Sweating assets overlooks the energy efficiency gains

17 August 2012

There is no question that the same austerity versus growth political argument in the Eurozone is spilling over into boardrooms too. At the microeconomic level of individual companies, the decision is whether to expand or cut back, and investment in new machinery always hangs in the balance, especially in the aftermath of staff cuts. Steve Brambley, deputy director of GAMBICA and convener of the organisation’s VSD group, outlines the situation with regard to industrial automation.

We have been discussing the energy saving benefits of variable speed drives (VSDs) on motors for many years, yet it never ceases to amaze us that this still comes as 'news' to so many people in industry. The cost of VSDs has remained fairly stable over the years and the cost of energy has gone up so drastically that it is hard to understand what the barriers in the way of greater use of VSDs to save energy are.

Some manufacturing directors regard the length of time they have sweated assets beyond their depreciation period as a badge of pride to show to their board. They eke out the last ounce of production, at times regardless of whether this proves to be profitable or not. However, inefficient machinery reduces profit on an ongoing basis because 90% of the total lifecycle cost of a motor is spent on energy as opposed to 10% on capital cost.

So, the asset you think you are sweating might actually be sweating you. GAMBICA recently commissioned a report from Oxford Economics, which argued that many companies are cash-rich because they haven’t wanted to invest in the face of a possible double-dip recession. That cash would give a much better return if invested in energy saving projects.

Retrenchment stifles growth
Even where companies have the means, short-term uncertainty prevents them from taking risks. However, such retrenchment does not set you up for growth, when it returns, if you have laid-off key staff and skills. You might save money, but you are not ready to come forward again.

In the last recession, the German Government paid companies to keep staff despite not having enough work, which allowed them to quickly ramp up during economic recovery.

GAMBICA has identified three key barriers to investment in VSDs. The first is economic uncertainty and a reluctance to invest despite benefits. The second is that machine builders and buyers focus purely on purchase cost and not on lifecycle cost. The third is the lack of awareness of how much energy is consumed by motors within a business and how much could be saved

The austerity mindset is not too dissimilar to that of the landlord-tenant relationship, where the former will not pay for a new washing machine until the old one finally packs up. The landlord will then buy the cheapest replacement rather than the most energy-efficient one, because as his tenant pays the bill; he is not concerned about the extra energy consumed.

In an industrial context, it is often the customer who demands the cheapest machine without regard to the attendant higher maintenance cost and energy use. As for the supplier, it takes some courage to offer equipment that is more expensive than the competition’s, despite the fact it may be significantly less costly to run over its life and is therefore is actually the least expensive.

Tax breaks
In the UK there are Government tax breaks to help companies, like the Enhanced Capital Allowance (ECA) but this is only for discrete products such as motors and variable speed drives – not for entire machines, so if a company buys a HVAC system it cannot claim money back.

There is also a Carbon Trust loan scheme, where energy-saving projects are assessed for funding. The loan is structured so that the repayments are equivalent to the money saved in energy efficiency, so cash flow is not affected. The business does not need to use its own funding and repayments are self-funding. The ongoing benefit to the business is continued reduction in costs.

This brings us back to the austerity versus growth dilemma. With regard to energy use in particular, the boards of businesses should be clamouring to spend, not cutback because, ironically, it is the former, not the latter, that will improve their bottom line.

GAMBICA is the Trade Association for Instrumentation, Control, Automation and Laboratory Technology in the UK. It has a membership of over 200 companies including the major multinationals in the sector and a significant number of smaller and medium sized companies. www.gambica.org.uk

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