Saving Energy Dollars In Your Retail Business Through Cost Avoidance

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Title:
Saving Energy Dollars In Your Retail Business Through Cost Avoidance
Physical Description:
Fact sheet
Creator:
Jarnagin, Ronald E.
Publisher:
University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication:
Gainesville, Fla.

Notes

Acquisition:
Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Melanie Mercer.
Publication Status:
Published
General Note:
"EES-28"

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Source Institution:
University of Florida Institutional Repository
Holding Location:
University of Florida
Rights Management:
All rights reserved by the submitter.
System ID:
IR00004795:00001


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FactSheetEES-28 SavingEnergyDollarsinYourRetailBusinessThroughCost Avoidance1 RonaldE.Jarnagin2Oneoftheunfortunateconsequencesofrapidly risingenergypricesisthateventhoughenergy efficiencyeffortsmayreduceoverallenergyusage,the totalenergybillmaycontinuetoincrease.Frequent rateincreases,coupledwithhigherfueladjustment costs,haveresultedinmanysmallbusinessmen asking,"WhyshouldImaketheefforttoreduce energyusewhenmybillisgoingtogoupanyway?" Theanswertothisquestionliesinlookingatenergy efficiencyasamethodofcostavoidance.Anysteps takennowtoavoidpayingadditionalcostsforenergy willresultinmoneysavingsinthefuture. Toillustratethispoint,assumethatabusinessis consideringanenergyconservationmeasure(ECM) thatwillyieldamodest10%averageannualreduction inelectricalenergyusageforthebusiness.Usingdata fromatypicalsmallbusiness,itisfoundthatthe energyusagebeforetheimplementationoftheenergy conservationmeasurewasapproximately48,000 kilowatthours(kwh)peryear.Withtheexpected 10%energyreduction,theaverageenergyusage wouldbe43,200kwhperyear.Theamountsofyearly dollarsavingsforvariouselectricutilityratesare showninTable1. Table1illustratesanimportantpointabout Table1. YearlySavingsforVariousElectricalUtility Rates. Electric Utility Rate (/kwh) Yearly Electrical CostBefore ECM($) Yearly Electrical CostAfter ECM($) Yearly Savings ($) 6 2880 2592 288 61/23120 2808 312 7 3360 3024 336 71/23600 3240 360 8 3840 3456 384 81/24080 3672 408 9 4320 3888 432energyconservationinvestments:thehigherthe utilityrate,themorecosteffectiveagiven expenditurebecomes.If,intheexample,thecostof theECMwas$500,thentheyearlyreturnon 1.ThisdocumentisFactSheetEES-28,aseriesoftheFloridaEnergyExtensionService,FloridaCooperativeExtensionService,InstituteofFood andAgriculturalSciences,UniversityofFlorida. 2.RonaldE.Jarnagin,MechanicalEngineeringSpecialist,FloridaEnergyExtensionService,CooperativeExtensionService,InstituteofFood andAgriculturalSciences,UniversityofFlorida,GainesvilleFL32611. TheFloridaEnergyExtensionServicereceivesfundingfromtheFloridaEnergyOffice,DepartmentofCommunityAffairsandisoperatedbythe UniversityofFlorida'sInstituteofFoodandAgriculturalSciencesthroughtheCooperativeExtensionService.Theinformationcontainedherein istheproductoftheFloridaEnergyExtensionServiceanddoesnotnecessarilyreflecttheviewsoftheFloridaEnergyOffice. TheInstituteofFoodandAgriculturalSciencesisanequalopportunity/affirmativeactionemployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,age,handicap,ornational origin.Forinformationonobtainingotherextensionpublications,contactyourcountyCooperativeExtensionServiceoffice. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/ChristineTaylorStephens,Dean

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SavingEnergyDollarsinYourRetailBusinessThroughCostAvoidance Page2investmentat6cts/kwhwouldbe58%,whilethe returnat8cts/kwhwouldbe77%.Usingthese assumedfigures,thesmallbusinessmanwouldachieve asimplepaybackof1.7yearsat6cts/kwhand1.3 yearsat8cts/kwh.Eveniftheenergyconservation measurehadcost$1000,theannualreturnon investmentwouldstillrangefrom29%to38%. Whilethissimpleanalysisdoesnotconsiderthetime valueofmoney,itdoespointouttheattractiverates ofreturnofferedbyenergyconservationinvestments.EFFECTSWITHANNUALRATEINCREASESThissameenergyconservationmeasureshouldbe consideredinlightofannuallyescalatingutilityrates. Itisagainassumedthatthesameannualenergyusage rateswillapply,andtheexpectedenergysavingswill be10%.Next,therateofenergycostincreasemust beprojected.Forcomparisonpurposes,theexample considersthreeratesofincrease:low,6%/year; moderate,8%/year;andhigh,10%/year.Tosimplify mattersfurther,anexistingutilityrateof6cts/kwh(as atypicalvalue)isassumed.Usingtheseassumptions, Table2comparestheyearlyenergycostsbeforeand afterimplementationoftheECM. Table2clearlyillustratestheproblemunder discussion.Wheninflationoccurs,andyearlyenergy costsarecomparedbeforeandafterimplementation oftheECM,thetotalenergybillrises.Forexample, atanassumedenergyinflationrateof8%peryear, thesecondyearenergycostsare$2799after implementationoftheECM.Alltoofrequentlythe conclusionisdrawnthattheECMwasworthlesssince energybillshaverisentoapproximatelywhatthey werebeforeimplementingtheECM($2799compared to$2880). Theerrorinthelogicshouldbeapparent, however,bylookingmorecloselyatthetable.Had theECMnotbeeninstituted,energybillswouldhave risenby$230--fromayearlyfigureof$2880toa yearlyfigureof$3110.Thisrisewouldhaveoccurred fromthenormalinflationofenergyprices.However, byinstitutingthesuggestedECM,thesmall businessmansaved$311inthesecondyear--the differencebetween$3110and$2799. Forthefiveyearperiodshown,thetotalsavings Table2. YearlyEnergyCostsBeforeandAfter ImplementationofandEnergyConservation Measure. Annual Energy Inflation Rate(%) YearlyEnergyCostat6/kwh($) 1 2 3 4 5 0 BeforeECM 2880 2880 2880 2880 2880 AfterECM2592259225922592 2592 6 BeforeECM 2880 3053 3235 3430 3636 AfterECM2592274829133088 3273 8 BeforeECM 2880 3110 3359 3628 3918 AfterECM2592279930233265 3526 10 BeforeECM 2880 3168 3485 3834 4217 AfterECM 2592 2851 3136 3450 3795achievedbytheECMattheassumed8%inflation ratewouldbethedifferencebetween$16,895and $15,205,or$1690.Again,thesesavingsdonottake intoaccountthetimevalueofmoney,buttheyare substantialnonetheless.Thesavingsachievedbycost avoidancecouldbeusedbythesmallbusinessmanto provideoperatingrevenuetoinvestinfutureECMs, ortoholdthelineonpriceincreases.Ineithercase, thecostavoidancewouldallowthesmallbusinessman tobecomebothmoreprofitableandmore competitive. Insummary,energycostswillcontinuetorise overtime.Becauseoftheserisingcosts,investments inenergyconservationmeasureswillsavemoneyon theenergybill.Theprudentsmallbusinessmanwill realizethatdespiteincreasesintotalbills,realsavings canbeachievedthroughcostavoidance.Armedwith thefacts,smallbusinessmenwillbeabletomakethe smartfinancialdecisionsthataffectthefutureoftheir businesses.