investing in industrial innovation response to climate change

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* Author to whom correspondence should be addressed. Phone: 202-429-8873, Fax: 202-429-2248

Energy Policy , Vol. 26, No. 5, pp. 413 423, 19981998 Elsevier Science Ltd. All rights reserved

Printed in Great Britain.0301-4215/98 $ 19.00 # 0.00

PII: S0301-4215(97) 00149-3

Investing in industrial innovation:a response to climate change

R Neal Elliott * and Miriam Pye American Council for an Energy-E fficient Economy, 1001 Connecticut A venue, N.W., Suite 801, Washington, D.C.20036, USA

In this paper, we review industrial energy use and energy intensity trends, and discuss industrial decision making andhow it relates to changes in energy intensity. Based on this review, we propose that policies that promote technology

innovation and investment in process equipment are most likely to lead to greater industrial energy efficiency. Wepropose and analyse four such policies and project that with full implementation of these policies, industrial energyconsumption and carbon emissions will be reduced in 2010 by 12.4 % and 12.1 % , respectively, over the base casewithout changing economic growth. Reductions will increase to 35.65 % and 33.1 % in 2030. 1998 ElsevierScience Ltd. All rights reserved. Keywords: Industry; Efficiency; Innovation

Introduction

Industry is the largest energy-consuming sector in theUnited States, with its 1994 primary consumption of 35.5exajoules (EJ) accounting for 38% of domestic consump-tion (EIA, 1995a). Industry is very different from othersectors and also very diverse, encompassing agricultural,mining, construction, and manufacturing. How energy isused by and within each sub-sector varies widely. Themanufacturing sub-sector accounts for about 70% of industrys energy consumption and is as diverse as theindustrial sector as a whole each industrys process andenergy requirements as different as the products it pro-duces (Laitner et al , 1995).

Much of the energy consumed by industry is directlyinvolved in manufacturing processes required to producevarious products. Electricity accounts for about a third of primary energy used by industries, with natural gas,petroleum, and coal accounting for about 28, 26 and 7%,respectively (EIA, 1995a). Industries also use what aretraditionally thought of as energy sources for non-fuelpurposes. For example, industries such as chemicals andpetroleum rening use crude oil, liquid propane gas(LPG), and natural gas as feedstocks in producing prod-ucts such as asphalt, gasoline, plastic resins and ferti-

lizers. This non-fuel use of energy sources accounted forabout 6.8 EJ in 1991 (EIA, 1994).In manufacturing, motors use about 70% of electricity,

lighting uses 7%, and heating or electrolytic processes

directly use 23%. Aggregated non-electric fuels are usedto generate heat, steam, or electricity. Some of these

applications (called combined heat and power [CHP]systems) are designed to both meet thermal loads andgenerate electricity, producing very high efficiencies of fuel utilization. The manufacturing sub-sector generates130 terawatt-hours (TWh) of electricity for internal con-sumption or resale, either from dedicated generation orcogeneration systems, while consuming 695 TWh net.

Non-electric fuels include purchased fuels (eg naturalgas) and waste by-products (eg paper pulping wastes[black liquor]). Many industries can switch among fuelsbased upon price and availability, so focusing on a par-ticular fuel for a particular end-use is difficult. Steamgeneration accounts for 26% of non-electric fuel con-sumption, with direct process heating accounting for23% (EIA, 1994).

Industrial trends

Industry signicantly reduced its energy intensity (con-sumption per constant dollar value of shipments) fromthe early 1970s to the mid-1980s (Fig. 1). In contrast,other sectors of the economy continued to increase their

energy intensity. Rapid increases in energy prices duringthe 1970s in part motivated industrys reduction, whichcontinued through the mid-1980s. This trend slowed inthe late 1980s as energy prices declined (EIA, 1995b).Decreasing energy intensity traceable to technologyinnovation has persisted since data have been recordedand is projected to continue for the foreseeable future.

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Figure 1 Total US primary industrial energy consumptionand manufacturing energy intensity

Figue 2 US industrial energy, electricity, natural gas prices innominal and 1993 constant US dollars

This trend is in part due to improvements in the energyefficiency of production processes and equipment, andchanges in products that industry produces. The lattertrend reects a dematerialization of manufactured prod-ucts in which less physical material is required to producea product of a given functionality. For example, advancesin semiconductor technology have allowed electronic de-vices to become smaller and lighter while increasing theircapabilities (Ross et al , 1993).

Industrial energy consumption peaked in 1979 and

then declined due to economic downturns in the early1980s (Fig. 1). Consumption increased again in the mid-1980s with economic recovery and continued into the1990s, when total consumption reached a new peak in1994 at 35.5 EJ (EIA, 1995a).

From 1970 to 1986, electricitys share of industrialenergy consumption increased from 23% to 35%, natu-ral gas fell from 33% to 25%, and coal fell from 16% to10%. After 1986, electricitys share stabilized and naturalgas began to recover its share because of its low price andperceived environmental benets. Petroleum consump-tion declined sharply in the early 1980s and then began togrow again slowly, driven mostly by increasing demandfor feedstock (EIA, 1996).

Current issues

While industrial consumption of all fuels has increasedover the last two decades, industry has become moreenergy efficient. Industry has never responded well to theconcept of energy conservation , since reducing use usuallyreduces production levels. Energy efficiency , however,

resonates with many industrial thinkers who seek tooptimize use of all resources. The importance of efficientresource use is seen in some integrated industries, such aspetroleum rening, in which feedstock is used to producethe product and generate energy required by the process.The less feedstock consumed for energy, the more prod-ucts that can be shipped.

All evidence suggests that potential still exists for effi-ciency improvements. Efficient energy use is good forindustry because it reduces operating costs for the samelevel of production, making the company more prot-able. Nevertheless, for a variety of reasons the pace of energy efficiency improvement has begun to stall in re-cent years, as will be discussed later.

One way to revitalize progress toward energy efficien-cy is to view it from a business/nancial perspective.Business managements responsibility is to enhanceshareholder value . Thus, to get the attention of businessmanagement, nancial analyses that evaluate thecost/benet of efficiency measures must be presented tothem. Analyses may range from a simple payback analy-sis to a detailed cash ow analysis calculating net presentvalue (NPV) or internal rate of return (IRR) for theinvestment. We intentionally refer to an investment inefficiency , rather than specically in energy efficiency ,because often energy efficiency projects have non-energybenets and efficiency projects that are not specicallytargeting energy produce energy savings. It is critical thatall the savings related to such projects energy andnon-energy be included in the nancial analysis so thatmanagement understands the complete nancial rami-cations of an efficiency project.

Market barriers

Many studies have identied signicant, economicallyadvantageous, energy efficiency improvements that arenot being implemented. The reasons for the lack of imple-mentation are complex, stemming from factors both in-ternal to the companies and from the market as a whole.

ow energy prices

A primary barrier to greater energy efficiency and in-creased renewable energy use is that conventional energysources are cheap and are getting cheaper (Fig. 2).

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Figure 3 Recent US R&D expenditure trends

However, energy prices do not reect all the social costs,such as environmental damage, associated with energyuse. Industrial energy and electricity prices (constantdollars) peaked in 1982 and natural gas peaked in 1983.By 1993, real (ie constant dollars) average energy priceshad declined from their peaks by 42% electricity by34% and natural gas by 46% (EIA, 1987; EIA, 1992; EIA,1995d; EIA, 1995c). With many cheap efficiencymeasures already implemented, lower energy prices makefurther investments hard to justify. Continued declines inindustrial energy prices, anticipated by many in view of utility deregulation, further reduce the incentive for effi-ciency investments.

Energy is a small fraction of the production cost

For most industries, energy expenditures are a very smallpart of operating costs, averaging less than 2% of thevalue of shipments for the manufacturing sub-sector.Industries such as primary aluminum, hydraulic cement,and industrial gases are exceptions, with energy ac-counting for more than 20% of the value of shipments.However, for some of the fastest growing industries (elec-tronics and computers) energy expenditures representonly 1.2 and 0.6% of shipments, respectively (CensusBureau, 1992). In most industries, larger costs, such aslabor and raw materials, receive attention before energy.

Energy is not a discrete issue

Most industries do not perceive energy as a discrete issuebut as part of broader issues such as cost of manufactur-ing, environmental compliance, safety and productivity.Since most energy efficiency projects impact some of these issues, decision making becomes more complex,involving evaluation of all these issues. Fortunately,many energy efficiency projects yield non-energy benets,which are frequently greater than energy savings (Elliottet al

, 1997). Thus, energy efficiency advocates canstrengthen their case to business management by ap-proaching projects from a broader perspective, takinginto account all costs and savings both energy andnon-energy.

Competition for resources

Energy efficiency competes with other issues for a com-panys nite resources. While capital is the most oftencited resource, staff time is also important. With indus-

trial downsizing, expenditures for issues not directly re-lated to the companys operation and near-term protab-ility have declined, and less staff are available to addressall issues. When choosing between addressing potentialemissions compliance, production reliability, or productquality problems, or identifying and implementing en-ergy efficiency projects, the former receive attention since

failure to address these may result in the plant being shutdown (Geller and Elliott, 1994).

Capital allocation remains a barrier to achievinggreater energy efficiency. Given a choice between ex-panding existing production capability or introducingnew products, and reducing energy bills, production-related projects will invariably win out. Fortunately, suchprojects often save energy or create opportunities tointegrate energy savings into other projects, again sup-porting the premise that both energy and non-energybenets must be taken into account when presentingprojects to management.

Factors inuencing energy decisions

Industrial energy decisions are made within the contextof maximizing shareholder prots and insuring the com-panys long-term viability. As a result, many factors inu-ence decision makers, including investment in researchand development (R&D), planning and managing projects, and using recycled feedstocks. These issues arediscussed below.

Reduced R &D spending

R&D is the process by which new ideas are developed

and transformed into commercial products and services.Innovation fuels economic growth and has allowed in-dustry to achieve impressive energy efficiency and envir-onmental gains. Continued innovation is critical toachieving future goals in these areas (Steinmeyer, 1997).The period since World War II saw a sustained commit-ment to R&D by the private and public sectors, withmore than half of the economic growth during this periodresulting from technology improvements (Eisenhauer,1996).

Recently, commitment to R&D has diminished, withboth federal and industrial R&D dollars declining(Fig. 3). As part of corporate cost reductions, many

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industries are closing their research laboratories andfocusing on more near-term activities, shifting from basicand applied research toward commercialization. In 1988,about 6% of corporate R&D budgets were directed atbasic research and more than 20% went to applied re-search. By 1995 these shares had fallen to about 2 and16%, respectively (Eisenhauer, 1996).

Project facilitation

Implementing an energy efficiency project involves morethan identifying the opportunity. The implementationprocess has seven steps: (1) opportunity identication; (2)technology identication and project design; (3) nancialanalysis; (4) purchasing and procurement; (5) nancing;(6) installation; and (7) startup and training.

Most industrial and utility technical-assistance pro-grams have focused on only one or two of these steps. It isimportant that resources be available for all steps toachieve high implementation rates. Final project phases,particularly startup and employee training, can be themost critical to maximizing long-term savings potential(Elliott et al , 1996). As an example, New Yorks FlexTechprogram has achieved impressive results by facilitatingthe entire implementation process at a modest cost (El-liott and Weidenbaum, 1994).

Recycling

Americans have embraced recycling as a means of be-coming involved with improving their environment. Re-cycling by homeowners, offices, and companies is widelyaccepted (Hershkowitz, 1997). In addition, recycled con-tent has become a positive marketing issue for manyproducts. Many offices and businesses use some recycledpaper products and consumers seek out products likeeece jackets made from recycled soft drink bottles.

Using recycled feedstocks in the production of primarymaterials has energy and cost savings potential (Elliott,1994a). Primary manufacturing industries transformfeedstocks into intermediate materials from which end-products and their packaging are produced. These indus-tries use chemical and physical processes to transformfeedstocks into more valuable materials, increasing thematerials embodied energy along the way. Once a prod-uct has served its useful life, the energy investment inconverting the material still remains. If the product isdiscarded, the value of that energy is lost. Some of thatenergy value can be recovered if the material is recycled.

Unfortunately, many recycling efforts have focused on

diverting recyclable material from the waste stream with-out understanding how to best use these products. Sincea signicant portion of energy used in initial materialtransformation goes into feedstock separation and puri-cation, for a recycled feedstock to maintain its value itmust be kept clean (ie segregated by type and kept cleanof foreign materials). The recycling system needs to pro-

duce quality feedstocks to increase manufacturers use of recyclables. In fact, lack of availability of quality recycledfeedstocks is one of the most important barriers to in-creased recycled content.

Future opportunities for improved energyefficiency

Few inside or outside industry question that potentialsignicant, cost-effective energy efficiency improvementsexist. Estimating the magnitude of potential energy sav-ings accurately is difficult because so much industrialenergy is used by manufacturing processes. Since tech-nologies and processes vary among industries, and evenamong plants, the energy efficiency potential will beunique to each plant. Companies such as Dow havefound that the more they look for energy efficiency op-portunities, the more they nd. These opportunities arecost-effective, often very low cost, and often have non-energy benets that far exceed energy savings (Elliott,1994b).

The largest energy-consuming industries haveachieved signicant, cost-effective energy savings, imple-menting many of the lowest cost opportunities. Theseindustries are typically large corporations with signi-cant technical and nancial resources. Several studieshave identied abundant, low- cost efficiency opportuni-

ties for smaller rms that are less energy intensive. In theUnited States, these smaller manufacturers (fewer than500 employees) account for almost 99% of the manufac-turing facilities, 42% of industrial energy use, 56% of manufacturing electricity, and 74% of distillate fuel oil(Hopkins and Jones, 1995). Through one-day as-sessments of small- to medium-sized manufacturing facil-ities conducted by engineering students, the US Depart-ment of Energys (DOEs) Industrial Assessment Centers(IAC) program (formerly the Energy Analysis and Diag-nostics Center program) has identied an average possi-bility of 10% energy savings. Since the program began in1976, 61% of the recommendations have been imple-mented. Resource limitations have focused assessmentson easily implemented, short-term payback measures,thus missing many savings that might be identied ina more detailed process assessment (DOE, 1996).

The rate at which industrial end use energy intensitycan be reduced is nite. However, carbon emissions arenot necessarily directly linked to energy intensity. Car-bon emissions can be reduced by reducing the carbonintensity of a plant and through changes in the plantsenergy balance and fuel mix. Combined production of

heat and power, often referred to as cogeneration, offersperhaps the greatest opportunity to reduce carbon inten-sity. Recent technology developments, especially in thearea of gas turbine technology, have reduced technicalbarriers to widespread implementation of small-scaleCHP. Emerging technologies, such as biomass gasica-tion, natural gas diesel, and fuel cell technologies, will



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further expand the potential. CHP has the potential togenerate enough electricity to meet almost all of theindustrial sectors demand. The following majorissues impede widespread implementation of this techno-logy:

E cost of environmental permitting, which prohibitivelyincreases the rst cost of smaller systems

E uncertain economic relationships with electricity sup-pliers and the transmission grid

E industrys use of CHP to satisfy only internal needs,rather than as a revenue generator

If these issues are not addressed, the opportunity forindustrial CHP will signicantly diminish. Following arepolicies to overcome these and other barriers previouslydiscussed.

Policy packages for an energy-efficient industryin the future

We analysed four sets of broad policies that would ad-dress market failures unique to industry and encouragemore sustainable business practices that could lead toa more protable industrial sector:

E Provide Incentives for Investment in New ProductionEquipment . Grant tax credits for investment in newproduction equipment to encourage replacement of older manufacturing plants and equipment.

E Expand Research , Development , and DemonstrationInvestment in , and Accelerated Adoption of Efficient echnologies . Fund research and support both pro-grams that facilitate implementation of improvedprocess efficiency, and education to create a pool of trained scientists, engineers, and technicians.

E Increase se of Recycled Feedstock . Eliminate favor-able tax treatment of virgin materials and changerecycling practices to increase the volume of clean

feedstocks.E Overcome Barriers to Combined Heat and Power Pro -duction . Expedite environmental permitting of CHPsystems, incorporate provisions into utility restruc-turing to allow sale of excess power, and provideprograms to educate end users on how to implementCHP.

Since each policy addresses a different issue, effects of these policies are additive. From the modeling perspect-ive, these policies move the sectoral conservation supplycurve to the right (ie increase how much efficiency is

justiable at a given energy price).These policies, however, do not address the barrier of low energy prices. Economy-wide carbon and energy taxstrategies would impact industrial energy consumptionby making more efficiency opportunities cost-effective.From the modeling perspective, energy price increasesmove us up the conservation supply curve.

Provide incentives for investment in new productionequipment

One effect of reducing the cost of capital is an increase inthe rate at which older manufacturing plants and equip-ment are replaced. Many of the most energy-intensivemanufacturing industries are also the most capital-inten-sive. Normal practice is for a new plant to be built withthe most modern and efficient technologies available.Since the cost of new facilities is very high, plants areoperated as long as they can be cost justied. As a plantages and becomes less cost-effective, maintenance andmodernization expenditures decrease, and productionshifts to more modern facilities until it becomes un-economic to operate the older plant, which is rebuilt withmodern equipment or replaced with a new plant (Stein-meyer, 1997). As a rule, the more modern the planttechnology, the more energy efficient, and the lower thelevel of environmental emissions.

A number of policy options are available to reduce thecost of capital and encourage modernization of manufac-turing plants. A tax credit could be offered for invest-ments in new production equipment. In the past, thefederal government and many states have offered taxcredits for energy efficiency improvements. These pastcredits have been problematic for industries in that it isoften difficult to segregate expenditures for energy effi-ciency from other process-related expenditures. How-

ever, industry already segregates manufacturing andnon-manufacturing expenditures so no additional ad-ministrative burden would be incurred by providing aninvestment tax credit for investment in new manufactur-ing equipment.

To reduce the cost of a new tax credit to the federal orstate governments treasury, a tax could be imposed onpurchased energy while a rms investment tax creditwould be capped at its energy tax liability. Besides mak-ing the tax and credit revenue neutral on an individualbasis, companies would be encouraged to make capitalinvestments so they could recover all the tax. Plantmodernization would also provide environmental bene-ts from reduced emissions and enhance competitivenessby improving productivity and reducing costs. It mighteven be argued that revenues from increased industrialprots that result from productivity and cost-contain-ment investments would pay for the credit.

A tax credit offers greater benets to larger companies,who may have greater access to low-cost capital. Manysmall- and medium-sized companies do not have accessto nancial resources that would allow them to take fulladvantage of the credits. For these capital-constrained

industries, loans, loan-guarantees, and interest rate subsi-dization programs may be valuable. The FlexTech pro-gram provided such incentives and proved very success-ful and cost-effective for this audience (Elliott andWeidenbaum, 1994).

Increasing the turnover in manufacturing capacity iscomplementary with the other sectorial policies and



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would accelerate investments. While the equipment turn-over rate varies dramatically among different industries,this policy set would increase the turnover rate acrossindustries. Thus, process efficiency opportunities identi-ed and new technologies developed would be morequickly implemented in plants. Manufacturing changesnecessary to increase recycled content would also bemade earlier. An economy-wide carbon tax would comp-lement this policy set by increasing the number of cost-effective efficiency options.

Expand research , development , and demonstration invest -ment in and accelerated adoption of efficient technologies

A broad range of activities at all stages of technologydevelopment and implementation is essential for achiev-ing both near- and long-term technology results. Thispolicy set consists of complementary initiatives that pro-vide a coordinated national industrial strategy to en-courage research, development, and demonstration(RD&D) and facilitate adoption of efficient technologiesand practices by industry. This policy set complementsthe other sector-specic policies by identifying energyefficiency opportunities while increasing the range of opportunities by demonstrating new applications of existing technologies and creating new technologies thatimprove efficiency.

Research is a continuum of activities, all phases of which must take place if innovation is to become mani-fest in the marketplace. Results of research are, by deni-tion, unsure since they involve discovery. While an areamay initially appear promising, as the technology evolvesand markets change, the potential may not materialize.Conversely, technologies developed for one purpose mayemerge as important in unforeseen applications.

It is difficult to justify research on a project-by-projectbasis; one must look at a portfolio of activities andcompare the total investment to the benets from thoseinnovations that succeed in the marketplace. A recentstudy of federal energy R&D expenditures draws rela-tionships between R&D expenditures, and energy sav-ings and shifts to renewable energy sources (Breger,1997). The study found that, after 20 years, 1.4 EJ of energy could be saved for each $100 million [US] inefficiency R&D expenditure. It also found that each $100million [US] in renewables R&D expenditure resulted in0.4 EJ of energy consumption being switched from con-ventional to renewable energy sources.

Since much government research is done cooperativelywith industry, declines in corporate research reduce

the effectiveness of government-funded research as well.In addition, governments R&D focus has become morenear-term due to tight budgets and a need to justify R&Dexpenditures with results. If the United States is to movetoward sustainability, it must reverse the trend of declin-ing R&D spending and revitalize long-term research.Government should increase its R&D expenditures in

both fundamental science and existing technology ap-plications. While the national laboratory system offersphysical resources, together with trained scientists andengineers, the number of commercially valuable innova-tions can be increased by involving engineers and scien-tists from industry. They bring perspectives that can leadto breakthroughs that have potential commercial ap-plications.

Industry should also be encouraged to increaseRD&D spending by granting favorable tax treatment forthese expenditures and facilitating cooperative researchbetween industry and government. Not only will thisadvance technology, but information in the form of tech-nology development represents an important commoditythat can be sold by the commercializing company, thusunderwriting future development costs (Steinmeyer,1997).

Commercializing innovation is important to increas-ing energy efficiency potential. This process is fraughtwith risk, something many companies are unwilling tobear. Government can share the risk at modest cost byproviding a structure in which companies can collabor-ate.

Accelerated implementation of improved technologiesFor a new technology to be implemented, potential usersmust be made aware of the technology and how to applyit. This learning process involves demonstrations, train-

ing and technical assistance.While many large companies continually search fornew technologies, many current technologies are notbeing implemented. This problem is most pronounced insmall- and medium-sized companies. These companiesfrequently do not have the time nor resources to identifyand implement energy efficiency opportunities. Govern-ment and utility programs have provided assistance tosome of these companies in the past with great success, asdiscussed above, but these programs have just begun tomeet the needs of the thousands of small rms. Expan-sion of DOEs IAC program with additional coopera-tive funding from state and local governments, founda-tions, and utilities could extend its reach. The lack of specialized technical expertise and follow-up has beenidentied as a limitation of this program. Governments,utilities and the private sector can all contribute to meet-ing these additional needs by creating technology centers,providing technical assistance, and assisting in imple-mentation (as seen in the FlexTech program).

Enhanced science educationR&D and accelerated implementation both need trained

scientists, engineers and technicians. US industries areimporting many of their experts from foreign countries.Engineers and technicians within manufacturing plantsare in an ideal position to implement technologies and beinnovative. When Dow encouraged its employees toidentify energy efficiency opportunities, they found cost-effective opportunities on a continuing basis (Nelson,



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1993). Creating trained engineers with practical experi-ence is one of the strengths of DOEs IAC program. It isimportant that the US public supports our educationalsystem in producing trained researchers and engineersneeded to make future technical discoveries and imple-ment them in our manufacturing plants.

Increase use of recycled feedstocks

Three groups of policies would help increase recycledcontent: increasing the availability of quality recycledfeedstocks; further encouraging market acceptance of products with high recycled content; and encouraging theuse of recycled feedstocks. These policies should focusupon plastics and resins, container glass, paper andaluminum, and products manufactured from these

materials.

Quality recycled feedstocksInsuring that high-quality recycled feedstocks are avail-able to manufacturers is important. The rst step is tokeep material clean by encouraging states and local gov-ernments, the waste industry, and consumers to use thebest practices to maintain segregation of different mater-ial streams. Federal bottle bill legislation of minimumrequirements for container and packaging reuse wouldprove very effective. Those states with bottle bills ac-count for the majority of recycled aluminum and glassfeedstocks. Government could also fund research anddemonstration of new collection and separation tech-nologies, and innovative and non-traditional uses forwaste materials, such as the recent introduction of lum-ber made from mixed recycled plastics.

Manufacturers of durable goods (eg vehicles, buildings,and appliances) should be encouraged to design for re-cycling. Such recycling friendly products can be easilydisassembled into reusable components or productsmanufactured from readily recyclable materials (eg theswitch from multi-layer, squeezable, non-recyclable cat-

sup bottles; to clear, single-layer, readily recyclable plas-tic bottles).

The government should initiate a review of currentpolicies to insure that recycled feedstocks are not disad-vantaged. Favorable tax treatments for using virgin ma-terials over recycled feedstocks should be eliminated.Regulations that pose a barrier to recycling and the useof products with a high-recycled-material content shouldbe considered for revision or elimination.

Market acceptance

Products produced from recycled feedstocks may havedifferent characteristics than those produced from virginmaterials. For example, recycled paper may not have thesame texture or be as white as virgin paper but can be justas functional. The public should be encouraged to acceptthese products. Purchasers should be encouraged toeliminate specications that exclude high recycled con-

tent products and give preference to goods with a highrecycled content. Federal and state governments havealready provided market leadership by changing theirprocurement but further steps would increase demandfor these products (Lewis and Weltman, 1992). Withproper encouragement (eg voluntary programs), the mar-ketplace can create further demand for products withhigh recycled content.

se of recycled feedstocksVoluntary targets, based on technical and economic po-tential, should be set for recycled content of key materialsidentied in this section and for products using thesematerials. Targets should also be set on availability of recycled feedstocks. Taxes should be considered for vir-gin materials and credits for the use of recycled feed-

stocks and investment in process equipment that allowsthe use of recycled feedstocks.Policies that encourage use of recycled feedstocks are

complementary and additive with the other sectoral pol-icy sets. By reducing the need to transform materials, wereduce the base energy required to produce the products.Investments in more modern and efficient productionfacilities, and development and implementation of moreefficient processes, would reduce energy requirementsfurther.

Overcome barriers to combined heat and powerproductions

To take advantage of the opportunities to reduce carbonintensity that combined production of heat and poweroffers, policies could be put in place that attempt toovercome the barriers to wide-spread implementation of this technology.

Though CHP equipment cost has declined, environ-mental permitting costs continue to drive up total projectcost. These costs do not vary signicantly with the sys-tems capacity, so permitting costs as a percent of totalproject costs increase as the unit size decreases, becomingthe dominant cost component in smaller systems. Manyof these new units are now being sold as integratedsystems in the ve to 50-megawatt range, with the sizeanticipated to drop to the 500 kilowatts range in thefuture (Carroll, 1996). It would be appropriate to con-sider rethinking the permitting process for these packagesystems and moving toward certifying unit emissions,much as we do now with automobiles and appliances.This approach would expedite the permitting process,

signicantly reducing the permitting cost. Certicationshould also take into account the grid generation capa-city that this unit displaces.

Impending utility restructuring may remove marketbarriers for on-site generation of electricity, creating newopportunities for CHP. Emerging market forces such asnew players and a redened role of utilities, could include



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the following:

E independent power producers providing on-site en-ergy services

E utility energy service businesses siting generation atcustomers sites

E industries entering the electricity generation businessHow deregulation evolves will dene how these marketplayers evolve. Restructuring should not be allowed toinhibit implementation of CHP.

If CHPs focus is extended to maximizing generation of electricity for sale, CHP at industrial sites has the poten-tial to become a major source of electricity generation.One particularly exciting opportunity is the potential toreplace black liquor boilers in the pulp and paper indus-try with gasiers powering turbine-based CHP systems.This change in technology could move the industry frombeing a net consumer of electricity to a major electricitygenerator, with a national potential of 55 terawatt-hoursof annual capacity (Nilsson et al , 1996). This future,however, requires fundamental rethinking of traditionalcogeneration. Rather than matching plant electrical gen-eration to plant thermal loads, the focus is placed upongeneration of electricity for sale. Opportunities for nd-ing economic uses for the waste heat will increase in thisscenario. Some industries may partner with a generationcompany, while others such as paper companies mayview this as a market expansion opportunity.

Within the industrial sector, the impact of this policyset depends upon the end-use energy within the sector. Asa result, this policy must be applied after all other sectorpolicies. This policy has a profound interaction with theutility sector, since a signicant portion of industrialsector demand would be internalized within the indus-trial sector. This results in modest increases in naturalgas consumption within the industrial sector but largereductions in fuel use for generation in the utility sector.

Assumptions and analysis

The National Energy Modeling System (NEMS) forecastwas used for reasons of consistency despite the fact thatthe model generates abrupt changes in energy consump-tion and some anomalous fuel and industry-specic re-sults. The Industrial Demand Module (IDM) of NEMS isnot well suited to modeling changes in energy policiessince it does not offer investment input parameters (egreturn rate) and the parameters that could be varied,retirement rate and the technology potential curves, gen-erated unstable results. Another model, Long-Term In-

dustrial Energy Forecasting Model (LIEF) (Ross et al,1993), was used to estimate the impact of all policiesexcept recycling, which involved a separate off-line analy-sis. The NEMS baseline was modied to reect eachsector-specic policy.

LIEF was developed from an analysis of 1958 1985sectoral energy intensities and prices. This analysis was

used to develop conservation supply curves for 18 indus-trial sectors. These sectors reect industry groupings thathave similar energy use characteristics based on histori-cal energy use. Most conservation supply curves havebeen developed by combining various energy efficiencymeasures that are typically implemented for a particularmarket. Such an approach is impractical for the indus-trial sector because of the complexity and site-specicnature of many measures. Since the efficiency of anindustrial system is determined by system design, analy-sis of component efficiencies will produce misleadingresults.

LIEF treats electricity and all other fuel use separately.Since many industries have some capability to switchamong non-electric fuels, a fuel-specic analysis is diffi-cult. In addition, efficiency is related to changes in theprocess, not the specic fuel use. LIEF uses electricityand industry-weighted fuel prices to estimate economi-cally acceptable energy efficiency potential. In addition,the approach used to develop LIEF also reects thebehavior that characterizes these industry groupings(Ross et al , 1993).

The investment incentives policy set was modeled byreducing the effective capital cost by 10% to reecta capital investment tax credit and a real discount rate of 15%, which is common for efficiency investments amongmore aggressive companies. LIEF estimates the changein economically justied, energy efficiency potential. It is

assumed that 75% of this potential would be realizedduring the analysis period ending in 2010 and that imple-mentation will occur evenly over time. Since effects of thispolicy would not be immediately apparent because of thedelay between making an investment decision and ac-tually implementing it, rst investments are not assumedto occur until 1999.

RD&D policies that would accelerate investment inefficient technologies were analysed as two components:near- and mid-term development and deployment, andlong-term R&D. Effects of development and deploymentactivities rely upon existing technologies and will haveimmediate impact. Results of long-term R&D will notmanifest themselves for 15 20 years. Policies supportingnear- and mid-term activities were modeled by reducingthe effective discount used in LIEF from 15 to 5%. Thisanalysis assumes 80% of this potential is realized be-tween 1998 2010, with the potential implemented inequal annual amounts beginning in 1997.

To analyse long-term activities, one must look ata portfolio of activities and compare the total investmentto the benets from innovations that succeed in themarketplace. A recent study found the following energy

savings/fuel shifts for each $100 million [US] in federalR&D expenditures (Table 1) (Breger, 1997). To analyseimpacts of long-term R&D, both energy efficiency andrenewable R&D are assumed to be funded at the $100million [US] annual level through at least 2010. Impactsbegin to manifest themselves in 2013, increasing at thelevels indicated by Breger (1997).



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Table 1 Energy savings and shifts to renewables from $1 million infederal R&D expenditure

Energy savings /fuel shift (EJ per year)20 years 30 years 40 years

Energy efficiency 0.6 1.4 2.0Renewable energy 0.2 0.4 0.6

Source: Breger, 1997.

Figure 4 Projected end-use US industrial energy consump-tion for different policy options

Analysis of policies to increase recycled feedstock use isbased on a study that estimated current recycled contentlevels for the primary materials considered and projectedachievable targets for 2010 (Elliott, 1994a). Based on thisstudy, an annual rate of increase in recycled content, witha corresponding decrease in energy intensity, was chosenfor each material that would achieve these targets. For allmaterials except paper, reduction in intensity was as-sumed to be distributed across fuels proportionally toeach fuels consumption. The change in energy consump-tion for paper was adjusted to reect a shift in fuel mixresulting from the elimination of virgin pulp productionswaste stream. This waste accounts for a signicant por-tion of the consumed fuel in this industry. Elimination of this waste stream necessitates substitution of purchasedfuels, assumed to be natural gas and coal.

Regarding policies to overcome barriers to combinedheat and power, the analysis was based upon an assess-

ment of the current self-generation trend in industrialself-generation in which approximately 12% of demandelectricity is generated and a net additional 3.4% of sector electricity demand is sold. We assumed for reasonsof modeling simplicity that no signicant additional ca-pacity will become operational before 2010. After that,both fractions of self-generation and net sales are anticip-ated to increase rapidly. By 2020, an additional 395 TWhof net generation is anticipated, increasing to 643 TWh in2030. Fuel utilization in the CHP system is assumed to be80%, producing equal amounts of steam and electricity.The steam is assumed to displace existing steam fromfossil fuels.

Results

he present path

While the energy intensity of the industrial sector hasdeclined for many years and is projected to continue todecline (Fig. 1), industrial energy consumption will con-tinue to increase with growing economic activity (Fig. 4).

This article focused upon end-use energy consumptiononly. Losses associated with electricity and gas distribu-tion were not accounted for in this analysis, and fuelsused as feedstocks in making products (eg natural gasused to produce plastic resins) are excluded since they donot directly result in emissions. The Industrial DemandModule of NEMS was used to project baseline energy

consumption. Industrial energy consumption is projectedto rise from 25 EJ in 1992 to over 31 EJ in 2010, and toalmost 38 EJ in 2030 (Fig. 4). Resulting carbon emissionsincrease over 1990 levels of 29.3 million metric tons of carbon (MTC) per year by 20% by 2010 and over 40%by 2030.

he innovation path

Implementation of the four policy sets produces abouta 12% energy savings by 2010. No impact is yet seenfrom the long-term R&D investments, nor from the ex-pansion of CHP within the industrial sector. Beyond2010, when results of pre-2010 projects are combinedwith benets from long-term R&D and CHP, resultsbecome impressive.

2010 ResultsEnergy consumption and carbon emissions from the fourpolicy sets are summarized in Table 2. Results from allthe policies except CHP are plotted in Fig. 1.

The investment incentives policy set produces approx-imately 4% reduction in total end-use energy consump-tion in 2010. Assuming past trends in innovation persist,new opportunities should continue to emerge, allowingthis increased efficiency trend to persist as long as theincentive remains for increased investment. This policywill require a levelized, annual investment of US $4.6 bil-lion to implement.

Near- and mid-term RD&D activities and acceleratedadoption of efficient technologies are estimated to yieldapproximately 7% reduction in end-use industrial energy

consumption from the NEMS baseline in 2010. Since it isassumed these changes in equipment and practices will,on average, persist for 15 years, savings build from about2% in 2000 and benets of these policies continue tocreate new opportunities past 2010. To realize these sav-ings, an annual investment of US $11.8 billion to imple-ment is required.



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Table 2 Summary of industrial sector results

1990 2000 2010 2020 2030

Base case energy consumption (EJ) 26.14 28.48 31.79 34.45 37.66End-use energy savings from base caseIncentives for investment in newproduction equipment

EJ 0.12 1.03 0.85 0.98% Savings 0.4 3.3 2.5 2.6

Increased RD&D investment in andaccelerated adoption of efficienttechnologies

EJ 0.53 2.28 4.20 7.00% Savings 1.9 7.2 12.2 18.6

Increased use of recycled feedstocks EJ 0.04 0.20 0.36 0.51% Savings 0.15 0.63 1.04 1.34

Overcoming barriers to combinedheat and power production

EJ 0 0 1.43 2.32% Savings 0 0 4.2 6.2

Savings from all policies EJ 0.90 3.95 7.25 13.40% Savings 3.2 12.4 21.1 35.6

All policies case energy consumption (EJ) 27.58 27.84 27.19 24.27Base case carbon emissions (MTC) 279.3 310.7 335.5 361.2 392.5Carbon saving MTC 17.9 40.6 73.9 129.9

% Savings 5.8 12.1 20.5 33.1All sector policies carbon emissions (MTC) 292.8 294.9 287.3 262.6

Source: EIA, 1994a.

Effects of the recycling policy set are restricted to thefour sub-sectors considered: steel, aluminum, containerglass, and plastic resins. Impact in these sub-sectors will

result in an average 0.7% decrease in total industrialconsumption in 2010. Though this may appear a modestimpact, it does represent a reduction of 0.2 EJ in indus-trial consumption. It is difficult to estimate the invest-ment required to implement these policies, since manyare changes in behaviors, rather than major capital in-vestment. If similar costing strategies are used for thispolicy as for the other policies groups, the levelizedannual cost would be expected to be in the US $56 millionrange.

Beyond 2010It is difficult to project what will happen to industrialenergy use beyond 2010. If energy prices continue todecline, new efficiency measures will become increasinglydifficult to justify, and industrial energy consumption willcontinue to grow (Fig. 4). However, the three policiesthat have resulted in the 2010 reductions will continue toyield increasing benets in the years beyond. In addition,long-term R&D in energy efficiency, renewable technolo-gies, and CHP will begin to contribute energy savings asseen in Fig. 4, and produce sector carbon reductions. If all these savings are realized, sector energy consumption

will decline, even with sectoral economic growth, to the26 EJ level (last seen in 1990) by 2020, and 24 EJ by 2030.While the annual increase of $200 million begins in

1998, benets from long-term R&D all occur post-2010,with efficiency reductions of about 1 EJ in 2020 and3.7 EJ in 2030. A shift of 0.25 EJ in 2020 and 0.72 EJ in2030 from conventional to renewable energy sources is

estimated to take place for combined feedstocks andend-use energy consumption. Increased renewables pro-duces no change in end-use energy consumption but

results in an additional 8.1 MTC reduction in 2030 car-bon emissions.It is assumed for reasons of analytical simplicity that

no additional industrial CHP capacity will become op-erational before 2010. This assumption is reasonablesince the uncertainty associated with utility restructuringand the lead time associated with permitting will likelydelay implementation. After that, both fraction of self-generation and volume net sales are anticipated to in-crease rapidly. By 2020, an additional 400 TWh of netgeneration is anticipated, increasing to over 640 TWh in2030. Fuel utilization in the CHP system is assumed to be80%, producing equal amounts of steam and electricity.The steam is assumed to displace existing steam fromfossil fuels. The result of this scenario is that the netpurchased industrial electricity is almost zero in 2030, if all other policy options are implemented. Carbon im-pacts of this policy in the industrial sector are verymodest since additional sectoral electricity generation in2030 results in an additional 0.22 EJ of gas consumptionby the sector. The real benets are realized in the utilitysector where electricity generation, with its intendantemissions, is reduced by about 400 TWh in 2030.

Conclusions

The industrial sector is dramatically different from othersectors of the US Economy. In contrast to other end-usesectors, the industrial sector has experienced declining



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end-use energy intensities, a decline projected to continuein spite of declining real energy prices. This sector is alsodiverse, with many of the opportunities for improvedefficiency being unique to an individual facility.

Opportunities for efficiency in the industrial sector aregreat, if industry is properly encouraged to seek andimplement them. Some efficiency can be realized throughimproved operating practices but the greatest saving isavailable from the innovation that has fueled the indus-trys history of improving energy intensity. Creating a fer-tile climate for innovation requires a commitment toresearch and education, with an understanding that be-nets are long term.

It takes time for energy efficiency improvements to berealized in the industrial sector, with normal plant invest-ment cycles usually exceeding ten years. As a result,near-term savings in this sector are relatively modest, asseen with this articles pre-2010 results. With patience,however, truly impressive savings can be realized.

It takes investment in new equipment and manufactur-ing processes for improved efficiency to be realized. In-dustry can be encouraged to make these investments byproviding favorable tax treatment for efficiency improve-ments. Fortunately, returns from these investments farexceed energy savings. Most energy efficiency inves-tments are accompanied by other benets, such as im-proved productivity, reduced waste and pollution, andimproved product quality. Some innovations may lead to

new processes and products that change the structure of how energy is used in our economy. Energy and eco-nomic potential from innovation are bounded only byimagination.

The industrial sector is poised to benet from utilitysector restructuring. Developments in CHP technologyhave created the possibility for the industrial sector tobecome a major electricity generator in the future. Costand efficiency opportunities from this redenition of elec-tricity generation benet not only the industrial sector,but the US as a whole. Efficiency provides a bright pathfor the industrial sector, for the future prosperity of theUS economy, and for an environmentally sustainablefuture for our planet.

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