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Unlocking the hidden value of energy efficiency

There has never been a greater imperative for industry to be more productive while using less energy. Yet energy efficiency measures are sometimes perceived as involving a greater risk than the rewards they can bring. Jukka Tolvanen, ABB’s energy efficiency expert, outlines exactly what is meant by ‘energy efficiency’ and explores the multiple benefits it offers, including the capability for it to act as a ‘first fuel’.

Energy efficiency has been the subject of discussion for a long time now. Its importance was highlighted at COP 22 in Marrakesh, when the World Energy Council published ‘Energy Efficiency: A straight path towards energy sustainability’. This report highlighted that there is still much progress to be made for energy efficiency in helping to reduce global energy emissions as agreed at COP21 in 2015. Energy efficiency issues now concern almost everyone from governments to industries and consumers in between. In particular, growing economies don’t often have the resources to spare to develop energy efficient solutions.

The truth is, seen from a purely economic perspective that for industries and companies implementation of energy efficiency measures is still perceived as an increased risk. This can be due to the need to change the processes or to replace process equipment. The International Energy Agency (IEA) has now introduced an approach that focuses on the multiple benefits of energy efficiency to offer a more varied perspective on energy efficiency that goes beyond traditional economic and financial considerations. There is a growing amount of evidence showing that energy efficiency can deliver significant value through a wide range of economic and social effects beyond the traditional perspective of energy demand reduction.

The five key benefit areas that IEA promotes in its document “Capturing the Multiple Benefits of Energy Efficiency” are macroeconomic development; public budgets; health and well-being; industrial productivity; and energy delivery.

A multiple benefits approach reveals the broad range of possible positive impacts. Source IEA.

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What is energy efficiency and why do we need it?

Energy is the essential fuel for economic and social development. And energy efficiency is usually defined by the ratio of energy consumed to the output it produces or the service performed. A major factor behind investment in energy efficiency is its capacity to lower energy demand and deliver energy cost savings.

A large amount of knowledge and evidence has been established on the economic benefits of energy efficiency improvements. These can be delivered across the whole economy, with direct and indirect impacts on economic activity. The impact might be reflected in terms of GDP, employment rates, trade balances and energy prices.

Investment in energy efficiency can provide many different benefits to various stakeholders. This can be achieved by directly reducing energy demand and related costs or enabling the accomplishment of other objectives – such as improving industrial productivity.

To quote just one example from my personal experience: After installing ABB drive technology at a motor factory in the UK, employees reported that they enjoyed their work environment more as the drives not only eliminated the negative side effects of energy loss like heat and noise, but reduced the overall energy demand. This resulted in an increase in the factory’s overall productivity.

First fuel and the rebound effect

Energy efficiency is taking its place as a major energy resource in the context of national and international efforts to achieve sustainability targets. Attention to energy efficiency has begun to evolve; progressing from its lack of visibility and identification as the ‘hidden fuel’, where energy efficiency is measured and valued only as a negative quantity of energy not used, to a recognized role as a ‘first fuel’.

Traditionally, we measured the impact of energy efficiency purely in terms of how much the energy demand is reduced. Measuring this kind of negative value ‘the energy not consumed’ can be elusive, to the extent that energy efficiency is sometimes called the ‘hidden fuel’. In essence, because energy efficiency represents a negative quantity, it is often perceived as a rather intangible concept, hindering the many possibilities it can offer.

Recently, energy efficiency has actually become a major energy resource itself. In 2010 the amount of energy saved through efficiency investments became the largest energy source for IEA countries. It exceeded even oil, gas, coal and electricity. Energy efficiency has in fact become a ‘first fuel’ for the IEA countries.

Energy efficiency has taken the role of the ‘first fuel’ since 1974 to 2010 by exceeding other sources of energy. Current calculations suggest that, under existing policies until 2035, two-thirds of the economically viable energy efficiency potential will remain unrealized. Source IEA.

Efficiency improvements that save energy can actually result in increased energy consumption that counteracts the potential savings that stem a reduction in energy demand. This phenomenon, known as the ‘rebound effect’ is usually seen as a negative outcome. It is one of the most persistent challenges associated with energy efficiency.

It is however ABB’s view that the rebound effect should be regarded as a positive outcome. In many cases we have seen customers save energy, and therefore money, by implementing energy efficiency improvements. And they have reinvested the money saved to buy more energy efficient products – allowing them to invest even more in energy efficiency. There is a particular examples of a farmer in South Africa who invested in variable speed drives for his irrigation system, gaining 40 percent energy savings. He has since utilized the saved money by investing in more variable speed drives.

If improved energy efficiency is used to access more energy services rather than to achieve energy demand reduction it can cause more harm than good. It is important to fully evaluate any potential rebound effects and to take them into consideration when calculating the actual energy demand reductions. However, in the industrial sector, savings from reduced energy use can be directed towards more productive and value-adding activities, creating a positive rebound effect.

Unfolding the relationship between energy savings and the broader results of energy efficiency can provide a better understanding of the rebound effect, and a clearer picture on whether the effect either reduces or strengthens the benefits of an energy efficient solution. The multiple benefits approach allows us to have a better understanding about the potential positive outcomes of the rebound effect.

Energy efficiency in industry

Industry often views energy as an operational cost, with energy savings perceived as secondary benefits of other investments rather than as a central value-generating proposition. Still, industrial energy efficiency measures can deliver considerable benefits in addition to energy cost savings. These benefits include enhancing competitiveness and profitability, reduced resource use and pollution, improved production and product quality and improving the working environment – all while reducing operational and maintenance costs. All of these contribute to improved productivity and value creation for the company.

Industry accounts for one-third of the global final energy demand. The impacts of industrial energy efficiency measures are routinely calculated – but only in terms of energy demand reduction and sometimes in greenhouse gas reduction. Understanding the wider range of benefits of energy efficiency and seeing it more as a targeted aim rather than just a by-product of something else, could lead to larger positive outcomes in society. Increased uptake by industry could generate more public funding for energy efficient policies – especially if it is shown that industrial energy efficiency policies contribute to wider policy objectives such as environmental protection and economic development.

Energy efficiency in industry is particularly complex – many processes involve multiple steps and have different energy needs along the process chain. Traditional tools used to assess the financial impacts of energy efficiency tend to focus on the short term results, using simple payback time or rate of return. Taking the multiple benefits into consideration, the payback time can be up to 4 times faster than it usually appears using these traditional calculation methods.

Since industrial operations are based generally on capitalism, investments must have some sort of return. In a capitalist world, the expected return has to be made for each investment, whether it is a new plant or a new hardware purchase. In the same way energy efficiency investments should be seen as investments that must deliver a return. ABB has practically never encountered an instance when the use of energy efficient drives and motors would have caused additional costs. The expected annual profit resulting from this type of investment is a much clearer measure of energy efficiency for financial advantages than a focus on the payback.

It is often claimed that energy efficiency is not part of core business and of limited strategic importance. Energy efficiency measures are frequently perceived as minimally to moderately strategic, and this does not encourage companies to invest in them. It is certainly true that companies usually prioritise investments that contribute to improving their bottom line.

What is the future?

Despite huge investments in renewable energy, many millions of tons of fossil fuels are burned each year to generate electricity. From the gathering of these energy sources to their eventual consumption, we create unnecessary amounts of carbon dioxide that contribute to global warming because of inefficient energy use.

Our best hope of combating climate change and reducing a significant amount of emissions is therefore to use energy more efficiently. Estimates suggest energy efficiency improvements could deliver half the cuts in emissions needed to slow global warming over the next 25 years. By using energy efficient solutions these resources will also last longer and money will be saved. The variations in energy efficiency across the world give a sense of what can be achieved with today’s technologies. The most efficient economies generate almost 16 times more GDP with the same amount of energy than the least efficient.

Applying the multiple benefits approach to energy efficiency policy enables a fuller understanding of the potential offered by energy efficiency. It is a shift away from the traditional view of simply delivering energy demand reductions and it recognizes energy efficiency’s important role in delivering tangible social and economic improvements.

Communicating the value of energy efficiency is a key challenge. Among non-energy experts, energy is rarely seen as a commodity or a service in its usual sense. Shifting the focus from energy efficiency as a good in its own right to talking about what improved energy efficiency actually delivers can help stakeholders to grasp its impact and value.

To truly deliver the multiple benefits of energy efficiency I cannot overemphasize the importance of working in close cooperation with our customers. This enables us to leverage our knowledge of ABB technology together with the customers’ intimate knowledge of their own processes. This cooperation enables ‘best practice’ in terms of discovery and achieving the optimum impact.

In the best case, all of a customer's motors will be in the highest efficiency class and controlled by variable speed drives. But new investments are often expensive. It is better to achieve small savings over a long operating time than great savings and a short operating time. For example, there may be the possibility to achieve large savings in one motor, but if its annual operating time is low then so are the savings we can realize. On the other hand, if we target a motor that is in constant use, even if the savings in energy are low they will have a much greater cumulative effect.

In many cases, energy saving has been the driver for investment. But in retrospect, we have found that the benefits achieved due to the investment have actually been far more important. For example, manufacturers in different industries have been able to optimize their consumption of raw materials, improve working conditions and enhance reliability and throughput times. There is though still a significant challenge in assessing these benefits to demonstrate what can be achieved before investing in energy efficiency.

Further reading

Capturing the Multiple Benefits of Energy Efficiency OECD/IEA, 2014
Tackling Investment Challenges in Power Generation In IEA countries OECD/IEA, 2007
From hidden fuel to world’s first fuel?

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