The 8 Factors Driving Global Industrial Efficiency

April 15, 2014
The world already has all the tools it needs to bend the curve on industrial energy efficiency, said IIP’s Executive Director Jigar Shah in Greentech this month. In this op ed, he lays out the eight exemplary initiatives that will change the way that industry uses energy.

Published in Greentech, 15 April 2014

Right now, industry accounts for around one-third of the world’s energy use -- more than any other end-use sector of the economy.

Additionally, industrial energy demand is projected to increase by as much as 44 percent over the next twenty years, particularly in emerging and developing countries. This, of course, means there will be an unprecedented increase in the greenhouse gas emissions that are associated with climate change.

To avert this course, we will need to cut our annual global energy use by a quarter by 2020. It will take a major shift toward energy efficiency and smarter resource use to ensure industry plays its part by becoming more efficient and productive.

The good news is that we already have much of the know-how in place to stimulate this level of change. Here are the eight exemplary initiatives I believe can fundamentally alter the way industry uses energy and, ultimately, how our global economy functions.

1. Policies and programs

Governments play a vital role in driving industry to adopt energy-saving and low-carbon practices. Most countries now have some kind of energy efficiency policy in place, and efforts are also ramping up in many developing countries that have large, energy-intensive industry sectors.

China is one of the countries leading in the policy arena with the industrial energy-efficiency initiatives in its Twelfth Five-Year Plan, which targets the country’s approximately 15,000 enterprises that consume more than 10,000 tons of coal equivalent (tce) per year.

This program builds on the successful “Top-1,000 Program,” which focused on the country’s top 1,000 energy-consuming enterprises. As a result of this initiative, China cut its energy intensity (energy use per unit GDP) by almost 20 percent between 2006 and 2010 -- primarily through energy efficiency upgrades and by closing obsolete facilities. It is now aiming to cut energy intensity by a further 16 percent by 2015.

In India, the Perform Achieve Trade (PAT) energy efficiency trading scheme has been developed to reduce industrial energy consumption through market-based mechanisms. Conceived in 2008, it is expected to contribute to savings of 6.6 million tons of oil equivalent in its first phase (2012-2015). This is comparable to the amount produced by 40 new coal-fired power plants over their lifetime.

Back in the United States, the Executive Order issued in 2012 will help meet the national goal of deploying 40 gigawatts of new, cost-effective industrial combined heat and power (CHP) by the end of 2020. CHP involves recovering the heat normally lost in power generation and using it to provide useful thermal energy to businesses and factories. If achieved, this goal will help generate as much electricity as 80 coal-fired plants can produce over their entire lifetime.

Many U.S. states also have energy efficiency resource standards that lay the foundation for industrial energy-efficiency programs funded by the public or by electric and gas ratepayers.

Many of the well-established, ratepayer-funded industrial energy-efficiency programs in North America -- those from Bonneville Power Authority, BC Hydro, the Energy Trust of Oregon or Wisconsin’s Focus on Energy -- have delivered reliable energy savings from industry at below the average costs they face for their programs overall. To realize increased low-cost energy savings in industry, however, will require a concerted effort developed specifically for each sector.

2. Energy management systems

Having an energy management system in place is one of the single most important factors in reducing the energy use of industrial operations in enterprises. As the term suggests, an EMS equips companies with certifiable practices and procedures that help them continuously improve their energy efficiency.

The benefit to companies is that it helps reduce energy costs, increases operational efficiency and productivity, and improves risk management. One recent study by the Lawrence Berkeley National Laboratory showed that the cost of developing and implementing an EMS to world standards was, on average, paid back in less than two years through energy savings.

The increasing uptake of ISO 50001 -- an international environmental management standard focused on energy use and performance -- demonstrates that energy management is becoming part and parcel of industrial operations around the world. Since the standard was launched in 2011 by the International Standardization Organization, there has been a tremendous leap in the number of industrial sites that are ISO-certified, increasing from about 90 two years ago to about 8,000 today.

Germany alone accounts for around 3,000 ISO-certified sites, largely due to voluntary agreements between the German government and industrial firms that encourage companies to cut energy use in return for a tax rebate. Other governments have also been successful in encouraging corporate adoption of EMS: Sweden, Ireland and Denmark, among others, have had longstanding negotiated agreements with industrial companies to provide technical support and financial incentives in return for energy savings and EMS implementation.

3. Transparency and disclosure

Another trend that is gaining momentum is carbon disclosure. Companies that measure their environmental risk are better able to manage it strategically. And those that are transparent and disclose this information are providing investors and other decision-makers with access to a critical source of global data that delivers the evidence and insight required to drive action. Thousands of companies around the world, from medium-sized enterprises to large publicly quoted corporation, are realizing the benefits of this process.

In China, new rules that signal a move toward greater transparency have just come into effect. They require 15,000 enterprises, including some of the biggest state-owned companies, to publish information about their air pollution, wastewater and heavy metal discharges.

In India, the Companies Act 2013 mandates that companies spend 2 percent of their profits on CSR initiatives and to publish related reports. Estimates suggest that if all companies that fall under the jurisdiction of the Act are to fully comply with the mandate, the CSR capital generated would amount to nearly INR 20,000 crore (USD 3.2 billion).

The not-for-profit organization Carbon Disclosure Project (CDP) works with 3,000 of the world’s biggest companies to measure and disclose environmental information. Members include BMW, Daimler, Phillips Electronics, Nestle, BNY Mellon, Cisco Systems, Gas Natural SDG, Honda Motor, Nissan Motor, Volkswagen, Hewlett-Packard and Samsung.

4. Putting a price on carbon

Many major companies now consider the price of carbon as a core element of their business strategy. Carbon pricing has increasingly become a valuable tool, as it helps companies identify and implement high-impact energy efficiency projects, and improves the paybacks and IRRs of measures such as CHP, the switch to low carbon fuels, and the use of newer process technologies that use less energy. Companies now pricing carbon include Exxon, Wal-Mart, American Electric Power, Microsoft, General Electric, Walt Disney, ConAgra Foods, Wells Fargo, DuPont, Duke Energy, Google and Delta Air Lines.

While the future of carbon pricing regulation is still uncertain, at least 29 major companies around the world have incorporated a carbon price into their long-term financial plans.

5. Benchmarking

With energy prices rising in many parts of the world, energy efficiency is seen as a means to save money. Benchmarking helps firms to assess what savings they can make by looking at the efforts of others, how much they have saved, and at what cost. A few industry sectors -- notably, petroleum refiners and cement producers -- already benchmark their energy efficiency performance successfully. But for the broader industry, this is an area that needs further development.

A UNIDO analysis on benchmarking shows energy efficiency could reduce global energy use by 26 percent, with a 15 percent to 20 percent potential improvement in industrialized countries and 30 percent to 35 percent in developing countries and economies in transition. The potential savings vary sector by sector, with energy-intensive processes and sectors having the potential to save even more than average. Most light industry processes show higher improvement potentials at an individual plant-level, but do not consume nearly as much as heavy industry.

6. Supply chains

The value of using supply chains to drive change cannot be underestimated. Around 40 percent to 60 percent of a manufacturing company’s carbon footprint comes from its supply chain, but this number can be as high as 80 percent. These numbers could be significantly reduced through better cooperation on energy efficiency practices and strategies between companies and their supply chains.

The Institute for Industrial Productivity is working with CDP on a new initiative called Action Exchange, which will help this seed take root in the supply chains of some of the world’s biggest companies, including Bank of America, L’Oreal, PepsiCo, Philips, Vodafone and Wal-Mart.

Supply chains are often opaque and complex; one multinational company can have hundreds of suppliers around the world. Creating transparency and targeted information through Action Exchange will open the door to emissions reduction strategies that governments have so far struggled to tap into. If successful, the thousands of companies that disclose to CDP will be able to access information on energy efficiency opportunities and purchasing clean technology and services, as well as to share the experiences gained from the program.

7. Innovation

Unlike the advances we’ve seen in IT in recent years, the basic processes used by industry are decades old. In fertilizer production, for example, ammonia is still converted using the Haber process, a technique that was first used on an industrial scale in 1913 in BASF's Oppau plant in Germany. Although the energy intensity of ammonia production has decreased substantially over the years, it remains the most energy-intensive and high-product-volume chemical process.

In recent research efforts conducted by companies and universities, the emphasis has been on reducing our carbon footprint by designing products with reusable parts that can be integrated into the next version of that product. This idea of a circular economy promotes the use of less precious resources and greatly reduces the embodied energy used in the making of each product, because each part or product has a much longer lifecycle.

We’re now seeing how the concept can work through the efforts of companies like Ricoh and Renault. Ricoh’s Greenline computers are leased out, then refurbished and upgraded at the end of each contract -- and then leased out again. Renault makes some of its car parts so that they can be reused in new models, literally giving them a new life. If this approach is applied on a greater scale, we would see a significant shift away from how the world produces and disposes of waste.

8. Financing

Financing remains one of the major challenges in accelerating industrial energy efficiency. Current investment is well below the economic potential, mostly because energy efficiency programs aren’t yet well understood by banks and financiers. Drawing on the work from the European Bank for Reconstruction and Development (EBRD), other financial institutions can take important steps to scale up their investment, while simultaneously increasing their revenues, building a positive brand, and satisfying regulators and other government agencies that they are committed to addressing climate change.

EBRD launched its Sustainable Energy Initiative (SEI) in 2006 and, by 2013, cumulative SEI investment reached $17 billion for 756 projects, of which $14.4 billion is related to energy efficiency projects. Moreover, SEI investment accounted for 28 percent of total EBRD investment in 2013, demonstrating just how bankable energy efficiency projects can be. Cumulative carbon emission reduction from these energy efficiency projects is estimated at 54 million tons per year.

The practical experience of the EBRD is that energy audits are a key instrument to drive energy-efficiency financing addressing important barriers.

The eight exemplary initiatives listed above, together with a new era of smart power and a grid powered by a much higher share of renewable and distributed energy systems, could accelerate the transition to a low-carbon economy. It is time industry moves away from its association with smokestacks and toward smart manufacturing based on productivity, sustainability and efficiency.