There are a number of rewards and tax breaks available from investing in green technology, which combined can dramatically reduce the financial payback.
Hospitality is traditionally a low-margin business and it’s not about to get any easier. The sector is expected to be one of the hardest hit by the rise from the national minimum wage to the living wage in April 2016. Add in forecast increases in energy bills and, as a manager in the sector, you’ll be dealing with a jump in two of your major overheads.
Pass the aspirin please. Indeed, the doom mongers have already pointed to redundancies, site closures and higher prices.
The opportunists, however, are already planning how to manage any potential cash flow issues – and energy efficiency will be a major focus.
This won’t just be to save money, it’ll also be to keep up with competitors, entice customers who demand ever more green options and meet tightening environmental regulations. Indeed, energy reduction will form a major part of national (via the Climate Change Act) and international (via the Paris Agreement signed in December 2015) commitments to reduce emissions and tackle climate change.
Changing the behaviour of staff and investing in mainstream technologies like LED lightbulbs can cut your energy bills. But these low-hanging fruits are drying up. To really accelerate your energy efficiency plans you’ll need to invest.
However, you’re already on tight margins and finding the capital for ‘green’ projects might be difficult. You’re not alone in this train of thought. It’s called the energy efficiency paradox.
This paradox relates to business investments in energy efficiency requiring higher rates of return than other investments with comparable risks. It happens for a number of reasons, not least the perception of risk and uncertainty regarding the real returns you’ll get.
But how about a proven technology that comes with a government stamp of approval? A technology that the Carbon Trust says can be ideally suited to businesses like hotels and leisure centres given their constant demand for heat and electricity:
“With year-round requirements for electricity and hot water, hotels can be well suited to using Combined Heat and Power, particularly if they have a swimming pool.”
Combined Heat and Power (CHP), which is the simultaneous generation of heat and power, won’t be right for every site, but “in an appropriate application can reduce energy bills by more than 30%,” the Carbon Trust has noted.
ECA and CHP – a perfect match
What’s more, good quality CHP will qualify for Enhanced Capital Allowances. This is a major financial incentive for businesses looking to invest in significantly cutting their energy use.
In a nutshell, ECAs are a straightforward way for a business to improve cash flow through accelerated tax relief: you write off the whole cost of equipment against taxable profits in the year of purchase.
So, if you pay corporation or income tax at 20%, every £10,000 you spend on energy-saving equipment would reduce the tax bill in the year of purchase by £2,000.
Compare that to the capital allowance available for standard equipment – £360 on £10,000 – and you’re looking at a cash flow boost of £1,640 per £10,000.
There are caveats though. There is an energy technology list. Well, actually, it’s two lists:
The energy technology criteria list
The energy technology product list
Combined Heat and Power (CHP) can qualify for ECA, but only if it meets the ‘good quality’ criteria in the government’s CHPQA scheme. This is also the route to exemption from Climate Change Levy to double-up the lucrative financial incentives and help swing the balance on your energy paradox. If you are using a renewable fuel source for your CHP, you may also be eligible for government money under the feed-in tariff and Renewable Heat Incentive schemes.
In combination with your reduced energy bills, the payback can be significantly reduced. Take a medium-sized hotel with 150 bedrooms, conferencing and office facilities that is saving £36,000 a year with its CHP, with a payback of five years. With energy bills set to rise and the likelihood of further carbon reduction regulation, this will certainly help the owners sleep more easily.
Rising energy prices and the new living wage will squeeze the already low margins on many hospitality businesses.
The opportunists recognise the importance of improved energy management and the significant savings available.
The low-hanging fruits like behaviour change are a good start, but these are drying up. To accelerate savings, your competitors will be looking at capital investments.
You need to look at tried and tested technologies and weigh up the capital costs against potential savings and financial incentives.
Investment in certain technologies, like Combined Heat and Power (CHP), can attract Enhanced Capital Allowances and other financial incentives.
Discover more about the financial incentives for a greener hospitality and leisure industry, download Tighter energy regulations in the hospitality and leisure industry: why you should embrace as well as adhere now.
Topics: Hospitality and Leisure