The Economics of Energy Efficiency

Rajesh and Jonathan forwarded me an awesome article on the irrationality of not pursuing energy efficiency. It features this chart:

The article goes on to explain:

“The result is a testament to economic irrationality. The measures below the horizontal line have a negative abatement cost–in other words, by carrying them out, people and companies could both cut emissions and save money. At a macroeconomic level they would boost, rather than reduce, economic growth."

Recently, in our Broomfield datacenter we did an $80K capital improvement that should yield around $100K of savings in electricity per year. There’s nothing that unique about our datacenters, and I suspect that similar savings exist in most others. So why aren’t we seeing a mad rush to do datacenter efficiency projects?

The article hints at the reason in the middle: in most organizations the people paying the energy bills aren’t making capital decisions, and the people making capital decisions aren’t paying energy bills. For example, if our IT guy in charge of the improvement above can get credit for the energy savings, his project has a positive return in under a year. If he can’t get credit for the energy savings, this project never shows a positive return.

This should be easy to fix, right? Well, not really. We’re dealing with it internally on a case-by-case basis, but I’d love to see us institutionalize it better. Others have more trouble. I was recently at a major university which gets lots of government grants, and electricity gets paid for out of “overhead” payments that come with lots of strings attached. And, oh, by the way, these payments are based on a fixed percentage and don’t change if you make yourself more efficient.

I gave a talk at a conference last week which included practical advice on how to reduce carbon emissions in businesses. Step 1 was to figure out where your energy goes today. Step 2 is to get your finances lined up so that you can factor energy savings into the ROI on capital improvements. Starting efficiency projects without this isn’t the end of the world, but its sure helps. There’s nothing worse than having efficiency projects get a bad name because they always cost money and don’t have a return. This is especially painful when these projects, in fact, often have fantastic ROIs.

So if you’re involved in IT, or in eco in general in your organization, make sure you work this issue up front. Energy efficiency makes financial sense, but only if you can bring the finances under one umbrella.