Company Investment in Industrial Energy Efficiency in the US – Attractive NPV but Few Takers

Article by , November 4, 2019

It seems that climate change is in the news almost daily and shareholders and stakeholders are seeking greater accountability from companies. Annually, $180 Billion in operational energy efficiency improvements is being left on the table by the US industrial sector.

For example, just one Nissan plant improved its energy efficiency by 7.2%. The energy efficiency measures implemented by Nissan saved $1.2 million in costs and 250 billion BTU annually. The investment required to reduce expenses was $331K, only 28% of the payback. Further, based on a US Department of Energy pilot program (Nissan was a participant), participating industrial companies achieved an average:

  • Annual savings of $87,000 to $984,000 using no-cost or low-cost operational measures
  • Paybacks of 1 year or sooner in facilities with annual energy costs > $3 million
  • Paybacks of < 2 years in facilities with annual energy costs > $1.5 million
  • 10% reduction in energy costs within 18 months
  • 6% to 25% improvement in energy performance over three years across industries

Energy efficiency seems like a no-brainer for a sector of the economy that consumes about 30% of the US energy diet. European industrial manufacturers are ahead of the US on the number of implemented energy efficiency programs using the ISO 50001 standard. As of the beginning of 2014 only one percent of ISO 50001 globally certified firms are in the US. Clearly, US industrial firms are not embracing the opportunity to operate more sustainably and efficiently in their energy usage.

A graduate student team from Columbia University (of which the author was part of) was tasked by the Natural Resources Defense Council (NRDC) to research ways of more effectively increasing the scope energy efficiency improvements in the US industrial sector. This would significantly capitalize on the $180 Billion opportunity and reduce the associated GHG emissions from a business as usual approach.

The findings are actionable. Jim Ruggiero, Director Energy Procurement, National Gypsum Company, one of the interviewees from the study said, “National Gypsum runs lean in terms of corporate staff and it was insightful to see how other companies are getting their wins with limited human resources . . . [this study] gave us an opportunity to refocus on these important money saving issues and as a direct result we reassigned some resources to focus on energy efficiency and measurement systems.”

The research found, somewhat surprisingly, that the issue is less about finance and more about line-of-sight from the factory to the C-Suite. The research identified existing barriers to strategic energy management uptake within the industrial sector:

  • Energy efficiency is not discussed using C-Suite language.
  • Energy costs are seen as fixed costs, not investments nor a manageable expense.
  • Energy efficiency is treated differently around the world. Those US firms that adopt ISO 50001 typically do so because of European mandates and incentives.
  • The complexity of the current energy efficiency and energy management environment confuses and clutters the landscape and slows engagement.
  • There are different requirements for certification across energy efficiency programs.
  • Energy usage and efficiency management systems are not standardized.

It is clear from our research that most of the engagement around energy efficiency is at the plant, not C-Suite, level. We identified a continuum of US industrial awareness and engagement with energy usage and efficiencybroadly divided into ten different categories from highest to lowest as follows:

Highest Level

  1. They have been doing energy management/measurement for a while and have realized that the high level metrics did not give them what they needed to find the next 25% usage reduction that the CEO has publicly committed to.
  2. They have a heavy/medium/light energy usage information management system that is or is not incorporated into their ERP (or complicated spreadsheets).
  3. They do not have the manpower to engage with federal programs, the expense of a dedicated employee(s) is too high for them to absorb.
  4. Local utility or government entity has worked with them aggressively to help make a new factory much more energy efficient, through rebates, incentives, tax breaks, etc. Energy efficiency is not seen much as a system, but an ever expanding list of projects.
  5. They know some energy metric of their usage beyond total annual costs (e.g., cost per square foot or unit produced).
  6. They started to participate in one or more programs but stopped when a key manager left or management imperatives shifted.
  7. Mostly in the case of small companies, they rent their factory space and the landlord would have to make significant investment. The company can’t shoulder any more cost than they have already invested.
  8. They have changed light bulbs and done some other improvements in HVAC/motors/compressors in past years but either they are able to provide a clear payback period of less than a year or they need to get incentives from utility/government to offset the cost.
  9. Energy efficiency is familiar to them and they have thought about participating in one or more programs.
  10. They are always looking for opportunities to reduce costs because it helps them be more profitable and survive competition and changing customer demands. However, they believe energy is a fixed cost.

Lowest Level

These finds are based on qualitative research and would benefit further from survey research that would enable the segments to be quantified and further analyzed by business demographics (e.g., annual energy spend, industry sector, domestic vs. international, number of plants/facilities, etc.).

While energy efficiency advocates (non-profits and government) have talked about energy efficiency in terms of financial payback and the environmental impact, the C-Suite decision-makers are most concerned with risk management and operational excellence, and think in terms of ROI. Further, US industrial firms are currently engaged with LEED, Energy Star and other improvement-based energy efficiency programs, but few are moving toward ISO 50001.

Thus, the current communication and message efforts of advocates are not aligned with C-Suite interests.

What needs to change?

Absent a US cap-and-trade system, it is clear that the experts start using the language and planning cycles of business in their discussions. Risk management, operational excellence, and brand reputation are business imperatives for a CEO while energy efficiency is not. At the CFO level, the focus is on income statement metrics and risks to operational performance of which energy efficiency is perceived to be a relatively small part (even though energy cost is often a significant expense).

We believe that there is a very large need to reframe the energy efficiency conversation. This can best be accomplished via a proactive communications and media strategy to other members of the energy efficiency universe. By highlighting case histories in language that C-Suite and executive cenergy efficiency decision-makers see as relevant to their roles, we can accelerate the progress on achieving energy efficiency operational performance improvement and energy supply risk reduction..

Specifically, we think that the message to the C-Suite about the way that an energy efficiency imperative impacts their business performance has to be made more compelling and relevant to their frame of reference. This means moving beyond arguments centered on payback and the environmental benefits of energy efficiency and talking frankly about the business risks of rising future energy prices, energy supply disruption (due do natural disasters, environmental degradation, political upheaval or some combination), or carbon regulations.

Lastly, we believe that picking one existing program that aligns with business interests offers a way to get both non-profits and manufacturers more focused on taking action. The landscape is currently very cluttered and there is confusion about all the different programs available. We identified Energy Star as the strongest and most well-known brand for energy efficiency solutions in the industrial sector. Therefore, we believe this is the one program that should be leveraged heavily – it offers the largest foundation upon which to build.

The financial stakes are measurable ($180 Billion annually) and the savings to the environment in terms of GHG emissions is equivalent to taking all US vehicles off the road for four months.

The benefits are clear, it is time to change the conversation!

This article was first published in The Cornerstone Journal of Sustainable Finance and Banking. You can view the full version of the article including proper footnotes and citations here