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Energy Policy, Vol. 26, No. 5, pp.

413—423, 1998
( 1998 Elsevier Science Ltd. All rights reserved
Printed in Great Britain.
0301-4215/98 $ 19.00#0.00
PII: S0301-4215(97) 00149-3

Investing in industrial innovation:

a response to climate change

R Neal Elliott* and Miriam Pye

American Council for an Energy-Efficient Economy, 1001 Connecticut Avenue, N.W., Suite 801, Washington, D.C.
20036, USA

In this paper, we review industrial energy use and energy intensity trends, and discuss industrial decision making and
how it relates to changes in energy intensity. Based on this review, we propose that policies that promote technology
innovation and investment in process equipment are most likely to lead to greater industrial energy efficiency. We
propose and analyse four such policies and project that with full implementation of these policies, industrial energy
consumption and carbon emissions will be reduced in 2010 by 12.4% and 12.1%, respectively, over the base case
without changing economic growth. Reductions will increase to 35.65% and 33.1% in 2030. ( 1998 Elsevier
Science Ltd. All rights reserved.
Keywords: Industry; Efficiency; Innovation

Introduction directly use 23%. Aggregated non-electric fuels are used

to generate heat, steam, or electricity. Some of these
Industry is the largest energy-consuming sector in the applications (called combined heat and power [CHP]
United States, with its 1994 primary consumption of 35.5 systems) are designed to both meet thermal loads and
exajoules (EJ) accounting for 38% of domestic consump- generate electricity, producing very high efficiencies of
tion (EIA, 1995a). Industry is very different from other fuel utilization. The manufacturing sub-sector generates
sectors and also very diverse, encompassing agricultural, 130 terawatt-hours (TWh) of electricity for internal con-
mining, construction, and manufacturing. How energy is sumption or resale, either from dedicated generation or
used by and within each sub-sector varies widely. The cogeneration systems, while consuming 695 TWh net.
manufacturing sub-sector accounts for about 70% of Non-electric fuels include purchased fuels (eg natural
industry’s energy consumption and is as diverse as the gas) and waste by-products (eg paper pulping wastes
industrial sector as a whole — each industry’s process and [black liquor]). Many industries can switch among fuels
energy requirements as different as the products it pro- based upon price and availability, so focusing on a par-
duces (Laitner et al, 1995). ticular fuel for a particular end-use is difficult. Steam
Much of the energy consumed by industry is directly generation accounts for 26% of non-electric fuel con-
involved in manufacturing processes required to produce sumption, with direct process heating accounting for
various products. Electricity accounts for about a third of 23% (EIA, 1994).
primary energy used by industries, with natural gas,
petroleum, and coal accounting for about 28, 26 and 7%,
respectively (EIA, 1995a). Industries also use what are Industrial trends
traditionally thought of as energy sources for non-fuel
purposes. For example, industries such as chemicals and Industry significantly reduced its energy intensity (con-
petroleum refining use crude oil, liquid propane gas sumption per constant dollar value of shipments) from
(LPG), and natural gas as feedstocks in producing prod- the early 1970s to the mid-1980s (Fig. 1). In contrast,
ucts such as asphalt, gasoline, plastic resins and ferti- other sectors of the economy continued to increase their
lizers. This non-fuel use of energy sources accounted for energy intensity. Rapid increases in energy prices during
about 6.8 EJ in 1991 (EIA, 1994). the 1970s in part motivated industry’s reduction, which
In manufacturing, motors use about 70% of electricity, continued through the mid-1980s. This trend slowed in
lighting uses 7%, and heating or electrolytic processes the late 1980s as energy prices declined (EIA, 1995b).
Decreasing energy intensity traceable to technology
* Author to whom correspondence should be addressed. Phone: 202- innovation has persisted since data have been recorded
429-8873, Fax: 202-429-2248 and is projected to continue for the foreseeable future.

414 Investing in industrial innovation: a response to climate change: R N Elliott and M Pye

All evidence suggests that potential still exists for effi-

ciency improvements. Efficient energy use is good for
industry because it reduces operating costs for the same
level of production, making the company more profit-
able. Nevertheless, for a variety of reasons the pace of
energy efficiency improvement has begun to stall in re-
cent years, as will be discussed later.
One way to revitalize progress toward energy efficien-
cy is to view it from a business/financial perspective.
Business management’s responsibility is to enhance
shareholder value. Thus, to get the attention of business
management, financial analyses that evaluate the
cost/benefit of efficiency measures must be presented to
them. Analyses may range from a simple payback analy-
Figure 1 Total US primary industrial energy consumption sis to a detailed cash flow analysis calculating net present
and manufacturing energy intensity value (NPV) or internal rate of return (IRR) for the
investment. We intentionally refer to an investment in
efficiency, rather than specifically in energy efficiency,
This trend is in part due to improvements in the energy because often energy efficiency projects have non-energy
efficiency of production processes and equipment, and benefits and efficiency projects that are not specifically
changes in products that industry produces. The latter targeting energy produce energy savings. It is critical that
trend reflects a dematerialization of manufactured prod- all the savings related to such projects — energy and
ucts in which less physical material is required to produce non-energy — be included in the financial analysis so that
a product of a given functionality. For example, advances management understands the complete financial ramifi-
in semiconductor technology have allowed electronic de- cations of an efficiency project.
vices to become smaller and lighter while increasing their
capabilities (Ross et al, 1993).
Industrial energy consumption peaked in 1979 and Market barriers
then declined due to economic downturns in the early
1980s (Fig. 1). Consumption increased again in the mid- Many studies have identified significant, economically
1980s with economic recovery and continued into the advantageous, energy efficiency improvements that are
1990s, when total consumption reached a new peak in not being implemented. The reasons for the lack of imple-
1994 at 35.5 EJ (EIA, 1995a). mentation are complex, stemming from factors both in-
From 1970 to 1986, electricity’s share of industrial ternal to the companies and from the market as a whole.
energy consumption increased from 23% to 35%, natu-
ral gas fell from 33% to 25%, and coal fell from 16% to ¸ow energy prices
10%. After 1986, electricity’s share stabilized and natural
gas began to recover its share because of its low price and A primary barrier to greater energy efficiency and in-
perceived environmental benefits. Petroleum consump- creased renewable energy use is that conventional energy
tion declined sharply in the early 1980s and then began to sources are cheap and are getting cheaper (Fig. 2).
grow again slowly, driven mostly by increasing demand
for feedstock (EIA, 1996).

Current issues
While industrial consumption of all fuels has increased
over the last two decades, industry has become more
energy efficient. Industry has never responded well to the
concept of energy conservation, since reducing use usually
reduces production levels. Energy efficiency, however,
resonates with many industrial thinkers who seek to
optimize use of all resources. The importance of efficient
resource use is seen in some integrated industries, such as
petroleum refining, in which feedstock is used to produce
the product and generate energy required by the process.
The less feedstock consumed for energy, the more prod- Figue 2 US industrial energy, electricity, natural gas prices in
ucts that can be shipped. nominal and 1993 constant US dollars
Investing in industrial innovation: a response to climate change: R N Elliott and M Pye 415

However, energy prices do not reflect all the social costs, failure to address these may result in the plant being shut
such as environmental damage, associated with energy down (Geller and Elliott, 1994).
use. Industrial energy and electricity prices (constant Capital allocation remains a barrier to achieving
dollars) peaked in 1982 and natural gas peaked in 1983. greater energy efficiency. Given a choice between ex-
By 1993, real (ie constant dollars) average energy prices panding existing production capability or introducing
had declined from their peaks by 42% — electricity by new products, and reducing energy bills, production-
34% and natural gas by 46% (EIA, 1987; EIA, 1992; EIA, related projects will invariably win out. Fortunately, such
1995d; EIA, 1995c). With many ‘cheap’ efficiency projects often save energy or create opportunities to
measures already implemented, lower energy prices make integrate energy savings into other projects, again sup-
further investments hard to justify. Continued declines in porting the premise that both energy and non-energy
industrial energy prices, anticipated by many in view of benefits must be taken into account when presenting
utility deregulation, further reduce the incentive for effi- projects to management.
ciency investments.

Energy is a small fraction of the production cost

Factors influencing energy decisions
Industrial energy decisions are made within the context
For most industries, energy expenditures are a very small
of maximizing shareholder profits and insuring the com-
part of operating costs, averaging less than 2% of the
pany’s long-term viability. As a result, many factors influ-
value of shipments for the manufacturing sub-sector.
ence decision makers, including investment in research
Industries such as primary aluminum, hydraulic cement,
and development (R&D), planning and managing pro-
and industrial gases are exceptions, with energy ac-
jects, and using recycled feedstocks. These issues are
counting for more than 20% of the value of shipments.
discussed below.
However, for some of the fastest growing industries (elec-
tronics and computers) energy expenditures represent
only 1.2 and 0.6% of shipments, respectively (Census Reduced R&D spending
Bureau, 1992). In most industries, larger costs, such as
labor and raw materials, receive attention before energy. R&D is the process by which new ideas are developed
and transformed into commercial products and services.
Energy is not a discrete issue Innovation fuels economic growth and has allowed in-
dustry to achieve impressive energy efficiency and envir-
Most industries do not perceive energy as a discrete issue onmental gains. Continued innovation is critical to
but as part of broader issues such as cost of manufactur- achieving future goals in these areas (Steinmeyer, 1997).
ing, environmental compliance, safety and productivity. The period since World War II saw a sustained commit-
Since most energy efficiency projects impact some of ment to R&D by the private and public sectors, with
these issues, decision making becomes more complex, more than half of the economic growth during this period
involving evaluation of all these issues. Fortunately, resulting from technology improvements (Eisenhauer,
many energy efficiency projects yield non-energy benefits, 1996).
which are frequently greater than energy savings (Elliott Recently, commitment to R&D has diminished, with
et al, 1997). Thus, energy efficiency advocates can both federal and industrial R&D dollars declining
strengthen their case to business management by ap- (Fig. 3). As part of corporate cost reductions, many
proaching projects from a broader perspective, taking
into account all costs and savings — both energy and

Competition for resources

Energy efficiency competes with other issues for a com-

pany’s finite resources. While capital is the most often
cited resource, staff time is also important. With indus-
trial downsizing, expenditures for issues not directly re-
lated to the company’s operation and near-term profitab-
ility have declined, and less staff are available to address
all issues. When choosing between addressing potential
emissions compliance, production reliability, or product
quality problems, or identifying and implementing en-
ergy efficiency projects, the former receive attention since Figure 3 Recent US R&D expenditure trends
416 Investing in industrial innovation: a response to climate change: R N Elliott and M Pye

industries are closing their research laboratories and duce quality feedstocks to increase manufacturers’ use of
focusing on more near-term activities, shifting from basic recyclables. In fact, lack of availability of quality recycled
and applied research toward commercialization. In 1988, feedstocks is one of the most important barriers to in-
about 6% of corporate R&D budgets were directed at creased recycled content.
basic research and more than 20% went to applied re-
search. By 1995 these shares had fallen to about 2 and
16%, respectively (Eisenhauer, 1996). Future opportunities for improved energy
Project facilitation
Few inside or outside industry question that potential
significant, cost-effective energy efficiency improvements
Implementing an energy efficiency project involves more
exist. Estimating the magnitude of potential energy sav-
than identifying the opportunity. The implementation
ings accurately is difficult because so much industrial
process has seven steps: (1) opportunity identification; (2)
energy is used by manufacturing processes. Since tech-
technology identification and project design; (3) financial
nologies and processes vary among industries, and even
analysis; (4) purchasing and procurement; (5) financing;
among plants, the energy efficiency potential will be
(6) installation; and (7) startup and training.
unique to each plant. Companies such as Dow have
Most industrial and utility technical-assistance pro-
found that the more they look for energy efficiency op-
grams have focused on only one or two of these steps. It is
portunities, the more they find. These opportunities are
important that resources be available for all steps to
cost-effective, often very low cost, and often have non-
achieve high implementation rates. Final project phases,
energy benefits that far exceed energy savings (Elliott,
particularly startup and employee training, can be the
most critical to maximizing long-term savings potential
The largest energy-consuming industries have
(Elliott et al, 1996). As an example, New York’s FlexTech
achieved significant, cost-effective energy savings, imple-
program has achieved impressive results by facilitating
menting many of the lowest cost opportunities. These
the entire implementation process at a modest cost (El-
industries are typically large corporations with signifi-
liott and Weidenbaum, 1994).
cant technical and financial resources. Several studies
have identified abundant, low- cost efficiency opportuni-
Recycling ties for smaller firms that are less energy intensive. In the
United States, these smaller manufacturers (fewer than
Americans have embraced recycling as a means of be- 500 employees) account for almost 99% of the manufac-
coming involved with improving their environment. Re- turing facilities, 42% of industrial energy use, 56% of
cycling by homeowners, offices, and companies is widely manufacturing electricity, and 74% of distillate fuel oil
accepted (Hershkowitz, 1997). In addition, recycled con- (Hopkins and Jones, 1995). Through one-day as-
tent has become a positive marketing issue for many sessments of small- to medium-sized manufacturing facil-
products. Many offices and businesses use some recycled ities conducted by engineering students, the US Depart-
paper products and consumers seek out products like ment of Energy’s (DOE’s) Industrial Assessment Centers
fleece jackets made from recycled soft drink bottles. (IAC) program (formerly the Energy Analysis and Diag-
Using recycled feedstocks in the production of primary nostics Center program) has identified an average possi-
materials has energy and cost savings potential (Elliott, bility of 10% energy savings. Since the program began in
1994a). Primary manufacturing industries transform 1976, 61% of the recommendations have been imple-
feedstocks into intermediate materials from which end- mented. Resource limitations have focused assessments
products and their packaging are produced. These indus- on easily implemented, short-term payback measures,
tries use chemical and physical processes to transform thus missing many savings that might be identified in
feedstocks into more valuable materials, increasing the a more detailed process assessment (DOE, 1996).
material’s embodied energy along the way. Once a prod- The rate at which industrial end use energy intensity
uct has served its useful life, the energy investment in can be reduced is finite. However, carbon emissions are
converting the material still remains. If the product is not necessarily directly linked to energy intensity. Car-
discarded, the value of that energy is lost. Some of that bon emissions can be reduced by reducing the carbon
energy value can be recovered if the material is recycled. intensity of a plant and through changes in the plant’s
Unfortunately, many recycling efforts have focused on energy balance and fuel mix. Combined production of
diverting recyclable material from the waste stream with- heat and power, often referred to as cogeneration, offers
out understanding how to best use these products. Since perhaps the greatest opportunity to reduce carbon inten-
a significant portion of energy used in initial material sity. Recent technology developments, especially in the
transformation goes into feedstock separation and purifi- area of gas turbine technology, have reduced technical
cation, for a recycled feedstock to maintain its value it barriers to widespread implementation of small-scale
must be kept clean (ie segregated by type and kept clean CHP. Emerging technologies, such as biomass gasifica-
of foreign materials). The recycling system needs to pro- tion, natural gas diesel, and fuel cell technologies, will
Investing in industrial innovation: a response to climate change: R N Elliott and M Pye 417

further expand the potential. CHP has the potential to Provide incentives for investment in new production
generate enough electricity to meet almost all of the equipment
industrial sector’s demand. The following major
issues impede widespread implementation of this techno- One effect of reducing the cost of capital is an increase in
logy: the rate at which older manufacturing plants and equip-
ment are replaced. Many of the most energy-intensive
f cost of environmental permitting, which prohibitively manufacturing industries are also the most capital-inten-
increases the first cost of smaller systems sive. Normal practice is for a new plant to be built with
f uncertain economic relationships with electricity sup- the most modern and efficient technologies available.
pliers and the transmission grid Since the cost of new facilities is very high, plants are
f industry’s use of CHP to satisfy only internal needs, operated as long as they can be cost justified. As a plant
rather than as a revenue generator ages and becomes less cost-effective, maintenance and
modernization expenditures decrease, and production
If these issues are not addressed, the opportunity for shifts to more modern facilities until it becomes un-
industrial CHP will significantly diminish. Following are economic to operate the older plant, which is rebuilt with
policies to overcome these and other barriers previously modern equipment or replaced with a new plant (Stein-
discussed. meyer, 1997). As a rule, the more modern the plant
technology, the more energy efficient, and the lower the
level of environmental emissions.
Policy packages for an energy-efficient industry A number of policy options are available to reduce the
in the future cost of capital and encourage modernization of manufac-
turing plants. A tax credit could be offered for invest-
We analysed four sets of broad policies that would ad- ments in new production equipment. In the past, the
dress market failures unique to industry and encourage federal government and many states have offered tax
more sustainable business practices that could lead to credits for energy efficiency improvements. These past
a more profitable industrial sector: credits have been problematic for industries in that it is
often difficult to segregate expenditures for energy effi-
f Provide Incentives for Investment in New Production
ciency from other process-related expenditures. How-
Equipment. Grant tax credits for investment in new
ever, industry already segregates manufacturing and
production equipment to encourage replacement of
non-manufacturing expenditures so no additional ad-
older manufacturing plants and equipment.
ministrative burden would be incurred by providing an
f Expand Research, Development, and Demonstration
investment tax credit for investment in new manufactur-
Investment in, and Accelerated Adoption of Efficient
ing equipment.
¹echnologies. Fund research and support both pro-
To reduce the cost of a new tax credit to the federal or
grams that facilitate implementation of improved
state government’s treasury, a tax could be imposed on
process efficiency, and education to create a pool of
purchased energy while a firm’s investment tax credit
trained scientists, engineers, and technicians.
would be capped at its energy tax liability. Besides mak-
f Increase ºse of Recycled Feedstock. Eliminate favor-
ing the tax and credit revenue neutral on an individual
able tax treatment of virgin materials and change
basis, companies would be encouraged to make capital
recycling practices to increase the volume of clean
investments so they could recover all the tax. Plant
modernization would also provide environmental bene-
f Overcome Barriers to Combined Heat and Power Pro-
fits from reduced emissions and enhance competitiveness
duction. Expedite environmental permitting of CHP
by improving productivity and reducing costs. It might
systems, incorporate provisions into utility restruc-
even be argued that revenues from increased industrial
turing to allow sale of excess power, and provide
profits that result from productivity and cost-contain-
programs to educate end users on how to implement
ment investments would pay for the credit.
A tax credit offers greater benefits to larger companies,
Since each policy addresses a different issue, effects of who may have greater access to low-cost capital. Many
these policies are additive. From the modeling perspect- small- and medium-sized companies do not have access
ive, these policies move the sectoral conservation supply to financial resources that would allow them to take full
curve to the right (ie increase how much efficiency is advantage of the credits. For these capital-constrained
justifiable at a given energy price). industries, loans, loan-guarantees, and interest rate subsi-
These policies, however, do not address the barrier of dization programs may be valuable. The FlexTech pro-
low energy prices. Economy-wide carbon and energy tax gram provided such incentives and proved very success-
strategies would impact industrial energy consumption ful and cost-effective for this audience (Elliott and
by making more efficiency opportunities cost-effective. Weidenbaum, 1994).
From the modeling perspective, energy price increases Increasing the turnover in manufacturing capacity is
move us up the conservation supply curve. complementary with the other sectorial policies and
418 Investing in industrial innovation: a response to climate change: R N Elliott and M Pye

would accelerate investments. While the equipment turn- both fundamental science and existing technology ap-
over rate varies dramatically among different industries, plications. While the national laboratory system offers
this policy set would increase the turnover rate across physical resources, together with trained scientists and
industries. Thus, process efficiency opportunities identi- engineers, the number of commercially valuable innova-
fied and new technologies developed would be more tions can be increased by involving engineers and scien-
quickly implemented in plants. Manufacturing changes tists from industry. They bring perspectives that can lead
necessary to increase recycled content would also be to breakthroughs that have potential commercial ap-
made earlier. An economy-wide carbon tax would comp- plications.
lement this policy set by increasing the number of cost- Industry should also be encouraged to increase
effective efficiency options. RD&D spending by granting favorable tax treatment for
these expenditures and facilitating cooperative research
between industry and government. Not only will this
Expand research, development, and demonstration invest- advance technology, but information in the form of tech-
ment in and accelerated adoption of efficient technologies nology development represents an important commodity
that can be sold by the commercializing company, thus
A broad range of activities at all stages of technology underwriting future development costs (Steinmeyer,
development and implementation is essential for achiev- 1997).
ing both near- and long-term technology results. This Commercializing innovation is important to increas-
policy set consists of complementary initiatives that pro- ing energy efficiency potential. This process is fraught
vide a coordinated national industrial strategy to en- with risk, something many companies are unwilling to
courage research, development, and demonstration bear. Government can share the risk at modest cost by
(RD&D) and facilitate adoption of efficient technologies providing a structure in which companies can collabor-
and practices by industry. This policy set complements ate.
the other sector-specific policies by identifying energy
efficiency opportunities while increasing the range of Accelerated implementation of improved technologies
opportunities by demonstrating new applications of For a new technology to be implemented, potential users
existing technologies and creating new technologies that must be made aware of the technology and how to apply
improve efficiency. it. This learning process involves demonstrations, train-
Research is a continuum of activities, all phases of ing and technical assistance.
which must take place if innovation is to become mani- While many large companies continually search for
fest in the marketplace. Results of research are, by defini- new technologies, many current technologies are not
tion, unsure since they involve discovery. While an area being implemented. This problem is most pronounced in
may initially appear promising, as the technology evolves small- and medium-sized companies. These companies
and markets change, the potential may not materialize. frequently do not have the time nor resources to identify
Conversely, technologies developed for one purpose may and implement energy efficiency opportunities. Govern-
emerge as important in unforeseen applications. ment and utility programs have provided assistance to
It is difficult to justify research on a project-by-project some of these companies in the past with great success, as
basis; one must look at a portfolio of activities and discussed above, but these programs have just begun to
compare the total investment to the benefits from those meet the needs of the thousands of small firms. Expan-
innovations that succeed in the marketplace. A recent sion of DOE’s IAC program — with additional coopera-
study of federal energy R&D expenditures draws rela- tive funding from state and local governments, founda-
tionships between R&D expenditures, and energy sav- tions, and utilities — could extend its reach. The lack of
ings and shifts to renewable energy sources (Breger, specialized technical expertise and follow-up has been
1997). The study found that, after 20 years, 1.4 EJ of identified as a limitation of this program. Governments,
energy could be saved for each $100 million [US] in utilities and the private sector can all contribute to meet-
efficiency R&D expenditure. It also found that each $100 ing these additional needs by creating technology centers,
million [US] in renewables R&D expenditure resulted in providing technical assistance, and assisting in imple-
0.4 EJ of energy consumption being switched from con- mentation (as seen in the FlexTech program).
ventional to renewable energy sources.
Since much government research is done cooperatively Enhanced science education
with industry, declines in corporate research reduce R&D and accelerated implementation both need trained
the effectiveness of government-funded research as well. scientists, engineers and technicians. US industries are
In addition, government’s R&D focus has become more importing many of their experts from foreign countries.
near-term due to tight budgets and a need to justify R&D Engineers and technicians within manufacturing plants
expenditures with results. If the United States is to move are in an ideal position to implement technologies and be
toward sustainability, it must reverse the trend of declin- innovative. When Dow encouraged its employees to
ing R&D spending and revitalize long-term research. identify energy efficiency opportunities, they found cost-
Government should increase its R&D expenditures in effective opportunities on a continuing basis (Nelson,
Investing in industrial innovation: a response to climate change: R N Elliott and M Pye 419

1993). Creating trained engineers with practical experi- tent products and give preference to goods with a high
ence is one of the strengths of DOE’s IAC program. It is recycled content. Federal and state governments have
important that the US public supports our educational already provided market leadership by changing their
system in producing trained researchers and engineers procurement but further steps would increase demand
needed to make future technical discoveries and imple- for these products (Lewis and Weltman, 1992). With
ment them in our manufacturing plants. proper encouragement (eg voluntary programs), the mar-
ketplace can create further demand for products with
high recycled content.
Increase use of recycled feedstocks

Three groups of policies would help increase recycled ºse of recycled feedstocks
content: increasing the availability of quality recycled Voluntary targets, based on technical and economic po-
feedstocks; further encouraging market acceptance of tential, should be set for recycled content of key materials
products with high recycled content; and encouraging the identified in this section and for products using these
use of recycled feedstocks. These policies should focus materials. Targets should also be set on availability of
upon plastics and resins, container glass, paper and recycled feedstocks. Taxes should be considered for vir-
aluminum, and products manufactured from these gin materials and credits for the use of recycled feed-
materials. stocks and investment in process equipment that allows
the use of recycled feedstocks.
Quality recycled feedstocks Policies that encourage use of recycled feedstocks are
Insuring that high-quality recycled feedstocks are avail- complementary and additive with the other sectoral pol-
able to manufacturers is important. The first step is to icy sets. By reducing the need to transform materials, we
keep material clean by encouraging states and local gov- reduce the base energy required to produce the products.
ernments, the waste industry, and consumers to use the Investments in more modern and efficient production
best practices to maintain segregation of different mater- facilities, and development and implementation of more
ial streams. Federal ‘bottle bill’ legislation of minimum efficient processes, would reduce energy requirements
requirements for container and packaging reuse would further.
prove very effective. Those states with ‘bottle bills’ ac-
count for the majority of recycled aluminum and glass
feedstocks. Government could also fund research and Overcome barriers to combined heat and power
demonstration of new collection and separation tech- productions
nologies, and innovative and non-traditional uses for
waste materials, such as the recent introduction of lum- To take advantage of the opportunities to reduce carbon
ber made from mixed recycled plastics. intensity that combined production of heat and power
Manufacturers of durable goods (eg vehicles, buildings, offers, policies could be put in place that attempt to
and appliances) should be encouraged to design for re- overcome the barriers to wide-spread implementation of
cycling. Such ‘recycling friendly’ products can be easily this technology.
disassembled into reusable components or products Though CHP equipment cost has declined, environ-
manufactured from readily recyclable materials (eg the mental permitting costs continue to drive up total project
switch from multi-layer, squeezable, non-recyclable cat- cost. These costs do not vary significantly with the sys-
sup bottles; to clear, single-layer, readily recyclable plas- tem’s capacity, so permitting costs as a percent of total
tic bottles). project costs increase as the unit size decreases, becoming
The government should initiate a review of current the dominant cost component in smaller systems. Many
policies to insure that recycled feedstocks are not disad- of these new units are now being sold as integrated
vantaged. Favorable tax treatments for using virgin ma- systems in the five to 50-megawatt range, with the size
terials over recycled feedstocks should be eliminated. anticipated to drop to the 500 kilowatts range in the
Regulations that pose a barrier to recycling and the use future (Carroll, 1996). It would be appropriate to con-
of products with a high-recycled-material content should sider rethinking the permitting process for these package
be considered for revision or elimination. systems and moving toward certifying unit emissions,
much as we do now with automobiles and appliances.
Market acceptance This approach would expedite the permitting process,
Products produced from recycled feedstocks may have significantly reducing the permitting cost. Certification
different characteristics than those produced from virgin should also take into account the grid generation capa-
materials. For example, recycled paper may not have the city that this unit displaces.
same texture or be as white as virgin paper but can be just Impending utility restructuring may remove market
as functional. The public should be encouraged to accept barriers for on-site generation of electricity, creating new
these products. Purchasers should be encouraged to opportunities for CHP. Emerging market forces such as
eliminate specifications that exclude high recycled con- new players and a redefined role of utilities, could include
420 Investing in industrial innovation: a response to climate change: R N Elliott and M Pye

the following: used to develop conservation supply curves for 18 indus-

trial sectors. These sectors reflect industry groupings that
f independent power producers providing on-site en-
have similar energy use characteristics based on histori-
ergy services
cal energy use. Most conservation supply curves have
f utility energy service businesses siting generation at
been developed by combining various energy efficiency
customers’ sites
measures that are typically implemented for a particular
f industries entering the electricity generation business
market. Such an approach is impractical for the indus-
How deregulation evolves will define how these market trial sector because of the complexity and site-specific
players evolve. Restructuring should not be allowed to nature of many measures. Since the efficiency of an
inhibit implementation of CHP. industrial system is determined by system design, analy-
If CHP’s focus is extended to maximizing generation of sis of component efficiencies will produce misleading
electricity for sale, CHP at industrial sites has the poten- results.
tial to become a major source of electricity generation. LIEF treats electricity and all other fuel use separately.
One particularly exciting opportunity is the potential to Since many industries have some capability to switch
replace ‘black liquor’ boilers in the pulp and paper indus- among non-electric fuels, a fuel-specific analysis is diffi-
try with gasifiers powering turbine-based CHP systems. cult. In addition, efficiency is related to changes in the
This change in technology could move the industry from process, not the specific fuel use. LIEF uses electricity
being a net consumer of electricity to a major electricity and industry-weighted fuel prices to estimate economi-
generator, with a national potential of 55 terawatt-hours cally acceptable energy efficiency potential. In addition,
of annual capacity (Nilsson et al, 1996). This future, the approach used to develop LIEF also reflects the
however, requires fundamental rethinking of traditional behavior that characterizes these industry groupings
cogeneration. Rather than matching plant electrical gen- (Ross et al, 1993).
eration to plant thermal loads, the focus is placed upon The investment incentives policy set was modeled by
generation of electricity for sale. Opportunities for find- reducing the effective capital cost by 10% to reflect
ing economic uses for the ‘waste’ heat will increase in this a capital investment tax credit and a real discount rate of
scenario. Some industries may partner with a generation 15%, which is common for efficiency investments among
company, while others such as paper companies may more aggressive companies. LIEF estimates the change
view this as a market expansion opportunity. in economically justified, energy efficiency potential. It is
Within the industrial sector, the impact of this policy assumed that 75% of this potential would be realized
set depends upon the end-use energy within the sector. As during the analysis period ending in 2010 and that imple-
a result, this policy must be applied after all other sector mentation will occur evenly over time. Since effects of this
policies. This policy has a profound interaction with the policy would not be immediately apparent because of the
utility sector, since a significant portion of industrial delay between making an investment decision and ac-
sector demand would be internalized within the indus- tually implementing it, first investments are not assumed
trial sector. This results in modest increases in natural to occur until 1999.
gas consumption within the industrial sector but large RD&D policies that would accelerate investment in
reductions in fuel use for generation in the utility sector. efficient technologies were analysed as two components:
near- and mid-term development and deployment, and
long-term R&D. Effects of development and deployment
Assumptions and analysis activities rely upon existing technologies and will have
immediate impact. Results of long-term R&D will not
The National Energy Modeling System (NEMS) forecast manifest themselves for 15—20 years. Policies supporting
was used for reasons of consistency despite the fact that near- and mid-term activities were modeled by reducing
the model generates abrupt changes in energy consump- the effective discount used in LIEF from 15 to 5%. This
tion and some anomalous fuel and industry-specific re- analysis assumes 80% of this potential is realized be-
sults. The Industrial Demand Module (IDM) of NEMS is tween 1998—2010, with the potential implemented in
not well suited to modeling changes in energy policies equal annual amounts beginning in 1997.
since it does not offer investment input parameters (eg To analyse long-term activities, one must look at
return rate) and the parameters that could be varied, a portfolio of activities and compare the total investment
retirement rate and the technology potential curves, gen- to the benefits from innovations that succeed in the
erated unstable results. Another model, Long-Term In- marketplace. A recent study found the following energy
dustrial Energy Forecasting Model (LIEF) (Ross et al, savings/fuel shifts for each $100 million [US] in federal
1993), was used to estimate the impact of all policies R&D expenditures (Table 1) (Breger, 1997). To analyse
except recycling, which involved a separate off-line analy- impacts of long-term R&D, both energy efficiency and
sis. The NEMS baseline was modified to reflect each renewable R&D are assumed to be funded at the $100
sector-specific policy. million [US] annual level through at least 2010. Impacts
LIEF was developed from an analysis of 1958—1985 begin to manifest themselves in 2013, increasing at the
sectoral energy intensities and prices. This analysis was levels indicated by Breger (1997).
Investing in industrial innovation: a response to climate change: R N Elliott and M Pye 421

Table 1 Energy savings and shifts to renewables from $1 million in

federal R&D expenditure

Energy savings/fuel shift (EJ per year)

20 years 30 years 40 years

Energy efficiency 0.6 1.4 2.0

Renewable energy 0.2 0.4 0.6

Source: Breger, 1997.

Analysis of policies to increase recycled feedstock use is

based on a study that estimated current recycled content
levels for the primary materials considered and projected
achievable targets for 2010 (Elliott, 1994a). Based on this
Figure 4 Projected end-use US industrial energy consump-
study, an annual rate of increase in recycled content, with
tion for different policy options
a corresponding decrease in energy intensity, was chosen
for each material that would achieve these targets. For all
materials except paper, reduction in intensity was as-
sumed to be distributed across fuels proportionally to consumption. Industrial energy consumption is projected
each fuel’s consumption. The change in energy consump- to rise from 25 EJ in 1992 to over 31 EJ in 2010, and to
tion for paper was adjusted to reflect a shift in fuel mix almost 38 EJ in 2030 (Fig. 4). Resulting carbon emissions
resulting from the elimination of virgin pulp productions’ increase over 1990 levels of 29.3 million metric tons of
waste stream. This waste accounts for a significant por- carbon (MTC) per year by 20% by 2010 and over 40%
tion of the consumed fuel in this industry. Elimination of by 2030.
this waste stream necessitates substitution of purchased
fuels, assumed to be natural gas and coal.
Regarding policies to overcome barriers to combined ¹he innovation path
heat and power, the analysis was based upon an assess-
ment of the current self-generation trend in industrial Implementation of the four policy sets produces about
self-generation in which approximately 12% of demand a 12% energy savings by 2010. No impact is yet seen
electricity is generated and a net additional 3.4% of from the long-term R&D investments, nor from the ex-
sector electricity demand is sold. We assumed for reasons pansion of CHP within the industrial sector. Beyond
of modeling simplicity that no significant additional ca- 2010, when results of pre-2010 projects are combined
pacity will become operational before 2010. After that, with benefits from long-term R&D and CHP, results
both fractions of self-generation and net sales are anticip- become impressive.
ated to increase rapidly. By 2020, an additional 395 TWh
of net generation is anticipated, increasing to 643 TWh in 2010 Results
2030. Fuel utilization in the CHP system is assumed to be Energy consumption and carbon emissions from the four
80%, producing equal amounts of steam and electricity. policy sets are summarized in Table 2. Results from all
The steam is assumed to displace existing steam from the policies except CHP are plotted in Fig. 1.
fossil fuels. The investment incentives policy set produces approx-
imately 4% reduction in total end-use energy consump-
tion in 2010. Assuming past trends in innovation persist,
Results new opportunities should continue to emerge, allowing
this increased efficiency trend to persist as long as the
¹he present path incentive remains for increased investment. This policy
will require a levelized, annual investment of US$4.6 bil-
While the energy intensity of the industrial sector has lion to implement.
declined for many years and is projected to continue to Near- and mid-term RD&D activities and accelerated
decline (Fig. 1), industrial energy consumption will con- adoption of efficient technologies are estimated to yield
tinue to increase with growing economic activity (Fig. 4). approximately 7% reduction in end-use industrial energy
This article focused upon end-use energy consumption consumption from the NEMS baseline in 2010. Since it is
only. Losses associated with electricity and gas distribu- assumed these changes in equipment and practices will,
tion were not accounted for in this analysis, and fuels on average, persist for 15 years, savings build from about
used as feedstocks in making products (eg natural gas 2% in 2000 and benefits of these policies continue to
used to produce plastic resins) are excluded since they do create new opportunities past 2010. To realize these sav-
not directly result in emissions. The Industrial Demand ings, an annual investment of US$11.8 billion to imple-
Module of NEMS was used to project baseline energy ment is required.
422 Investing in industrial innovation: a response to climate change: R N Elliott and M Pye

Table 2 Summary of industrial sector results

1990 2000 2010 2020 2030

Base case energy consumption (EJ) 26.14 28.48 31.79 34.45 37.66
End-use energy savings from base case
Incentives for investment in new EJ 0.12 1.03 0.85 0.98
production equipment % Savings 0.4 3.3 2.5 2.6

Increased RD&D investment in and EJ 0.53 2.28 4.20 7.00

accelerated adoption of efficient % Savings 1.9 7.2 12.2 18.6

Increased use of recycled feedstocks EJ 0.04 0.20 0.36 0.51

% Savings 0.15 0.63 1.04 1.34
Overcoming barriers to combined EJ 0 0 1.43 2.32
heat and power production % Savings 0 0 4.2 6.2

Savings from all policies EJ 0.90 3.95 7.25 13.40

% Savings 3.2 12.4 21.1 35.6

All policies case energy consumption (EJ) 27.58 27.84 27.19 24.27
Base case carbon emissions (MTC) 279.3! 310.7 335.5 361.2 392.5
Carbon saving MTC 17.9 40.6 73.9 129.9
% Savings 5.8 12.1 20.5 33.1
All sector policies carbon emissions (MTC) 292.8 294.9 287.3 262.6

!Source: EIA, 1994a.

Effects of the recycling policy set are restricted to the estimated to take place for combined feedstocks and
four sub-sectors considered: steel, aluminum, container end-use energy consumption. Increased renewables pro-
glass, and plastic resins. Impact in these sub-sectors will duces no change in end-use energy consumption but
result in an average 0.7% decrease in total industrial results in an additional 8.1 MTC reduction in 2030 car-
consumption in 2010. Though this may appear a modest bon emissions.
impact, it does represent a reduction of 0.2 EJ in indus- It is assumed for reasons of analytical simplicity that
trial consumption. It is difficult to estimate the invest- no additional industrial CHP capacity will become op-
ment required to implement these policies, since many erational before 2010. This assumption is reasonable
are changes in behaviors, rather than major capital in- since the uncertainty associated with utility restructuring
vestment. If similar costing strategies are used for this and the lead time associated with permitting will likely
policy as for the other policies groups, the levelized delay implementation. After that, both fraction of self-
annual cost would be expected to be in the US$56 million generation and volume net sales are anticipated to in-
range. crease rapidly. By 2020, an additional 400 TWh of net
generation is anticipated, increasing to over 640 TWh in
Beyond 2010 2030. Fuel utilization in the CHP system is assumed to be
It is difficult to project what will happen to industrial 80%, producing equal amounts of steam and electricity.
energy use beyond 2010. If energy prices continue to The steam is assumed to displace existing steam from
decline, new efficiency measures will become increasingly fossil fuels. The result of this scenario is that the net
difficult to justify, and industrial energy consumption will purchased industrial electricity is almost zero in 2030, if
continue to grow (Fig. 4). However, the three policies all other policy options are implemented. Carbon im-
that have resulted in the 2010 reductions will continue to pacts of this policy in the industrial sector are very
yield increasing benefits in the years beyond. In addition, modest since additional sectoral electricity generation in
long-term R&D in energy efficiency, renewable technolo- 2030 results in an additional 0.22 EJ of gas consumption
gies, and CHP will begin to contribute energy savings as by the sector. The real benefits are realized in the utility
seen in Fig. 4, and produce sector carbon reductions. If sector where electricity generation, with its intendant
all these savings are realized, sector energy consumption emissions, is reduced by about 400 TWh in 2030.
will decline, even with sectoral economic growth, to the
26 EJ level (last seen in 1990) by 2020, and 24 EJ by 2030.
While the annual increase of $200 million begins in Conclusions
1998, benefits from long-term R&D all occur post-2010,
with efficiency reductions of about 1 EJ in 2020 and The industrial sector is dramatically different from other
3.7 EJ in 2030. A shift of 0.25 EJ in 2020 and 0.72 EJ in sectors of the US Economy. In contrast to other end-use
2030 from conventional to renewable energy sources is sectors, the industrial sector has experienced declining
Investing in industrial innovation: a response to climate change: R N Elliott and M Pye 423

end-use energy intensities, a decline projected to continue Eisenhauer, J (1996) Corporate R&D in ¹ransition: Changing Patterns of
in spite of declining real energy prices. This sector is also Private Sector Investment in Research and Development Energetics,
Columbia, MD
diverse, with many of the opportunities for improved Elliott, R N (1994a) Carbon Reduction Potential from Recycling in
efficiency being unique to an individual facility. Primary Materials Manufacturing American Council for an Energy-
Opportunities for efficiency in the industrial sector are Efficient Economy, Washington, DC
Elliott, R. N (1994b) Electricity Consumption and the Potential for
great, if industry is properly encouraged to seek and Electric Energy Savings in the Manufacturing Sector American Coun-
implement them. Some efficiency can be realized through cil for an Energy-Efficient Economy, Washington, DC
improved operating practices but the greatest saving is Elliott, R N, Laitner, S and Pye, M (1997) ‘Considerations in the
estimation of costs and benefits of industrial energy efficiency pro-
available from the innovation that has fueled the indus- jects’ Proceedings of the 32nd Intersociety Energy Conversion Engin-
try’s history of improving energy intensity. Creating a fer- eering Conference Honolulu, HI, USA (July 27—August 1) 2143—2147
tile climate for innovation requires a commitment to Elliott, R N, Pye, M and Nadel, S (1996) Partnerships: A Path for the
Design of ºtility/Industry Energy Efficiency Programs American
research and education, with an understanding that be- Council for an Energy-Efficient Economy, Washington, DC
nefits are long term. Elliott, R N and Weidenbaum, A (1994) ‘Financing of industrial energy
It takes time for energy efficiency improvements to be efficiency through state energy offices’ Proceedings of the Sixteenth
National Industrial Energy Efficiency Conference Houston, TX, USA
realized in the industrial sector, with normal plant invest- (April 13—14) 80—85
ment cycles usually exceeding ten years. As a result, Energy Information Administration (EIA) (1987) State Energy Price
near-term savings in this sector are relatively modest, as and Expenditure Report 1985 U.S. Department of Energy, Energy
Information Administration, Washington, DC
seen with this article’s pre-2010 results. With patience, Energy Information Administration (EIA) (1992) State Energy Price
however, truly impressive savings can be realized. and Expenditure Report 1990 U.S. Department of Energy, Energy
It takes investment in new equipment and manufactur- Information Administration, Washington, DC
Energy Information Administration (EIA) (1994) Manufacturing Con-
ing processes for improved efficiency to be realized. In- sumption of Energy 1991 U.S. Department of Energy, Energy In-
dustry can be encouraged to make these investments by formation Administration, Washington, DC
providing favorable tax treatment for efficiency improve- Energy Information Administration (EIA) (1995a) Annual Energy Re-
view 1994 U.S. Department of Energy, Energy Information Adminis-
ments. Fortunately, returns from these investments far tration, Washington, DC
exceed energy savings. Most energy efficiency inves- Energy Information Administration (EIA) (1995b) Changes in Energy
tments are accompanied by other benefits, such as im- Intensity in the Manufacturing Sector 1985—1991 U.S. Department of
Energy, Energy Information Administration, Washington, DC
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new processes and products that change the structure of ment of Energy, Energy Information Administration, Washington,
how energy is used in our economy. Energy and eco- Energy Information Administration (EIA) (1995d) State Energy Price
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imagination. Information Administration, Washington, DC
Energy Information Administration (EIA) (1996) Annual Energy Out-
The industrial sector is poised to benefit from utility look 1996 U.S. Department of Energy, Energy Information Adminis-
sector restructuring. Developments in CHP technology tration, Washington, DC
have created the possibility for the industrial sector to Geller, H and Elliott, R N (1994) Industrial Energy Efficiency: ¹rends,
Savings Potential and Policy Options American Council for an En-
become a major electricity generator in the future. Cost ergy-Efficient Economy, Washington, DC
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Hershkowitz, A (1997) ¹oo Good to ¹hrow Away: Recycling’s Proven
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Purchasing Green Center for Study of Responsive Law, Washington,
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