Volvo Group North America: Giving Energy Projects a Boost with New Investment Guidelines
Amidst competing demands for capital funding, Volvo team members felt that cost-effective energy efficiency projects at manufacturing facilities were often losing out. In response, the company developed the Volvo Group Guideline for Energy-Efficiency Investment Calculations. By treating energy savings projects as strategic investments, the Guideline allows managers to factor in the risk of future energy price increases when weighing whether to invest in competing plant, property and equipment (PPE) energy efficiency projects. Generally, this makes energy-saving projects more attractive and has led to more projects being funded — even projects that exceed the company’s normal payback threshold of 1-3 years.
Proposed capital projects at Volvo are evaluated according to standardized methods that include profitability calculations such as Net Present Value (NPV), Internal Rate of Return (IRR), Modified IRR (MIRR), and Simple Payback. Profitability calculations such as NPV, IRR, and MIRR are used for larger investments and Simple Paybacks for minor investments. Previously, some energy efficiency projects faced resistance due to long payback periods and the challenge of estimating energy costs over time. Implementing the Volvo Group Guideline for Energy-Efficiency Investment Calculations helps address these barriers by providing clear guidance on factoring in the risk of sharp rises in energy costs.
The new guideline levels the playing field for energy efficiency projects and helps prioritize Volvo Group’s vision and environmental responsibility, one of the company’s core values. The company’s vision is to become the world leader in sustainable transport solutions. Reducing its energy consumption at manufacturing sites is a key method by which the company is working towards this vision. Objectives for these sites include reducing energy intensity at United States sites by 25% by 2020 from a 2009 baseline, striving towards CO2 neutrality, and reducing idling losses (system losses during non-production hours) by 50%. Reducing system losses when a system is idle (no load) has become an important consideration.
Graph 1 – Guideline cost development
The new guideline was developed in 2013 by Volvo’s Environmental Director and members of the Executive Management, Environmental Council, and Corporate Standards teams. This guideline is an update of the Guidelines for Energy Saving Investments guideline developed in 2006.
The Guideline for Energy-Efficiency Investment Calculations was disseminated throughout Volvo Group by the Corporate Standards team after its development, with other teams helping communicate guideline details. Energy cost projections used in the guideline were developed in collaboration between the Volvo Environmental Council and Executive Management team and are reviewed annually. Maintenance and Energy staff has been essential in executing the guideline throughout the new project approval process.
Tools & Resources
All PPE investments are reviewed according to the Volvo Group Investment Policy. Once approved, environmental and energy professionals are involved in collecting, reporting, and analyzing data on the implementation and impact of each energy savings project.
- Volvo Environmental Data Reports (http://www.volvogroup.com/group/global/en-gb/responsibility/sustainability_reports/Pages/env_data.aspx)
There are two metrics for measuring the impact of the new guideline: the number of new energy savings projects and a reduction in company energy intensity. Volvo Group Trucks Operations tracks proposed and implemented energy savings projects, while energy consumption data is tracked at the corporate level. Both sets of data are featured in the annual Volvo Group Environmental Data Report.
Since the guideline was launched, numerous energy savings projects have been approved that may not have received capital funding otherwise. The guideline provides a powerful tool for the company’s energy, maintenance, and environmental managers to obtain funding for strategic energy projects. This has helped Volvo make significant strides in energy efficiency at its U.S. plants. The company met its initial 25% energy intensity reduction target in 2014, and followed up by setting a new 25% target.
The New River Valley truck plant in Dublin, Virginia used the guideline to gain approval for an energy-efficient lighting project. The case study below shows a hypothetical comparison of Return on Investment (ROI) results using the Energy-Efficient Investment Guideline.
Case Study: Replacing 400w HID Metal Halides with LED Bulbs with Occupancy Sensors
The norm at Volvo’s New River Valley plant is to use the Group guideline in all energy project financial calculations. The following example shows use of the Group guideline in replacing 400w High Intensity Discharge (HID) metal halide bulbs with energy-efficient Light-Emitting Diode (LED) lights with occupancy sensors. Traditionally, HID lights are used for high bay plant lighting, parking lot lights, wall packs, and outdoor flood lights. Common types of HID lights are metal halide, mercury vapor, and high-pressure sodium. LED bulbs use less power (watts) relative to the amount of light generated (lumens) and also help to reduce greenhouse gas emissions by saving energy. The table below shows a side-by-side comparison between 400w HID metal halide bulbs and LED bulbs with occupancy sensors:
Parameters 400w HID Metal Halide LED Bulbs with Occupancy Sensors Input Watts 465 215 Hours/Day 21 20* Watts Hours/Day 9,765 989 Days/Year 313 313 Watts Hours/Year 3,056,445 309,557 $/KWH $0.07 $0.07 CO2 LBS/MWH 1,537.82 1,537.82 Yearly Cost $213.95 $21.67 Fixture Cost $250.00 $1,043.00 Maintenance Cost $30.00 $0.00 Simply Payback 4.01 Lumens 44,000 18,000 Lumens/Watt 95 84 Number of Fixtures 289 250 Demand Savings KW 80.635 Volume Cost $250.00 $1,043.00 KWH Per Year 883,313 77,389 Yearly Cost $70,501.88 $5,417.25 Fixture Cost $72,250.00 $260,750.00 Savings $ $65,084.63 Savings KWH 805,923 Savings MWH 806 Savings CO2 Tons 620
*Occupancy sensors will dim to 10% during lunch and breaks. Hence total hours/day drop to 20 hrs/day.
Graphs 2 and 3 below show a hypothetical comparison of ROI results when the Volvo Group Guideline for Energy-Efficient Investments is used and when the Guideline is not used. The comparison is done for illustrative purposes only, although the data is from an actual project proposal at New River Valley to replace HID bulbs with LEDs with occupancy sensors. The Guideline allows for a 10% projection in electricity prices in Year 1 to 3, while the second calculation assumes a 5% increase in Y1 to Y3. This comparison shows a payback period of four to five years for the LEDs with or without the Guideline. However the return on investment (ROI) is much higher in year 4 and year 5 respectively, when the 5%/10%/15% increase specified in the Guideline is used. Using the Guideline, the graphs show that a 5%/10%/15% increase in electricity price cuts a year off of the projected payback period.
Graph 2 – Annual Electricity Cost Savings With and Without Using Volvo Group Guideline for Energy-Efficiency Investment Calculations
Graph 3 – Return on Investment with and Without Using Volvo Group Guideline for Energy-Efficiency Investment Calculations
Volvo established a new guideline that allows managers to factor in the risk of increasing energy prices when making energy efficiency investment decisions, helping it meet its initial 25% energy intensity reduction target and set a new 25% goal.
Transportation related products and services
Difficulty securing internal capital for energy savings projects with relatively long payback periods due to limited availability of funds for competing plant, property and equipment (PPE) investments
Establishing a new guideline that allows managers to factor in the risk of increasing energy prices when making energy efficiency PPE investment decisions
Implementing energy savings projects that previously may not have been selected to receive capital funding