chapter 3 industrial energy uses technologies policies

8/13/2019 Chapter 3 Industrial Energy Uses Technologies Policies

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Contents

Industrial Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Sources of Industrial Energy. . . . . . . . . . . . . . . . . . . .Energy Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Characteristics of Industrial Energy Use . . . . . . . . . . . .Determinants of lndustrial Energy Use . . . . . . . . . . .Qualitative Characteristics of Energy Use . . . . . . . . .Quantitative Energy Use Characteristics . . . . . . . . . .Variability of Energy Intensiveness. . . . . . . . . . . . . . .End-Use Profile.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Trends in Energy Use Per Unit of Output. . . . . . . . .

Industrial Energy-Related Technologies and ProcessesHousekeeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Retrofitting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Computer Control Systems . . . . . . . . . . . . . . . . . . . . .Waste Heat Recovery. . . . . . . . . . . . . . . . . . . . . . . . .Electric Motors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fuel Switching. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policies That Affect Industrial Energy Use . . . . . . . . . .Existing U.S. Industry Energy-Related Legislation . . .The Industrial Energy Conservation Program . . . . . .

Foreign Industrial Energy Use and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .National Programs To Spur Industrial Energy Conservation . . . . . . . . . . . . . . . . . . . . .Implications for the United States . . . . . .......

TABLES

Table No.

6.U.S. Industrial Energy Use by Source . . . . . . . .7. industrial Energy Use by Division. . . . . . . . . . .8. Distribution of Purchased Energy for Heat and

industry Croup in U.S. Manufacturing 1979 .

00..... . . . . . . . . . . . . . . . . . . . .

Power of Output by Selected

9. Estimated Distribution of U.S. lndustrial Energy Use, by Energy Service, 1978 ..4610. lndustrial Energy and Oil Use by Representative IEA Countries 1973 and 1979,..11. Comparative Energy Efficiencies-of lndustrial Processes unrepresentative IEA

countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * * . . . . . . * * * . . .12.

13.

Changes in industrial Energy Consumption in lEA Countries between 1973and 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Projected Trends of industrial Energy and Oil Use in Selected IEA CountriesThrough 1990.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FIGURES

Figure No.7. lndustrial Energy Demand, 1950-81 . . . . . . . . . .*..***. . . . . . . . . . **.*.*** ****8. industrial Energy Prices, 1970-81 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9. Overall Age Distribution of Equipment in the Manufacturing lndustry, 1975 . . . . . .

10. Energy Trends in lndustry, 1972-81 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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454659

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Chapter 3

Industrial Energy: Uses, Technologies, and Policies

INDUSTRIAL ENERGY

Energy does not flow through the industrial sec-

tor in simple or direct ways. Some energy orenergy-bearing materials are recycled and reused.Substantial portions of energy used are derivedfrom unusual sources. Some materials are proc-essed in ways that yield both energy and feed-stock value. Finally, some energy materials arenot used at all for energy purposes. Thus, con-ceptual and data collection problems arise indefining and measuring the energy used by theindustrial sec tor.

Sources of Industrial Energy

In the industrial sec tor, petroleum is the domi-nant energy source for motor-driven mechan-ical equipment of agriculture and construction.Natural gas is the dominant energy source in min-ing because of its availability in the relativelyremote operations of the oil and gas extractionindustry. Natural gas is used in manufacturingbecause it burns cleanly and provides easy flamecontrol. It has also been used as a feedstock andas fuel for the special needs of a number of proc-esses, such as glass manufacture and some c e-ramic production processes.

The use of petroleum and c oa l as raw materialsaccounts for about half of the manufacturing useof each of these fuels. * Most of the remaining half of petroleum use in manufacturing is for directhea t or for steam generation. This is also true forcoal, but coal is used more for steam generationbecause there are relatively few goods producedusing direct heat that can tolerate the impuritiesemitted by burning coal. For some energy uses,

1 Substantial parts of the discussion concerning the definition,measurement, and determinants of industrial energy use are basedon material in the following: John G. Myers, et al., Energy Con-sumption m Manufacturing (Cambridge, Mass.: Ballinger PublishingCo., 1974); John G. Myers and Leonard Nakamura, Saving Energy in Manufacturing: The Post-Embargo Period (Cambridge, Mass.: Ball-inger Publishing Co., 1978), and Bernard A. Gelb and Jeffrey Pliskin,Energy Use in Mining: Patterns and Prospects (Cambridge, Mass.:Ballinger Publishing Co., 1979).

Metallurgical coal that IS converted to coke is counted as a rawmaterial.

particularly for large boilers (for water heating or

steam production), coal, oil, and gas are easilyinterchangeable in a technical, if not economical,sense. Many facilities, in fact, have dual or eventriple fuel capabilitieswith oil and natural gasthe most likely combination.

As with other energy use variables, the diver-sity of use of various energy sources is more strik-ing at lower levels of aggregation. Table 6, whichshows energy use by source for the divisions, alsohas data for three selected industries in the man-ufacturing a nd mining divisions. Pa permills, witha wide distribution of purchased energy source

use, contrast with steel, which is heavily depend-ent on coal and coke, and the chemicals indus-try, which uses large quantities of natural gas andelec tricity. overall industrial energy use from1950 to 1980 is shown in figure 7.

Energy Costs

Although the use of energy in industry is amajor contributor to the character of moderneconomies, the share of energy in the total costof producing goods is relatively small. In manu-facturing, for example, purchased energy (fuels

and electricity) ac counted for only 7.5 percentof gross produc t in 1979, even a fter the steepenergy price increa ses of the 1970s. Given thevariability of energy intensiveness across in-dustries, the relative share of energy in total pro-duction costs is much higher in the more energy-intensive industries. Thus, the c ost of purchasedenergy equaled 23 percent of the cement indus-trys value of shipments in 1979, 14 percent of the paperboard industrys value of shipments,and 25 to 30 percent of those for steel mills.

The degree of the energy price increases of the1970s should not be understated. prior to theea rly 1 970s, manufac turers energy costs rosemoderately in nominal terms and actually fell rel-ative to inflation. Between 1970 and 1979, how-ever, the average real cost of fuels and electrici-ty purchased by manufac turers increased from

3 7

99-109 0 - 83 - 4


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38 Industrial Energy Use

Table 6.U.S. Industrial Energy Use by Source (quadrillion Btu)

Entire Selected industries, 1979b

industrial Sector divisions, 1979a

Steel ChemicalsEnergy source sector, 1981 Agriculture Mining Construction Manufacturing Papermills industry industryCoal and coke . . . . . . . . . . . . . . . . . . . 3.12 (c) 0.10 (c) 3.69 0.18 1.91 0.31Natural gas . . . . . . . . . . . . . . . . . . . . . . 8.12 0.17 1.70 (c) 6.67 0.41 0.64 1.37Petroleum . . . . . . . . . . . . . . . . . . . . . . . 8.12 1.32 0.62 1.58 6.68 0.41 0.21 0.76

Purchased electricity at3,412 Btu/kWh . . . . . . . . . . . . . . . . . 2.85 0.13 0.26 0.02 2.50 0.15 0.17 1.00Total. . . . . . . . . . . . . . . . . . . . . . . . 22.21 1.62 2.68 1.60 19.54 1.15 2.93 3.44

NOTE: Recent revisions of petroleum and natural gas use data by DOE have been substantial, and make it difficult to reconcile DOE figures on energy use by fuelwith figures published by the Bureau of the Census for manufacturing and mining.

aEstimated.bpurchased energy only.cNone, or less than 5 trillion Btu.

SOURCE: Energy Information Administration, U.S. Department of Energy, Month/y Energy Review, March 1982; End Use Energy consumption Data Base: Series 1, Tables,June 1978; Economics, Statistics, and Cooperative Service, U.S. Department of Agriculture, Energy and U.S. Agriculture: 1974 and 1978, April 1980; Bureauof the Census, U.S. Department of Commerce, 1979 Annual Survey of Manufactures and 1977 census of Mineral Industries; American Iron and Steel Institute,Annual Statistical Report for 1960; Chemical Manufacturing Association, 1980 Report to the Office of Industrial Programs, Department of Energy.

Figure 7.industrial Energy Use, 1950-8130

25

20

15

10

5

0

*

1950 1955 1960 1965 1970 1975 1980 1985

YearSOURCE. Energy Information Administration


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Ch. 3industrial Energy: Uses, Technologies, and Policies 3 9

$2.34 to $4.44 per million Btu (see fig. 8). The used by manufacturers continued its pre-1971cost per million Btu of d istillate oil jumped from trend toward more expensive energy sources (oil$1.76 to $5.31, and that for natural gas increased and electricity) and away from coal, at least un-from $0.63 to $1.76. Despite this dramatic in- til 1979.crease in energy prices, the mix of energy sources

8

7

6

5

4

3

2

1

0

SOURCE: Energy Information Administration.

CHARACTERISTICS OF INDUSTRIAL ENERGY USE The manner of ac counting for energy use in this Iated data are collected, what is actually meas-

report is defined as the attribution to industry (or ured and reported is the quantity of fuels andits divisions) of the energy that is applied or con- electricity purchased by the industrial sector thatverted to nonenergy products. This is the so- does not leave the sector as fuel or electricity.called disappearance approach. As a conse- This approach has the disadvantage of excludingquence of the way in which energy use and re- from energy use the process byproduc ts and


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40 Industr ia l Energy Use --

waste materials that are consumed for their heatvalue. * It also excludes utility generation andtransmission losses.

If defined to exclude utility generation andtransmission losses, industrial energy use direct-ly reflects changes in technology, product mix,and other developments in a sector or industry.On the other hand, distortions result from thismethod if the sector or industry generates partof its electricity internally and the proportion of internally generated electricity changes over time.For example, a decrease in the proportion of elec-tricity that is self-generated will shift the hea tlosses from industry to the e lec tric utility sec tor,causing an apparent decline in Btu consumed perunit of output, even if industrial energy efficien-cy has been unchanged.**

The ana lytic focus of this chapter is on finalrather than primary energy use. Mainly for thisreason, energy use by the industrial sector hasbeen defined to equal the direct heat content of fuels and purchased electricity used plus the heatequivalent of the energy materials used for non-energy (feedstock) purposes.*** Energy materials

*An approach that avoids the above disadvantage is to measurethe energy content of all materials and electricity taken in by thesector or industry and to subtract from it the energy contained inall products shipped. Since this entails the enormous task of deter-mining the energy content of each of the millions of commodityinput and output flows, this method has not been used herein.

* *The choice between the measures of heat value of purchasedelectricity is particularly important for the industrial sector because

the proportion of electricity used that IS self-generated can be sig-nificant for the sector as a whole and appreciable for some ln-dustrles. For instance, more than 46 percent of the electric powerused by paper and paperboard mills (excluding building paper) in1979 was self-generated. However, for industry as a whole, the self-generated electricity share has decreased markedly. While suchself-generated electric power accounted for 21 percent of electricityused in manufacturing establishments in 1958, it was only 9 per-cent in 1979. Appropriateness of measurement method hinges onpurpose of analysis, the particular Industry group under examina-tion, and the level of disaggregation. Correct analytical treatmentof electrical generation heat losses wiII become more critical if thereIS rapid growth of cogeneration. This is true whether the electricpower IS used by the industrial plant or IS sold to a utility.

* * *Use of the narrower definition of the energy content of pur-chased electricity has another analytical advantage for the presentpurpose. While the overall measure of energy in purchased elec-

tricity IS helpful in Indicating the total impact of a sector or industryon the total demand for energy in the economy, it IS not a goodIndicator of the effects on energy use brought about by changeswithin the sector or industry, This is because changes in the amountof heat used by external electric utilities to generate each unit ofelectricity are Incorporated into the energy use totals of the sectoror Industry. Average thermal efficiency of electric utilities Improvedby nearly one-third between 1947 and 1967, fell a Iittle from 1967to 1971, and has Since risen slightly, but Irregularly.

used for feedstock represent as much a demandfor energy resources as do energy materials usedfor heat or power. The energy value of purchasedelectricity is calculated to be its theoretically con-tained energy3,41 2 Btu/kilowa tt-hour (kWh)rather than the total amount of energy used in

generating and delivering the electricity, whichis more than three times that number of Btu/kWh.

Self-generation, it should be noted, is a broadterm denoting the generation of electricity by anindustrial plant whose primary activity is not theproduction of electric power. Such self-genera-tion may or may not constitute pa rt of a cogen-eration operation, in which the energy in thesteam used for electricity generation is also usedto meet (entirely or partially) one or more otherenergy needs. Cogeneration can mean the com-plete use of all the energy within the plant, or

the sale of some of the energy or one of theenergy forms to an elec tric utility or an energyend user.

Determinants of Industrial Energy Use

The total amount o f energy used in industry atany one time depends on the level and composi-tion of demand for the products of industry, therelative price of energy, the quantities of capitalequipment available for use, the level of technol-ogy, Government regulations, and the cost of equipment for improving energy efficiency.

Changes in any of these variables will influenc ethe amount of energy used.

Analyzing the determinants individually (i.e.,holding the others constant) the following obser-vations have been made:

Product demand: In the short run, total en-ergy use generally increases when demandrises and more goods are produced. Sincethe production of every kind of industrialcommodity requires some energy, only ashift in the composition of demand (productmix) to less energy-intensive c ommodities

can prevent energy use from increasingwhen output increases. Such produc t mixchanges can result from changes in the econ-omy. For example, there is evidence that inrecent years the sharp increase in the priceof energy has reduced the demand for en-ergy-intensive products and slowed the


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Ch. 3industrial Energy: Uses, Technologies, and Policies . 41

o

growth of energy-intensive manufacturing in-dustries.Relative price of energy: In production,those processes that use less energy for mak-ing a commodity become more economicaland attractive when the relative price of en-

ergy increases. Another way to reduce en-ergy losses is by instituting more carefulhousekeeping.Use of capital equipment: Energy use overthe long term can be affected by an increasein the amount of capital equipment. For ex-ample, a change from a labor-intensive proc-ess to one that is highly mechanical can in-crease energy consumption. However, cap-ital can be substituted for energy, such aswhen a furnace or steam pipe is insulated.Level of technology: An improvement intechnology results in a decrease in the

amount of one or more inputs needed toproduce the same amount of output (holdingother factors constant). While energy fre-quently is one of the inputs reduced, some-times its use will rise as a result of a tec hno-logical change. For instance, a new processmay economize on labor, yet consume moreenergy.Government regulations: Energy use can beaffected by Government regulations, par-ticularly those aimed at protecting the en-vironment or worker safety and health. Inmost cases, additional procedures are re-quired, such as processing of wastes and in-stituting work area sec urity measures, thatentail the use of energy.Cost of equipment for improving energy ef-ficiency: The cost of equipment for improv-ing energy efficiency can have a direct im-pact on energy use within an industry. Apiece of equipment may return many dollarsin savings via decreased energy costs; but if the initial investment is very expensive, thecorporation may not have the funds to un-dertake such a projec t.

Qualitative Characteristics of Energy Use

Capital IntensivenessEnergy use in any sector is related to the avail-

able stock of capital equipment in use. While

energy intensiveness is not solely a function of capital intensiveness, the connec tion is strong.When data on capital equipment per person em-ployed are compared with figures on energy useper unit of output, divisions and industry groupsthat have high ratios of c ap ital to labor appearto be those with high energy intensity. z

In capital-dominated industries, increases inoverall productivity (which normally means re-duced energy intensity) are most likely to comefrom additions of new equipment or proc esses. 3

However, because the initial cost of capital equip-ment is high and the average useful life of capitalranges from 5 to as many as 50 years, replac e-ment of equipment is slow (see fig. 9). This fac tlimits the rate at which new equipment with dif-

2 J ohn w. Kendrick and Elliot S. Grossman, Productivity in theUnited States, Trends and Cycles (Baltimore: The Johns Hopkins

University Press, 1980).3Bela Gold, Productivity, Technology, and Capita/ (Lexington,Mass.: D.C. Heath & Co., 1979), pp. -98-100.

Figure 9.Overall Age Distribution of Equipmentin the Manufacturing Industry, 1975

601 - 57

2 5 +

16

16.25 11-15 6-10

Age of equipment(in years)

7

0-5

SOURCE: John Govoni and Cyr Livonis, Age of Manufacturing Plants, Joint Statistical Meetings, San Diego, Calif., August 1978.


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42 . Industrial Energy us e

ferent energy-use characteristics can be adopted feedstock by the Bureau of the Census becauseby industry.

In some cases, improved raw materials resultin improved productivity in capital-dominated in-dustries. A notable example is the steel industry,where the use of pelletized iron ore (producedi n t he min ing d iv i s ion ) has dec reased coke andheat energy requirements.

Process-Specific Technologies

The proc esses employed in the output of in-dustrial products are many and diverse. Each of the many industrial substances handled and trans-formed requires a process suitable to the loca-tion of the industrial activity and the c ommodi-tys physical state, chemical composition, andfinal use. For example, some furnaces in the steelindustry are used to melt materials to permit fur-

ther processing, whereas furnaces in brick man-ufacture are used to harden the product. Becausetechnological change in one process often haslittle or no applicability to other processes, therate at which changes in industrial energy use canoccur is limited.

Raw Material Use

In its role a s the goods-producing pa rt of theec onomy, the industrial sec tor uses large quan-tities of energy materials primarily, if not ex-clusively, as feedstocks for products that are notintended for energy purposes. This situation isunique among the major energy-using sec tors.

The energy materials used as feedstoc ks by theindustrial sector in 1979 had a heat value of near-ly 6 Quads, roughly one-fourth of the total indus-trial energy use.

The use of energy materials for feedstoc ks isconcentrated in manufacturing and construction.Most of such feedstock materials are petroleumproducts and natural gas. Petroleum-based feed-stocks are used mainly in the petroc hemica l in-dustrye.g., for industrial organic chemicals andin construction asphalt. Natural gas is a majorfeedstock for ammonia and fertilizer manufac-ture.

Most of the substantial amount of coal pur-chased by the steel industry is c lassified as a

it is processed to produce coke and other byprod-ucts. Coke is essential to the chemical change thatoccurs when iron ore is changed to molten iron,and it is a source of the necessary heat. In 1981,metallurgical coal with a heat value of approx-imately 1.4 Quads was converted into coke.

Use of Captive Energy

A significant proportion of energy used for heator power by the industrial sector is derived fromwaste materials or byproduc ts generated by in-dustrial processes. Examples are exothermic heatgenerated in chemical reactions, the productionof coke oven and blast furnace gases in the steelindustry, and the combustion of waste wood inthe paper industry.

The energy content of the used captive en-

ergy may or may not be counted in Departmentof Energy (DOE) or Census Burea u compilations,depending on the type of energy source. For ex-ample, where the energy source is a petroleumproduct, its full heat value has already beencounted by DOE, but not by the Census Bureauin its quinquennial Census of Manufactures or theAnnual Survey of Manufactures reports. If thesource is not a conventional industrial energysource (e.g., wood wastes in a papermill), theheat value of the used captive energy is countedby neither DOE nor the C ensus Burea u. In thefirst case, the demand for energy sources is

known, but there is no information on the partthat went for heat or power rather than for in-corporation into a product. In the second case,there is no reflection in overall energy use dataof this portion of energy use in the economy,even though its existence has an effect on theamount of conventional energy consumed. Inboth cases, some information is missing thatwould assist ana lysts in lea rning about the man-ner, efficiency, and extent of both conventionaland unconventional energy use.

Shifts in Energy Use Between Sectors

C hanges in the relative prices of goods andservices over time affect the loc ation of energyuse in the economy. Such changes can resulteven if there has been no change in the composi-


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Ch. 3industrial Energy: Uses, Technologies, and Policies 43

tion of demand. Awareness of energy displace-ment is important to avoid incorrect conclusionsabout energy conservation in an industry, divi-sion, or sector. Many such shifts have occurred.For example, a shift to the mixing of concrete bysuppliers, as opposed to builders, has resulted in

a shift in energy use from the construction tomanufacturing (the ready-mix concrete industry).Rapid growth in fertilizer and pesticide use byagricuIture has increased farmers output relativeto energy input, but has added substantially tototal energy use in manufacturing. Finally, the ex-pansion of the frozen food industry in manufac -turing has decreased the amount of energy usedfor food preparation in the residential sec tor.Awareness of such shifts is cruc ial to proper in-terpretation of industrial energy use figures.

Capital Effects and Capacity Utilization

Energy use per unit of output is generally highwhen the level of production is low. One reasonfor this is simply the need, at reduced levels of output, to reheat furnaces, ovens, or boilers thathave been allowed to cool during exceptionallyslac k periods. The steel industry provides an es-pecially good example of this effect. During therecession years of 1970 and 1975, energy use perton of raw steel produced rose 6 and 10 percentrespective y.

An exception to this effect is found in industrieswhere plants can be partially or completely shutdown if there is a decline in demand and whenit is feasible to shut down the least efficientfacilities. Such a situation requires a homogene-ous product and a comparatively small numberof firms in the industry. A

Quantitative Energy Use Characteristics

Overall Sector ConsumptionEnergy directly used by the industrial sector for

heat, power, and feedstocks accounts for almostone-third of the total energy used in the United

States. In 1981, the heat value of such direct4This discussion of cyclical effects is based on material in J. G,

Myers, et al., Energy Consumption in Manufacturing (Cambridge,Mass,: Ballinger Publishing Co., 1974); and J. G. Myers and L.Nakamura, Saving Energy in Manufacturing (Cambridge, Mass.: Ball-inger Publishing Co., 1978).

energy use totaled 25 Quads, or 30 percent of the economywide aggregate of 73.8 Quads.

In contrast to the other broad, energy-using sec-tors, direct energy use by industry has decreasedfrom 40 percent of the U.S. tota l in 1947, to 30percent in 1981. This decline was due partly tothe decline in the share of the gross national prod-uct (GNP) accounted for by the sec tor.

As shown in figure 10, extrapolating historicaltrends prior to 1972 would lead to an estimateof 40 Quads of energy use for 1981. However,actual energy use in 1981 was only slightly higher(29 Quads) than in 1972. DOE analysis indicatesthat a slower growing economy ac counted for4.4 Quads of this difference: the economy wentfrom an annua l GNP growth rate of 4.0 percentin 1972 to 2.6 percent in 1981. In addition, theUnited States now uses a slate of industrial prod-

uc ts different from that used in 1972. For exam-ple, consumers drive more fuel-efficient automo-biles, made of less steel and less petroleum-basedplastics. Moreover, U.S. production is now great-er in areas such as computers and biotechnol-ogy and less in steel produc tion a nd petroleumrefining. This market-induced phenomenon isdue, in part, to perceived or anticipated risingenergy prices and also to expanding markets inthese new areas.

In addition, there is a historical trend towardeven more energy-efficient production facilities,

Even when energy costs were stable or declin-ing, industrial managers had significant reason tomake efforts to conserve energy. Moreover, asmanufacturing technology continues to evolve,it becomes more energy efficient. Between 1972and 1981, the 2.3 Quads of energy saved becauseof new technology would have been saved evenif prices had not increa sed since 1972,

Finally, 1.1 Quads of energy were saved be-cause of efficiency improvements made specif-ically to existing equipment to counteract thequadrupling of energy prices since 1972.

Energy Use by Divisions

Energy use by the industrial sector is not p ro-portional to the relative sizes of the divisions indollar value of output. J ust as the divisions are


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44 . Industrial Energy Use

x

Improvedefficiency

)

Slower growth (4.4 Quads) Industrial output slowed from 4.%per year to 2.6% per year after 1972;Shifts in output mix (2.6 Quads) depressed output among large,energy-using industries (steel, cement, chemicals, aluminum,paper) is offset by increased growth in lighter manufacturing

(textiles, fabrication of aircraft and machinery parts, computers,and food processing); /reproved energy efficiency (3.4 Quads)new technologies andbetter energy management. Part is due to the historical trends (2.3 Quads) in improving energy efficiency associated withcapacity expansion and capital stock turnover; the remainderis due to accelerated gains (1.1 Quad) in improved efficiencyassociated with higher energy prices.

1972 1974 1976 1978 1980

Year

SOURCE: R. Marlay, Off Ice of Plannlng and Analysis, U.S. Department of Energy. Analysis based on data from the Board of Governors of the Federal Reserve System,the U.S. Department of Commerce, the Energy Information Administration, and on Industrial Energy Productivity, 1954 -1980, Massachusetts Institute-.of Technology, Cambridge, Mass.

diverse, so are the activities and products withinea ch division. The bulk of industrys energy usetakes place in manufacturingthe largest divisionin output. Direc t energy use in manufacturingtotaled an estimated 19.5 Quads in 1979, or 75percent of the total for the industrial sector (seetable 7). Gross product originating in manufac-turing was 76 percent o f industrial sec tor grossproduct (in 1972 dollars) that same year.

Almost half of the rest of the energy used byindustry is accounted for by mining, but miningsshare of the sector total is disproportionate to itsoutput. Estimated energy use in mining was 2.7Quads in 1979, while gross product originatingin mining accounted for only 4 percent of the in-dustrial sectors total. Agriculture and construc-tion each used about 1.6 Quads in 1979, or 6 per-

cent each, of total industrial energy use. Thesedivisions respective shares of sec tor gross prod -uct originating were 8 and 12 percent. The dif-ferent proportions between energy use and out-

Table 7.industrial Energy Use by Division(in quadrillion Btu)

Division 1954 1967 1972 1979Agriculture. . . . . . . . . . 0.90 1.40 1.61 1.63Mining . . . . . . . . . . . . . 1.27 1.78 1.99 2.68Construction . . . . . . . . 0.82 1.24 1.60 1.60Manufacturing. . . . . . . 11.78 17.62 19.76 19.54

Total . . . . . . . . . . . . . 14.77 22.04 24.96 25.45NOTES: The energy value of purchased electricity is defined hereto be the theo-

retically contained energy of the delivered electricitythat is 3,412Btu/kWh.

The data shown are estimates and include energy substances usedas raw materials. Recent revisions by DOE of energy consumption datahave been substantial and make it difficult to reconcile DOE figures onenergy use with figures published by the Bureau of the Census formanufacturing.

SOURCES: Bernard A. Gelb and Jeffrey Pliskin, Energy Use in Mining: Patterns and Prospects, Cambridge, Mass., 1979; John G. Myers, Industrial Energy Demand, 1976-2000, draft report prepared for the General Ac-counting Office, July 31, 1979; Economics, Statistics, and CooperativeService, U.S. Department of Agriculture, Energy and U.S. Agriculture: 1974 and 1978, Washington, D. C., 1980; Tetra Tech, inc., Energy Use in the Contract Construction Industry, prepared for the Federal EnergyAdministration, Feb. 18, 1975; Bureau of the Census, U.S. Departmentof Commerce, 1977 Census of Mineral Industries, Fuels and Elec-tric Energy Consumed, February 1981; Energy information Adminis-tration, U.S. Department of Energy, End Use Energy Consumption Data Base: Series 1 Tab/es, Washington, D. C., 1978; Energy informa-tion Administration, 1981 Annual Report to Congress, Washington,D. C., 1982; Bureau of Mines, U.S. Department of the Interior, Minerals Yearbook, several issues, Washington j D, C.; Bureau of Mines, Energy Through the Year 2000, Washington, D. C., 1972.


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Ch. 3industrial Energy: Uses, Technologies, and Policies 4 5 .. -. . .

put reflect large differences in energy use per unitof output among divisions.

Much more is known about energy use in man-ufacturing and mining than in agriculture andconstruction because of the availability of detailedindustry data over an extended time period fromthe quinquennial Census of Manufactures andfrom the Bureau of Mines industry surveys andMinerals Yearbook. In recent years, the Annual Survey of Manufactures has provided yearly fig-ures on energy use i n manufacturing.

Variability of Energy Intensiveness

The energy used per unit of product variesmarkedly among divisions and industries. Ex-amples of high energy use in relation to outputcan be found in the following industry groups:primary metals, chemica ls, petroleum and c oa lproducts, and paper and allied products. Pur-chased energy use per unit of output by thesegroups ranged from 39,000 to 57,000 Btu per dol-lar of value added in 1979, compared with 17,000Btu for all of manufacturing (see table 8). To-gether, the five groups accounted for approxi-mately 65 percent of manufacturings purchasedenergy for heat and power in 1979, as against 26percent of manufacturing, valued added.

In sharp contrast, the following four groupstogether accounted for 40 percent of manufac-turing, value added, but only 11 percent of

energy use: nonelectrical machinery, transpor-tation equipment, electric and electronic equip-ment, and fabricated metal products. Energy useper dollar of value added by these groups rangedfrom 3,400 Btu to less than 6,700 Btu.

Greater differences in energy intensity can beseen at the lowest basis of aggregationthe in-dividual industry (four-digit SIC level). For exam-ple, in 1979 purchased Btu (for heat and power)per dollar of value added ranged as high as332,000 Btu for the lime industry to as low as

5,000 Btu for the motor vehicles and car bodiesindustry. These differences in energy intensity areimportant for evaluating prospec ts for reducedenergy use i n the economy by virtue of shifts i nproduct mix.

End-Use Profile

Attesting to its diversity, industry uses energyfor probably a wider variety of purposes thandoes any other sector of the economy. Estimates,updated for this report, by the Energy Informa-tion Administration (E IA) and other organizations

indicate that each of seven different types of energy service account for at least 2 percent of sec tor use 5 (see table 9).

The most energy-intensive industrial proc essesentail the direct application of heat to break andrearrange atomic bonds through chemical reac-tions. Since processes such as smelting, ore ben-eficiation, cement manufacture, and petroleumrefining typically involve large amounts of such

5Energy Information Ad m I nitration (EIA), Department of Energy,End Use Energy Consumption Data Base: Series 1 Tables (Sprlng-field, Va.: National Technical Information Service, June 1976), p.206.

In preparing its data on energy consumption by end use, EIA usedonly explicit published figures, and made few, if any, estimates,As a result, large quantities of energy use were not categorized byend use, but designated as other. The Congressional ResearchService has used additional related Information to categorize mostof this use in the case of the industriaI sector.

Table 8.Distribution of Purchased Energy for Heat and Power of Outputby Selected Industry Group in U.S. Manufacturing, 1979

Energy usedEnergy used per dollar

Value added of value addedIndustry group (Trillion Btu) (% of total) ($ billion) (o/o of total) (thousand Btu)Paper and allied products . . . . . . . . . . . . . . . . . . . 1,300 10.1 29.7 3.8 43.8Chemical and allied products . . . . . . . . . . . . . . . . 2,889 22.5 73.4 9.5 39.4Petroleum and coal products . . . . . . . . . . . . . . . . 1,245 9.7 24.8 3.2 50.1Stone, clay, and glass products . . . . . . . . . . . . . . 1,266 9.8 24.1 3.1 52.6Primary metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,689 20.9 47.6 6.2 56.5

Total manufacturing . . . . . . . . . . . . . . . . . . . . . . 12,869 100.0 772.6 100.0 16.7NOTES See note to table 7 regarding energy content of purchased electricity Percentages were calculated from unrounded numbers

SOURCE: U S. Bureau of the Census, 1979 Annual Survey of Manufactures


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Table 9.Estimated Distribution of U.S. IndustrialEnergy Use, by Energy Service, 1978 (percent)

Energy service Manufacturing Entire sectorSpace conditioning . . . . . . . 2Direct heat . . . . . . . . . . . . . . . 30Machine drive . . . . . . . . . . . . 5Vehicles b . . . . . . . . . . . . . . . . 2

Steam . . . . . . . . . . . . . . . . . . . 22Electrolytic process . . . . . . . 5Raw material . . . . . . . . . . . . . 30Other c . . . . . . . . . . . . . . . . . . . 5

Total . . . . . . . . . . . . . . . . . . 100

2

26 13

8

16 4 27

4

100alnclude~ space heating and cooling light, water heating, and refrigeration.bOff highway.Cln some cases where no amounts are shown, the small quantities of energy

use accounted for by particular energy services have been included in other.

SOURCES: Energy Information Administration, U.S. Department of Energy, End Use Energy Consumption Data Base: Series 1 Tables (Springfield, Va.:National Technical Information Service, June 1978); Solar EnergyResearch Institute, Building a Sustainable Energy Future, vol. 2,published by the U.S. Congress, House Committee on Energy andCommerce, April 1981, estimates by the author.

heat, it is not surprising that more than one-fourthof industrial energy use is accounted for by directheat applications. Because steam is anothersource of heat, most notably in the manufactureof paper and chemicals, this energy service rep-resents another one-sixth of industrial energy use.

Thus, heat of some sort ac counts for nearly half of total industrial energy applications. Whenenergy sources used for feedstocks (more thanone-fourth of the total) are subtracted, direct heatand steam account for nearly three-fifths of in-dustrial end-use energy demand. Using energyto provide fuel and electrical power for machin-

ery and vehicles is predominant in agriculture,construction, and mining, where it accounts foran estimated 86, 45, and 57 percent, respective-ly, of energy use in those divisions.

Trends in Energy Use Per Unit of Output

Overall industrial energy use per unit of out-put has decreased steadily since the late 1940s,including both before and after the Arab oil em-bargo of 1973-74.

Post-World War II to 1972

Between 1947 and 1972, energy use per dollarof real gross product in the industrial sector fellan average of 1.1 percent per year. Also, use of energy per unit of output in manufacturing de-creased an average of 0.8 percent per year be-

tween 1954 and 1972. Most of this dec line wastraced to: 1 ) faster energy saving by the energy-in-tensive manufacturing industry groups comparedto other manufacturing industries, and 2) fasteroutput growth by the less energy-intensive in-dustries. Among the energy-intensive manufac-

turing industry groups, the 8 or 10 largest users(which accounted for half of manufacturing en-ergy use) reduced their energy use per unit of out-put faster than did the remaining energy-intensiveindustries.

Within manufacturing, declines in energy-out-put ratios were the net result of a number of op-posing influences. Probably most important wasthe introduction of new technology that per-mitted an industry to produce a given volume of product with a smaller quantity of capital, labor,energy, and materials. The introduction of newtechnology nearly always entailed new or ex-panded manufacturing facilities. In some cases,improved raw materials aided overall productivi-ty. Labor and energy were frequently the inputsthat were ec onomized.

Improvements in management techniques alsocontributed to the decreases in energy consump-tion per unit of output. However, such manageri-al and technological developments were largelyincidental to innovations designed primarily toenhance overall productivity. Finally, the shift inproduction from energy-intensive industries to-ward those that were less energy-intensive also

contributed to the decline in the energy-outputratio for all manufacturing. The former are mainlybasic material industries; thus, this shift is pa rt of the long-term development toward higher de-grees of fabrication.

In contrast, energy use per unit of output inmanufacturing was boosted by an accelerationin the late 1960s in the growth of industries usinglarge amounts of energy-bearing commodities forraw materialsparticularly petrochemical feed-stocks and natural gas. Such industries includedplastics, manmade fibers, and agricultural chem-

icals. The decline in energy use per unit of out-put would probably have been steeper withoutthis development.

The preemba rgo period also saw a drastic shiftin the sources of energy used by industry, some


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.

Ch. 3industrial Energy: Uses, Technologies, and Policies . 47 . .

of which may well have c ontributed to the de-cline in energy use per unit of output. Between1947 and 1972, the share of industrial energy useaccounted for by coalwhich burns relatively in-efficientlyshrank from 55 to 20 percent. At thesame time, shares of natural gas and petroleum

expanded from 23 and 19 percent, respectively,to 45 and 25 percent. To some extent, the growthin natural gas and petroleum was attributable torapid expansion of their use as feedstocks.

Meanwhile, use of electricity by industry grewrapidly, continuing the electrification of the sec-tor that began early in the 20th century. Expa n-sion of electricity use took place mainly from in-creased purchases of utility electricity, in part be-cause the real price of electricity to industry fell.But self-generated electrical power also grew inabsolute terms, though its relative share of thetotal amount of electricity used by industry fell.Purchases in 1972 were about five times the 1947level; self-generated electricity was twice the 1947volume.

Perhaps most notable about the drop in energyuse per unit of output in industry between thelate 1940s and ea rly 1970s is that it oc curredwhen the real price of energy was falling.

Trends Since 1972

The rate of decline in industrial energy use perunit of output has ac celerated since 1972. Sec-

tor energy use for fuel and nonfuel uses per unitof output fell an average of 2.4 percent per yearbetween 1972 and 1980, compared with the 1.1percent decline of the earlier period, The causesof this more rapid decline appear to be a com-bination of: 1) a decrease in the energy-outputratio within each division, caused both by bet-ter housekeeping and by major capital equipmentmodifications, and 2) a product mix shift to lessenergy-intensive products. b

At the division level, manufacturing experi-enced an average annual decline of 3,4 percentper year in energy use per constant dollar of gross

bSome anaIysts have attributed more of the acceleration In thedecline in energy use per unit of output by the Industrial sectorto the shift to less energy-intensive products than has been donehere. See the DOE analysis described in fig. 10. Such a differenceIn resuIts may be due to d Inferences I n the respective methods usedand in the data available to and used by the analysts.

product between 1972 and 1979 and, as the larg-est energy-using division, provided most of theimpetus to lower energy use per unit of outputin the industrial sector.

Energy use per unit of output in agriculture alsofell, but less rapidly. Data for energy use and out-

put in mining indicate a notable rise in energyuse per unit of mining output. However, it is pos-sible that difficuIties enc ountered by estimatorsat the Department of Commerce i n determininggross product originating in mining have resultedin an understatement in mining gross product andtherefore an overstatement of energy use per unitof output in 1979.

Analysis of manufacturing energy use duringthe 1970s reveals considerable energy savingsthroughout the sector. In many cases, this energyefficiency improvement was assisted by faster out-

put growth, especially in the less energy-inten-sive industries. Among industry groups, only one(tobacco manufacture) did not experience a de-crease in energy use per unit of output between1971 and 1979 (using Federal Reserve Board pro-duction indices to measure output change). 7 Mostindustry groups achieved overall decreases of more than 30 percent in energy use per unit of output over the 8 years.

Smaller than average reductions in per-unitenergy use by the largest and most energy-inten-sive industries during the 1970s are due toseveral factors. Slow economic growth and amajor rec ession tended to hold down c apac ityutilization and, therefore, to boost energy use perunit of output. Slow growth in demand for an in-dustrys products also reduced the rate o f infu-sion of new state-of-the-art plants and equipmentand minimized opportunities to incorporate themost energy-efficient, fixed capital, and produc-tion methods. Imposition of a variety of workerhealth and safety and pollution control regula-tions also had a negative impact on energy effi-ciency in the industries affected. a

70TA calculations based on production Indices obtained fromthe Board of Governors of the Federal Reserve System and theenergy use data from The Annual Survey of Manufactures, Bureauof the Census, Department of Commerce.

Edward F. Denison, Effects of Selected Changes in the lnstitu-tional and Human Environment Upon Output Per Unit of Input, Survey of Current Business (Washington, DC.: U.S. Departmentof Commerce, Bureau of Economic Analysis, January 1978), pp.21-44.


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INDUSTRIAL ENERGY-RELATED TECHNOLOGIES AND PROCESSES

Certain energy-related, industrial technologiesand processes, such as steam generation, tran-scend any particular industry. The generic tech-nologies discussed in this chapter are tec hnol-

ogies which, for the most part, exist today andare used by all four of the case study industriesexamined by OTA.

Although not a technology, perhaps the mostimportant influenc e in conserving energy is thecorporate energy manager, who is often used inconjunction with an energy review committee.Such an individual who can step back and ex-amine the energy flows in an entire mill, or be-tween mills in a corporation, can often achievehighly cost-efficient energy savings which otherswith more confined attention have not seen. Thefact that this is not a hardware purchase, butrather a commitment of human talent should notdisguise its importance as a means of energy con-servation. Extensive documentation exists on therewards attributable to making such a serious cor-porate commitment to energy conservation. 9

Housekeeping

Housekeeping items are numerous. In the areaof maintenance and repairs they include weather-stripping, replacement of wornout pipe insula-tion, improved maintenance of steam traps, andtuning of combustion equipment. Those meas-ures for controlling energy waste range frommanually switching off lights, machinery, andother energy-using equipment not in use, todesigning and operating production schedulesthat ensure operation of equipment at maximumefficiency. An example of the latter would be en-suring that furnaces are operated only when theirload is fully needed. A large amount of the energysavings by industry during the period 1974-80were obtained by housekeeping.

9See, for example, NBS Handbook 115, Energy Conservation Pro- gram Guide for Industry and Commerce, Gatts, Massey, & Robert-son (eds. ) (Washington, D. C.: U.S. Government Printing Office,1974).

Retrofitting

In the c ontext of reducing energy use a nd in-creasing energy efficiencies, typical examples of retrofitting would be the installation of computerprocess and production control systems, combus-tion control systems on a burner array, an econ-omizer on a boiler, or a variety of other heat ex-change equipment designed to capture and usewasted heat.

Retrofits can be highly cost effective, not onlybecause of the energy they save, but also becausethey often increase the performance level of theirhost equipment and thereby allow increased pro-duction without building new facilities. In thisevent, a retrofit can leverage much bigger costselsewhere i n the corporation and simultaneous-Iy offer t he possibility of increasing output. More-over, the small scope of many retrofit projectsgives them an advantage: they are incrementalpurchases and hence have little associated risk.

The c ost of a retrofit is often low enough to beaccommodated in the discretionary or contingen-cy funds available to many mill managers.

Computer Control Systems

Two ea sily distinguished varieties of computercontrol systemscombustion control and processcontrolare examples of generic technology thatcan be bought specifically as an instrument tosave energy, as with a combustion controller, oras part of an overall profit improvement programthat saves energy in an incidental way, as witha process controller.

Combustion Control

In the combustion process, a given quantity of fuel requires a fixed and easily measured quan-tity of air. Having an excess (i.e., nonoptimal)quantity of air or fuel results in either unused airbeing heated or incomplete combustion of fuel.

In either case, the full heat value of the fuel isnot captured, and the overall conversion of fuelto electrical, mechanical, or thermal energy is notas efficient as it could be.


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The aim of a combustion controller is to main-tain the fuel-to-air ratio as close as possible to op-timal by c ontrolling the rate a t which each is in-troduced to the combustion chamber. The con-troller pe rforms its function by mea suring the ratioof combustion products found in the exhaustgases. Products of combustion can include ox-ygen, carbon dioxide, and carbon monoxide. Bymonitoring ratios of these products, a computercan calculate an optimal air-fuel ratio, and makenecessary corrections or adjustments to minimizeinefficient combustion.

Modern combustion controllers are electron-ically based and, apart from being far more ac-curate than their old mechanical counterparts,are able to act more quickly to correct any im-balances. They are, therefore, far more efficientin their intended operation. C ombustion controlsystems have been extensively applied to in-dustrial operations and are expected to play aneven greater role in the future.

Process Control

Process control is defined here as the com-puterized monitoring of process variables for theoptimization of production. Process controls arealmost universally applicable to industry; andalthough saving energy is not their primary func-tion, it becomes a secondary benefit of the ef-fort to increase overall efficiency and productiv-ity.

Because of the increased speed of industryprocesses, hand-operated and slow-acting analogcontrols create inefficiencies. The advent of themicroprocessor and of computer control systemshas enabled industry to advance the speeds of processes, thereby maintaining higher efficien-cies without losing control. Although not adopteduniversally, the use of proc ess control tec hnolo-gies is expected to increase throughout industryover the next two decades.

Waste Heat Recovery

Wherever fuel is burned, the products of com-bustion are a potential source of wasted heat. in-dustrial processes employ a vast variety of fuel-burning equipment; therefore, the recovery of

Photo credit: American Petroleum Institute

Control room at a modern petroleum refinery

waste heat has major potential for numerous en-ergy conservation programs throughout the in-

dustrial sector. The task is to find suitable applica-tions for the waste heat, much of which is at toolow a temperature to be used as is.

Heat Exchangers

Heat exchangers are devices that transfer heator energy from a high-temperature, wa ste hea tsource (e. g., the combustion gases) to a moreusefuI medium (e. g., steam) for Iow-temperatureuse. The energy transferred can then be em-ployed within the plant. Heat exchangers takemany forms and include heat wheels, recuper-ators, economizers, waste heat boilers, regen-erators, and heat pipes.

The cost of a heat exchanger of a ny type isoften dec eptively low, Installation costs are fre-quently triple (or more) the base price of the unit.Furthermore, maintenanc e costs can be signifi-cant, particularly if there are moving parts (as ina heat wheel), or where the flue gases are cor-rosive (as when burning high-sulfur oil or coal).In many industrial applications, heat exchangersare usually a more attractive investment whenthey are purchased as part of the original packageof the furnace or boiler.

Upgrading Energy

Apart from these high-temperature, waste heatsources, industry has a variety of low-temperature


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and low-level waste heat sources that can onlybe utilized by upgrading themi.e., by raisingtheir temperature and pressure. Two technologiesfor upgrading heat are:

Vapor recompression: By vapor recompres-sion, low-pressure stea m is recompressed

mechanically to a pressure and temperaturethat can be used in an industry.Heat pump: A heat pump converts wasteheat into useful energy through a cycle of operations that can be described as a reverserefrigeration cycle.

In both cases energy must be added to upgradethe energy contained in the waste heat sources.

In terms of Btu, low-level waste heat sourceswould appear to have enormous potential. A sub-stantial percentage of industrial energy input isrejected as low-level heat. However, the eco-nomics of recovering these Btu in the form of usefuI energy through such devices as vapor re-compression and the heat pump vary greatly withthe origin and quality of the waste heat source,the capital costs of the compressor or heat pump,and the energy cost associated with driving thesystem. Therefore, although these upgradingsteps are technically the same across many in-dustries, some pertinent applications and factorsare industry-specific.

Electric Motors

The use of e lectricity by industry in 1980 was2.8 Quads (or three times greater if one includesthe electricity generated by utilities burning fossilfuels). Of that, roughly 80 percent was for me-chanical drive, which essentially means electricmotors. Accordingly, there is a large energy-sav-ing opportunity associated with increasing the ef-fic iency of electric motors. Standard electricmotors range in effic iency from between 80 to90 percent. By increasing the iron and coppercontent of the core and windings, respectively,energy efficiencies can be improved to beyond95 percent.

This incremental increase in efficiency may notappear significant at first sight. However, elec-tric motors are almost unique among capital in-

vestments in that their capital costs are only asmall fraction of their operating costs, even withthe added iron and copper content of the higherefficiency motors. For example, an electric motorcould use in excess of 10 times its capital costin energy each year, and the difference betweena 90- and 95-percent efficiency could mean anannual energy saving of between 50 and 60 per-cent of a motors capital costs. However, the elec-tric motor is a very reliable item of equipment.In normal atmospheric applications it can havea life expectancy in excess of 20 years. Becauseof this, the replacement of a low-efficient elec-tric motor with its high-efficient counterpart oftencomes under disc retionary spending. Althoughthe replacement of a functioning motor could beec onomically justified, it would c ertainly not bemandatory. On the other hand, when an elec-tric motor has reached the end of its useful life,

it is common to replace it by a newer, more effi-cient type.

Fuel Switching

In U.S. manufacturing, there exists an econom-ic incentive to use one fuel over another whenprices differ, In addition, noneconomic factorswould also lead a firm to use one fuel overanother. Such nonec onomic fac tors are usuallyrelated to security of supply or to governmentreguIation.

OTA analysis indicates that there are two trendsin fuel switching that will continue for the nexttwo decades. The first trend is toward the use of coal as a primary boiler fuel at industrial plantsites. The second is toward the increasing use of cogeneration facilities in which both electricity(or perhaps mechanical and drive power) andsteam are produc ed simultaneously.

Technology for Converting to Coal

Although switching from natural gas or oil tocoal does not usually constitute an improvement

in energy efficiency, it may very well be a desir-able goal from a national point of view, Coalprices are often one-quarter of the c ost of oil interms of Btu purchased.


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Some of the well-documented 1o barriers pre-venting a smooth and consistent transition fromnatural gas or oil to coal, however, include the

following:

1.

2.

3.

4.

5.

Within the corporate plant, switching fromnatural gas or oil to coal would be of very

low priority in the discretionary spendingpool unless it could be readily coupled tosec urity of supply.Unless the boilers were originally designedfor coal, a complete new boiler plant wouldbe required, including all the coal storageand handling equipment, as well as equip-ment for ash removal. if existing boilers werestill operational, their premature replace-ment would very rarely make economicsense.

The installation of material-handling equip-ment, as described in (2), above, requireslarge amounts of space, as does the storageof coal. Such space is often at a premiumat most industrial sites.Pollution control technology for coal is ex-tremely expensive and far more complexthan that necessary for gas or oil. In fact,natural gas requires no special technology,and, providing that one can purchase low-suIfur oil, all other regulations ca n easily bemet. Even if low-sulfur coal can be obtained,it requires equipment to remove fly ash andparticulate. Furthermore, there is now aperceived risk involved in burning c oa l be-cause of the attention and publicity associ-ated with acid rain.In the large installations, deliveries of coalcan involve major capital and space alloca-tions for railroa d fac ilities and sidings. Onthe other hand, oil and gas for this type of facility can be fed into the plant via pipeline.

Thus, despite the large cost advantage of coal,most of the problems listed above tend to under-mine the attractiveness of c oa l. Some of thenewer coa l-burning technologies (i.e., fluidizedbed combustion or the burning of coal/water mix-tures) may reduce these problems. However, un-til these technologies have actually been proven,

I o The Direct Use of Coal: Prospects and Problems of Product/on and Combustion (Washington, D. C.: U.S. Congress, Office of Tech-nology Assessment, OTA-E-86, April 1979).

there is no way to assess their impacts, and, underthe present economic and competitive environ-ment, it will take a long time for coal to makemajor inroads as an energy source in most indus-tries.

Cogeneration

C ogeneration is defined a s the production of both electrical or mechanical power and thermalenergy from a single energy source. 11 In industrialcogeneration systems, fuel is first burned to pro-duce steam. This steam is then used to producemechanical energy at the turbine shaft, where itcan be used directly, but more often is used toturn the shaft of a generator, thereby producingelectricity. Although the steam that leaves the tur-bine is at a lower temperature and pressure thanthat which entered, it still has sufficient thermalenergy to perform the heating and mechanicaldrive duties required throughout the plant. Incontrast to cogeneration systems, conventionalindustrial power systems produce their own ther-mal energy at the plant site but usually buy theirelectrical power from a utility.

The principa l technical a dvantage of a cogen-eration system is its ability to improve the effi-ciency of fuel use. In producing both electric andthermal energy, a cogeneration facility uses morefuel than is required to produce either electricalor thermal energy alone. However, the total fuelrequired to produce both types of energy in a

cogeneration system is less than the total fuel re-quired to produce the same amount of powerand heat in separate systems. Because it producestwo energy forms, a cogenerator will have lesselectrical output from a given amount of fuel thanwill a comparable powerplant. However, whensteam and electrical efficiencies are summed, thecogenerator will achieve overall fuel use efficien-cies 10 to 30 percent higher than the sum of sep-arate conventional energy c onversion systems.

Cogeneration does not easily fit into any of thepreviously described categories such as retrofit-

ting or housekeeping, and although presented inthis section, is not entirely a generic technology. A more detallecf c fiscussic n of promising cogeneration technol-

ogies and their potential Impacts can be found in: /ndustria/ and Cornrnercia/ Cogeneration (Washington, D. C.: U.S. Congress, Of-fice of Technology Assessment, OTA-E-1 92, February 1983).


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Cogeneration is really a new name for an old andproven practice. Around the turn of the century,industry produc ed more than 50 percent of theelectricity generated in the United States. By1950, only 15 percent of the U.S. electricity wasproduced by cogeneration systems in large on-site industrial plants; by 1970, this figure haddropped to less than 5 percent.

Historically, in order to justify a cogenerationsystem economically and technically, a planteither had to have a balanced need for thermaland electrical or shaft power that was congruentin both time and amount (e.g., the peak require-ment for electricity and steam had to be coinci-dent, and their load profiles similar). If suchbalance and congruence were not present, thesystem had to be able to distribute excess elec-tricity to other sites or to purchase backup elec-tricity from the local utility. However, few in-dustrial processes had power needs that were thisba lanced. Moreover, systems that sold elec tricpower were subject to regulation as utilities, andbackup power often was more expensive thanwas regular electrical service. Thus, throughoutthis century, as elec tricity from utilities bec ameprogressively cheaper, industry found other usesfor its capital, and the use of cogeneration by in-dustry dec lined.

Now, however, the picture has changed, bothfrom an economic and legislative standpoint. Inec onomic terms, the c ost of a new, large, utility

generating plant increased in recent years to wellover $1,000/kW. Furthermore, utilities have beenaffected by the massive increases in energy prices.

The combined effects of increased cap ital and op-erating costs have increased the attractiveness of cogenerating fac ilities once again. I n addition,Congress has passed the Public Utility RegulatoryPolicies Act (PURPA, Public Law 95-61 7), whichmandates that utilities purchase the excess elec-trical energy generated by a cogeneration facili-ty and provide ba ckup service a t a reasonablerate. This situation alleviates the nec essity of arigorous energy balance within the plant and al-lows the cogenerator to retrieve some of itscapital expenditure through the sale of electrici-ty to a utility or the purchase of electricity froma utility.

The ec onomic key to cogeneration is the utili-zation of the waste heat from the cogenerationprocess, a potential not usually available to a utili-ty. A high level of efficiency for a utility opera-tion would be on the order of 35 to 37 percent,whereas an industrial cogeneration operationmay reach an overall efficiency in excess of 70 percent.

Although most of the regulatory problems as-sociated with the sales of industrially cogeneratedelectric power have been removed by PURPA,industry is unlikely to rush to make the signifi-cant new investments required for such opera-tion. Examples of the disincentives facing industryare the following:

1.

2.

3.

The environmental implications of c ogenera-tion can be a problem to industry, althoughthey are sometimes overlooked in discus-

sions of the benefits from cogeneration. There is no a utomatic way for a potential in-dustrial cogenerator to get regulatory ap-proval for the emissions its additiona l use of fuel will generate. Even though incremen-tal electrical energy will be made availableat perhaps half the emission rates of the utili-tys powerplant, the industrial emitter getsno credit for this improvement. Instead, theemissions would be charged directly and en-tirely to the industry.How the financial returns from cogeneratedelectrical energy can be predicted is still un-

certain. There has been considerable publici-ty about the high prices (from 5 to per-haps even IO/kWh) that a utility will haveto pay cogenerators and other producers of electricity for the energy that the utility hasbeen able to avoid generating or purchas-ing from the grid. But the situation is not thissimple. In many areas (e. g., where utilitieshave excess capacity or low-cost generatingplants), the rates for purchases of powerfrom cogenerators maybe as low as 1/kWh.Achieving cogeneration efficiencies at thecost of reducing utility coal use and increas-ing industrial use of petroleum-derived fuels,would probably not be desirable if the pri-mary goal of national energy policy were netoil savings.


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4. Finally, and this may in many instances bethe ultimate c onsideration, even a very at-tractive cogeneration project may not meetindustry managements exacting require-ments for the short paybacks and high ratesof return that are used to evaluate all proj-ects seeking a share of the hard-pressed,companywide capital budget.

Product Mix Shift

As energy costs increase or uncertainties prevailover future fuel costs and supply, industries willalmost automatically, and on an evolutionaryba sis, move to minimize these costs, risks, anduncertainties. One method of achieving this is to manufacture existing product lines with less proc-ess energy through the introduction of more ef-ficient technology.

However, three other alternatives are also avail-able. First, a company could cease manufactur-ing products that are energy-intensive and putcapital to work instead in other spheres of busi-ness and industry. For example, J apan, which ishaving great difficulty in competing with U.S.manufacturers of aluminum and paper, may takemea sures to secede from these businesses en-tirely.

Second, a company could develop and man-ufacture new products that use less energy, yetcompete with the old energy-intensive product.

An obvious example is the small automobile in

competition with the large automobile. Evenwithin this broad category are c ompeting c on-siderations. For example, in the c ar itself,aluminum and plastics readily replace othermetals, such as steel. Arguments that the energyintensity assoc iated with making one produc t ismore desirable than that used for making anotherproduc t are not rea lly conc lusive. Examples in-clude debates about which packages are less en-ergy-intensive i.e., the glass bottle v. the plasticbottle or the aluminum can v. the steel can. Inthe final analysis, the marketplace, which con-siders many other costs besides energy, deter-mines which product wins or loses.

The third course of ac tion oc curs when theenergy used to make a final product is shiftedaway from the manufacturing facility to the userof the product, An example of this can be foundin the petroleum refining industry. Although lessrefined gasolines require less energy to produce,they burn less efficiently in automobiles, therebylasting fewer miles per gallon and increasing theenergy cost of transportation. The refinery hasessentially shifted part of its energy losses to con-sumers using these produc ts.

The measurement a nd quantification of the im-pact on energy conservation by product shift andproduct cha nge is beyond the scope of this re-port. However, it should be noted that over time,these c hanges almost will inevitably take placeto an extent that products and even whole in-

dustries could radically contract and disappear.

POLICIES THAT AFFECT INDUSTRIAL ENERGY USE

Existing U.S. IndustryEnergy-Related Legislation

During the 1970s and early 1980s, Congressenacted several major laws that affected industrialuse of energy. The general goals of these meas-ures were to reduce oil imports, to encourage do-mestic production of fossil fuels and the develop-ment of nuclear and alternative energy sources,and to reduce energy demand through conser-vation and energy efficiency improvements. In-centives to meet these goals fell into three generalcategories: 1 ) pricing mechanisms, 2) regulations,

and 3) financial incentives. In addition, DOE con-duc ts several programs designed to study indus-trial energy use and ways to improve energy ef-ficiency in industry.

Pricing Mechanisms

Oil and natural gas pricing issues dominatedcongressional energy debate in the 1970s. Thedifference between domestic oil prices and higherworld energy prices was significant and had tobe resolved. After a year-long debate, the EnergyPolicy and Conservation Act (EPCA, Public Law

99-109 0 - 83 - 5


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94-1 63) was enacted in December 1975. The lawprovided for the eventual decontrol of oil afterSeptember 30, 1981; however, mandatory Fed-eral oil price controls were c ontinued until J une1, 1979, EPC A ga ve the President authority tocontinue, modify, or remove the controls afterthat date. In April 1979, President Carter sub-mitted to C ongress his plan, later approved byC ongress, to phase in oil dec ontrol to c ushionconsumers from rising prices. Oil dec ontrol pro-ponents believed higher prices would encouragedomestic oil production and discourage use whileadvocates of price control were concerned thathigher domestic oil prices would contribute toinflation and burden consumers without pro-viding commensurate new supplies. 12

To ac company oil decontrol, the Crude OilWindfa ll Profits Tax Ac t (WPTA, Public Law96-223) was passed in April 1980. Designed to

capture some of the windfall profits that oil com-panies would realize from decontrol, this new taxwas levied only on the difference between theba se price (ranging from $12.81 to $16.55) andthe actual selling price o f a ba rrel of oil. The taxrate varied from 30 to 70, depending on the typeof oil, the date the well was tapped, the methodof production, and the size of the producer. 13 Todate, total revenues collected from the windfallprofits tax amount to $28.1 billion ($3.7 billionin fiscal year 1980, $13.8 billion in fiscal year1981, $10.6 billion in fiscal yea r 1982). Theserevenues have been added to general U.S. Treas-ury funds and not to specific energy-related ortransportation projects. On J anuary 28, 1981,President Reagan lifted price and allocation con-trols on gasoline and crude oil.

For natural gas, the Natural Gas Policy Act(NGPA, Public Law 95-621) provided for con-tinued controls indefinitely on most natural gascontracted for prior to 1977, thus avoiding a sud-den windfall for producers. The act further spec-ified that price controls on new gas and certainintrastate gas be lifted entirely by 1985 and thatgas from certain onshore wells be deregulatedin J uly 1987. NGPA also provided for incremen-

2Enerw poi;cy zd ed Washin@on D. C.: Congressional Qua~er-Iy Inc., March 1981), p. 25.

31 bid., p. 224.

tal pricing, thus plac ing the initial burden of gasprice deregulation on industrial customers. Theincremental price is equal to the price of newlydiscovered natural gas plus regulated transpor-tation c osts. This industrial gas price is mitigatedthrough a ceiling determined by regional alter-native fuel oil prices for either number 2 or num-ber 6 fuel oil.

The Federal Energy Regulatory Commission(FERC), whic h administers NGPA, is now c on-sidering raising old na tural gas* prices. FERCplans to issue a Notice of Inquiry that will explorewhether NGPA fosters market ordering problems,such as unequal distribution of gas among inter-state and intrastate pipelines, and whether suchproblems can be alleviated by raising the priceof old ga s. The FERC staff has suggested thathigher prices would eliminate the c ushion of price-controlled gas now enjoyed by interstate

pipelines. The record developed during theNotice of inquiry could be used as a basis forfuture FERC rulings. 14

On February 23, 1983, the administration sub-mitted to C ongress a proposal to e liminate allnatural gas price controls and enable pipelinesand producers to abrogate long-term contractsthat are believed to be keeping prices high. Inaddition to the administration proposal, severalalternative proposals have been introduced. Leg-islative debate has focused on the decontrol of old gas. Decontrol, opponents argue, means

higher rates for homeowners who cannot easilyswitch to other fuels. Also, there is concern thatrising gas prices could prompt industrial and utili-ty users to switch to oil. Bec ause ga s prices, insome areas, have surpassed industrial fuel oil,switching has already begun to occur. However,proponents argue that eliminating all controlswould encourage the production of old gas andcause old gas prices to increase and new gasprices to dec rease. 15

*Old gas is that which was discovered before 1977, and whoseprice is federally controlled.

lq/n~j~e ~ergy ew york McGraw Hill, April 1982 , PP. 7-8. ~Congressional u ~erly Weekly Report, Natural Gas Prices:

Ready for the Free Market? vol. 41, No. 9, Mar. 5, 1983, pp.443-447.


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Regulations

The Government can also intervene in the en-ergy marketplac e through regulation. in the in-dustrial sector, Government policies seek to pro-mote the switch from oil and natural gas to coalor renewable resources. Since 1974, the FederalGovernment has administered coal conversionprograms under provisions of the following leg-islation: EPCA , the Environmental Supply and En-vironmental Coordination Act (ESECA, public Law93-319), and the Powerplant and Industrial FuelUse Act of 1978 (FUA, Public Law 95-620).

ESECA prohibited a ny powerplant or majorfuel-burning installation from burning natural gasor petroleum as a primary fuel source if the plantor installation had the c apability and necessaryequipment to burn coal. EPCA expanded the au-thority of the Federal Energy Administration to

order major powerplants and fuel-burning in-stallations to use coal instead of oil and gas. FUAfurther modified and expanded coal switchingprograms and established new regulatory policiesfor converting industrial users of oil and naturalgas to coal. Under FUA, new facilities may notburn oil or gas until the owners demonstrate toDOE that an exemption is justified. Also, FUAprohibited the burning of natural gas in existingpowerplants from 1990 on and restricted its useprior to then. However, a full range of temporaryand permanent exemptions was established. 16

The omnibus Budget Rec onc iliation Ac t of 1981 (Public Law 97-35) made changes in FUA.It repealed the general prohibition against burn-ing gas in existing powerplants and withdrew theauthority of DOE to prohibit burning oil/naturalgas in existing powerplants if the plant werecapable of using coal or alternative fuels. Instead,the law allows a utility to certify to DOE whethera powerplant is capable of burning coal/oil orcoal/gas and gives DOE authority to prohibit theburning of oil/gas in such plants as certified.

The effec tiveness of coa l conversion programsis questionable for a number of reasons. The costof fuel conversion is staggering, and it may beimprac tical to retrofit some plants. Capital con-

lbcongresslonal esearch Service, Th e 9.5th C0frg~e55 fl~ ~fle~gyPo icy prepared for the House Subcommittee on Energy and Power,January 1979, p. 13.

straints will stretc h the time for completion evenfurther. And, while coal is cheaper than oil ona Btu basis, it is not necessarily a cheap fuel whentransportation, handling, and pollution controlcosts are included. In addition, coal-fired boilersare more expensive to purchase than are oil-firedboilers. This reality could be a deterrent to greatercoa l use, particularly in smaller companies thatdo not have access to the capital necessary to buynew boilers or to retrofit old ones. In addition,exemption provisions of the law still allow com-panies to continue burning oil and gas. A com-pany can petition for an exemption for a varietyof reasons: air quality, site limitations, and cost.

Another law that can affect energy use in theindustrial sector is PURPA. PURPA is intended toencourage the production of power by means of cogeneration and the use of renewable resources,primarily by removing the principa l barrier toelectric power generationmarket entry. Priorto PURPA, utilities were often reluctant to pur-chase cogenerated electricity at a rate that madegrid-connected cogeneration economically feasi-ble. Some utilities charged very high rates for pro-viding backup service to cogenerators (for thatelectricity that cogenerators could not providefor themselves), With PURPA, utilities must pur-chase from and sell power to cogenerators andsmall power producers at economically justifiedand equitable rates. However, not all cogener-ating facilities qualify for the PURPA benefits. Aqualifying cogenerating facility* must meet FERCrequirements for fuel efficiency, reliability, andthe like. Presently, the potential size and struc-ture of the market for cogeneration and smallpower production is largely unknown.

The U.S. Supreme Court recently upheld theFERC regulations implementing PURPA that re-quire: 1 ) utility rates for purchases of cogener-ated power to be based on the utilitys fullavoided cost, * * and 2) utilities to interconnectwith cogenerators and small power producers.A Federal C ourt of Appea ls dec ision had found

A cogenerating facility, as defined by the law, is one that pro- duces both electric energy and steam, or other forms of useful en-ergy (such as heat), which are used for industry, commercial heating,and cooling.

* The cost of power generated by conventional means that isavoided or replaced by power from alternative energy technologies.


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that full avoided cost pricing deprives other utilityratepayers of any share of the benefits and thatthe FERC interconnec tion requirement violatedother provisions of the Federal Power Act. 7 TheSupreme Court ruled that, while full avoided costpricing would not direc tly provide any rate sav-

ings to consumers, it would provide a significantincentive for the development of cogenerationand small power production, and ratepayers andthe Nation as a whole would benefit from the de-creased reliance on scarce fossil fuels through themore efficient use of energy. The Supreme Courtalso he ld that FERCs authority under PURPA isadequate to promulgate rules requiring utilitiesto interconnect with cogenerators and small pow-er producers.

In an earlier decision, the U.S. Supreme Courtupheld the constitutionality of the PURPA re-quirement that utilities buy power from c ogen-erators and small power producers and upheldthe provision that exempts these facilities fromregulation as electric utilities. a These aspects of PURPA had been dec lared unconstitutional bya Federal district court on the grounds that theyexceeded the scope of the power granted to theFederal Government under the U.S. Constitu-tion. 19

Financial Incentives

Financial incentives, such as tax credits and ac-celerated depreciation measures, can be directedtoward encouraging the use of coal or alternativeenergy sources and the adoption of conservationprojects. Since the Arab oil embargo, the politicalclimate has generally been favorable to the useof financial incentives. Opposition to these meas-ures was not directed at the concept, but at theamount or timing of the incentive. Some criticsargued that the tax credits proposed were notstrong enough to affect energy conservation ef-forts or to compensate for the increased capitaloutlay and technological risks associated with

TAmerjcan E trjc power Service Corporation V. FERC 675 F.2d1226 D.C. Circ. 1982), cert. granted in Case Nos. 82-34 and 82-226(Oct. 12, 1982).

laFecjera/ nergy Regulatory cO 77mlS5 n V. Mississippi,U s. 102 S. Ct. 2126 (1982).

~~MiSSiSSippi v ederal Energy Regulatory omm ss on ( unre-ported opinion, U.S. District Court for the Southern District of Mis-sissippi).

greater coal usage. Others argued that tax creditsinvolve the Government in the industrial deci-sionmaking proc ess too hea vily. What finallyemerged from this congressional debate wereseveral laws that provided a number of financialincentives to industry: the Energy Tax Act of 1978

(ETA, Public Law 95-618), WPTA, and ERTA.ETA provided a 10-percent business investment

credit for: 1 ) specified equipment, such as boilersthat use coal or alternative fuels; 2) heat conser-vation; and 3) recycling and shale oil equipment.

This c redit could be applied to equipment placedin service between O ctober 1, 1978 and J anuary1, 1983. At the same time, the law denied a taxcredit and granted a rapid depreciation allowancefor early retirement of oil- and gas-fired boilers.ETA also encouraged the production of additionalfuel supplies, particularly natural gas, by pro-viding a tax credit for equipment used for the pro-duction of natural gas from geopressurized brine.

WPTA increased the tax credits for solar, wind,and geothermal equipment from 10 to 15 per-cent and extended to 1985 the cutoff for grant-ing credits. Also, the law provided a tax creditequal to 10 percent of the cost of cogenerationequipment and extended the tax exemption forindustrial development bonds to bonds used tofinance facilities that produce energy fromrenewable resources, as long a s the facility wasState-owned, backed by sufficient taxing authori-ty, and eligible for financing by general obliga-

tion bonds,One of the most important tax initiatives for in-

dustry is ERTA. This law simplified the tax codefor depreciation, replacing all capital retirementcategories with just four: 3 years for vehicles; 5years for most machinery and equipment and sin-gle-purpose agricultural structures, petroleumstorage facilities, and public utility property witha life expectancy of 18 years or less; 10 years forrecreational facilities and park structures, mobilehomes, and qualified coal conversion propertyand other public utility property with a life ex-

pec tanc y of 18.5 to 25 years; and 15 years fordepreciable real property and public utility prop-erty with a life expectancy of 25 years or more,Also, the law encouraged investment in both newand used property placed in service after 1980by establishing new credit rules: 6-percent credit


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applies to qualified property in the 3-year depre-ciation class and 10 percent applies for all otherqualified property. The investment credit carry-over period is extended to 15 years for creditsarising in taxable years ending after 1973. In ad-dition, ERTA provided a 25-percent tax credit for

research and development (R&D) expenditurespaid or incurred in carrying on a trade or busi-ness, rather than in connection with a trade orbusiness. Eligible expenditures include suppliesused in conducting research and wages to em-ployees performing the research. Furthermore,ERTA reduced the tax on newly discovered oil,and decreased the credit allowed where the costof energy savings is excessive or where capacityincrea ses as energy is conserved.

Since ERTA shortened the period in which busi-nesses could write off investments, companiescould deduct larger amounts each year from theircorporate income taxes, thus lowering tax billsand presumably enc ouraging investment. Critics,however, point out that accelerated depreciationwould favor large businesses and would affect in-dividual industries very differently. Furthermore,accelerated depreciation would substantially in-crea se certain types of d istortions that exist inpresent lawparticularly those that favor equip-ment over structures. They also point out that ac-celerated depreciation will cost the U.S. Treasurybillions of dollars in lost revenues. Proponents,on the other hand, say the act simplifies tax laws

and will stimulate the economy, increase produc-tivity, and moderate inflation. 20

ERTA also liberalized earlier leasing rules topromote the sale of tax benefitsboth investmentcredits and depreciation deductions.

Under these new leasing regulations, a corpora-tion who (because of small or nonexistent taxliabilities) is unable to make use of a propertysdepreciation and tax credits can sell the proper-ty and its associated income tax credits to anothercorporation, and then immediately lease theproperty back for continued use. The original

owner, now a lessee, receives a downpaymentand a note for the balance. The new owner, now

a lessor, receives payments for rent and makespayments for principal and interest on the out-standing note. Since the property never leavesit original site, and the rental and debt paymentsare equal, the net effect is that the original ownerof the equipment has sold its unusable tax and

depreciation credits for the dollar amount re-ceived as a downpayment. 21

In an alternative third-party safe harbor leasearrangement, the lessee is not the actual ownerof the property. The new owner purchases theproperty from the actual owner and then leasesit to the lessee at an annual rent that is lower bythe tax benefit amount associated with the prop-erty, 22

The U.S. Treasury reported that the value of leased property in 1981 totaled $19.3 billion.About 84.5 percent of the tax benefit

chapter 3 industrial energy uses technologies policies

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