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July 2003/30 - Section 2 - developing a business case
Good practice
Value for money study



Energy management in higher education

Section 2 - developing a business case

(This text appears in HEFCE 2003/30)



Members of the Expert Working Group felt that energy conservation measures should be subject to the same financial rigours as other calls for funding by institutions. This section addresses the concept of developing a business case, and its importance in the decision-making process within institutions. Further, it provides guidance to energy staff and others responsible for preparing cases and sourcing funding. It is not prescriptive - every institution will have particular processes and styles that their staff will have to follow. Rather, it indicates the sorts of issues that should be explored within a business case. Examples from institutions are provided in the first two case studies at Appendix I of HEFCE 2003/30.

Why have a business case?

Institution decision-makers face increasingly tough decisions on how to allocate scarce resources, both human and financial. The investment proposal must therefore demonstrate that it offers value-for-money to the institution - this applies equally to requests for additional staffing as it does to requests for capital equipment. Adopting a business case approach should ensure that those responsible for allocating resources have all the information necessary when making their decision on investment projects. Business cases can vary in format, but all will include financial projections and an impact/benefit analysis - both of which are key in assessing value-for-money overall.

Preparing a business case

The following are the key elements that would normally be included in a business case:

  1. Executive summary This should summarise the key points of the proposal and include explicitly the resources that are being requested and the benefits that will accrue.
  2. Description of the project/investment This would be a short but precise description of the project. It should summarise for management why the proposal is being made (draw particular attention to any compliance/health and safety issues, if relevant, and to links with the strategic priorities and institutional drivers), the nature of the investment/project (what is being purchased/requested), what it will do and the benefits it will bring, and where it will impact within the institution. This last point is important in allowing senior management to judge the spread of benefits.
  3. Current position This section should give any relevant background knowledge that readers will require, plus a brief description of what happens currently. It is important that senior management are able to judge whether what is proposed is a replacement, part-replacement or new investment altogether. If it is a proposal for a replacement and it is essential, then make this clear - for example, by indicating the state of the existing equipment in the case of a capital replacement proposal. See Appendix D2 checklist 6 - Repair or replace decisions checklist - of HEFCE 2003/30.
  4. Options appraisal This section should detail the alternative options that have been considered, including that of doing nothing. The primary purpose of the options appraisal is to select a solution which optimises value for money within the overall constraints of affordability and achievability. Here it is important to highlight the additional benefits that each option might bring - it is suggested that these need to be considered across the whole lifetime of the project. Any assumptions about the external operating environment should be included here. See Appendix D2 checklist 5 - Appraising investment decisions checklist - of HEFCE 2003/30.

    For each option, there should be a list of assumptions made, benefits analysis, financial analysis, sensitivity analysis and risk analysis. From these, it should then be possible to do an economic analysis, ie, compare costs with anticipated benefits and so derive value-for-money comparisons.

    The financial analysis needs to take account of the total outlays for the project. These may include, for example, one-off capital outlays, revenue costs and professional fees for advisers. On the positive side, the proposer needs to identify the financial benefits that will flow. These may come in different forms; for example, as savings that will accrue from making the investment (such as CHP, combined heat and power), ongoing current actual revenue savings, sale of existing assets. It is also important to include the residual value of new assets at the end of the investment appraisal period. As expenditure and savings may occur throughout the period of the investment proposal, adjustment will have to be made for the relative cost of money into the future - this is done by discounting net future cash flows back to the present day. Finance staff in institutions will be able to advise should energy managers require assistance.

    The sensitivity analysis is critical and may relate to all aspects of the proposal, for example costs, returns, capital machinery performance and savings. Essentially, the sensitivity analysis gets the proposer thinking about the range in which costs and returns might lie. For example, anticipated energy savings may vary by plus or minus 10 per cent, which could have a bearing on the attractiveness of an investment option for senior management. For both benefits and risks, it is important to consider both quantifiable and non-quantifiable aspects - for the non-quantifiable aspects, some scoring mechanism is needed to assess relativity between the options, for example, high, medium, low.

    Finally, taking into account the conclusions of the options appraisal, a preferred option is proposed.

    In evaluating the benefits associated with energy management projects, it is suggested that whole life costing (or Life Cycle Costing Analysis) is the most appropriate and effective tool to use. A description and consideration of the use of life cycle cost analysis as a possible method of project evaluation can be found in Appendix E, Additional sources - international, under 'Life Cycle Costing Manual' - of HEFCE 2003/30.

  5. Monitoring and evaluation Once a preferred option has been identified, it is usual to indicate how the overall project will be monitored and evaluated. Within this, the proposer may wish to consider including ways in which expenditure and savings will be monitored, and how the overall effectiveness of the project will be measured. While the monitoring of expenditure in the period of getting the project up and running may be fairly easy to identify, less easy may be monitoring ongoing net savings that may accrue from the investment. This is because other factors that may impinge on savings will have to be taken into account, such as efficiency ratings of ageing plant and equipment, and some measure needs to be determined accordingly.

Helpful information

A 'Business case template' is available - see Appendix D2, checklist 4 - of HEFCE 2003/30.