IEA Roundtable on Industrial Productivity and Competitiveness Impacts

Paris, France

January 27, 2014

Robert Bruce Lung – Industrial Energy Efficiency Advisor

“…Poppa got a job with the TVA,

He bought a washing machine,

And then a Chevrolet…”

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Alabama “Song of the South”

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

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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

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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

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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 analysis6

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

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Courtesy of John “Skip” Laitner

How to Quantify Macro-Economic Impacts of Energy Efficiency?

Integrate energy efficiency into economic production models3-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

energyOutput elasticities measure sensitivity of output to changes

in inputs (A, L, K and E)Different values of Energy (E) affect GDP growthEnergy efficiency reduces E, freeing up capital and labor for

other uses and increases the productivity parameter AHence, energy efficiency can lead to higher GDP growth

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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

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Conclusion/Lessons for Programs and PoliciesConventional 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

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Contact Information

Robert Bruce Lungindustrialeeadvisor@gmail.com202-262-7897

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