Lighting the Way: Toward a Sustainable Energy Future

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  • 2.4 Industrial energy efficiency

    The industrial sector accounts for 37 percent of global primary energy consumption; hence, it represents a major area of opportunity for efficiency improvements. This sector is extremely diverse and includes a wide range of activities from extracting natural resources and converting them into raw materials, to manufacturing finished products. The industrial sector can be broadly defined as consisting of energy-intensive industries (e.g., iron and steel, chemicals, petroleum refining, cement, aluminum, pulp and paper) and light industries (e.g., food processing, textiles, wood products, printing and publishing, metal processing). Energy-intensive industries account for more than half of the sector’s energy consumption in most countries.

    Trends in industrial-sector energy consumption
    Primary energy consumption in the industrial sector grew from 89 exajoules in 1971 to 142 exajoules in 2002 at an average annual growth rate of 1.5 percent (Price and others, 2006). Primary energy consumption in developing countries, which accounted for 43 percent of worldwide industrial-sector primary energy use in 2002, grew at an average rate of 4.5 percent per year over this time period. Industrialized countries experienced much slower average growth (0.6 percent per year), while primary energy consumption by the industrial sector in the countries that make up the former Soviet Union and Eastern and Central Europe actually declined at an average rate of 0.4 percent per year.

    Industrial energy consumption in a specific country or region is driven by the level of commodity production, the types of commodities produced, and the energy efficiency of individual production facilities. Historically, the energy efficiency of this sector has been closely tied to overall industrial efficiency (Japan being perhaps the prime example of a country that achieved high levels of industrial efficiency in part by using energy very efficiently). In general, production of energy-intensive commodities like iron, steel, and cement is declining or stable in most industrialized countries and is on the rise in most developing countries where infrastructure and housing is being added at a rapid rate. For example, between 1995 and 2005, steel production declined at an average annual rate of 0.3 percent in the United States, while growing at an annual rate of 1.0 percent in Japan and 14 percent in China (USGS, 2006).

    The amount of energy consumed to produce one unit of a commodity is determined by the types of production processes involved, the vintage of the equipment used, and the efficiency of various conversion processes within the production chain, which in turn depends on a variety of factors, including operating conditions. Industrial energy intensity varies between different types of commodities, individual facilities, and different countries depending upon these factors.

    Steel, for example, can be produced using either iron ore or scrap steel. Best practice energy intensity for producing hot rolled steel from iron ore is 19.5 gigajoules per ton, while the production of the same product using scrap steel only requires 4.3 gigajoules per ton (Worrell and others, 2007). The energy intensity of the Chinese steel industry declined over the decade from 1990 to 2000, despite an increased share of primary steel production, indicating that production efficiencies improved as small, old, inefficient facilities were closed or upgraded and newer facilities were constructed. In the future, Chinese steel production will likely continue to become more efficient as Chinese producers adopt advanced casting technologies, improved furnaces, pulverized coal injection, and increased recovery of waste heat.

    In the Indian cement industry, a shift away from inefficient wet kilns toward more efficient semi-dry and dry kilns, together with the adoption of less energy-intensive equipment and practices, has produced significant efficiency gains (Sathaye and others, 2005). Similarly, the energy intensity of ammonia production in current, state-of-the-art plants has declined by more than 50 percent. Developing countries now produce almost 60 percent of the world’s nitrogen fertilizer and many of the most recently constructed fertilizer plants in these countries are highly energy efficient.

    Energy-efficiency potential in the industrial sector
    Industrial producers, especially those involved in energy-intensive activities, face stronger incentives to improve efficiency and reduce energy consumption than most end-users in the buildings or transportation sectors. Important drivers include the competitive pressure to minimize overall production costs, the desire to be less vulnerable to high and volatile energy prices, the need to respond to environmental regulatory requirements, and growing consumer demand for more environmentally friendly products.

    Opportunities to improve industrial energy efficiency are found throughout this diverse sector (deBeer and others, 2001). At the facility level, more efficient motor and pumping systems can typically reduce energy consumption by 15–20 percent, often with simple payback periods of around two years and internal rates of return around 45 percent. It has been estimated that use of high-efficiency motor-driven systems, combined with improvements to existing systems, could reduce electricity use by motor-driven systems in the European Union by 30 percent (De Keulenaer, 2004), while the optimization of compressed air systems can result in improvements of 20–50 percent (McKane and Medaris, 2003). Assessments of steel, cement, and paper manufacturing in the United States have found cost-effective savings of 16–18 percent (Worrell and others, 2001); even greater savings can often be realized in developing countries where old, inefficient technologies are more prevalent (WEC, 2004). A separate assessment of the technical potential for energy-efficiency improvements in the steel industry found that energy savings of 24 percent were achievable by 2010 using advanced but already available technologies such as smelt reduction and near net shape casting (de Beer and others, 2000).

    In addition to the potential that exists based on currently available improvements, new and emerging technologies for the industrial sector are constantly being developed, demonstrated, and adopted. Examples of emerging technologies that could yield further efficiency improvements include direct reduced iron and near net shape casting of steel, separation membranes, black liquor gasification, and advanced cogeneration. A recent evaluation of over 50 such emerging technologies—applicable to industries as diverse as petroleum refining; food processing; mining; glass-making; and the production of chemicals, aluminum ceramics, steel, and paper—found that over half of the technologies promised high energy savings, many with simple payback times of three years or less (Martin and others, 2000). Another analysis of the long-term efficiency potential of emerging technologies found potential savings of as much as 35 percent for steelmaking and 75–90 percent for papermaking over a longer time horizon (de Beer, 1998; and de Beer and others, 1998).

    In an encouraging sign of the potential for further efficiency gains in the industrial sector, some companies that have effectively implemented technology improvements and reduced their energy costs are creating new lines of business in which they partner with other energy-intensive companies to disseminate this expertise.

    Policies to promote industrial-sector energy efficiency
    Among the barriers to improved efficiency, those of particular importance in the industrial sector are investment and profitability barriers, information and transaction costs, lack of skilled personnel, and slow capital stock turnover. The tendency of many companies to believe they are already operating as efficiently as possible may constitute a further barrier: a survey of 300 firms in the Netherlands, for example, found that most viewed themselves as energy efficient even when profitable improvements are available (Velthuijsen, 1995). Uncertainties related to energy prices or capital availability are another common impediment—they often result in the application of stringent criteria and high hurdle rates for energy efficiency investments. Capital rationing is often used within firms as an allocation means for investments, especially for small investments such as many energy efficiency retrofits. These difficulties are compounded by the relatively slow turnover rate of capital stock in the industrial sector and by a strong aversion to perceived risks associated with new technologies, especially where these risks might affect reliability and product quality.

    Many policies and programs have been developed and implemented with the aim of improving industrial energy efficiency (Galitsky and others, 2004). Almost all industrialized countries seek to address informational barriers through a combination of individual-plant audit or assessment reports, benchmarking, case studies, factsheets, reports and guidebooks, and energy-related tools and software. The U.S. Department of Energy provides confidential assessment reports through its Industrial Assessment Centers for smaller industrial facilities and has just initiated an Energy Savings Assessment Program that provides free assessments for 200 of the country’s most energy-intensive manufacturing facilities (USDOE, 2006).

    Benchmarking provides a means to compare energy use within one company or plant to that of other similar facilities producing similar products. This approach can be used to compare plants, processes, or systems; it can also be applied to a class of equipment or appliances, as is done in Japan’s Top Runner Program (Box 2.1). The Netherlands has established negotiated ‘benchmarking covenants’ under which participating companies agree to reach performance goals that would put them within the top 10 percent of most efficient plants in the world or make them comparable to one of the three most efficient producing regions of the world (where regions are defined as geographic areas with a production capacity similar to the Netherlands). In return, participating companies are exempt from further government regulations with respect to energy consumption or carbon dioxide emissions. In addition, the Dutch government requires companies that have not yet achieved the rank of top 10 percent most efficient (or top 3 regionally) by 2006 to implement all economically feasible energy conservation measures by 2012, defined as those measures that generate enough savings to cover the costs of borrowed capital (Ministry of Economic Affairs, 1999).

    Target-setting, where governments, industrial sectors, or individual companies establish overarching energy-efficiency or emissions-reduction goals, can provide a valuable framework for reporting energy consumption and undertaking efficiency improvements. The Chinese government, for example, recently issued a policy aimed at reducing that country’s energy intensity (economy-wide energy consumption per unit of GDP) by 20 percent over the next five years. The policy includes energy-savings quotas for local governments. At the company level, governments can offer financial incentives, supporting information, rewards, publicity, and relief from other environmental or tax obligations in exchange for meeting certain targets. Where this approach has been used, progress toward negotiated targets is closely monitored and reported publicly, typically on an annual basis. In the United Kingdom, for example, energy-intensive industries have negotiated Climate Change Agreements with the government. The reward for meeting agreed-upon targets is an 80 percent discount on energy taxes. During the first target period for this program (2001–2002), total realized reductions were three times higher than the target (Pender, 2004); during the second target period, average reductions were more than double the target (DEFRA, 2005). Companies often did better than expected, in part because the targets they negotiated typically reflected a belief that they were already energy efficient (DEFRA, 2004). Finally, a number of large multi-national corporations have recently undertaken ambitious voluntary initiatives to improve energy efficiency and reduce greenhouse gas emissions.

    Many countries provide energy management assistance by supporting standardized energy management systems, promotional materials, industry experts, training programs, and some form of verification and validation assistance for companies interested in tracking and reporting energy use and/or greenhouse gas emissions. Incentives can also be provided via award and recognition programs. Efficiency standards can be effectively applied to certain types of standardized equipment that are widely used throughout the industrial sector.

    Fiscal policies—such as grants or subsidies for efficiency investments, subsidized audits, loans, and tax relief—are used in many countries to promote industrial-sector energy-efficiency investments. Worldwide, the most popular approach involves subsidized audit programs. Although public loans are less popular than outright energy efficiency subsidies, innovative funding mechanisms such as can be provided through energy services companies, guarantee funds, revolving funds, and venture capital funds are growing in popularity. Similarly, many countries offer tax relief in the form of accelerated depreciation, tax reductions, and tax exemptions to promote efficiency improvements. In general, financial incentive mechanisms should be designed to avoid subsidizing technologies that are already profitable. Continued subsidies may be justified in some cases, however, to achieve the economies of scale necessary to make sustainable technologies affordable in a developing country context.