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…” 2 Alabama “Song of the South”

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 3

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 4

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 5

Quantified Impacts of Co-benefits When co-benefits are quantified, ROI metrics always improve: Worrel et al. (2003)  Simple payback of energy savings only = 4.2 years  Simple payback of energy savings and co-benefits = 1.9 years Lung et al. (2005)  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 6

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:  ~$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 million fewer total jobs between 2012 and Courtesy of John “Skip” Laitner

How to Quantify Macro-Economic Impacts of Energy Efficiency? Integrate energy efficiency into economic production models 3-factor Cobb-Douglas example: Output = A*L a *K b *E c GDP = A*L a *K b *E c + (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 8

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 Exajoules (2009 data from AEO) Median wages of $65,000/year (2009) Labor force of 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 = % reduction in energy intensity scenario: Value of used energy = $721 billion, GDP = $21.9 billion, energy intensity =

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 10

Contact Information Robert Bruce Lung