Cutting Costs by Reducing Energy Use: Sustainability Pays Off

# Cash and Working Capital

# Compliance

# Sustainability

How a portfolio company slashed electricity expenses and effectively demonstrated to its PE firm owner the boost to EBITDA.

In a convincing demonstration of how a commitment to sustainability combined with the right actions and reporting produces concrete financial benefits, a member of NeuGroup for Value Creation recently described how their company has reduced energy use by 15%, resulting in cost savings and cost avoidance totaling millions of dollars.

“This is not just an ESG narrative,” the member told peers from other portfolio companies owned by the same PE firm participating in a virtual session. “This is OpEx reduction—it flows straight into EBITDA, and it's backed by a real measurement. We're not done either.”

Returns from an LED retrofit. The company is a heavy user of energy with nearly 2,000 locations, about half located in regulated electricity markets. “Driving down usage is pretty much our number one cost control,” the member explained. “So what we did is an LED retrofit, starting a few years ago.”

The project began with a pilot program establishing a baseline of energy consumption by monitoring lighting usage at scores of locations. “Once we had that sub-metering data, we moved forward with the retrofit, completed it and immediately started seeing value-add. This was an improvement in P&L pretty much on the start of the turn.”

Results from the pilot along with proof that employees liked the new lighting helped convince senior leaders to extend the retrofit to all locations. “Having that true data showing the reduction in the usage and the spend and the happiness of the teammates, it was a win-win to our exec leadership that this is a project we need to invest in, we need to move forward,” the member said.

Include cost avoidance—and costs—in sustainability ROI. To determine the complete ROI from sustainability projects beyond savings, the member recommended peers calculate cost avoidance that occurs when a company boosts revenues without a proportionate growth in expenses following actions to reduce energy use.

“Cost avoidance is going to ebb and flow based on our revenue and our production levels,” they said. “But I do believe cost avoidance is something that you should speak to, because it is important, and in the end, it's cost that you didn't pay.”

They also made clear that companies must account for the cost of making the changes that ultimately lead to reduced expenses. “You need to capture your investment cost. We had to invest several million dollars into these LEDs—to get the project going, we had to purchase the equipment.”

“However, there are rebates out there that offset a lot of that cost, but that is factored into the ROI. So I can't just give the total savings number; I need to factor the cost for us to get here.”

Develop a sustainability ROI playbook. The member encouraged peers to adopt an ROI playbook process that can be repeatable with any sustainability initiative. It should include these elements:

Classify the project. Determine if the initiative will render a real reduction in operating expenses or in capital expenditures. Or it may be risk mitigation such as preparing for California’s 2027 requirement of “ limited assurance ” data on Scope 1 and 2 emissions reporting.

“Not every single sustainability project is going to have an ROI payoff, but it's still value-add,” the member said, “because if you're doing something like assurance, or doing something to prepare for CDP reporting , that is insurance to you, so it's protecting you.”

Set the baseline. Before you start the project, establish your current energy use and costs, normalizing all the data for factors like weather, locations and production levels “to have a true calculation that’s factual,” the member said. “Finance and accounting will be your best friends.”

Report realized results. In calculating benefits to the P&L by comparing updated costs to the baseline, incorporate the amount invested to achieve the objective, net of any rebates. In presenting the data to stakeholders, keep the realized savings separate from what has been modeled for future savings from ongoing or expected projects (that will use the same baseline).

Repeatable frameworks. The presentation of that validated playbook represents part of what distinguishes NeuGroup for Value Creation from private equity firms that bring portfolio company leaders together to share resources, noted Katie Ginsberg , a NeuGroup Senior Executive Advisor. “NGVC is designed to go a step further, capturing the operational frameworks behind successful initiatives so companies can adapt proven approaches, shorten the learning curve and accelerate measurable value creation across the portfolio,” she said.

This model for problem-solving extends beyond energy management and works with a wide range of operational priorities, including supplier management, AI, waste reduction and resource efficiency, Ms. Ginsberg added. In addition, a focus on process, tangible results and messaging is a hallmark of NGVC sustainability presentations, including this one.

“Rather than focusing on why sustainability matters, the discussion centered on how to execute projects, measure results, and communicate value to executive leadership,” Ms. Ginsberg said.

More savings to come. Toward the end of their session, the member presented a chart clearly delineating realized reduction in net energy use thus far, the expected decline from ongoing efforts that include HVAC optimization, and future consumption reductions. “We've got a path modeled to reduce beyond that 15% energy usage reduction,” the member said. “Our goal is to reduce, at minimum, 30% at Scope 1 and 2 on a per-location intensity basis.”

As established in the LED retrofit, the company’s ongoing efforts to reduce energy use and emissions are guided by a discipline around the costs to cut expenses. For example, in assessing how to address the inefficiency of older HVAC units, they are weighing the cost of replacement versus maintenance.

“You don’t have to invest all the money to replace the unit,” the member said. “While energy reduction from an HVAC replacement can be a substantial reduction, that's a larger investment that you're going to have to make, so your ROI payoff is not going to be as good.”