2016/55 k nKonw A A weldegdeg e ol n oNtoet e s eSrei r e ise s f ofro r p r&a c t hteh e nEenregryg y Etx itcrea c t i v e s G l o b a l P r a c t i c e The bottom line Designing Effective National Programs to Industry accounts for approximately 30 percent of Improve Industrial Energy Efficiency global final energy consumption and a similar share of CO2 emissions. Its total energy Why is industrial energy efficiency a priority? Are there major opportunities to improve intensity could be reduced by Even minor adjustments to industrial processes industrial energy efficiency? about 25 percent by modernizing have high impact, yielding large gains with Huge improvements can be made where technologies technology, particularly in developing countries. The minimal effort are outdated and new capacity is just being developed main barriers to achieving Increasing industrial energy productivity is essential to doubling the Worldwide, the greatest opportunities to improve industrial energy broad energy efficiency gains global rate of improvement in energy efficiency, one of the three efficiency are found in countries outside the Organisation for are insufficient information; objectives of the Sustainable Energy for All initiative. Worldwide, Economic Co-operation and Development (OECD), particularly in Asia difficulty obtaining financing; industry accounts for approximately 30 percent of final energy (table 1). Some emerging economies already have large industrial and, in many developing consumption and for a similar share of carbon dioxide (CO2) bases (for example, China, India, and Turkey), some have a legacy of countries, insufficient capacity emissions. By 2050, population growth and economic development outmoded and inefficient plants (notably the nations of the former for identifying, preparing, and in developing countries could increase demand for raw materials Soviet bloc), and some have ambitions for industrialization (for exam- delivering projects. A well- by between 45 and 60 percent (relative to 2010). Unless energy ple, Vietnam, Uzbekistan, and nations in Sub-Saharan Africa). The designed national industrial efficiency is rapidly accelerated, industrial emissions of CO2 could potential for industrial energy efficiency is already evident: China’s energy efficiency program should rise 50 to 150 percent by 2050, substantially affecting global efforts rapid improvements in the energy intensity of the gross domestic include clear policy goals linked to mitigate climate change (IPCC 2014). product highlight the dual role of energy efficiency in increasing to tangible targets; a range of Industrial energy efficiency is closely linked to the economic economic productivity while reducing energy demand. policy instruments to guide and competitiveness of countries with significant manufacturing bases Although most analyses of the potential of industrial energy encourage action; and measures and to the energy security of countries that rely heavily on imported efficiency have focused on energy-intensive industrial processes, to build implementation capacity energy. For individual enterprises, improving energy efficiency substantial opportunities exist in small and medium enterprises and facilitate financing. strengthens the bottom line, often reducing direct energy costs by 10 (SMEs), where most countries have the bulk of their manufacturing to 30 percent (http://www.iipnetwork.org/IEE). employment and GDP productivity. Figure 1 shows the expected Feng Liu is a senior capacity growth in energy-intensive industries and also highlights energy specialist in the that the largest growth in non-OECD economies lies in the category World Bank’s Energy and of “other industries,” which tend to be less energy intensive and Extractives Global Practice. distributed across larger areas than the energy-intensive production Robert Tromop is a senior energy efficiency consultant. 2 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y Table 1. Estimated need for global investment in energy efficiency, 2012–35 OECD Non-OECD Additional Additional investment Energy savings Fuel cost savings investment Energy savings Fuel cost savings “Worldwide, the greatest ($ trillion) (Mtoe) ($ trillion) ($ trillion) (Mtoe) ($ trillion) opportunities to improve Industry 0.4 668 1.2 0.7 3,482 2.2 industrial energy efficiency Transport 1.6 1,121 3.0 3.2 2,731 2.7 are found in countries Buildings 3.2 3,478 5.9 1.4 3,704 1.7 Total 5.3 5,267 10.0 5.2 9,917 6.6 outside the OECD, particularly in Asia.” Source: IEA 2012. Note: Mtoe = million ton oil equivalent; OECD = Organisation for Economic Co-operation and Development. DSM = demand-side management; ESCO = energy service company of iron and steel, cement, chemicals, and pulp and paper. Future Is there a need for government intervention in efforts to improve industrial energy efficiency should focus on this industrial energy efficiency? category.1 Investments in industrial energy efficiency typically focus on Yes, limited and careful intervention ensures renovation or new capacity. Renovation involves the replacement of that common barriers will not hamper the particular pieces of equipment (old boilers, inefficient motors, and achievement of long-term goals so on) or other improvements (for example, the recovery of waste heat) that do not fundamentally change production technologies or In a market economy, industrial enterprises respond to market substantially alter production capacity. Reducing energy costs (and signals, such as energy prices. Government intervention in enterprise thus improving energy efficiency) is usually the primary driver of such investment decisions should be limited to ensuring that market investment. Developing new capacity, on the other hand, involves the principles are operative; more intrusive measures, such as manda- replacement of existing production facilities or the installation of new tory standards or performance requirements, should be kept to a production capacity for the same or new products through improved minimum. or new technologies. Here, energy efficiency is only one of the many Market failures or barriers often prevent the implementation factors considered in investment decisions. of financially viable investments in industrial energy efficiency, investments that typically require the alignment of several important factors. These factors include information on existing inefficiencies, 1 Upstream industrial production—ranging from mining and extraction to the production appropriate interventions, and estimated returns on investment, of raw materials such as glass, cement, steel, and petrochemicals—is particularly energy intensive (that is, a lot of energy is consumed per unit of value added), relatively concentrated as well as the willingness of financiers to provide needed capital. (a small number of countries account for a large portion of global output), and highly polluting. Since the alignment of these factors depends on the decisions and Mid-stream and downstream industrial production covers a wide spectrum of products, from machine tools to consumer goods to textiles and processed foods. Compared with the produc- actions of multiple stakeholders (including industrial enterprises, tion of raw materials, these processes tend to be substantially less energy intensive and more evenly distributed geographically. 3 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y Figure 1. Growth in capacity in energy-intensive and other industries, 2011 and forecasted OECD 100 Non-OECD 80 “The role of the 60 percent government is to facilitate 40 or even to mandate the 20 removal of impediments to successful investment in 0 2011–20 2021–35 2011–20 2021–35 2011–20 2021–35 2011–20 2021–35 2011–20 2021–35 energy efficiency. Carefully Iron and steel Cement Chemicals Pulp and paper Other industries calibrated interventions can Source: IEA 2012. address local and global Note: Includes replacements of currently existing capacity. OECD = Organisation for Economic Co-operation and Development. environmental concerns while generating social and economic benefits.” providers and suppliers of energy services and technologies, and efficiency. Carefully calibrated interventions can address local and financiers), it is not easy to implement projects to improve industrial global environmental concerns while generating social and economic energy efficiency. Table 2 provides a broad review of market barriers, benefits. grouped into two main categories, as follows: How can barriers to energy efficiency be best • Knowledge, capacity, and incentive barriers. These may arise overcome? where enterprises have not developed a knowledge base for their own energy use or are overly focused on growth or market Barriers can be lowered by reinforcing market share; where there is a dearth of service providers offering principles and institutions expert advice or data on the energy performance of various Those developing countries and economies in transition that have technologies, processes, and equipment; or where energy is achieved significant and consistent improvements in industrial perceived as a fixed cost. energy efficiency over the past two decades (for example, China) • Finance barriers. These may arise where financiers misperceive have made deliberate efforts to pursue market reforms and to pilot, risks and returns for lack of familiarity with energy efficiency demonstrate, and scale up policy interventions. Meanwhile, highly measures and technologies; where the transaction costs of developed industrial economies, such as Japan and the Netherlands, relatively small investments are high; or where there is general have made efforts to encourage, facilitate, and at times mandate risk aversion surrounding SMEs. industries to achieve significant long-run improvements in energy efficiency. The role of the government is to facilitate or even to mandate the removal of these impediments to successful investment in energy 4 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y National energy efficiency agendas must be underpinned by incentive grants tied to verified energy savings; special assistance relevant legislation, institutions, and broad-based market principles to SMEs (for example, grants or in-kind assistance for energy audits (for example, energy prices set at cost-recovery levels). Governments and project development); assistance in establishing energy-man- may choose among a broad set of policy instruments and imple- agement systems; information and training programs; and assistance mentation support systems to address the barriers faced by market in the development of energy service companies (ESCOs) and in the “Developing countries and participants. Instruments include minimum energy performance facilitation of commercial financing for industrial energy efficiency. economies in transition standards for broadly used energy-consuming equipment (for Appendix 1 provides examples of government efforts to facilitate example, boilers and electric motors); voluntary or mandatory energy industrial enterprises, undertake cost-effective energy efficiency that have achieved savings agreements with large energy users; requirements for energy investments, and increase access to finance. significant and consistent audits and energy managers (again for large energy users); tax improvements in industrial incentives (for example, for the installation of efficient equipment); energy efficiency over the past two decades have Table 2. Barriers to implementing energy efficiency projects in the industrial sector made deliberate efforts to pursue market reforms Industrial energy users Energy service or technology providers Financiers and to pilot, demonstrate, Knowledge, • Excessive management focus on short- • Limited demand for energy efficiency • Lack of information on energy-efficient capacity, and term benefits such as sales revenue services and technological innovations technologies and their benefits and scale up policy incentive and growth • New contractual mechanisms (for • Lack of customized financial products barriers • Low energy efficiency benefits relative example, energy savings performance and appraisal procedures interventions.” to other costs and priorities contracts) that may increase business • Lack of capacity for measurement and • High perceived risks of new risks verification technologies or systems • Limited technical, business, and risk- • Limited understanding and capacity • Lack of credible data and information management skills among loan officers and risk managers needed for decision making • Poor communication with bankers • Inadequate technical and financial expertise • Poor access to energy-efficient technologies and relevant services Financial • High up-front capital costs, usually for • High project-development costs • High transaction costs associated with barriers energy-intensive industries • Limited access to financing and equity small and widely dispersed energy • High borrowing costs and limited efficiency projects access to financing, especially for SMEs • Competition for capital from other high- • Expectation of a high return on return, low-risk business opportunities investment (quick payback) • Financial risks associated with SMEs, • High project development and including energy service companies transaction costs relative to project size, particularly for SMEs Source: Authors. Note: SMEs = small and medium enterprises. 5 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y What have we learned? Enabling energy efficiency finance. Current investments in global energy efficiency, estimated at $300 billion per year, are small Better information, better incentives, and compared with global capital resources of $300 trillion. better financing packages will encourage The challenge is to package financing so as to make it more investments in energy efficiency accessible. Steps include addressing the gulf between the business “Governments should and finance spheres with technical assistance, enabling local banks Overcoming information barriers. Information barriers can be take a leadership role by to act as project integrators, and developing local banks’ abilities to overcome by innovative learning networks, energy-management manage risk and uncertainty. analyzing how energy techniques, and tools such as audits, standards (for example, ISO International finance institutions (IFIs) are already making drives productivity and how 50001), benchmarking, and technical programs that are embedded progress in designing instruments that integrate technology assis- in new learning processes in businesses. The first step is to con- improvements in energy tance with the financing of energy efficiency. Among other relevant vince businesses to invest in these information tools, which are efficiency can increase the efforts, they offer a range of risk-sharing and -mitigation options and necessary to generate demand for energy efficiency and associated conduct operations via local banks—all of which can ease the pain of bottom line.” investments. accessing finance. Energy efficiency continues to be undersold and undervalued. Although it brings clear benefits related to energy productivity, and in turn to human health, economic growth, and the environment, better How can IFIs help governments scale up outcomes in these areas are rarely considered in business cases or investment in industrial energy efficiency? in the evaluation of energy efficiency policies and measures. IFIs can assist governments in developing Coordinating and cooperating to address incentive and capacity gaps. Alone, none of the available policies and measures effective policy instruments to promote can advance energy efficiency. Substantial results require a strategic industrial energy efficiency mix of policies and measures. Countries that have been successful IFIs can support governments, industries, and suppliers in developing in implementing energy efficiency improvements have done so over solutions for industrial energy efficiency that promise benefits time through carefully calibrated actions. for all. Successful programs are embedded in a supportive policy Cooperation among governments, utilities, financial institutions, environment and sustained by private sector capabilities. Necessary and industries is necessary to create a critical mass of capabilities elements include governance capability and a supportive fiscal con- and resources. Governments should take a leadership role by text, utility programs, and sound operational policies. If one element analyzing how energy drives productivity and how improvements in is missing, its absence can easily undermine the operation of the energy efficiency can increase the bottom line. Establishing relevant others. For example, relevant policies are unlikely to be successful governance frameworks is a necessary first step; these frameworks if energy prices are subsidized or if utilities have an incentive to sell will ensure that programs can be sustained to achieve long-term more and more energy regardless of efficiency. benefits. Recent experiences in both industrial and emerging economies Utilities can make energy efficiency gains both by ensuring that underscore the importance of national governments in removing bar- the price of delivering energy to consumers reflects its cost, and riers to the knowledge, incentives, capacity, and finance needed to by applying their substantial technical, marketing, and commercial scale up investments in industrial energy efficiency. A well-designed resources. If energy price subsidies are not addressed, other policies national industrial energy efficiency program has clear policy goals may be ineffective, so identifying ways to shift to less distorting linked with tangible energy efficiency targets and a range of policy policy options is an important step. instruments to guide and encourage action, facilitate financing, and 6 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y build the implementation capacity of market participants. A portfolio References of policies and measures to realize an economy’s industrial energy Forster, Hillary Jane, Patrick Wallace, and Nicolas Dahlberg. 2013. efficiency potential might be realized by: 2012 State of the Efficiency Program Industry—Budgets, • Setting ambitious, yet realistic, national energy efficiency targets Expenditures, and Impacts. Boston, MA: Consortium for Energy that are based on a sound understanding of energy efficiency Efficiency. http://library.cee1.org/sites/default/files/library/10533/ “International financial gaps, cost-effective investment opportunities, and available CEE_Annual_Industry_Report.pdf. institutions can support resources. Examples include China’s energy intensity reduction IEA (International Energy Agency). 2012. World Energy Outlook. Paris: governments, industries, target and the European Union’s 20-20-20 targets. IEA. • Developing sector-specific programs and underlying core policy and suppliers in developing ———. 2013. Energy Efficiency Market Report 2013. Paris: IEA. instruments that can deliver the contribution of industries toward solutions for industrial http://www.iea.org/bookshop/460-Energy_Efficiency_ achieving national energy efficiency targets. Examples include energy efficiency that China’s 10,000 Enterprise Program, which is based on mandatory Market_Report_2013. promise benefits for all.” energy savings agreements, India’s Perform Achieve Trade ———. 2014. Energy Efficiency Market Report 2014. Paris: IEA. scheme, and the national energy efficiency action plans adopted IPCC (Intergovernmental Panel on Climate Change). 2014. Climate by EU member countries. Change 2014: Mitigation of Climate Change. Contribution • Developing supplementary policies and implementation-support of Working Group III to the Fifth Assessment Report of the systems, such as requirements and support for enterprise energy Intergovernmental Panel on Climate Change. United Kingdom: managers, energy audits and energy management, facilitation for Cambridge University Press. http://mitigation2014.org/report/ commercial bank financing, support for energy-performance con- publication/. tracting, and support for training and information dissemination. Kato, T., J. Ellis, P. Pauw, and R. Caruso. 2014. “Scaling Up and Replicating Effective Climate Finance Interventions.” http://www. IFIs could thus help promote comprehensive approaches to oecd.org/env/cc/Scaling_up_CCXGsentout_May2014_REV.pdf. industrial energy management by (i) assisting governments in devel- Tanaka, K. 2011. “Review of Policies and Measures for Energy oping and deploying appropriate policy instruments, (ii) leveraging Efficiency in Industry Sector.” Energy Policy. http://linkinghub. local banks’ financing and building their capacity, (iii) supporting the elsevier.com/retrieve/pii/S0301421511005933. development of energy service markets and energy efficiency supply chains, and (iv) helping industrial enterprises identify opportunities to The task team leader for the Energy Efficiency Outreach activity within the improve energy efficiency. World Bank’s Europe and Central Asia region is Kathrin Hofer. That activity is sponsored by the Energy Sector Management Assistance Program, a multidonor technical assistance trust fund administered by the World Bank and cosponsored by 13 official bilateral donors. The authors acknowledge the assistance of the following peer reviewers: Ashok Sarkar (senior energy specialist, GEEDR), Ivan Jaques (senior energy specialist/ESMAP) and Jonathan Davidar (knowledge management officer, GEEDR). 7 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y Appendix 1. cement, paper and pulp, oil refining, and chemicals) were set at the energy efficiency levels of the best-performing companies Examples of government interventions in that industrial subsector (top 10–20 percent). The benchmarks that address barriers related to knowledge, were based on sector studies and negotiated between the capacity, incentives, and finance government and private sector. http://iepd.iipnetwork.org/policy/ mandatory-energy-efficiency-benchmarking-industry. Energy savings targets (national or sector targets under- pinned by specific actions) and energy savings agreements The Netherlands (with a group of enterprises or individual enterprises) Introduced in 2009, the Long-term Agreement on Energy Efficiency was negotiated between the government and enter- China prises under the EU emissions trading system. Participating A binding national energy efficiency target was included in the companies were required to develop an energy efficiency plan Five-Year National Social and Economic Development Plan set up and to implement all profitable measures (those with payback in 2006. The implementation of the target was underpinned by the periods of five years or less). http://iepd.iipnetwork.org/policy/ Top 1,000 Enterprises Program from 2006 through 2010 and was long-term-agreement-energy-efficiency-eu-ets-enterprises-lee. further scaled up to the Top 10,000 Enterprises Program from 2011 to 2015. Among the key features of the Top 10,000 program are energy European Union savings agreements in which specific energy savings targets are set 20/20/20 targets require member states to achieve 20 percent for individual enterprises over the plan period. Achievement of such energy efficiency improvements by 2020, against a defined baseline. targets is supported by a range of initiatives. http://iepd.iipnetwork. EU member states are required to prepare and implement a national org/policy/top-10000-energy-consuming-enterprises-program. energy efficiency action plan geared to achieve EU energy efficiency targets. For large industrial energy users in EU member states, India energy efficiency investments are primarily driven by the EU emis- Perform Achieve Trade (PAT) is a market-based trading scheme sions trading system. http://ec.europa.eu/europe2020/index_en.htm. suited to the Indian business context. The PAT scheme targets energy consumption reductions of 6.6 million tons of oil equivalent Capacity building for industries, including assistance (Mtoe) in 478 covered facilities in the aluminum, cement, chlor-alkali, in energy audits and the establishment of energy fertilizer, iron and steel, pulp and paper, textiles, and thermal power management systems industries. The scheme establishes plant-specific targets rather than Canada sectoral targets, with the average target being a 4.8 percent reduc- The Industry Program for Energy Conservation is a longstanding tion. Facilities making reductions in excess of the mandatory targets partnership between private industries and the Canadian federal receive “energy saving certificates” that can be banked for future government. It counts 1,400 companies and trade associations as use or traded to facilities having trouble meeting targets. http://iepd. partners. The program includes sector task forces, a cost-shared iipnetwork.org/policy/perform-achieve-trade-scheme-pat-scheme. assistance program for ISO 50001 implementation pilots, process Japan integration studies, industry networking, and customized energy Mandatory energy efficiency targets were introduced by the Act efficiency workshops. http://www.nrcan.gc.ca/energy/efficiency/ on the Rational Use of Energy (amended in April 2010) in the form industry/cipec/5153. of benchmarks that were spelled out in secondary legislation. Germany The act also introduced a 1 percent annual energy-efficiency-im- Learning Energy Efficiency Networks support innovative companies provement obligation for all businesses. Medium- (2015) and in their efforts to increase energy efficiency and improve their long-term (2020) targets for designated sectors (steel, electricity, own competitive position. Companies cooperate to save energy 8 D e s i g n i n g E f f e cti v e Natio n a l P r o g r a m s to I m p r o v e I n d u s t r ia l E n e r g y E f f ici e n c y in the most cost-effective way through cross-cutting technologies United States Make further (for example, compressed air systems, combined heat and power In 2011, $7 billion was invested in ratepayer-funded energy efficiency connections systems, and electrical drives). Thirty networks in Germany took projects, producing an estimated 117 terawatt hours (TWh) of energy 4,000 profitable measures with an average internal rate of return reductions. In 2012, there were 25 states with energy efficiency Live Wire 2014/11. of 35 percent. Cooperating companies increase their efficiency resource standards and a further 9 states adopting other policies “Designing Credit Lines for twice as fast as the German industrial average. http://leen.de/en/ (Forster, Wallace, and Dahlberg 2013). Energy Efficiency,” by Ashok leen-netzwerke/. The European Union Sarkar, Jonathan Sinton, and U.S. Industrial Assessment Centers for small Countries such as the United Kingdom, Italy, and Poland have Joeri de Wit. and medium-sized enterprises adopted energy efficiency obligations that require energy utilities to Live Wire 2014/18. Assessments are performed by local teams of engineering faculty achieve mandatory energy savings by investing in energy efficiency “Exploiting Market-Based and students from 24 centers and 32 participating universities across improvements that benefit their customers. https://openknowledge. Mechanisms to Meet Utilities’ the United States. A university-based IAC team conducts a survey worldbank.org/handle/10986/18678. Energy Efficiency Obligations,” of the eligible plant, followed by a one- or two-day site visit to take by Jonathan Sinton and measurements as a basis for assessment recommendations. The Addressing finance barriers by facilitating commercial Joeri de Wit. team writes up a detailed recommendations on cost, performance, financing and payback times. Within 60 days, a confidential report detailing International financial institutions such as the World Bank and the Live Wire 2014/25. the analysis, findings, and recommendations of the team is sent to European Bank for Reconstruction and Development have partnered “Doubling the Rate of the plant. In two to six months, follow-up phone calls are placed to with many developing countries to establish and scale up financing Improvement of Energy the plant manager to verify that the recommendations are being for industrial energy efficiency by utilizing local commercial banks. Efficiency,” by Jonathan implemented. http://iac.rutgers.edu/about.php. Notable efforts include: Sinton, Ivan Jacques, Ashok Ireland • The World Bank’s industrial energy efficiency credit lines in China, Sarkar, and Irina Bushueva. From 2007 to 2011, the Irish Sustainable Energy Authority’s SME Turkey, Ukraine, and Uzbekistan. program has supported 1,470 SMEs with 130,000 employees. In 2012, • The International Finance Corporation’s partial risk guarantee Live Wire 2016/53. program in China (Kato and others 2014). cost reductions of €2 million (from a total energy bill of €19.7 million) “Why Energy Efficiency • The World Bank’s partial risk sharing facility for energy efficiency were achieved in 200 SMEs with a total of 2,000 employees (IEA Matters and How to Scale in India. 2014). It Up,” by Jas Singh. • The EBRD’s Sustainable Energy Financing Facilities in 20 coun- Energy efficiency programs implemented through energy tries (IEA 2014). Live Wire 2016/54. utilities and efforts to develop an ESCO industry “Fostering the Development China Addressing finance barriers through fiscal and other finan- of ESCO Markets,” by Kathrin In 2010, the Chinese government issued “Electricity Demand-side cial incentives Hofer, Dilip Limaye, and Management Implementation Measures” that required all grid Some countries give industries favorable tax treatment for their Jas Singh. companies to deliver energy reduction of at least 0.3 percent from energy-saving efforts. For example, tax deductions are used to the previous year’s sales, and peak demand reductions of at least 0.3 partially offset the costs of energy efficiency investments in Canada, percent from the previous year’s peak demand (IEA 2013). Japan, the Netherlands, and the United Kingdom. Some countries With assistance from the World Bank, China introduced energy provide grant subsidies for energy efficiency investments, w0hich are performance contracting and energy service companies in the late often tied to verified energy savings (as in China) (Tanaka 2011). 1990s. It has since developed its ESCO market into the world’s largest to gain substantial industrial energy savings.