Working Group III: Mitigation

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5.4.3 Industry

Under perfect market conditions, all additional needs for energy services are provided by the lowest cost measures for increased energy supply or reduced energy demand. There is considerable evidence that energy efficiency investments that are lower in cost than the cost of marginal energy supply are not being made in real markets, suggesting that market barriers exist. A study of the industrial electric motor market in France has demonstrated the existence of barriers arising from decision-making practices, within an environment characterized by lack of information and split incentives (de Almeida, 1998). Barriers may exist at various points in the diffusion process of measures to reduce energy use and/or GHG emissions. The diffusion process depends on many factors such as capital cost, operating cost savings, information availability, network connections, imitation effects, and other factors (DeCanio and Laitner, 1997). All of these factors influence the probability of a firm adopting a given technology at a particular point in time. Barriers may take many forms in this process, and should be reviewed in the context of the industrial and business environment (e.g., multi-criteria optimization, firm size and structure, market structure, opportunity, and information routes). While barriers exist, it is important to note that ESTs and practices may also represent a strategic and competitive advantage through the development of new markets or new market opportunities, as shown by various authors (Porter and Van der Linde, 1995b; Reinhardt, 1999). This section focuses on barriers and opportunities in the industrial sector, and cites examples of successful approaches that have been used to remove barriers.

Decision-making Processes
In firms, decision-making processes are a function of its rules of procedure, business climate, corporate culture, managers’ personalities, and perception of the firm’s energy efficiency (DeCanio, 1993; OTA, 1993) and perceived risks of the investment, stressing the importance of firm structure, organization, and internal communication (Ramesohl, 1998). Energy awareness as a means to reduce production costs seems not to be a high priority in many firms, despite a number of excellent examples in industry worldwide. For example, Nelson (1994) reports on a (discontinued) successful programme at a major chemical company in the USA, which resulted in large energy savings with internal rates of return of over 100%. However, such programmes are only reported in a relatively small number of plants. A recent analysis of the Green Lights programme in the USA demonstrated the shortcomings in traditional decision-making processes, as investments in energy efficient lighting showed much higher paybacks than other investments. (DeCanio, 1998). These analyses demonstrate the need for a better understanding of the decision-making process, to be appropriately accounted in modelling and policy development.

Lack of Information
Cost-effective energy efficiency measures are often not undertaken as a result of lack of information on the part of the consumer, or a lack of confidence in the information, or high transaction costs for obtaining reliable information (Reddy, 1991; Sioshansi, 1991; OTA, 1993; Levine et al., 1995). Information collection and processing consumes time and resources, which is especially difficult for small firms (Gruber and Brand, 1991; Velthuijsen, 1995). In many developing countries public capacity for information dissemination is especially lacking (TERI, 1997). The information gap concerns not only consumers of end-use equipment but all aspects of the market (Reddy, 1991). Many producers of end-use equipment have little knowledge of ways to make their products energy efficient, nor access to the technology for producing the improved products. Equipment suppliers may also lack the information, or ways to assess, evaluate, or disseminate the information. End-use providers are often unacquainted with efficient technology. In addition, there is a focus on market and production expansion, which may be more effective than efficiency improvements, to generate profit maximization. In the New Independent States (NIS) firms are more directed towards increasing competitiveness, although there are examples where firms have used energy efficiency as a means to reduce production costs (Gritsevich, 2000). Also, a lack of adequate management tools, techniques, and procedures to account for the economic benefits of efficiency improvements is an information barrier (see below). Finally, other policies and regulations may limit access to energy-efficient technologies. For example, import regulations for specific projects and industries in China (Fisher-Vanden, 1998) and India (Schumacher and Sathaye, 1999) limited or imposed high levies on the import of industrial technologies for some periods.

Limited Capital Availability
Energy efficiency investments are made to compete with other investment priorities, and many firms have high hurdle rates for energy efficiency investments because of limited capital availability. Capital rationing is often used within firms as an allocation means for investments, leading to even higher hurdle rates, especially for small projects with rates of return from 35% to 60%, much higher than the cost of capital (~15%) (Ross, 1986). In many developing countries cost of capital for domestic enterprises is generally in the range of up to 30%-40%. Especially for SMEs capital availability may be a major hurdle in investing in energy efficiency improvement technologies because of limited access to banking and financing mechanisms. When energy prices do not reflect the real costs of energy (without subsidies or externalities) then consumers will necessarily underinvest in energy efficiency. Energy prices, and hence the profitability of an investment, are also subject to large fluctuations. The uncertainty about the energy price, especially in the short term, seems to be an important barrier (Velthuijsen, 1995). The uncertainties often lead to higher perceived risks, and therefore to more stringent investment criteria and a higher hurdle rate.

Lack of Skilled Personnel
A lack of skilled personnel, especially for SMEs, leads to difficulties installing new energy-efficient equipment compared to the simplicity of buying energy (Reddy, 1991; Velthuijsen, 1995). In many firms (especially with the current development toward “lean” firms) there is often a shortage of trained technical personnel, as most personnel are busy maintaining production (OTA, 1993). In most developing countries there is hardly any knowledge infrastructure available that is easily accessible for SMEs. Also, the position within the company hierarchy of energy or environmental managers may lead to less attention to energy efficiency, and reduced availability of human resources to evaluate and implement new measures.

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