Reevaluating energy infrastructure as a distinct category of capital expenditure (CapEx) can bring transformative benefits to organizations. In this blog post, we'll explore why infrastructure deserves its own consideration and shouldn't be held to the same standard as traditional CapEx projects.
The cost of capital is on the rise, utility rates are at an all-time high, and companies are consistently striving to edge out competitors. On top of that, consumers and investors alike are increasingly expecting a commitment to sustainable practices and Net Zero targets with measurable results. For tier-one corporations, budget is rarely a barrier to investing in sustainable infrastructure projects, while tier-two and -three companies often require CapEx to implement projects. Enhancing operational efficiency, improving processes, or expanding production capabilities fall under the conventional CapEx perspective. Energy infrastructure improvements have been held to the same standard and are expected to have a rapid return on investment (ROI). As the world evolves towards a more environmental and energy-conscious future, it's time to rethink how we categorize and approach certain projects and consider the true long-term ROI.
In many organizations, CapEx projects are typically evaluated based on their payback period, often aiming for a rapid ROI within 1.5 to 2 years. This approach makes sense for initiatives such as updating manufacturing lines or improving business processes where direct cost savings can be measured and realized quickly. These projects align with corporate rules and follow stringent financial standards.
However, measuring success solely based on ROI can be shortsighted when it comes to energy infrastructure investments, particularly those aimed at sustainability and carbon reduction. These investments are unique because their primary goals extend beyond immediate cost savings. While energy-efficient technologies and renewable energy installations generate long-term financial benefits, their impact also lies in reducing an organization's environmental footprint and contributing to broader sustainability goals.
Energy infrastructure serves a different purpose than traditional business process changes. On-site renewable energy generation, storage, and other facility improvements are critical to operational continuity, reducing environmental impact to meet net-zero targets and, ultimately, future-proofing your organization. We are beginning to witness finance teams recognize this distinction and adapt to new models that acknowledge the strategic value of sustainable and reliable infrastructure.
Making progress on ESG commitments and providing measurable results can also help organizations improve the public perception of consumers and investors. Tier-one corporations often expect their subcontractors and supply chain to adopt similar ESG goals, which could impact the eligibility of tier-two and -three companies to work with tier-one organizations. Alternatively, tier-two and -three corporations that have implemented improvements in alignment with Tier-one objectives can gain a competitive advantage while bidding for work.
While traditional capex investments may offer a swift ROI, the cost of doing nothing or delaying action on energy infrastructure projects can be far more significant in the long run. Inaction costs include missed opportunities for government incentives, potential regulatory fines, and reputational damage with the potential to lose future contracts as sustainability concerns become more prevalent.
Incentive dollars are often readily available for early adopters of sustainable energy solutions. Organizations can tap into these funds by prioritizing clean energy infrastructure investments and gaining a competitive advantage while contributing to their carbon reduction goals.
Capital budget allocated five investments in infrastructure over five years. Because of the delay in implementation, as-a-service cash flow can exceed self-financed solutions.
Alternative delivery methods, such as an infrastructure-as-a-service contract, may improve project feasibility for tier-two and -three organizations that want to implement sustainable infrastructure improvements yet lack the upfront capex to get started. This finance model can help spread the cost of sustainable energy infrastructure over time, making it more manageable and accessible for organizations of all sizes while transferring maintenance and performance risk to a contractor like Centrica Business Solutions.
In conclusion, rethinking energy infrastructure as a separate category of capital expenditure is a strategic move that aligns with the changing landscape of sustainable businesses and carbon reduction goals. While traditional capex projects focus on short-term ROI, energy infrastructure investments offer long-term benefits beyond financial returns. By recognizing this distinction, organizations can make informed decisions, access incentives, and contribute to a more sustainable future while ensuring resilience in an evolving environment.
