Earth Consultants

Applying Lean Six Sigma to the Environment

Yet another reason why the cards are stacked against energy reduction

4 min read

It’s hard enough to get people to invest in energy reduction conservation or upgrades, but it’s even more frustrating when you realize that you need to deduct the company or individual tax rate from the savings, which reduces the return on investment or payback period.

The main reason why energy reduction is not on the top list of activities for individuals and companies is because we are not paying the full price for energy. If we were charged for the full environmental impact of pollution and carbon emissions, which increases healthcare costs and increases climate change, the price of energy would be much higher. In addition, the coal, oil and gas industries are subsidized in the United States, so that reduces the price of energy even more. Bottom line, the price of energy is much less expensive than it should be.

So when we propose energy reduction efforts, you have to show an even bigger savings, in order to offset the investment costs. If the prices were higher, the payback would be much quicker and more people would be interested in upgrading equipment or conserving energy.

But the third reason why these projects can be difficult to justify, although not normally considered, is that the projected savings will be taxed. Therefore, you cannot take the full amount of savings into your payback calculations. This applies primarily to companies that categorize their energy costs as expenses of their business, and are able to deduct them from their tax burden. With the extra profit they will make from not paying for energy, they will have to pay taxes on it. For individuals, this would apply if they run a business from their home.

Let’s look at an example. Let’s say your company pays $1000 per month in lighting costs. At $0.10 per kWh, that is 10,000 kWh per month to run the lights. If we invest in LED lights, that have a cost of $20,000, then we can save 3,000 kWh per month (30%), or $300 per month. To calculate a simple payback, we divide the investment by the savings per month:

$20,000 investment / $300 per month = 67 months = 5.6 years

Paybacks less than 7 years are pretty good for energy reduction, considering the issues I mentioned above with the price of energy. However, the $300 per month savings is now taxable income for the company, so we need to reduce the savings by the company tax rate, to get the true savings. If the company pays 25% of their profits (after deductions) in taxes, then we can only take credit for $225 per month savings (75% of $300). The $75 difference would be paid as taxes to the government. That’s a good thing for the government, but not so good for the company, other than an increase in profits.

$20,000 investment / $225 per month = 89 months = 7.4 years

Now the project is less viable, and less likely to get approved.  It went from a solid 5.6 year payback to 7.4 years. Ugh!!

Let’s consider the scenario where the price per kWh is much more realistic, say $0.20 per kWh. The company would be paying $2000 per month in lighting, so the savings would be $600 per month. Taking out the tax rate, the actual savings would be $450 per month. The project would still cost $20,000 to implement, so here’s what it would look like.

$20,000 investment / $450 per month = 44 months = 3.7 years

Now that is a good investment for any company! We could also do the same calculations with a project to investment in fuel efficient or hybrid vehicles for the company fleet.

So what can we do about these issues?

1) Continue to fight for the removal of subsidies

2) Promote additional fees for carbon fuels and pollution, to account for the true impact on society.

3) Convince our companies to realize that they are paying a cheap price for energy, and to consider the environmental and social benefits of these projects, not just the payback period.

Depressing news, I realize, but we need to continue to educate and remind people about these issues, so they aren’t solely focused on price alone.

How have you been able to convince your company to move forward on energy reduction projects, even if the payback period wasn’t as good as other business projects?

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