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IEA Roundtable on Industrial Productivity
and Competitiveness Impacts
Paris, France
January 27, 2014
Robert Bruce Lung – Industrial Energy
Efficiency Advisor
“…Poppa got a job with the TVA,
He bought a washing machine,
And then a Chevrolet…”
Alabama “Song of the South”
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Introduction
 Conventional approaches to quantifying energy savings of energy
efficiency
 Co-benefits of energy efficiency in manufacturing
 Impacts of quantifying co-benefits of industrial energy efficiency
 Lessons for programs/policies
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Conventional Approaches
 Energy savings potential of energy efficiency evaluation methods:
 Simple payback
 Discounted payback
 Internal rate of return
 Net present value
 Return on investment
 Lifecycle cost analysis
 All of these methods treat only quantified energy savings
 Based on energy baselines and estimated savings generated during
energy assessments
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Co-benefits
 Energy efficiency in manufacturing results in quantifiable co-
benefits:
 Production increases (higher absolute and/or per unit increases)
 Improved product quality (fewer passes, fewer warranty claims)
 Lower maintenance costs (especially repairs)
 Reduced emissions (especially for thermal energy sources)
 Lower use of other resources (water, treatment chemicals, raw materials)
 Safer work environments (fewer sick days taken)
 Fiscal rebates and/or incentive payments
 Co-benefits are not systematically quantified because they are greatly
underappreciated and rarely estimated during energy assessments
 Omitting co-benefits understates full impact of energy efficiency
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Quantified Impacts of Co-benefits
 When co-benefits are quantified, ROI metrics always improve:
 Worrel et al. (2003)
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Simple payback of energy savings only = 4.2 years
Simple payback of energy savings and co-benefits = 1.9 years
 Lung et al. (2005)
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Total energy savings = $47.7 million
Total co-benefits = $21 million
Simple payback of energy savings only = 1.43 years
Simple payback of energy savings and co-benefits = .99 years
Co-benefits were quantified during post-implementation interviews
 Quantifying productivity benefits enhances business case for energy
efficiency
 Also, important implications for economic analysis
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Productivity Changes and Economic Impact
• Just a 0.3% decline in productivity of the U.S. economy could cause
GDP (in 2005 dollars) to be ~$2.7 trillion smaller by 2040
• If U.S. economy is ~$2.7 trillion smaller in 2040, this implies:
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~$800 billion fewer in 2040 than might otherwise be available for
investment and/or government revenues
Between 2012 and 2040 ~$6 trillion fewer available for investment and
government revenues
Approximately 15-18 million fewer total jobs between 2012 and 2040
Courtesy of John “Skip” Laitner
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How to Quantify Macro-Economic Impacts of Energy Efficiency?
 Integrate energy efficiency into economic production models
 3-factor Cobb-Douglas example:
 Output = A*La *Kb *Ec
 GDP = A*La *Kb *Ec + (E production – E imports)
 A is a productivity parameter, L is labor, K is physical capital, E is
energy used
 a, b, c represent output elasticities of labor, capital and energy
 Output elasticities measure sensitivity of output to changes in
inputs (A, L, K and E)
 Different values of Energy (E) affect GDP growth
 Energy efficiency reduces E, freeing up capital and labor for other
uses and increases the productivity parameter A
 Hence, energy efficiency can lead to higher GDP growth
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Cobb-Douglas Model Example in U.S.
 Assumptions:
 Energy intensity reduction 30% between 1990 and 2030
 Energy cost of $12.95/MMBtu (2009 data from AEO)
 Energy use of 113.6 Exajoules (2009 data from AEO)
 Median wages of $65,000/year (2009)
 Labor force of 164.4 million workers
 10% return on rented physical capital
 Physical capital stock valued at $60 trillion (2000 dollars)
 Results:
 Business as usual scenario: Value of used energy = $1,030 billion, GDP =
$20.1 billion, energy intensity = 5.65
 30% reduction in energy intensity scenario: Value of used energy = $721
billion, GDP = $21.9 billion, energy intensity = 3.63
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Conclusion/Lessons for Programs and Policies
 Conventional approaches to analyzing energy efficiency
understate its impact
 Quantifying co-benefits of energy efficiency has two important
implications:
 Truer understanding of impact on output/GDP
 More compelling business case
 A greater emphasis on energy-efficiency led productivity could
yield more robust economic growth
 Energy assessments need to be integrated with
quality/competitiveness assessments to:
 Properly estimate co-benefits
 Account for energy savings from measures intended to improve
productivity
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Contact Information
Robert Bruce Lung
[email protected]
202-262-7897
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