Co-Benefits of Industrial Energy Efficiency: Insights and Lessons

1. Co-Benefits of Industrial Energy Efficiency: Insights and Lessons IEA Roundtable on Industrial Productivity and Competitiveness Impacts Paris, France January 27, 2014 Robert Bruce Lung – Industrial Energy Efficiency Advisor

2. “…Poppa got a job with the TVA, He bought a washing machine, And then a Chevrolet…” Alabama “Song of the South”

3. Introduction • Conventional approaches to quantifying energy savings of energy efficiency • Co-benefits of energy efficiency in manufacturing • Impacts of quantifying co-benefits of industrial energy efficiency • Lessons for programs/policies

4. Conventional Approaches • Energy savings potential of energy efficiency evaluation methods: • Simple payback • Discounted payback • Internal rate of return • Net present value • Return on investment • Lifecycle cost analysis • All of these methods treat only quantified energy savings • Based on energy baselines and estimated savings generated during energy assessments

5. Co-benefits • Energy efficiency in manufacturing results in quantifiable co-benefits: • Production increases (higher absolute and/or per unit increases) • Improved product quality (fewer passes, fewer warranty claims) • Lower maintenance costs (especially repairs) • Reduced emissions (especially for thermal energy sources) • Lower use of other resources (water, treatment chemicals, raw materials) • Safer work environments (fewer sick days taken) • Fiscal rebates and/or incentive payments • Co-benefits are not systematically quantified because they are greatly underappreciated and rarely estimated during energy assessments • Omitting co-benefits understates full impact of energy efficiency

6. Quantified Impacts of Co-benefits • When co-benefits are quantified, ROI metrics always improve: • Worrel et al. (2003) • Simple payback of energy savings only = 4.2 years • Simple payback of energy savings and co-benefits = 1.9 years • Lung et al. (2005) • Total energy savings = $47.7 million • Total co-benefits = $21 million • Simple payback of energy savings only = 1.43 years • Simple payback of energy savings and co-benefits = .99 years • Co-benefits were quantified during post-implementation interviews • Quantifying productivity benefits enhances business case for energy efficiency • Also, important implications for economic analysis

7. Productivity Changes and Economic Impact • Just a 0.3% decline in productivity of the U.S. economy could cause GDP (in 2005 dollars) to be ~$2.7 trillion smaller by 2040 • If U.S. economy is ~$2.7 trillion smaller in 2040, this implies: • ~$800 billion fewer in 2040 than might otherwise be available for investment and/or government revenues • Between 2012 and 2040 ~$6 trillion fewer available for investment and government revenues • Approximately 15-18 million fewer total jobs between 2012 and 2040 Courtesy of John “Skip” Laitner

8. How to Quantify Macro-Economic Impacts of Energy Efficiency? • Integrate energy efficiency into economic production models • 3-factor Cobb-Douglas example: • Output = A*La *Kb *Ec • GDP = A*La *Kb *Ec + (E production – E imports) • A is a productivity parameter, L is labor, K is physical capital, E is energy used • a, b, c represent output elasticities of labor, capital and energy • Output elasticities measure sensitivity of output to changes in inputs (A, L, K and E) • Different values of Energy (E) affect GDP growth • Energy efficiency reduces E, freeing up capital and labor for other uses and increases the productivity parameter A • Hence, energy efficiency can lead to higher GDP growth

9. Cobb-Douglas Model Example in U.S. • Assumptions: • Energy intensity reduction 30% between 1990 and 2030 • Energy cost of $12.95/MMBtu (2009 data from AEO) • Energy use of 113.6 Exajoules (2009 data from AEO) • Median wages of $65,000/year (2009) • Labor force of 164.4 million workers • 10% return on rented physical capital • Physical capital stock valued at $60 trillion (2000 dollars) • Results: • Business as usual scenario: Value of used energy = $1,030 billion, GDP = $20.1 billion, energy intensity = 5.65 • 30% reduction in energy intensity scenario: Value of used energy = $721 billion, GDP = $21.9 billion, energy intensity = 3.63

10. Conclusion/Lessons for Programs and Policies • Conventional approaches to analyzing energy efficiency understate its impact • Quantifying co-benefits of energy efficiency has two important implications: • Truer understanding of impact on output/GDP • More compelling business case • A greater emphasis on energy-efficiency led productivity could yield more robust economic growth • Energy assessments need to be integrated with quality/competitiveness assessments to: • Properly estimate co-benefits • Account for energy savings from measures intended to improve productivity

11. Contact Information Robert Bruce Lung industrialeeadvisor@gmail.com 202-262-7897