Operating costs, the technology’s lifespan, how it is used, available power capacity, security of supply and the company’s plans for further development are all decisive factors. A solution that appears to be the cheapest today may therefore prove very expensive in the long term. Conversely, an investment with a longer payback period may, in fact, make good economic sense.
This is precisely why the energy sector cannot be viewed solely through the lens of today’s prices. A good decision must take into account not only current operations, but also what the company will need from its energy systems in the future. And that, in my view, is the true purpose of a company’s energy strategy.
How much does the cheaper option cost?
The purchase price is only one aspect of the economics of an energy investment. We must therefore assess capital expenditure (CAPEX) alongside future operating costs (OPEX), the equipment’s service life and the conditions under which it will actually operate. A higher initial investment may result in lower operating costs, whilst cheaper technology may prove significantly more expensive over its service life.
Technology with a service life of fifteen years and a payback period of thirty years generally does not make economic sense. However, this does not mean that the shortest payback period is always the right choice. A longer payback period may be justifiable, for example, if the investment improves operational safety, enables the company’s further development, or resolves technical limitations that cannot be overcome by other means.
A typical example is available power capacity. If a company needs to grow but the required power capacity cannot be secured at a given location, it is no longer simply a matter of the payback period for a specific technology. The assessment must also take into account whether the chosen solution will enable the company to carry out its planned development at all.
Today’s investments as seen from the year 2040
The economics of an investment are therefore determined not only by its operating costs and return on investment, but also by the solution to which the company commits itself for the coming years. Let us imagine a facility where the heat source is reaching the end of its service life. The simplest solution may be to replace it with the same technology. The company is familiar with it, the investment is cost-effective, and there is no need to make significant changes to the entire system. However, the new source will be in place for the next fifteen or twenty years.
When making such a decision, I therefore recommend looking at the investment over a longer time horizon: will our decision today still hold up in 2040? It is not a question of predicting the future. It is a question of taking into account developments that are already evident today. The energy sector is moving towards greater electrification, and as the share of variable sources grows, so does the importance of control, flexibility and data management. A long-term investment should therefore not unnecessarily limit a company’s ability to respond to these changes.
The same principle applies to subsidies. They can help offset the higher initial costs of a solution with better long-term prospects. However, they should not be the deciding factor in choosing a technology that would not be economically or operationally viable without support.
Volvo Trucks: when return on investment isn’t the only criterion
It was precisely this combination of economic considerations, long-term plans and technical possibilities that also played a crucial role in the energy concept we developed for the Volvo Trucks production and service site in Nýřany. The brief was ambitious: to make maximum use of renewable sources, completely phase out fossil fuels from the site’s energy supply and, at the same time, create the conditions for charging electric lorries.
The available electrical power input was a key technical constraint. The electrification of the heating system, together with the charging of electric lorries, significantly altered the requirements for the site’s energy infrastructure. We therefore needed to determine what was actually feasible given the specific conditions of the site. We assessed the existing heating system, the options for changing heat sources, and the conditions for the efficient use of heat pumps.
We also independently reviewed the proposal for a photovoltaic power plant, the usability of the electricity generated, the size of the battery storage system and the economics of the investment. This resulted in a proposal for the further development of the site’s energy system, which took into account both its potential and technical limitations and set out realistic options for further electrification. The concept subsequently served as the basis for decisions by Volvo Trucks’ international management regarding further investments.
REFERENCE PROJECT: Energy concept for the Volvo Trucks site in Nýřany
A good project must also stand up to scrutiny by the bank
It is not just the company itself that assesses the long-term economic viability of an investment. If a project requires external financing, its assumptions must also stand up to scrutiny by the bank. And for the bank, it is no longer enough simply to know how much the technology costs.
In the case of energy projects, the expected operation, the feasibility of the economic model and budget, the project’s readiness, the permitting processes, connection options and other risks are all assessed. Battery storage systems are a typical example. The investor must provide evidence not only of the technical parameters of the equipment, but also of the project’s economic basis and whether the projected returns correspond to real market conditions. And given the extremely rapid pace of change in the energy sector, thorough analysis and planning are crucial.
We also encounter a similar approach from the other side – as an approved external technical adviser to Česká spořitelna. For projects for which investors are seeking financing, we independently assess their technical readiness, completeness, key risks and the realism of the assumptions on which the investment proposal is based. This is not merely a formality added to the loan application. Both the technical solution and the economic model must be sufficiently well prepared to serve as the basis for a funding decision.
Similarly, poor preparation can affect the possibility of securing grant funding. If a project is structured from the outset in such a way that it fails to meet the programme’s key conditions or sustainability requirements, cosmetic adjustments may not suffice later on. The quality of the preparation can therefore affect not only future operations, but also the very possibility of carrying out the investment.
Investing in good time does not mean investing straight away
In practice, two extremes tend to recur when decisions are made about the energy sector. On the one hand, there are companies that allow themselves to be swept up in the current technological wave. Photovoltaics, batteries, hydrogen – if a particular solution is the talk of the town, it is easy to get the impression that it simply must feature in the investment plan. On the other hand, there are companies that wait. They wait for lower prices, better technology, more favourable subsidies or the certainty that the right moment has arrived.
The first approach can lead to an investment that does not meet the actual operational needs. The second approach risks the company missing the right moment for change. Yet in the energy sector, it is not necessary to wait for the target state to be 100 per cent resolved. The Pareto principle can also be applied to investment planning: if we can make an informed decision on the key 80 per cent of the solution, there is no point in postponing the entire project simply because we do not yet have all the answers for the remaining part.
What’s more, the long wait has a less obvious consequence: the company becomes accustomed to the gradually deteriorating conditions. It can still cope with slightly higher costs. The reduced power reserve does not yet restrict operations. The ageing power source is still functioning. The investment can be postponed for another year. Taken individually, none of this may seem critical. However, the problems gradually mount up, and with every further delay, the options for resolving them dwindle. And that is precisely how the frog is being boiled in the energy sector – slowly, in small steps, and for a long time without any sense that anything fundamental needs to change.
Energy is not a product for a self-service collection point
Lost time in the energy sector cannot simply be made up. Between the decision being taken and the technology becoming operational, there may be years of preparation, design, planning permission and implementation. Quite simply, you cannot order an energy source or new infrastructure today and start using it tomorrow.
A decision may be taken today; the first investment will be made in a year’s time, and the next in three. The change may take place gradually. The key is to know which steps need to be taken in good time so that the company retains the scope to take the subsequent ones.
A good energy strategy does not tell a company exactly what will happen in twenty years’ time. It gives it sufficient lead time to make its own decisions about its energy future – rather than waiting until circumstances begin to dictate what it can still do.
Jan Hanus
Chief Executive Officer of ORGREZ ECO