Investment Evaluation Methods for Smart Energy Businesses

Investment Evaluation Methods for Smart Energy Businesses

Investment in energy systems with strategic value is a natural cornerstone of the smart energy business. In essence, investing in an integrated energy supply and optimization system is an acknowledgment of resource scarcity. That scarcity means that people must expend ever greater amounts of energy in order to obtain usable energy. Today, the low efficiency of energy production and the associated pollution costs are already directly affecting both our economy and our physical health. To improve energy efficiency and reduce investment costs, users and smart energy service providers must work together to upgrade outdated and inefficient energy supply systems. After making a long detour since the Industrial Revolution, resource scarcity has brought us back once again to investment in energy systems. Such investment must integrate power generation with user heating, cooling, and production systems in a systematic way so that overall performance can be optimized.

Unlike traditional and inefficient energy projects, the design, construction, operation, and maintenance of smart energy systems are often carried out incrementally on the basis of conventional energy systems. The generation, transmission, distribution, and use of energy must all be planned and coordinated in a unified manner. In some cases, optimization requires not only selecting among internal system elements, but also coordinating with the surrounding environment. For example, a combined heat and power unit may need to supply electricity to nearby systems as well in order to achieve its best operating condition. These complex internal and external couplings greatly increase the complexity of investment evaluation. From the user’s perspective, the long-term benefits brought by energy system optimization are often delayed by immediate planning priorities, and investment in smart energy systems may appear more like a financial burden than an investment opportunity. The same issue also exists for the finance departments of smart energy providers, because fragmented economic benefits can only become meaningful at scale through sufficiently detailed evaluation and integration. Therefore, unlike traditional energy investment projects, smart energy businesses require a newer and more comprehensive approach to investment evaluation.

In smart energy practice in developed countries, a method known as Opportunity Assessment (OA planning) has gradually demonstrated its advantages. OA planning uses an integrated, pyramid-structured, systematic approach that enables professionals from both technical and financial fields to participate fully in the planning, communication, and decision-making processes of smart energy projects. In form, the OA planning method and steps are similar to those shown in the figure below. In practice, however, investment budgeting and settlement for smart energy projects should begin to be planned at a much earlier stage.

To obtain lower-cost and more reliable energy, users and suppliers must first understand the baseline economic benefits of renovating systems near the point of energy use—or on site. This requires basic investigation and research into primary fuels such as natural gas, coal, sunlight, electricity, and other energy sources, as well as a solid understanding of local policies and cost information related to energy, business operations, management, and operations and maintenance. This forms the foundation of investment evaluation. At the same time, the design of an optimized smart energy system must fully consider the production and distribution of electricity, steam, hot water, and chilled water at the user site, as well as coupling and coordination with the surrounding environment. Only on this basis can the overall investment evaluation begin through OA planning. In the first and second levels shown in the diagram, the process begins with baseline assumptions—usually a base year—and uses each step to forecast expected growth, historical trends, and related factors. The focus of the third and fourth levels is on the equipment currently used by the customer and the cost of obtaining energy from public utility systems, which in turn determines strategies for operations, project implementation, and financing.

At the first level, the main tasks are to integrate information through data tables and to define basic project information and strategies, such as project objectives. The collection of equipment information should include not only the previously mentioned energy costs, but also, as comprehensively as possible, the condition of all system equipment currently used by the customer, as well as the surrounding geographic and natural environment. Such detailed inventories help experienced investment evaluation experts quickly judge the feasibility and direction of technical solutions. For example, if the user already owns a power plant that is supplying steam, then an additional investment in combined heat and power may be inappropriate. The definition of business objectives requires consideration of many factors, including not only technical and commercial aspects, but also softer requirements that the user may raise, such as comfort and operations and maintenance expectations. A representative example of business objectives is shown in the figure below.

In addition to the two steps described above, every step of the OA planning method includes detailed implementation procedures and tables. These procedures and tables gradually consolidate and highlight what would otherwise be scattered economic value, while also enabling a relatively thorough assessment of potential growth opportunities and risks within a project. Methodologically, this improves the accuracy of investment evaluation for smart energy business projects. For decision-makers, smart energy projects are no longer merely a financial burden on paper, but become truly actionable investment opportunities with real economic value. For smart energy service providers, using these complete process and outcome documents to secure more adequate capital investment is also a crucial part of business development.