Written by Mark Wolf, Erika Fitch Benson, Dain Lee, and Gabriela Koloffon Valdez
It seems that climate change is in the news almost daily and stakeholders on all sides are seeking greater accountability. But we haven’t begun to scratch the surface when it comes to energy. Annually, an estimated $180 billion in operational energy efficiency improvements is being left on the table by the U.S. industrial sector.
For example, when just one Nissan plant implemented measures to improve energy efficiency by 7.2%, the company saved $1.2 million in costs and 250 billion BTU annually. The investment required to reduce expenses was $331K, only 28% of the payback. Further, under a U.S. Department of Energy pilot program (in which Nissan took part), participating industrial companies achieved, on average:
- Annual savings of $87,000 to $984,000 using no-cost or low-cost operational measures
- Paybacks of 1 year or sooner in facilities with annual energy costs > $3 million
- Paybacks of less than 2 years in facilities with annual energy costs > $1.5 million
- 10% reduction in energy costs within 18 months
- 6% to 25% improvement in energy performance over three years across industries
Energy efficiency seems like a no-brainer for a sector of the economy that consumes about 30% of the total U.S. energy diet. European industrial manufacturers are ahead on the number of energy efficiency programs underway using the ISO 50001 standard. As of 2014, only one percent of ISO 50001 globally certified firms are in the U.S. Clearly, domestic industrial firms are not embracing the opportunity to operate more sustainably and efficiently in their energy usage.
A graduate student team from Columbia University was tasked by the Natural Resources Defense Council (NRDC) to research more effective ways of increasing the scope of energy efficiency improvements in the U.S. industrial sector. Our aim: to significantly capitalize on the
$180 billion opportunity and reduce associated greenhouse gas (GHG) emissions from a business-as-usual approach.
The findings are indeed actionable. Jim Ruggiero, Director Energy Procurement, National Gypsum Co., who was among those interviewed for the study said, “National Gypsum runs lean in terms of corporate staff and it was insightful to see how other companies are getting their wins with limited human resources . . . [this study] gave us an opportunity to refocus on these important money saving issues and as a direct result we reassigned some resources to focus on energy efficiency and measurement systems.
The research found, somewhat surprisingly, that the issue is less about finance and more about line-of-sight from the factory to the C-Suite. And it identified existing barriers to strategic energy management uptake within the industrial sector:
- Energy efficiency is not discussed using C-Suite language.
- Energy costs are seen as fixed costs, not investments nor a manageable expense.
- Energy efficiency is treated differently around the world. The U.S. firms that adopt ISO 50001 typically do so because of European mandates and incentives.
- The complexity of the current energy efficiency and energy management environment confuses and clutters the landscape and slows engagement.
- There are different requirements for certification across energy efficiency programs.
- Energy usage and efficiency management systems are not standardized.
A CONTINUUM OF AWARENESS
It is clear from our research that most of the engagement around energy efficiency is at the plant, not C-Suite, level. We identified a continuum of U.S. industrial awareness and engagement with energy usage and efficiency, including very different situations (ranging from the highest to the lowest). Highlights include:
- A company that has used energy management/measurement for a while and realized that their high level metrics did not give them what they needed to find the next 25% usage reduction to which the CEO publicly committed.
- Firms that do not have the manpower to engage with federal programs, or the expense of a dedicated employee(s) is too high for them to absorb.
- Local utility or government entities have worked with the firm aggressively to help make a new factory much more energy efficient, through rebates, incentives, tax breaks, etc. Energy efficiency is not seen much as a system, but as an ever expanding list of projects.
- Companies that have changed light bulbs and initiated some other improvements in HVAC/motors/compressors in past years, but unless they are able to provide a clear payback period of less than a year, they need to get incentives from utility/government to offset extra costs.
- And finally, companies who are always looking for opportunities to reduce costs because it helps them be more profitable survive competition and respond to changing customer demands. However, they believe energy is a fixed cost.
While energy efficiency advocates (non-profits, government and to a lesser extent, utilities) have talked about energy efficiency in terms of financial payback and the environmental impact, the C-Suite tends to think in terms of ROI and are often most concerned with risk management and operational excellence.
Thus, the current communication and message efforts of energy efficiency advocates are not aligned with C-Suite interests.
What needs to change?
Absent a cap-and-trade system, it is clear that U.S. experts must start using the language and planning cycles of business in their discussions. Risk management, operational excellence, and brand reputation are business imperatives for a CEO, while energy efficiency is not. At the CFO level, the focus is on income statement metrics and risks to operational performance, of which energy efficiency is perceived to be a relatively small part (even though energy cost is often a significant expense).
We believe that there is a great need to reframe the energy efficiency conversation. This can best be accomplished through proactive communications and strategies that embrace other members of the energy efficiency universe. By highlighting case histories in language that C-Suite and other decision makers see as relevant to their roles, we can accelerate progress on operational performance improvement and energy supply risk reduction.
Specifically, we think a more compelling and relevant message must be made to the C-Suite proving the merits of greater efficiency as a business imperative. It means moving beyond arguments centered on payback and environmental benefits and talking frankly about the business risks of rising future energy prices, future carbon regulations, or supply disruptions (due do natural disasters, environmental degradation, political upheaval, or some combination of the above).
Lastly, we believe that picking one existing program that aligns with business interests offers a way to get both non-profits and manufacturers more focused on taking action. The landscape is cluttered and there is confusion about all the different programs available. We identified Energy Star as the strongest and most well-known brand for energy efficiency solutions in the industrial sector. Introduced in 1992 by the US Environmental Protection Agency, Energy Star Buildings & Plants is the oldest and most well-known certification process out of the US strategic energy management programs. Energy Star Buildings & Plants certification in the industrial sector has been responsible for “saving more than $9 billion and preventing nearly 120 million metric tons of greenhouse gas (GHG) emissions from entering our atmosphere.” Therefore, we believe this is the one program that should be leveraged heavily as it offers the largest foundation upon which to build.
No matter your vantage point — whether the plant floor or corner office — the financial stakes are measurable ($180 billion annually, with only a third required as a one-time invesment) and the savings to the environment in terms of GHG emissions is equivalent to taking all U.S. vehicles off the road for four months.
The benefits are clear, it is time to change the conversation!
This article was first published in the Summer 2014 version of The Cornerstone Journal of Sustainable Finance and Banking. You can view the full version of the article including proper footnotes and citations here.