eurosif energy efficiency report

Theme Report – 6th in a series

O ekom research provided the research for this Eurosif theme report. It outlines the majorenvironmental, social and governance (ESG) challenges that energy efficiency poses to industriesand relevant actions that can optimise consumption levels.

This report is published in association with EU Sustainable Energy Week 2011.

ENERGY EFFICIENCY – BACKGROUND AND POLITICAL FRAMEWORKEnergy efficiency is the accomplishment of or the ability to accomplish atask with a minimum expenditure of energy. Improved energy efficiencycan result in cost and emissions savings and reduce the dependency onnon-renewable energy sources. Efficient energy use is one key strategy incombating climate change and other environmental impacts created bythe energy sector. Seizing energy efficiency opportunities proves importantwhen addressing challenges related to economic development and energysecurity. Energy efficiency can further contribute to decoupling energyconsumption from economic growth. Article 2 of the Kyoto Protocolidentifies the improvement of energy efficiency in relevant sectors as a keymeasure helping countries achieving their national reductioncommitments.1 Climate protection and energy-efficiency targets are thusclosely linked.

Energy Efficiency

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Eurosif wishes to acknowledge the support and direction provided by the Energy Efficiency Report Steering Committee:

Bank Sarasin & Co. Ltd

CM-CIC Asset Management

Henderson Global Investors

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This sector report has been compiled by:

1 United Nations, “Kyoto Protocol to the United Nations Framework Convention on Climate Change“, 1998, p. 3.2 European Commission, “Action Plan for Energy Efficiency (2007-2012) “, 19 October 2006.3 Financial Times Deutschland, “Gewinnbringender Kampf“, 21 December 2010.

4 Deutsche Energieagentur, “Umfrage: Autofahrer wollen sparsame Autos. Mit der richtigen Wahl beimAutokauf dauerhaft Spritkosten senken“, Press release, 29 March 2010.5 Bitkom, “Kaufkriterien bei TV-Geräten“, Press release, 14 July 2009.

31 International Energy Agency, “World Energy Balances”, 2010.

In 2006, the EU pledged to cut its annual consumption of primary energy,based on the projected energy consumption, by 20% by 2020. Theinitiative aims to reduce Europe’s dependency on fossil fuel imports and toachieve cost reductions of approximately € 60 billion a year.

The EU Commission’s Action Plan for Energy Efficiency (2007-2012)includes measures aimed at improving the energy efficiency of products,buildings and services, and at increasing the efficiency of power generationand distribution systems. The EU Commission considers that the greatestenergy-saving potential lies in the areas of residential housing andcommercial buildings (with potential savings of approximately 27% and30% respectively), the manufacturing industry (approx. 25%) and thetransportation sector (approx. 26%).2 Further relevant EU Directives andother regulations specific to some industries will be examined below.

THE BUSINESS CASE FOR ENERGY EFFICIENCYIn most cases, improving energy-efficiency is cost-effective. Both legislationand market signals further contribute to the business case for energyefficiency. The following two aspects are of particular significance:

1. Energy costs in Europe have risen sharply over the past few years.According to Eurostat, the average net electricity price for industrialcustomers surged from € 9.4 per 100 kWh in 2007 to € 10.4 in 2010. Afurther rise in energy prices is anticipated in the coming years, partly onaccount of the pricing-in of CO2 costs in a growing number of industriesunder the EU emissions trading scheme. In many sectors, energy costsalready represent a significant part of the production costs: in paperproduction, they account for over 14% and for approximately 9% in thechemicals industry.3 In light of rising energy prices, savings in energyconsumption can increase competitiveness and profitability. However, theenergy price sensitivity differs between sectors.

2. The energy consumption of electrical equipment, cars and buildings isbecoming an increasingly important factor in the purchasing decisions ofbusiness and private customers, as well as the public sector. For example,95% of car purchasers claim that fuel consumption is a ‘very important’or ‘important’ criterion,4 while 86% take energy consumption intoaccount when buying a TV set.5 Increasing transparency about the energyconsumption of appliances, through the wider use of appropriatelabelling, will further increase the attention paid to this issue. Companiesoffering appropriate products will be able to consolidate or evenstrengthen their market positions.

Nevertheless, in many cases, energy efficiency improvements are notadopted as quickly or as extensively as might be expected. The InternationalEnergy Agency (IEA) identifies the following barriers to energy efficiencymeasures:

Barriers to Energy Efficiency

Source: International Energy Agency, “Energy Efficiency Governance Handbook”, 2010.

The lack of sensitivity towards energy price increases for sectors whereenergy costs are a negligible share of total production costs. Moreover, thebusiness case for energy efficiency measures is not equally clear in allindustries. For example, in the building sector, although the potential forsavings is extraordinarily high, the considerate start-up investmentsnecessary for retrofitting will only pay off in the long run. Where owner andtenant are different parties, only the tenant will profit from the owners’investments as long as there is no apportionment of costs (i.e. higher rents).

Risks occur primarily through involvement – whether in the form of a loan or an investment in shares or bonds - in companies that are at a cost andcompetitive disadvantage due to inadequate measures to reduce energy consumption, and whose economic success is threatened as a result.

At the same time, market opportunities are opening for the financial sector:

• Cooperation with development banks’ lending programmes for investments in energy efficiency;• In-house loan schemes for small and medium enterprises to improve energy efficiency;• Provision of venture capital for the development of innovative technologies; • Cooperation with energy suppliers on consultancy services and finance for energy contracting;• Performance guarantee cover for equipment acquired in order to improve energy efficiency;• Analysis of regulatory frameworks and company performance in terms of energy efficiency;• Creation of investment funds focussing on energy efficiency.

There are various instruments available for investors aiming to benefit from and/or contribute to energy efficiency:

• Stock-picking of the most energy-efficient companies (in a sector);• Selection of companies providing energy-efficient products and services for investments;• Engagement / active ownership activities in the field of energy efficiency;• Exclusion from investment universe of companies operating highly inefficient power plants and/or offering energy-intensive services or products.

Focus regions, countries and sectors for activities include:

• Those with a strong business case for energy efficiency, for instance sectors to be included in the European Union’s Emission Trading Scheme(airlines, metals, chemicals, etc.) and sectors/companies with high energy price sensitivity;

• Companies driving energy efficiency, such as LED producers or companies offering cloud computing services;• Sectors in emerging and developing economies with great energy efficiency potential and strong growth;• Countries with high energy intensity per capita (for instance, the United States and Australia) and countries with high energy intensity per

GDP (for instance, Russia and South Africa);31

• Countries/sectors with abundant potential for improving energy efficiency, such as retrofitting of old buildings in Europe and energyefficiency improvements in Central and Eastern Europe’s industrial sector.

RELEVANCE FOR THE FINANCIAL SECTOR

Information & awareness

• Lack of sufficient information and understanding,on the part of consumers, to make rationalconsumption and investment decisions

Regulatory & institutional

• Energy tariffs discourage energy efficiency investments (e.g. declining block prices)

• Incentive structures encourage providers to sellenergy rather than invest in cost-effective energyefficiency

• Institutional bias towards supply-side investments

Technical

• Lack of affordable energy efficiency technologies suitable to local conditions

• Insufficient capacity to identify, develop, implementand maintain energy efficiency investments

MACHINERY

Challenges The machinery sector plays a key role in energy efficiency as manyother industries rely on the efficiency of machines and facilities tomeet their own energy efficiency goals. In the EU, these industriesjointly account for about 30% of total energy consumption.6 Therefore,the basic challenge for this sector is to supply energy-efficientmachines, both stationary and mobile, with minimal consumption ofenergy or fuel. Energy-efficient machines alone could help avoid up to25% of Germany's yearly CO2 emissions until 2020.7

ActionsThe sector works towards improving the efficiency of its productsthrough process optimisation, enhancement of system controls andoptimisation of product design. The increasing demand for energy-efficient products has also given rise to product Life Cycle Assessments(LCAs) which measure the overall environmental impacts of a product.

The modernisation of factories and plants is one of the major fieldsof activity in this regard. Further examples are the supply of efficienttechnology for energy transformation or the efficiency of pumps orcooling and air-conditioning technology. The machinery industry alsohas to meet tighter regulations for its products. Examples include thephasing out of inefficient electric motors in the EU from 2011onwards, or stricter regulations on emissions of stationary engines.However, in 2008, only 12% of electric motors in European factorieswere efficient variable-speed motors.

Outlook Faced with the rising demand by all industries to meet their energyefficiency goals, the use of energy-efficient equipment will continue togrow. In the coming years, existing technologies and newly developedtechnologies are expected to contribute in equal measure to energyefficiency improvements.8 The most important technological aspectswill remain the following: process optimisation, enhancement ofsystem controls and optimisation of product design.

METALS

ChallengesMetal production is highly energy-intensive and many metals areproduced in very large quantities. The world’s steel production iscurrently 1.4 million tonnes/annum.9 Current energy intensitiescommonly range from 10-25 Gigajoules/tonne (steel), 50-70 GJ/t(aluminium) and 6-75 GJ/t (copper), depending on the appliedtechnology and the extent to which secondary material is used.10 Whilesome aluminium and steelmakers already use 60% to 80% of secondaryraw materials in their production processes, others still exclusivelyproduce from metal ores. CO2 intensities of large aluminium and steelproducers range from 0.5 to 2.2 tonnes of CO2/tonne, depending onvarious factors, including the energy sources used.11

Actions Metals producers have already taken numerous measures to improveenergy efficiency, including modernisation of plants, investment in newtechnologies, heat recovery and minimisation of energy losses. Largepotential savings can be generated by optimising processes and byusing secondary raw materials. The processing of aluminium scrap, forexample, only requires 5% of the energy demand for production basedon primary raw materials.

ULCOS (Ultra–Low CO2 Steelmaking), a consortium of 48 Europeancompanies and organisations, launched a voluntary initiative to enabledrastic reduction in CO2 emissions from steel production by improvingenergy efficiency and applying low-carbon technologies.

Outlook Steel Production levels are expected to double by 205012 and thus maycompensate voluntary efficiency improvements. The wide range inenergy intensities shows the potential for further improvements.Recycling will become increasingly important in order to lower energydemand within the sector. The reduction of carbon intensity throughgreater use of renewable energy sources will also have to be considered.

MOBILITY & LOGISTICS

Challenges The fast growing transport sector already consumes almost 20% of theglobal final energy and is expected to be responsible for 97% of theincrease in world primary oil use between 2007 and 2030.13 Buses andcars account for the major part of fuel use, followed by road freight,aviation, shipping and rail.14 The projected doubling of passenger andfreight transport by 2050 is based on trade growth and drasticallyexpanding car fleets in developing countries, led by China and India.15

Climate change-related regulation puts increasing pressure on thesector: carmakers are facing targets for average CO2 emissions of newvehicles, aviation will be included in the EU Emissions Trading Schemefrom 2012 onwards and energy-efficient design standards for ships areunder consideration.

Actions With energy prices increasingly affecting profitability, transportationand logistics companies aim at cost savings, primarily through fleetrenewal and modernisation, route and capacity optimisation, as well asoperational changes (such as speed adjustment and eco-drivingsupported by fuel monitoring systems). Vehicle design offersopportunities for substantial reductions if optimised for fuel economyinstead of speed, but carmakers have been slow to promote smaller carsand continue to serve the high-performance segment. Companies alsouse intermodal systems to choose the most fuel-efficient transportcombination for a particular route.

Outlook Sound policy frameworks, economic incentives (i.e. taxes) andgovernment investment into sustainable transport infrastructure areneeded to accelerate and support industry efforts. Behaviouralchanges must also be urged in order to abate the projected growth intransport volumes over the next decades. Besides energy efficiency,alternative propulsion systems are crucial for climate changemanagement, where the global transport sector, despite its hugeimpact, is still lagging behind. Relevant energy-efficiency schemesoffer transportation companies immediate payback through loweroperating costs. The Global Fuel Economy Initiative, for instance, aimsat doubling energy-efficiency levels for the global car and light dutyvehicle fleet by 2050.16

POWER GENERATION

Challenges According to the IEA, power generation in 2008 accounted for 32% oftotal global fossil fuel use. The global average efficiency of fossil-fuelled power plants at about 36% (34% for coal, 40% for natural gasand 37% for oil) illustrates that much energy is lost during theconversion process.17 In the European Union, efficiency rose to a levelof 48.3% in 2007, mainly due to the replacement of older plants.18 Acontributing factor was the growth of the use of combined cycle gasturbine plants (CCGT), with efficiencies of up to 60%. Energy efficiencyrepresents a huge challenge for this sector, given that carbon captureand storage (CCS) technology at such plants can create energyreduction of up to 30%. Savings can also be achieved during powertransmission and distribution. Grid losses are low in most industrialisedcountries, but can reach over 80% in developing nations.19

Actions Increasingly, companies explore new business opportunities related toenergy efficiency services. Transport losses may be reduced bypromoting a decentralised energy supply, grid modernisation and byintroducing automated electricity meters as part of smart gridsolutions. As of yet, only few smart grid projects have been rolled outon a large scale. Great potential also lies in combined heat and power(CHP) systems with efficiency rates of up to 90%. The feasibility ofdistrict heating and cooling, however, depends on the localinfrastructure. Overall fossil fuel savings potential could reachbetween 21 and 29 exajoules (EJ)/year, an equivalent of 11.4% to15.9% of fossil fuel used for electricity production, mainly throughimproving the efficiency of coal-fired plants.20

Outlook Most fossil-fuelled power plants were built in the 1960-70s and arenow reaching the end of their operational life. The rising price of fossilfuels may not only lead to a shift from electric utilities to non-fossilenergy sources, but also to an improvement of conversion efficiency. Ascoal-fired plants are among the least efficient, the expected rise in theuse of coal for electricity generation will pose significant challenges.Given current forecasts on rising energy demands, it will be all the moresignificant to promote demand-side reductions in energy consumption.

REAL ESTATE

ChallengesWith buildings being responsible for 40%-45% of total energy use inEurope, the real estate sector offers the greatest potential forimproving energy efficiency in Europe. Most of the energyconsumption in a building’s life cycle occurs during the building’soperational phase for heating, cooling, ventilation and lighting.21

Governmental targets regarding energy efficiency refer mostly tonew developments. According to the EU Energy Performance ofBuildings Directive (EPBD), new public buildings from 2018 on and allnew homes and offices from 2020 onwards must be built as passivehouses, using very little energy in general and renewable energies tocover residual energy demand.

ActionsActions include the implementation of guidelines and measures toimprove energy-efficiency in lighting, cooling, heating andventilation. Besides the provision of technical solutions, tenantsshould be made aware of possibilities and encouraged to saveenergy. Energy performance certificates, for example, providepotential tenants or buyers with information on energetic qualitiesof buildings. Having identified the high-energy savings potential ofolder buildings, the German government aims at increasing the lowrefurbishment rate from 1% to 2% per year, applying fiscal andfinancial incentives.22 Still, existing buildings offer the highestsavings potential, especially those older than 30 years.23 If homeenergy retrofits, such as better insulation, are implemented, energydemand can be reduced by 50% on average, and by as much as90% in some cases.24

Outlook The real estate sector has not yet fully explored its energy savingspotential. Besides government incentives, rising energy prices willstimulate real estate companies to implement measures to improvethe energy efficiency of existing stock and to switch to renewableheating sources. In this context, the question of who bears theretrofitting costs may be a future challenge for the sector.

6 “Eurostat Pocketbook: Energy, Transport and Environment Indicators”, Luxembourg: PublicationsOffice of the European Union, 2009. 7 VDMA – Verband Deutscher Maschinen- und Anlagenbau, Roland Berger Strategy Consultants (Hrsg.):Dr. Torsten Henzelmann, Ralph Büchele, “Der Beitrag des Maschinen- und Anlagenbaus zurEnergieeffizienz”, 2009.

8 Ibid.9 World Steel Association, “2010 Statistics Table: World Crude Steel Production”, 21 January 2011.10 oekom research AG, “Corporate Industry Report Metals & Mining”, September 2011.11 Ibid.12 Wellmet50, “Steel, Aluminium and the Carbon Targets 2010–2050”, University of Cambridge, 2011.

13 International Energy Agency, “Transport Energy Efficiency: Implementation of IEA Recommendations Since 2009and Next Steps“, 2010.14 International Energy Agency, “Transport, Energy and CO2 Moving Toward Sustainability”, 2009.15 United Nations Environment Programme, “Transport: Investing in Energy and Resource Efficiency“, 2011.16 Global Fuel Economy Initiative, “50 by 50 Prospects and Progress“, 2010.

17 International Energy Agency, “Energy Efficiency Indicators for Public Electricity Production from Fossil Fuels”, 2008.18 European Environment Agency, “Efficiency of Conventional Thermal Electricity Generation”, 2010. 19 World Bank, “Electric Power Transmission and Distribution Losses”, 2010.20 International Energy Agency, “Energy Efficiency Indicators for Public Electricity Production from Fossil Fuels”,2008.

21 United Nations Environmental Programme, “Buildings and Climate Change: Status, Challenges andOpportunities“, 2007.22Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (Germany), “EnergyConcept for an Environmentally Sound, Reliable and Affordable Energy Supply“, 2010.23 Magazin für Wirtschaft und Finanzen, “Sparen ist unsere größte Energiequelle“, No. 87, October 2010.24 Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (Germany), “EnergieEffizient Nutzen – Tipps zum Klimaschützen und Geldsparen“, 2009.25 US Geological Survey, “Cement Statistics”, 13 December 2010.

26 Taylor, Michael, Cecilia Tam and Dolf Gielen, “Energy Efficiency and CO2 Emissions from the Global CementIndustry”, International Energy Agency, 2006.27 International Energy Agency & World Business Council for Sustainable Development, “Cement TechnologyRoadmap 2009: Carbon Emissions Reductions up to 2050”, 2009.28 International Energy Agency, “Chemical and Petrochemical Sector“, September 2009.29 European Commission, “DG INFSO: Impacts of Information and Communication Technologies on EnergyEfficiency, Final Report”, September 2008, p.104.30 Ibid, pg. 407.

BUSINESS RISKS AND OPPORTUNITIES FOR INDUSTRIES

DRIVERS Regulation mediumEnergyprices

lowCustomerdemand

high DRIVERS Regulation mediumEnergyprices

lowCustomerdemand

DRIVERS Regulationmedium

mediumEnergyprices

mediumCustomerdemand

medium DRIVERS Regulation highEnergyprices

medium

Characterised below are industries with a high potential for reducing energy intensity and thus able to contribute to enhancing energy efficiency.For each industry, sector-specific challenges, achievements and expected future developments are outlined.

CEMENT

World cement production amounted to 3.060 mega tonnes (Mt) in2009.25 At an average energy intensity of 4-5 GJ/t, the total energyconsumption of the sector reaches between 12 and 15 million GJ.26

Energy efficiency can be improved mainly by applying state-of-the-art technology. Due to their long lifespan (30-50 years) and highinvestment costs, the replacement of old kilns is likely to be a longprocess. Both the use of alternative raw materials and alternativefuels are not considered to have significant potential to improveenergy efficiency for this sector. Through state-of-the-arttechnology, the average energy intensity is expected to decrease to3.9 GJ/t in 2012 and 3.2 GJ/t in 2050.27 Cement production is uniqueas CO2 emissions are not exclusively linked to energy consumption:CO2 emissions are also directly released as a result of thecalcinations process of limestone to clinker.

CHEMICALSWith a share of more than 30% of the total industrial energy usedworldwide, the chemical and petrochemical sector is by far the largestindustrial energy user. Its energy saving potential is smaller than manyother energy-intensive industries due to the high share of feedstock(non-energy use). Therefore, in addition to energy efficiencyimprovements, other possible developments including recycling, energyrecovery, enhanced implementation of combined heat and power(CHP), the use of latest technology (e.g. chlorine production) and theuse of biomass (renewable) feedstock should be explored. Results inpotential savings in energy use may reach up to 35%.28

INFORMATION & COMMUNICATION TECHNOLOGY In 2005, the use of products and services from the ICT sectoraccounted for 8% of global electricity use (EU-25).29 The sector hastaken a whole series of measures to improve the energy efficiencyof hardware equipment (‘Green IT’). National and regionalregulations like the Japanese Top-Runner-Programme and theEuropean Directive on Eco-Design of Energy-Using Products haveaccelerated these efforts. The implementation of ICT applicationscan translate into efficiency gains in other areas, for instance in thebuildings sector (‘smart buildings’) or energy sector (‘smart grids’).In Europe, this ‘enabling effect’ could represent over 7 times the ICTsector’s direct impacts in terms of energy use.30

OTHER SECTORS AT A GLANCE

Key Issue: Energy-efficiency guidelines and measures

Frontrunners: British Land Co PLC (United Kingdom),Capital Shopping Centres Group (United Kingdom), JM AB(Sweden)

Source: oekom research AG, 2011.

Key Issue: Thermal efficiency of power plants

Frontrunners: EDP SA (Portugal), Iberdrola SA (Spain), Fortum OYJ (Finland)

Key Issue: Fuel efficiency

Frontrunners: Fiat (Italy), Canadian Pacific Railway (Canada),Air France (France)

Key Issue: Secondary raw material use

Frontrunners: Outokumpu (Finland), Norsk Hydro (Norway),Aurubis (Germany)

Key Issue: Measures to reduce energy and fuel consumption ofproductsFrontrunners: Volvo AB (Sweden), Atlas Copco AB (Sweden),ABB Ltd (Switzerland)

MACHINERY

METALS

POWER GENERATION

REAL ESTATE

lowCustomerdemand

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medium

CEMENT

MACHINERY

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POWER GENERATION

REAL ESTATE

lowCustomerdemand

mediumEnergyprices

medium

CEMENT

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eurosif energy efficiency report

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