28,545 £123, Lighting upgrades - Residential Hall A £100,000 £90,

Simple Payback Graph in CMPR

Further metrics Pounds per tonne CO 2 (£/tCO 2 ) –Capex per tonne of CO 2 saved in year 1 Capex (£) Tonnes CO 2 saved year 1 (tCO 2 ) Lifetime CO 2 savings (tCO 2 ) –The amount of carbon likely to be saved over the lifetime of a project Tonnes CO 2 (year 1) x Project lifetime (yrs) Adjusted to account for ‘persistence’ of CO2 savings in CMPR. (default 0%)

Salix metrics Best outputValue tends to zero (low £, high CO 2 ) Worst outputLarge positive number (high £, low CO 2 ) Persistence factor Capex (£) = Provided by Salix (see References and lookup tab in CMPR) Effectively a reduced lifetime of the technology = £↓£↓ ↑ CO 2 Tonnes CO 2 (year 1) x Salix pounds per tonne CO2 lifetime (£/tCO2 LT)

Financial metrics Net Present Value (NPV) –The present value of an investment's future net cash flows minus the initial investment. Net Present Cost –The negative value of the NPV –Works better for energy saving projects as a larger negative number shows greater savings = Capital Cost + Operating Cost – Savings (discounted over project lifetime)

Financial Metrics Discount rate –The interest rate used in determining the present value of future cash flows, or –Multiplier that converts anticipated returns from an investment project to their present value. –For the public sector this is usually 3.5% as set by UK Treasury Green Book, 2008

Example you expect £1,000 in one year's time. To determine the present value of this (what it is worth to you today) you would need to discount it by a particular rate of interest. Assuming a discount rate of 10%, the £1,000 in a year's time would be the equivalent of £ to you today (£1000/[ ]).

Net Present Cost examples factor [=1/(1+r)^n]

Other rates in the CMPR Inflation rate –3.1% (Consumer Prices Index, CPI – July 10) –Use an appropriate rate to reflect rising energy costs, not just overall inflation ‘Persistence’ rate –How quickly the opportunities’ energy savings degrade over time. –E.g. a draught proofing project saves 1,000 kgCO 2 in year 1, but thereafter saves 3% less each year due to deterioration. So year 2 will save 970 kgCO 2

Amending the rates in the CMPR

Cost effectiveness ratio (£/tonne CO 2 ) Best outputLarge negative number Worst outputLarge positive number Lifetime CO 2 Savings Net Present Cost = = -£ ↑ CO 2 Cost effectiveness ratio (£/tonne CO 2 )

Cost effectiveness ratio ProjectCapexOpex£ Savings (gross) Cost effectiveness ratio(£/tonne CO2) Secondary glazing - Offices £450,000 £8,010 £ Voltage optimisation - Block A £90,000 £24,440-£ Cavity wall insulation - Research Centre £100,000 £15,000-£79.05 Upgrade to condensing boilers - Swimming pool hall £200,000 £22,291-£63.81 Video and web conferencing £9,000£2,049 £6,058-£ Automatic Meter Reading£90,000£28,545 £123,484-£ Lighting upgrades - Residential Hall A £100,000 £90,000-£148.59

Understanding Financial Metrics Internal Rate of Return (IRR) –The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. –The higher a project's IRR the more desirable it is to undertake the project. –IRR can be used to rank several prospective projects being considering.

Break

Agenda Session 1: Introduction and context –Timeline –Where are we now? –HEFCE Guide –The Carbon Management Plan (CMP) –Estimating Capital Cost of Projects –Understanding Financial and Carbon Metrics Session 2: Prioritising and the CMPR –Getting to Grips with the CMPR –Prioritising Projects Using Combined Carbon & Financial Metrics –Recap Progress Against Target –Next steps

Getting to grips with the Carbon Management projects Register (CMPR)

CMPR flowchart

Initial analysis

Advanced Analysis

Prioritising Projects Using Combined Carbon & Financial Metrics

CMPR flowchart

Sort by Payback Implement

Marginal Abatement Cost Curve (MACC) Implement Cost effectiveness ratio £/tCO2

Exercise 2

Draw a MACC ProjectCost effectiveness ratio(£/tonne CO2) CO2 savings in yr 1 (tonnes) Secondary glazing - Offices £ Voltage optimisation - Block A -£ Cavity wall insulation - Research Centre -£ Upgrade to condensing boilers - Swimming pool hall -£ Video and web conferencing -£ Automatic Meter Reading-£ Lighting upgrades - Residential Hall A -£

Something like this…..

Recap progress against target

CMPR flowchart

The Quantification Process Map Check Progress Is there a short fall? Consider Increasing Target Quantify Highest Priority Opportunity Do you have opportunities to quantify? Generate More Ideas Yes No

Project Maturity What stage are your projects at now? –RAP Tool Estimates? –Quantified energy? –Etc… 80% or more

Reduction plan

Next steps

Linking to the CMP ‘CMP outputs’ tab

Project Definition Template ‘Appendix B’

Thank you