Comments Off on Industrial Energy Efficiency – Opportunities and Challenges

Great strides have been made over the last four decades to improve economy-wide energy efficiency and energy productivity. Estimates indicate that U.S. energy use per dollar of GDP has declined by over 50% since 1970 (from 18,000 BTUs per dollar of GDP in 1970 to 8,900 BTU’s per dollar of GDP in 2008 – Note 1). This is an astounding level of improvement. And importantly, most of the savings will provide long-term benefits as they are now built into the business process. To put this into more concrete terms, these energy efficiency improvements constitute energy savings equal to 301 billion barrels of oil equivalent over the 38-year period, or 247% of our total oil imports over the period. In gross terms, assuming foregone efficiency gains were replaced with more imported oil, and using the simple average of $38.24/barrel for oil prices over the period, our import bill for foreign oil would have increased by $4.7 trillion (Note 2). This avoided cost constitutes an immense benefit to our Balance of Trade Account. Of course, much of the savings come from reduction in energy demand from the commercial and industrial sectors, where natural gas and other fuels are the primary energy sources. But this advancement in efficiency represents a harbinger of things to come for transportation, which constitutes the primary demand for imported oil. The advent of Hybrid and electric cars will have a similarly dramatic impact.

As referenced above, much of this improvement has been achieved in the industrial sector, which currently accounts for approximately one-third of all energy consumption in the United States. Industrial energy efficiency has been on the rise in the past few years, driven by the need to mitigate increasing and volatile energy prices, concerns over global warming and the impact of potential greenhouse gas legislation, and access to energy efficient technologies. There still remain tremendous opportunities for further implementation of energy efficiency measures within the industrial sector, and specifically the energy-intensive segments (such as chemicals, refining, metals, and pulp and paper). Additional implementation of energy efficiency projects within the industrial sector is challenged by a number of issues, not the least of which is capital budgeting priorities. Corporations are operating under strict budget constraints and non-core or non-production focused projects such as energy efficiency are competing for capital against other initiatives such as research and development and other business needs. As the price of energy declines and the volatility diminishes, motivation for incremental investment in energy efficiency diminishes. As a result, energy efficiency projects require higher project returns and lower payback periods (less than 2 years in many cases) to be compelling. Additional challenges include lack of visibility, assessment requirements, and integration of energy efficiency opportunities within corporate strategic and capital planning processes.

The long-term benefits to corporate competitiveness and risk avoidance require that industrial companies invest in a structured, programmatic approach that starts with a transparent set of goals, sharing of ownership across facility managers, accountability, availability of funding, visibility of progress and promotion of results. At Pace Global (an energy consulting and management company) we have found through working with industrial leaders that energy efficiency requires leadership and sustained commitment.

Technological advancements in the industrial sector and mainly in the field of manufacturing have given ample scope for saving energy and reducing harmful greenhouse gas emissions. In addition, utility, state and federal incentives in the form of rebates, grants, loans and income tax deductions can make investments in energy efficiency projects more alluring by lowering upfront capital costs.

Energy efficiency will continue to play a significant role in our energy policy in the coming years, as it is one of the best ways to address a number of objectives at once: controlling the increase in power demand, savings money, and protecting the environment.

1 – Karen Ehrhardt-Martinez, et al., “The Size of the U.S. Energy Efficiency Market: Generating a More Complete Picture” ACEEE 2008.
2 – All data from USDOE Energy Information Administration; all monetary values and prices are calculated in constant 2009 dollars.