Save Money by
Saving Carbon
Decision Making in the NHS using Marginal Abatement Cost Curves
Version 1.1
Sustainable Finances
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[1]
Save Money by Saving Carbon
Decision Making in the NHS using Marginal Abatement Cost Curves
Contents
Background
2
What is a Marginal Abatement Cost
(MAC) Curve?
2
Purpose of this document
3
Why would you create a MAC Curve 3
Reading a MAC Curve
4
NHS England MAC Curve
5
Combining a MAC Curve with other
investment appraisals concepts
6
How to create a MAC Curve
7
Tools
11
Annex 1. What is Net Present Value
Annext 2. Examples using NHS
Evidence QIPP case studies 12
14
Glossary
15
Reference
15
Background
The 2008 Climate Change Act has been ground-breaking. It made the
UK the first country in the world to have a legally binding long-term
framework to cut carbon emissions. This means by law we must reduce
greenhouse gases by 34% by 2020 and 80% by 2050.
The NHS is a major contributor to the UK’s carbon footprint and one of the
planets largest public sector polluters. It must therefore play its part in
reducing emissions and help the UK meet its legally binding targets.
To help the NHS achieve its pledge of reducing greenhouse gas emissions
the NHS Sustainable Development Unit has published “A Marginal
Abatement Cost Curve for NHS England.”
What is a Marginal Abatement Cost (MAC) Curve?
A MAC Curve is an investment analysis tool. It will help NHS organisations work out which investment decisions will save
most money and most carbon.
The MAC Curve will aid the consideration of sustainability principles in the business decision making process. It will be
particularly beneficial to professionals in both Estates and Finance.
A MAC Curve condenses technical data into an easily understandable graph showing cost effectiveness and magnitude
of carbon saved for different measures.
Many measures taken specifically to reduce carbon emissions will also save money. These carbon and financial savings
can be achieved in many ways, including:
•
•
•
investment in NHS estates, facilities and services
making current activities more efficient
altering service delivery models
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Purpose of this document
The NHS Sustainable Development Unit (SDU) is keen to promote the appropriate use of MAC Curves as part of investment appraisal and to help organisations make changes to their service delivery or business activities.
This document will consider:
•
•
•
•
•
•
The benefits of a MAC Curve for your NHS organisation
How to create one
Where to source data to support MAC Curve calculations
How to mitigate risks surrounding this information and its use
How MAC Curves empower decision making
Potential future uses of MAC Curves
MAC Curves can be used to illustrate many measures from transformative changes in service delivery models to investments in energy savings and estates management.
In all cases good data is essential to produce a worthwhile MAC Curve.
Why would you create a MAC Curve?
A MAC Curve has many useful applications for a Trust. For example it could use a MAC Curve:
•
to support prioritisation of one investment over another, where a Trust is assessing the carbon emission and
financial impact of a project;
•
to support the case being made for specific investments or canges, for example during the business case process;
•
as part of its annual reporting process, highlighting which steps have beentaken to reduce the environmental
impact of the organisation, and which will form its priorities in the future;
•
to contribute to the QIPP case for a capital or revenue investment; and
•
in conjunction with payback period analysis to identify quick wins, particularly where legislation such as the Carbon
Reduction Commitment Energy Efficiency Scheme (CRC) pressurises organisations to reduce emissions quickly with
limited resources.
One of the benefits of the MAC Curve is that it allows you to compare very dissimilar investments, capital programmes or
programme activities on the same basis.
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Reading a MAC Curve
In brief
In detail
1. The width of each block illustrates the amount
of greenhouse gas emissions saved per year. The
greater the width, the greater the carbon saving.
Organisations considering making changes or investments that will affect their emissions can easily reproduce the carbon and cost implications on a MAC Curve.
2. The height of the block illustrates the net financial
saving or cost (of a measure) per tonne of carbon.
If an organisation is considering measures which increase carbon emissions, these will appear to the left of
the vertical line.
3. If a block is below the line this carbon reduction
measure will save more money than it originally
cost to introduce. If it is above the line the cash
invested will not be recovered over the lifetime of
the project.
The combined carbon and financial win-wins are those
measures which appear as tall, broad columns below the
line. This signifies a significant carbon and financial saving will be generated by a project with a high Net Present Value (NPV).
NPV is an investment decision making calculation which
offsets financial costs and benefits and takes into consideration the idea that money now is worth more to an
organisation than the same amount of money received
in the future. This document contains a quick guide on
how to calculate this value.
It is likely that the cause of a high NPV in the context of
estates management will be low initial capital costs and/
or, large reductions in organisational running costs.
The value for each measure on the graph is calculated by
dividing the project’s NPV by the annual emissions saving (either an average value for the project, or the emissions saving in a given year). The result is the Marginal
Abatement Cost.
Options which result in less financial savings per tonne
of CO2 will appear as increasingly shallow columns below
the horizontal line.
In “A Marginal Abatement Cost Curve for NHS England”
the carbon savings used are what could be achieved in
2015 if all the measures were enacted immediately.
It is worth revisiting and reviewing the MAC Curve periodically. As changes arise in the costs of technologies
or the value of incentives, such as the price of carbon in
the CRC scheme then some projects will become more
cost effective. This should be factored into the decision
making process.
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NHS England MAC Curve
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Combining MAC Curves with other investment appraisal concepts
MAC Curves are an ideal way to compare different investments or changes on a similar basis. However, they do not include
all of the criteria upon which an investment decision should be made.
NPV and MAC Curves
A key investment decision making concept is NPV. This
is the result of comparing the future cash flows, both
positive and negative, to determine whether a project
will have a net positive impact upon an organisation.
The design of the MAC Curve recognises the utility and
importance of NPV by making the Marginal Abatement
Cost dependent on NPV. A project’s NPV is a summary
of the costs and changes to future cash flows.
Payback period, Rate of Return and MAC Curves
An investment concept which coexists with MAC Curves
and NPV is Payback Period. This is an indicator of how
long it will take to recoup an initial investment from
savings generated. Payback Period is the length of time
over which savings must accrue or additional revenue
be generated before the NPV of a project is zero.
Payback Period is widely used in the commercial, construction and facilities management sector, where it is
a key part of the decision making process. As budgets
are increasingly constrained, the NHS may find this
concept of increasing value especially if a choice needs
to be made between two investments. For example,
an investment where expenditure can be classified as
revenue, and the impact on the bottom line is immediate may be preferred to a capital investment with a
more long lasting impact, or which delivers more environmental benefits. The opportunity cost or knock on
effects of such investments should be considered, and
this is an area in which MAC Curves can play a role.
Rate of Return (RoR) is an alternative method of displaying the speed with which an investment improves the
bottom line. Rate of Return is given as a percentage,
and is calculated by dividing the average annual benefit
(saving plus increase in revenue) by the total investment cost.
It might also be useful to rank projects by the total
investment required. This will allow a distinction to be
drawn between projects that require significant capital
input and which may require external funding, through
PFI, loans or grants, and those which fit within the
Trust’s own spending limits and plans.
Timelines and MAC Curves
The timing and volume of carbon savings might prove
critical – you might want to consider projecting the timing of various carbon savings on a timeline or bar chart,
to make sure that the measures you are considering will
help you to meet your targets. The MAC Curve could
then be used to help bridge the gaps which arise.
How to spot a “quick win”
The combination of short payback periods and carbon
reductions can be seen as “quick wins.”
With the increasing demands on NHS organisations to
reduce their carbon footprints, there is pressure to find
ways to swiftly reduce carbon and costs. This pressure
might combine or compete with the need for a longer
term strategy if an organisation is to match or exceed
average performance in the CRC scheme. If the NHS
needs to cut its greenhouse gas emissions by 80% by
2050 then organisations will need to reduce their energy usage year on year by 3% or more.
To identify a “quick win”, combine your MAC Curve with
the most relevant constraint faced by your organisation.
This might be achieving a short payback period or high
rate of return, a limited pool of capital for initial investment, or achieving the highest net present value. The
tall, broad bars on the resulting MAC Curve will then be
the most appropriate courses to pursue.
The best way of combining either investment appraisal
method with a MAC Curve is by creating MAC Curves
with similar Rates of Return or Payback Periods or by
highlighting on the MAC Curve itself what the Rates of
Return or Payback periods are for various projects.
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How to create a MAC Curve
Approximate costs and CO2 savings for certain carbon reduction measures (CRM) can be acquired by scaling the results
from the SDU’s previous publication on MAC Curves. This will provide a high-level overview and identify measures meriting further investigation.
Before making investments Trusts may wish to compile an organisation specific MAC Curve, gathering a clear picture of
the cost effectiveness of a range of investments or changes relevant to their specific circumstances.
A MAC Curve relies on calculating the marginal changes to an organisation, both in terms of the amount of expenditure
required to enact each change, and in terms of the impact the change will have on carbon emissions (for a description
of what this entails, see the NPV calculation annex).
MAC Curves need to be approached in a logical sequence:
A.
B.
C.
What is the current situation?
What types of changes are you making?
What will the impact of these changes be on the current position?
What is the current situation?
Data needs to be gathered to establish the current
situation. At this point it is crucial that the quality and
source of the information is understood. The following
questions may prove useful:
•
•
•
•
•
Where can you get the information from?
Is there a difference between standard/average
data and specific data for your organisation?
What risks are associated with this data?
Where appropriate, can you mitigate these risks?
What assurance exists around the valuations you
are using?
Standard/average data
To save time and money some information can be
drawn directly from the SDU’s existing NHS MAC Curves
which are available on the SDU website1.
For example obtaining a market cost for a combined
heat and power plant is unnecessary since it can be
drawn from the appropriate MAC Curves.
Other examples are:
• Unusual revenue costs (e.g. Biomass fuel costs)
• Assumptions about interactions and overlaps
•
By the latter we mean that some decisions will have an
impact on the same consumption value – for example,
changes to the insulation of a building might reduce
the fuel needed to heat it, but reducing the thermostat
temperature by 1 degree will also affect this value. The
NHS wide MAC Curve contains assumptions about the
order that these actions will be taken in, in order that
the cost and impact reflects the marginal change in
costs and benefits.
Energy consumption will need to be converted from
its raw form to show the carbon impact it generates.
Conversion factors for gas, electricity, transport and
other activities are provided on the Defra website2.
Data sources – Specific Data
Some data to generate the MAC Curve is already likely
to exist within your organisation. When collating the
support for Display Energy Certificates (DEC), Estates
Return Information Collection (ERIC) returns and CRC
requirements you will have measured information as
the electricity consumption of your sites, relevant floor
spaces, building heated volume and site-by-site fuel
consumption.
Carbon footprint data could also be used to support
the calculation of the baseline for carbon emissions for
the organisation. A carbon footprint is the expression
of how large the greenhouse gas emissions for an
organisation are. Guidance on how these values are
arrived at is available on the NHS SDU website3 based
on national guidance from Defra. The Carbon Trust also
provide free tools, aligned with this advice, for creating
an organisation carbon footprint.
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The organisation carbon footprint may also be useful as
a basis for the documentation required for CRC.
Using Data - Risks and Assurance
When relying on data it is important to consider the
risks related to its creation.
MAC curves can be created on a building-by-building
basis, to give a more detailed picture about the
impact of changes proposed. Gathering data that
sets out energy consumption, floor space, heating
and lighting requirement for the components of your
Estate may well be a good starting point for helping
your organisation become more environmentally
sustainable, regardless of the level of granularity
required for your MAC Curves.
Accurate, quality and reliable data is essential. In the
future the performance of teams in the estates function
might be measured in part based on the reduction in
electricity meter readings from one year to the next.
This could create an incentive to only include electricity
meters for areas where reductions are likely to occur. It
would be worthwhile considering what incentives for
underreporting exist in your organisation.
When looking at Estates investments, the information
collected for DEC may be useful for individual buildings.
In order to assess changes to service delivery, staff
operating hours, patient demand and potential
alterations to site use then analysis of the current
position and projections of future provision need to be
considered.
Another risk might occur where no monitoring or measurement of local data occurs, because in this instance
there is no incentive for accuracy in measurement. With
each risk, and each piece of data, it would be appropriate to consider whether to gather additional information or assurance. If the impact of a change is likely to
be low, then the extra assurance gained might not be
worth the additional work.
Data sources – Estimates and Assumptions
Estimates and assumptions may be the basis for some
data used in MAC Curve calculations. For example,
when creating a MAC Curve, it might be desirable to
calculate the relevant heating demand for a building,
(or section of it), based on its floor area – here the
assumption is that heating demand is consistent
between floors and buildings.
Of course any actual site-specific data should be used
wherever possible to provide the best MAC results.
Site/building opening or operating hours will also influence consumption of electricity for medical equipment,
lighting, computers etc, and could also inform the
calculation of potential saving in these areas.
Travel of staff, patients and visitors to the Trust is an
example of a situation where activity might not be
heavily monitored. In such cases, it is best to develop
estimates allowing for degrees of error or variance. It is
also worth considering what data sources you could use
to substitute for missing data groups such as the results
of surveys, or information gathered by partner organisations or stakeholders.
Another source of data for the MAC Curve will be a third
party (electricity bills, gas bills etc). In these instances it
is important to know whether these bills make estimates in the billing or consumption statistics reported,
and what work if any the Trust is performing to reconcile measurements back to the underlying data (meter
readings by the supplier against meter readings by
Estates staff, for instance).
These good governance processes are useful for highlighting unnecessary expenditure and will also help
create an accurate MAC Curve.
For much of your information, it is likely that you are
already seeking and gathering assurance. Perhaps
outside consultants conducted work with other goals
in mind, the data from which remains valid and can
be applied to MAC Curve creation. Perhaps the data
comes from verified independent sources. Perhaps the
information is audited, and so audit packs are created
periodically. When creating a MAC Curve it will not be
necessary to repeat these types of activties, indeed a
significant amount of the work which would be required to create a MAC Curve for a new organisation
will already have been conducted in the NHS.
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What type of change are you making?
Some carbon reduction measures are unlikely to suit all organisations, and this is reflected in the NHS MAC Curve uptake
rates. It is worth considering which measures match your specific circumstances, and the proportion of your activity to
which the measures apply – the uptake rate.
Options Selection
A Central London Acute Trust might struggle to gather sufficient fuel for a biomass heating system from local sources,
and shipping biomass in would negate the carbon savings intended in the investment. Equally, a small rural site might
find that investing in a Combined Heat and Power plant is not cost effective.
Uptake rate
For Estates - understanding the site-by-site situation in your organisation could lead to significant adjustments to the
wider MAC Curves. For instance improving the glazing and draft proofing of all buildings might be something that
would create a substantial benefit for your organisation, whereas in the Large Acute Trust MAC Curve only 20% uptake is
assumed. When considering uptake the specificities of a site’s operation will also be important, as hours of opening will
have a significant impact on technologies such as lighting controls.
For changes to service delivery the uptake rate appropriate will be driven by how much of the service you are proposing
to change – for example, if your Trust is pursuing a larger proportion of home births as opposed to births in hospital,
how large a percentage of your service is intended to be transferred? Another important consideration will be how
much of the service patients will be willing to see transferred? In the case of maternity, some expectant mothers will
always prefer a hospital birth, but this consideration applies to other areas too – whether it is Accident and Emergency
care or shifting from face to face to telephone based outpatient appointments.
Impact of these changes on the current position
With some investment decisions the impact of a change will be relatively simple to find – if a boiler uses 10% less fuel
than an alternative, then a simple substitution calculation will suffice to identify the carbon saving.
Some changes will require more consideration. For example:
•
If a clinic is going to be open for 3 more hours in the evening, then staff will have to be paid to man it for that time
but the clinic will also require extra heating and lighting.
•
If patients are asked to come to a new centre, rather than have a nurse visit them, the nurse’s time will be more
efficiently spent and her travelling mileage reduced but the patients travel needs to be taken into account.
The same basic considerations will apply to the projections of future activity as apply to the establishment of the
baseline, namely, what is the source of the data for the projections, what variance might exist, what are the risks and
how do we mitigate them. As with costs and benefits, pilots, best practice guidance and surveys are all good places to
start.
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Impact of these changes on the current position
With some investment decisions the impact of a change will be relatively simple to find – if a boiler uses 10% less fuel
than an alternative, then a simple substitution calculation will suffice to identify the carbon saving.
Some changes will require more consideration. For example:
•
If a clinic is going to be open for 3 more hours in the evening, then staff will have to be paid to man it for that time
but the clinic will also require extra heating and lighting.
•
If patients are asked to come to a new centre, rather than have a nurse visit them, the nurse’s time will be more
efficiently spent and her travelling mileage reduced but the patients travel needs to be taken into account.
The same basic considerations will apply to the projections of future activity as apply to the establishment of the
baseline, namely, what is the source of the data for the projections, what variance might exist, what are the risks and
how do we mitigate them. As with costs and benefits, pilots, best practice guidance and surveys are all good places to
start.
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Tools
When considering whether to create a MAC Curve
there are several options. You might rely on an existing
MAC Curve creation tool, sourced from the internet4 ,
to create your own tool to generate a MAC Curve, or
to outsource some or all of the work of creating a MAC
Curve to a specialist consultancy.
Whichever route you opt for, the same basic requirements exist:
1. Ongoing ownership of the underlying source data
Your organisation needs to retain intellectual property
rights data and methodologies, to ensure that software
licences are in the appropriate name and protect commercially sensitive information. Included in this necessity is a requirement to ensure that knowledge of where
data has been drawn from, and how it was collected.
Without this, making changes and adjustments in the
future becomes a lot harder.
2. The capacity to adjust your output based on new or
changing information
As discussed above, you may want to adjust the MAC
Curve output to include other decision-making information or outputs in the graph. This might be more
challenging if using a stock tool.
3. Time required to create the MAC Curve
Outsourcing the creation of a MAC Curve to a specialist
consultancy provider may save your staff time. However, there will need to be a balance struck between the
value of having external expertise bought in, and the
need to support and inform their work, and the relative
financial cost.
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Annex 1
What is Net Present Value?
Net Present Value (NPV) is the current value of the future cash flows of a project or investment.
The method takes into account the timing of future cash flows, as well as their values. Future income or savings generated by the project are offset against any initial investment or ongoing increases in cost, after a required rate of return
is applied. The result of this calculation is an expression of the benefit an organisation will gain from a course of action,
expressed in monetary terms.
To calculate a project’s NPV the following pieces of information are required: the investment cost, any impacts on ongoing expenditure, the projected timing of these impacts, and the discount rate.
When calculating an NPV only the marginal increase in cost should be used. For example, if the investment being appraised was the introduction of a new type of boiler, instead of continuing with the current boiler replacement programme, then only the increase in costs between the new type of boiler and the old type would be relevant for assessment.
The discount factor is calculated using the required rate of return for an investment. As such it includes both interest
and inflation. Using this to calculate NPV is based on the principle that money now is worth more than money in the
future and ensures that this is reflected in the project valuation.
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Example NPV – LED lighting
Cash Flow
Y0
Y1
Y2
Y3
Y4
Installation of LEDs
(£5,000)
Increase in maintenance costs
(£100)
(£100)
(£100)
(£100)
Reduced electricity cost
£1,500
£1,500
£1,500
£1,500
Discount factor @ 3.5%
1
0.966
0.934
0.902
0.871
Present Value
(£5,000)
£1352
£1308
£1263
£1,219
Net Present Value
£142
In this example the installation cost of LED lighting is £5,000.
The new system also requires £100 of extra maintenance costs, but it does bring a significant reduction in the electricity
cost of £1,500 per annum for each of LED lighting system’s four years of life.
It is convention that costs which occur during a period, whether it is a year or a month, are recorded as having occurred
at the end of that financial period. The initial outlay/investment in a project is recorded as occurring at the start of the
first financial period, and hence is not discounted.
The amount by which cash flows are reduced (the discount factor) escalates each year. This reflects how much the
money initially invested would have been worth if it had been spent in other ways (the opportunity cost).
The future cash flows are reduced by the discount factor, which is given by the formula
1
---------(1+DF)y
Where DF is the discount factor (in the example, we have used 3.5% which is the Treasury’s required rate of return) and y
is the number of years that have passed.
The sum of these discounted flows forms the NPV of the project. In this example the project’s NPV is £142, which means
that the organisation will gain £142 more benefit than its overall investment during the project’s life.
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Annex 2
Examples using NHS Evidence QIPP case studies
The NHS Sustainable Development Unit has created a MAC Curve graph for three recommended examples from NHS
Evidence. These examples are of initiatives taking place in the NHS that support quality and productivity at a local level.
These have been used and scaled up to calculate the impact if implemented across the whole of NHS England, based on
a 50% uptake rate.
Where possible all figures have been extracted from the evidence submission on the NHS Evidence website. Where there
has been missing data this has been requested from the leads of each initiative and the best estimates possible have
been used. In order to convert the information into a MAC Curve it has been assumed that all initiatives will run over a
ten year period.
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Glossary
CO2 – Carbon Dioxide
DF – Discount Factor
MACC – Marginal Abatement Cost Curve
NHS SDU – National Health Service Sustainable Development Unit
NPV – Net Present Value
DEC – Displayed Energy Certificate
References
1. http://www.sdu.nhs.uk/documents/MACC_Final_SDU_and_AEA.pdf
2. http://www.defra.gov.uk/environment/business/reporting/pdf/conversion-factors.pdf - care should be used to
ensure that CO2e factors are used.
3. http://www.sdu.nhs.uk/sd_and_the_nhs/measuring.aspx
4.
Two examples of these are available from low carbon cities or the Carbon Trust:
http://www.lowcarboncities.co.uk/cms/assets/Toolkit-Documents/3-Identify-City-wide-Opportunities/MACC-Calculation.xls?phpMyAdmin=b2269d0b74f0653ad75eab0d458e983d
http://www.carbontrust.co.uk/SiteCollectionDocuments/press_releases/5-CMPR-2009-v1-1.xls
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NHS Sustainable Development Unit
The NHS Sustainable Development Unit
develops organisations, people,
tools, policy, and research
to help the NHS in England fulfil its
potential as a leading sustainable
and low carbon organisation.
Victoria House, Capital Park
Fulbourn, Cambridge CB21 5XB
Tel: 01223 597 792
Fax: 01223 597 712
Web: www.sdu.nhs.uk
Published September 2010
© NHS Sustainable Development Unit, 2010. All rights reserved.
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