The last step of the carbon strategy consists in setting up an action plan that describes the way the company will implement actions to meet the target. In order to establish the planning and forecast the investments, business cases shall be thoroughly assessed from a technical and financial point of view. A detailed financial appraisal may be required as well as the analysis of funding and third party involvement opportunities.

Table 6 – Top 15 list of actions for energy saving and carbon réduction, Ticket to Kyoto
 

	Traction energy	Station energy	Workshops and depots energy	Office buildings energy	Transversal action	Operators concerned
Energy monitoring		x	x	x		All operators
HVAC improvements	x	x	x	x		All operators
Combined heat and power systems			x			Workshop's owner
Lighting optimisation and relighting	x	x	x	x		Mainly railway operators
Escalators and lifts improvements		x				Railway operators
Point heaters and third rail heating	x		x			Railway operators
Energy recovery from braking (Metro and light rail)	x					Railway operators
Eco-driving (Metro, light rail and bus)	x					All operators
Start and Stop systems (Bus)	x					Bus operators
Renewable energy production systems	x	x	x	x		Medium and big sized operators
Ecobuilding					x	Medium and big sized operators
Staff awareness					x	All operators
Staf travel plans					x	Medium and big sized operators
Stakeholders awareness					x	All operators
Green procurement					x	All operators

 

Scope of actions

The scope of actions will certainly differ from one public transport company to another. Based on the Ticket to Kyoto experience, the partners have established a top 15 list of actions that shall be considered by any transport company.
Managerial actions will also be required internally to ensure that the strategy targets can be met:

• Strategy (embedding carbon saving in the company strategic plans);
• Programme Management;
• Roles and Responsibilities;
• Data and Research;
• Measuring and Reporting;
• Communication and training;
• Finance and Investment.

Financial appraisal

Public transport companies need to evaluate the investments that will generate the greatest energy savings and CO₂ reduction in relation to money invested. Investing in energy-efficient technologies often involves higher initial costs. However, by using alternative methods of evaluation, decision-makers can determine when these technologies are sound investments.

Financial appraisal is the analysis conducted to determine the merit of an item or project, taking account of established criteria such as costs and socio-economic impacts.

Different financial concepts are often used and sometimes confused during the evaluation of projects. This section details some of the most commonly used appraisal techniques.

Payback period

A payback period is the length of time required to recoup the initial cash outflow of an investment from the cumulative net cash flow generated by the project. It is an important determinant of whether to proceed with an investment or not; longer payback periods are typically not desirable.

For example, if a company invests €300,000 in a green technology and the system produces energy savings of €50,000 per year, then the payback period is six years.

Return On Investment

Return On Investment (ROI) is a performance measure used to evaluate the efficiency of an investment. The result is expressed as a percentage or a ratio.

For example, if a company invests €500,000 in a green technology with a lifespan of 20 years and the system produces energy savings of €1,200,000 during this period, then the ROI is 2.4, meaning that for every euro invested, €2.4 are generated.

Cost-Benefit Analysis

Cost-Benefit Analysis (CBA) is a decision-support methodology. It aims to determine the net result of a planned investment. CBA identifies and quantifies all the positive factors (benefits) and subtracts all the identified and quantified negative factors (costs). The outcome of this analysis will determine whether the investment is financially feasible.

Table 7 – Example of cost-benefit analysis

Year	Costs	Benefits	Benefits-Costs
t	€300,000		€-300,000
t+1	€25,000	€50,000	€25,000
t+2	€25,000	€55,000	€30,000
t+3	€25,000	€60,000	€35,000
t+4	€25,000	€65,000	€40,000
t+5	€25,000	€70,000	€45,000
t+6	€25,000	€75,000	€50,000
t+7	€25,000	€80,000	€55,000
t+8	€25,000	€85,000	€60,000
t+9	€25,000	€90,000	€65,000
TOTAL	€525,000	€630,000	€105,000
Interest rate			4%
Net Present Value			€23,932.37

Public-funded projects require a measurement of the social benefits of a proposed project or alternatives in monetary terms and a comparison of them with its costs. This approach has been widely used for project investments worldwide and can measure all benefits, assets, drawbacks and costs in monetary terms. The advantage is that all important criteria to keep in mind can be measured with a monetary unit. The outcome and costs of the investment are calculated over a long period, and future costs and benefits must be discounted at current values (net present value) using a discount rate.

For example, a company invests €300,000 in a green technology with a lifespan of 10 years. The outgoing (initial cash outflow + ongoing operating costs) and incoming cash flows (energy savings + monetised CO₂ emissions reduction) are given in the table. Benefits increase over time because of rising energy prices and the value of CO₂ emissions. Given a discount rate of 4% per year, the net present value of the benefits minus the costs is positive, showing that the investment is financially viable.

Total Cost of Ownership

Total Cost of Ownership (TCO) is a method that aims to include a wider range of costs and benefits. It does this by looking at the wider impacts of a project, wherever possible from ‘cradle to grave’. Costs considered usually include the financial costs as well as the environmental and social costs, which are generally more difficult to quantify.

Typical areas of expenditure that are usually included in TCO include planning, design, construction and acquisition, operations, maintenance, renewal and rehabilitation, depreciation, cost of finance and replacement or disposal.

T2K recommendations

The choice of appraisal method can have a significant impact on the energy efficiency (and related carbon emissions) of a project or organisation. Although easier to calculate, the simple payback period tends to be overly simplified in order to assess options with a longterm impact on energy use and maintenance costs. Public transport in general should work on improving the appraisal methods when deciding on the viability of an investment. T2K partners identified problems with current practices, as they often include unrealistic assumptions of future energy costs and in most cases exclude monetary impacts of GHG emissions. The following issues were identified as key points to be addressed:

• The chosen appraisal period must be linked to the useful life of the assets considered. If the period selected is too short, the appraisal risks ignoring some energy savings and maintenance/replacement costs or savings. For instance, investment in energyefficiency measures can result in significantly higher upfront costs, which will take longer to be recovered. Assessing the whole-life cost of investments allows for a more rounded comparison of potential projects.
• The discount rate should represent the opportunity cost of capital adjusted for risk. The choice of a discount rate can strongly impact the financial appraisal. This is especially true when options have high costs or benefits in the longer term as a higher discount rate will reduce their impact. In all case, the discount rate used in appraisal should be clearly stated and used in a consistent manner across investment proposals to allow for comparisons.
• The assumptions made about future energy prices and their volatility can have a significant impact on how energy-efficient projects compare with less energy-efficient solutions. Investors can achieve a higher degree of certainty on the benefits of an energy-efficient project if they conduct sensitivity analysis on the business case regarding variations in energy price.
• When calculating the impact of an investment on carbon emissions, it is important to use consistent emission factors, which are regularly updated and take into account, when possible, the future trends in carbon intensity.
• Taking the cost of carbon emissions into account (giving emissions a monetary value) allows for a more balanced approach to the business case and would help energy-efficient projects.

Funding opportunities

EU Member States have set up funding schemes to encourage households and companies to invest progressively in green technologies. Various funding options are available at regional, national and EU levels to invest in energy efficiency and emission reduction. They often subsidise part of the investment or set a price for green commodities. Such policies are crucial for most companies aiming to reduce their carbon footprint, as new technologies tend to be more expensive than traditional ones and require high capital funds.

Access to investment capital was identified as one of the main challenges facing T2K partners, when considering investment in energy use and carbon reduction. Funding mechanisms identified below should provide additional support, although it is also important to recognise that transport companies will require staff time and budgets to apply for these potential funding sources. Within the T2K project, many investments have been made possible thanks to the 50% INTERREG IVB NWE funding.

Green certificates

The green certificate concept has been used worldwide since 2001 to guarantee that energy production is environmentally safe. Green certificates are freely tradable commodities representing the benefits associated with electricity generated by renewable resources. When available, public transport companies can obtain green certificates by investing in renewable energy production systems. The revenue generated from green certificates will help funding the project.

White certificates

Similarly, a system of tradable white certificates for energy savings measures is in place in France. Energy providers are required to achieve a certain level of energy efficiency improvements. They can either invest themselves or support their customers’ investment in energy efficiency. They have to advise and give a financial contribution to energy consumers in exchange of their ‘white certificates’ to meet their requirement. Otherwise, a penalty of €0.02 per missing kWh is set. White certificates are issued to local authorities when they invest and achieve energy efficiency improvements for their operations. These improvements include building insulation, energy efficient HVAC, lighting or eco-driving.

Feed-in tariffs

A feed-in tariff is a policy mechanism designed to accelerate investment in renewable energy technologies in the United Kingdom. It achieves this by offering long-term contracts to incentivise renewable energy producers, typically based on the cost of generation of each technology. Feed-in tariffs offer three financial benefits:

• A payment for all the electricity produced, even if used by the investor
• Additional bonus payments for electricity exported to the grid
• A reduction on the standard electricity bill, from using energy that is self-produced.

Third-party involvement

Using third-party involvement models may be useful to facilitate capital investment in energy efficiency. These models involve a third party (private or public) in one or more of the following roles:

• To fund the investment
• To advise on best technical options
• To procure and install equipment
• To maintain equipment.

Such financial mechanisms have the potential to address (at least partially):

• Trade-off between high short-term costs and longterm benefits
• Access to capital and credit market failure
• Technology risk
• High search and transaction costs.

Models are generally based on the ‘Golden Rule’. Here, the expected savings on energy bills should be at least as big as the total repayments of the investment/loan, including interest. After the loan is repaid, the users should benefit from lower energy bills.

The figure on the left provides an overview of the process usually followed to set up a third-party arrangement.

A key issue regarding third-party involvement is resistance to this type of arrangement within public transport organisations. These approaches are a type of outsourcing contract and this might not be well received within the organisation.

Energy services companies investing in this type of contract will generally require access to installations and premises to carry out maintenance work themselves, as this will impact on the performance of their initial investment and their financial reward. This can also be an issue for organisations that usually carry out the majority of maintenance work in-house. The two main models are Energy Services Company (ESCO) and Energy Performance Contracting (EPC).

Energy Service Company (ESCO)

An Energy Service Company (ESCO) is a natural or legal person that delivers energy services and/or other energy efficiency improvement measures in a user’s facility or premises, and accepts some degree of financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on the achievement of energy efficiency improvements and on the meeting of the other agreed performance criteria.

Energy Performance Contracting (EPC)

Energy Performance Contracting (EPC) is a contractual arrangement between the beneficiary and the provider (normally an ESCO) of an energy efficiency improvement measure, where investments in that measure are paid for according to a contractually agreed level of energy efficiency improvement.