IPO Return, Treasury Risk

13 04 2010

If there’s one thing that most people painfully realized over the past couple years, it’s that there is risk in putting your money in anything in hopes of earning a return on investment.  Riding a company into bankruptcy is an obvious one.  I’ve done that several times by investing in fast-growing start-ups, initial public offerings (IPO) and stock options.  Invest $3,000 for 100 shares of common stock and a few years later the company emerges from bankruptcy (isn’t that a cute phrase – it sounds like a daffodil blooming in spring but it’s more like rummaging for your charred silverware after your house burned to the ground) … anyway that investment may “emerge” at 10 shares worth $6 apiece, or if they liquidate you get a check for 36 cents.

If you avoid Bernie Madoff funds, you can greatly reduce your risk by buying mutual funds, which more or less track the entire stock market.  Corporate bonds might be next.  In the case of bankruptcy, provided the government doesn’t take over the company, you are first in line to get your money back.  Next might be U.S. government bonds but I wouldn’t go near them now as their value moves in the opposite direction of interest rates.  Just take a look where interest rates are now compared to historic numbers and do the math.  You CAN lose a lot of money in bonds.  Then there are money market funds that invest in super safe short term treasuries, but right now you earn about nickel a month per $1,000 invested.  Finally, there’s cash in the bank, which earns even less or zero but at least the first $100,000 is insured by the feds (the minimum was increased to something but I don’t care).

Commercial and industrial facility owners can invest in energy efficiency.  Lighting would be the bonds of energy efficiency, with the exception that you’re virtually guaranteed a return on investment as long as you can do 5th grade math to ensure you aren’t being ripped off.  Beyond that, the vast majority of energy efficiency projects carry the full gamut of risk from guaranteed savings (which isn’t free) and just buying a new piece of expensive equipment or system that may not save you a dime or could even increase your energy costs.

The big money is in custom measures and the risk varies depending who is identifying the opportunities and who, if anyone, is calculating savings.  If you browse our website you will find we identify measures and quantify savings all the time.  For many large projects we take a two phase approach to the analysis.  Phase 1 is to identify opportunities and guesstimate cost and savings to within plus or minus 40%, which means a project guesstimated to have a 2 year payback may actually have a payback from less than a year to more than 4.5 years, with the most likely being 2 years.

Phase 2 is a detailed analysis, sometimes with quotes from contractors, and energy analysis based on specific equipment performance characteristics, construction documents, and metered data.  After Phase 2, the guesstimates are sharpened to within plus or minus 10%, perhaps.  Now that 2 year payback would range from 1.6 years to 2.4 years, with the most likely being 2 years.

So energy analysis can take your project from a completely unknown return on investment to something that is close to guaranteed, and if you want, that can be added too.  The cost of hiring a firm that knows what they’re doing, delivering both quantity and accuracy of cost and savings estimates, is considered by end-users to be anything from reasonable to outrageously expensive.  Owners with smaller facilities and especially government ones tend to be at the latter portion of that range.  Large industrials may be closer to the front.

But the kicker is, utilities that run efficiency programs often pay for a good share or all of the energy analysis, sometimes even both phases of analysis described above.  But yet, end users may baulk.  We recently completed phase 2 analyses that largely demonstrated our phase 1 estimates were pretty good and some representatives of customers were scoffing that phase 2 was a waste of money.  Well look at the “uncertainty analysis” above and tell me, would you use “free money” from the utility to shore up your investment certainty before you invest a dime to implement anything, OR NOT?

As my colleague says, “It’s a no BRAINER!  Gee willikers!”

As an investment, an energy efficiency project may pay for itself four or five times or even more over its lifetime.  Peter Lynch who ran the Fidelity Magellan fund during the 80s would call doubling your investment a one bagger; tripling, a two bagger and so on.  This makes energy efficiency a likely two bagger and in many cases a four bagger.  It’s a home run with the risk of a money market fund.

Why doesn’t everyone get on this ride?  There are many reasons; some good ones and some utterly stupid ones.

written by Jeffrey L. Ihnen, P.E., LEED AP

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Fortune 100 Energy Efficiency

30 03 2010

One of the downsides of the surging awareness and growth in energy efficiency and renewable energy, in my opinion, are all the Johnny Come Lately energy services arms of giant corporations.  Companies include Lockheed Martin, United Technologies, Eaton, and Chevron.  These giants have revenues of $45 Billion, $53 Billion, $12 Billion and a meager $176 Billion, respectively.  Poor Chevron’s revenue dropped from $275 Billion from the year prior.  Maybe they should focus on their core business and leave the energy saving to the rest of us.  Among these, only measly Eaton isn’t in the Fortune 100 (Eaton comes in at 207 on the Fortune 500).

Why do these giants want to get into energy efficiency?  Revenue from their energy efficiency services wouldn’t show up on the first six significant digits of their total revenue, but yet this is huge business compared to peons like Michaels Engineering and dozens of other service providers.  Lockheed probably charges the government more for one tire on an F-35 joint strike fighter than we earn in a year with 40 people.

On the other hand, these behemoths have to get huge projects like those for large college campuses or military bases to be worth their while and to be cost effective to carry their crushing overhead.  This leaves plenty for us little guys to fight over.

On the third hand, they provide competition for the other titans of performance contracting, including Trane, Honeywell, Siemens, and Johnson Controls, and I’m all for that.

Having provided technical support and program evaluation for dozens of utilities, I don’t think we have yet seen any requests or applications for incentives from these giants, for their customers.  Why would they leave all this free money their customers could claim on the table?  Could it be they don’t want anyone looking at their underbelly?  Customers should demand this.  But then again, customers are typically state and federal government entities.  Even though these incentives are theirs to lose, it’s really ours.  So who cares?  What a racket.

Of course most of these huge companies, except Lockheed and Chevron I believe, use performance contracting to peddle their wares, whether customers need the stuff or not.  As mentioned last week, they’ll “give away” studies and other services, and sometimes even equipment to hook (or harpoon) these customers.

Within the past couple years, one of these performance contractors had seduced a local school district by offering them “free” equipment in exchange for maintaining their buildings’ heating, cooling, and control systems over 10-20 years.  What were they thinking?  Remember last week; nothing is free.  The whole spectacle can be most vividly portrayed in Warner Bros’ Hansel and Gretel episode on Bugs Bunny.   Guess who the characters represent.  As soon as reality set in and the invoices started coming for the maintenance services, the district wanted out yesterday.  Another happy customer.

On a couple unrelated notes:

A group of scientists wants to create a new unit for energy savings, the “Rosenfeld”.  He may have been a great guy, but I would vote no on that.  All the units and named thermodynamic cycles I can think of are named after one or two-syllable names, and Rosenfeld doesn’t just roll off the tongue.  Joule, Newton, Volt, Tesla, Kelvin, Rankine, Curie, Diesel, Otto, and Watt.  The only major oddball I can think of is Fahrenheit.  There should be a contest to replace that.  He deserves it because it’s such a stupid scale.

The Rosenfeld thing would replace kilowatt-hours, three billion of them to be exact.  What about Mr. Watt?  This is a diss to him.  What is special about three billion kWh: it’s supposed to be the annual output of a 500 MW power plant.  Per my calculations, it’s closer to 4 billion kWh.  And who is ever going to use this metric?  “The results of our study indicate that you can save 0.00016 Rosenfelds with a two year payback.”  I think they would eject us from their building and not pay us for such pathetic looking savings.

So there you have it, a “Rosenfeld” is too long, too much, incorrect, goofy, and it runs roughshod over Mr. Watt.

Then there’s this laugh out loud headline, suitable for an article in The Onion.   “Warning Biofuel Targets May Hit Oil Industry”.  Just think about that for a moment.