G. Anandalingam

Overview

The development and implementation of technologies that are energy efficient are necessary components of any responsible energy plan. Research and experience in industrialized countries suggest that efficient technologies can play a vital role in improving industrial productivity and sustaining high rates of economic growth. They are also less costly and more environmentally benign than an exclusively supply-oriented strategy. This paper discusses the technical concepts of industrial energy efficiency, reviews energy consumption and the potential for savings in several selected industries, presents the concepts of economic analysis applied to conservation, discusses

policy options designed to encourage industrial energy conservation, and suggests a number of research issues that deserve further study.

Analysis

Industrial Energy Efficiency

Energy efficiency is measured using the first and second laws of thermodynamics. The first law defines efficiency as the ratio of energy output to energy input. The second law efficiency is defined as the minimum energy input required to perform a task, divided by the actual input of energy. Energy conservation measures have the potential to improve first law efficiencies by 10-60% and second law efficiencies by 65-99% in various industrial subsectors.

Industry uses energy not for its own sake, but to satisfy end-use requirements for process heat (40% of total industrial energy use), for a feedstock (20%), and for mechanical drive and other services (40%). In most industries, process heat represents the dominant requirement. Measures designed to improve industrial energy efficiency include investment in efficient boilers and cogeneration systems, recovery systems for waste heat, pipe insulation, and improved housekeeping (for example, boiler maintenance). These measures are cost effective in terms of achieving energy savings with relatively short payback periods. For example, insulation and other housekeeping measures have payback periods under 3-6 months; recovery of waste heat, including cogeneration, has a payback period of up to 3 years; and process modifications and improved mechanical drives have somewhat longer payback periods.

Industrial Consumers

In developing countries, industry typically accounts for the largest share of the consumption of commercial fuel. Generally, the largest five or six industries represent more than 70% of the use of industrial energy. The major energy consumers are the aluminum, cement, chemical (including fertilizers), iron and steel, mining, and pulp and paper industries. Although the food and textile industries are not energy intensive, they too are major energy consumers in developing countries.

Developing countries have higher energy intensities than developed countries. The differences are caused by a variety of reasons (for example, the use of older, inefficient equipment, the use of different technologies, the existence of subsidies on fuel prices, the lack of expertise in energy conservation, and the lack of capital and incentives for investing in conservation). The scope for improvements in energy efficiency is substantial in most industries. The cement industry has the potential to improve by 20%, iron and steel

industries by 10-15%, ammonia production by 5-15%, and pulp and paper production by 10-15%. New processes in the aluminum industry could save about 40% of current energy consumption.

Economic Analysis

Rigorous economic analysis requires more than a calculation of payback periods. Ideally, a discounted cash-flow model should be developed and opportunities to make investments in energy savings should be assessed using such criteria as the net present value and the internal rate of return before and after taxes. A recent study used this type of model to analyze the economics of industrial energy conservation in developing countries. The first part of the study consisted of a comparative economic analysis of measures of energy conservation (based on actual case studies) and of investments to develop new domestic supplies of oil and coal. The second part of the study assessed the impact of government incentives for energy conservation in cases where it was economical from the national perspective but not cost effective for the individual firms. The case studies were selected to provide a representative sample of measures to save energy. The projects ranged from minor changes in energy management in specific firms to industry-wide process changes.

The results confirmed that nearly all the conservation measures were economical from the national perspective as measured by their "supply price" per unit of energy savings. In other words, investments in energy savings provided energy at a cost that was competitive with the cost of investments in conventional new energy supplies. For those energy-saving projects that showed net economic benefits but did not meet commercial investment criteria, the appropriate level of financial incentives (for example, tax credits) was analyzed.

Policy Options

Firms do not make investments in energy savings when barriers make investments in conservation less economical than in a distortion-free economy and prevent the adoption of cost-effective measures.

Economic barriers include

• Fuel prices that do not reflect full social costs (including replacement and environmental costs),

• High costs for conservation equipment because of the low volume of sales, the lack of economies of scale, and the impact of import taxes on foreign goods, and

• High rates of interest and corporate income tax.

Noneconomic barriers include

• Price controls on manufactured products (discouraging firms from improving their energy productivity),

• Inadequate information on energy-saving measures and technologies,

• Lack of technical know-how on energy management,

• Fuel rationing (which encourages firms to maintain their current level of fuel use), and

• A preference on the part of firms for investing in new productive capacity rather than in plant retrofitting and energy savings.

Policies to overcome barriers to energy conservation pertain to pricing, financial incentives, and nonfinancial incentives. Pricing policy should aim to remove price subsidies and make prices equal to economic (including environmental) costs. Tariffs may also be imposed on imported oil, and taxes can be levied on energy products. Financial incentives include income tax credits and accelerated depreciation for conservation investments. These, however, have the potential drawback known as the "free-rider" problem. In this case, incentives are provided inefficiently for all investment proposals, not just for those that require incentives to achieve financial viability. Nonfinancial incentives include standards, targets, and regulations, technical assistance and information programs, and rationing and allocation schemes to encourage energy productivity.

Suggestions for Further Research

Research is needed to