Jan 30, 2017

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Energy, the real Cost

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What are shipowners’ social responsibility toward climate change and greenhouse gas (GHG) emissions? If businesses and governments do not rise to the challenge, how can society achieve its reduction goals?

Presently, there are financial assistance programs in the Province of Québec that are aimed at reducing GHG emissions. However, the Québec government’s program only extends to March 31, 2017. Consequently, there isn’t much time left to act.  

Consuming fossil fuel is not without consequence. Atmospheric pollution affects the quality of the air that we breathe and disrupts the chemical composition of the oceans. Despite the fact that maritime transport is a very efficient means of transportation, ships nonetheless produce significant quantities of GHGs.

Our industry’s social responsibility goes beyond the concepts of sustainable development and respect for the environment. It positions the maritime industry as a major societal player entrusted with responsibilities, values, privileges and rights.

Shipowners form part of society and depend on it for their existence. Consequently, they have obligations that stem from this privilege.

Additionally, as members of society, they have a social responsibility to contribute positively to the health of the community and the environment.

To what extent does profit seeking justify not putting in any effort to ensure that our ships burn fuel as efficiently as possible?

These resources, which are both non-renewable and harmful to the environment, require that we at least determine where and how they are used on our ships, whether old or new. Once their energy consumers are measured and quantified, it becomes possible to make appropriate decisions, adjust operating procedures or initiate small-scale projects that benefit the environment and your finances. The energy audit is an indispensable tool in that process.

For the majority of people wishing to do their part in reducing their carbon footprint, it is difficult for them to do so in a meaningful way. Even if they deploy all their efforts, it is rare that a single family can reduce its GHG emissions by more than two tons per year.

We often point out to ship captains that, what a Canadian family can achieve in a year, they can accomplish in a single trip.

By virtue of their capabilities, seafarers and shipowners have a social responsibility toward climate change.

These capabilities also come with a responsibility to do what is needed to help our society achieve its goals.

Simple Return on Investment The Trap Inherent In this Approach To Calculating a Project’s Cost-effectiveness

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Many managers use the simple return on investment (ROI) method of calculating the cost-effectiveness of a project. The formula, as its name indicates, is simple: one only has to divide the cost of the project by its projected savings. A project costing $50,000 and saving $15,000 per year in fuel costs will result in a simple ROI of 2.97, i.e. a nearly 3 year payback.

Many companies use this formula to determine the cost-effectiveness of a project. If the resulting ROI is greater than one or two years, the project will not be greenlighted.  In the example above, the project risks not going ahead.

This simple calculation was somewhat reliable when bank interest rates hovered around 12% but, today, a 7% rate is regarded as very attractive.

In the current context, allocating money to a project implies doing a more detailed study of its cost-effectiveness.

Take the example of the $50,000 above. If that money is invested in a bank instrument bearing 7% interest (which is highly optimistic), it will earn $20,127 after 5 years.

If that money is invested in a project that results in $15,000 in savings per year over 5 years, the payoff will be $31,630 and the business will be richer by $11,502. However, the project at first does not meet the criteria for calculating simple ROI.

The above amount represents the net present value of the project, commonly referred to as its NPV. The project’s NPV is therefore $11,502, which is equivalent to a return of 15.2%. No investment today offers that high a rate of return.

In the current context, what manager can afford to leave that kind of money on the table? Is return on invested capital not the foundation of any business?

Actually, despite the relatively low price of fuel, energy efficiency projects continue to be very cost-effective when properly evaluated, and they will be even more so in the future. Investing today will ensure significant gains in the years to come.

The price of fuel will increase as we move forward; the process has already begun. If, according to estimates, its price increases by 4% per year over the next 5 years (it rose by nearly 40% from February 2016 to today), the resulting gain using the above example will be $16,225, for a yield of 18.4%

If one adds the potential subsidy by the Government of Québec for reducing greenhouse gases, the return rises to 56% and the NPV exceeds $41,000.

Not bad for a $50,000 investment…

Given such a return, borrowing to invest in energy efficiency becomes an option worth considering.

Energy efficiency projects should be examined and analyze with care. They offer interesting possibilities for all types of ships.

For a reliable and cost-effective study of your project, call the experts at GHGES.

A project that provides a ROI of 2.94 years and a yield of 18.4% should not be approved without first being adequately evaluated.