Economic Assessment

• a critical reflection about the concept of economic feasibility: what is the target (minimum) rate of return from the point of view of common good ?

Energy saving in many cases requires investment of capital. This means, the implementation of (human) resources today (and accumulated from the past) in order to reduce the need for natural (e.g. fossil fuels) and human (labour) resources tomorrow. Or in accountancy terms: substitution of current spending (purchase of energy) by investment (mainly in energy efficient equipment). Therefore, the expectation on return of investment, is crucial for assessing the economic feasibility of projects.

From the point of view of common good, any investment is reasonable (from a merely economic point of view), if its economic return (over the technical life-time) is higher than the average growth rate of the economy as a whole (which is the average return to the total current capital stock). If the real world-GDP growth rate since the year 2.000 was about 4 % in the average, this means that each investment with an internal rate of return (IRR) higher than 4 % would save economic resources for the society as a whole on the long run. Real-world GDP growth in most developed economies throughout the 21st centuries is even much lower than this.

An IRR of 4%, in other terms, corresponds to a linear pay-back period of less than 11 years at 15 years lifetime or 14 years at 20 years lifetime)

If in addition the additional benefits: avoidance of environmental, health and other problems (which in micro-economic calculations are [not] considered as “externalities”) are taken into account, even lower rates of return / higher pay-back times would still be reasonable – and given the current emergency situation of the planet - even desirable.

This contrasts radically with the experience from everyday practice of many of us working as energy auditors, system designers or energy engineers in industrial companies: energy saving projects are often very likely to be rejected by company management, if pay-back times are higher than 2 years, and in many cases fully out of discussion if pay-back times are longer than 4 or 5 years (corresponding to internal rates of return still in the range 18 – 25 %). This means that micro-economic rationality (the company or shareholder point of view) is in contrast with the point of view of common good.

The way to a solution to this conflict is not a technical, but a political one and would require a change of paradigm where economic decisions are taken democratically (economic democracy) instead of following criteria of private profit maximisation of a minority of capital owners. The goal of highlighting this issue in the EINSTEIN methodology is to create consciousness in order to make the conflict VISIBLE between WHAT IS and WHAT COULD BE. It’s up to everybody and out of the scope of EINSTEIN to draw conclusions out of this insight and act in consequence (or not).

• costs and benefits for whom ?

One of the decisive parameters determining the outcome of economic feasibility analysis is the definition of the system boundaries: accounting of costs and benefits for whom ? There is a substantial difference whether projects in the energy sector are analysed from the point of view of an investor interested in private profit maximisation or from the point of view of common good:

• taxes and subsidies may have a strong influence on private investors’ decisions, but are a zero-sum game from the point of view of common good, affecting only the distribution between individuals.

• non-economic costs and benefits such as avoiding greenhouse gas emissions, a cleaner and healthier environment, avoiding negative impact on landscape and living conditions are highly relevant from the point of view of common good, but are not relevant at all for profit oriented investment (except maybe in some cases for reasons of „greenwashing“ and marketing)

• transparency and awareness about the impact of the basic parameters in economic analysis

As outlined above, the outcome of any type of economic analysis depends strongly on basic apriori assumptions and optimisation targets. 

• basic assumptions: capital cost or expected internal rate of return

• optimisation target: e.g. profit maximisation; optimisation of environmental impact with given economic resources; etc.

• optimisation for whom ?

Evaluations such as „economically feasible / not feasible“, therefore, are without any sense it they are not accompanied by the information on those parameters used in the analysis.

EINSTEIN, therefore, provides a standard for economic analysis, that provides transparency and awareness about the critical input parameters and optimisation targets and their impact on the assessment results. In practice this means that everywhere where economic analysis or the concept of economic feasibility comes into play, EINSTEIN obliges the user to be aware that economic feasibility is not an objective truth, but depends on the subjective point of view: economically feasible for whom ? in whose interest ? In consequence, in parallel to the classical (micro-)economic analysis as teached by the schools for business administration and understood by company management, EINSTEIN always offers also the additional alternative possibilty to evaluate investments in energy savings and renewables from the society (or common good) point of view.

• efficient use of public resources, build-up of democratically (public and community) controlled capital

funding vs. direct public investment

• a significant amount of public resources is dedicated to push mostly private profit-oriented actors into a desired direction in order to consider also non-economic („external“) costs, with the corresponding additional effort for transaction costs such as preparing and evaluating tenders, controlling the use of the resources and avoiding abuse. An alterative strategy would be direct investment in energy systems and services in the logic of „public resources for public capital“, e.g. by public (municipal) energy companies, with the following important advantages:

  - direct public control about where and how to invest the available resources

  - multiplier effect in case of a positive return of investment: profits remain in public hands and can be re-invested. On the long-term this can contribute to the build-up of democratically controlled public capital.

Comparison of different ways of financing for an energy project with moderate economic return: total investment 100 MEUR, 20 years life-time, 7 MEUR yearly net-incom (14,3 years of linear pay-back): (1) private investor with 50% public funding; (2) direct public investment with 50% bank loan at 3% real interest rate; (3) public-community partnership with 50% community financing (participation of energy cooperatives, small shares of private individuals) at low (real) rates of return of 1,8%.

Power to the people – democratic control of the energy sector or who best represents the „common good“: public vs. community investment

• in an idealised and abstract formal view of democratic societies „common good“ should be represented best by the democratically elected public administration on the different levels, from local to supra-national. Practice, nevertheless, is strongly differing from this:

  - minorities are not reflected in systems, where governements are built based on 50% + x of the voters. This is the case in societies with a growing but still minoritary share of population with consciousness about environmental concerns, so that the latter find little or no reflection in public policies

  - due to the influence of economic power and control of mass media, governments are tending to represent the interest of the upper classes even in formally democratic societies. Recent history shows that also in (formally) democratic countries public policy may become dominated by climate negationism and directed towards subsidising fossil fuel industry.

In any case, there is no objective definition of what is „common good“. How much weight should be given to economic and non-economic aspects, etc. is subject to the outcome of a continuous political debate and the balance of forces in conflicts of interest.

• build-up of energy cooperatives are one answer of civil society in order to push projects and investment in renewable energy projects and sometimes also energy efficiency, where public action is too slow or not existing at all. The motivations are so diverse as are the different cooperatives, being located in the wide range from idealistic / non-profit / social and environmental concerns on the one end to cooperatives interested in first place for the economic return of their members on the other, and many of them probably somewhere in between. The democratic legitimation of the cooperatives is given by the often large numbers of members on a local level and the high level of engagement.

In the following table the pro’s and con’s of the different actors are schematically compared. A cooperation of public administration on a local level and (mostly) non-profit energy cooperatives should be the most powerful team for pushing and speed-up the build-up of a democratically controlled renewable energy sector on a local level.