169
Best Practices Opportunities
Typical Investment
180
Typical Cost Savings Replace air conditioners with
air handlers and economizers
€€ Up to 50% of legacy costs Variable speed fan drives €€€ 4 to 10 months return on
investment (ROI)184
Lighting Advanced Lighting Technology €€ Up to 70% of legacy lighting consumption depending on lighting technology Occupancy Control € Up to 80% of lighting load
depending on occupancy
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4.10 outlines sector energy usage in the UK, this may be indicative of Western Europe in general.
Table 4.10 Final energy consumption in the commercial offices service sector by end use; 2013 Commercial Offices Thousand tonnes of oil
equivalent (ktoe)
Approximate % of total consumption
Heating 1,071 59%
Lighting 254 14%
Cooling & Ventilation 169 9%
Computing 117 6%
Hot Water 118 6%
Catering 50 3%
Other 48 3%
Total 1,828
Source: DECC Energy consumption in the UK Service Sector, 2014 update
4.4.3 Opportunities
Many of the opportunities listed in the retail space apply to office based sectors, such as variable speed drives, occupancy controls, LED technology, demand controlled ventilation, temperature set-back, energy efficiency appliances, overnight cooling, and building management system optimisation. For details of these opportunities see Table 4.5.
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5 Barriers for Potential Energy Saving Opportunities
The type of organisations that distinguish a sector also plays a role in how energy is perceived and addressed. For example, the pulp, paper and print sector comprises of large, SME and microenterprises across the value chain. While pulp producers are mainly large companies (>250 employees), the paper and print sectors are dominated by SMEs. For the large producers, where their products are commodities that are vulnerable to global competition, the economic recession has seen an increasing spate of consolidation in the EU as companies aim to address distressed situations, secure supply, geographically diversify into new growth markets, and reposition their product and operational portfolios. Consolidation, while it brings many benefits, including healthier balance sheets, can also introduce challenges; for example, as operations are consolidated with unprofitable operations closed, the preservation of knowledge, employees and documentation can become difficult. As such, there is a lack of standardisation of practices across sites. Furthermore, larger organisations tend to have longer and complex decision chains, which can deter or delay ESO uptake. For SMEs, the lack of access to internal or external capital is seen as a major barrier; as such, the priorities for capital investments will typically focus on increasing output rather than energy efficiency.
Vast sources of recent and past literature have focussed on a wide variety of techno- economic and behavioural aspects of barriers attributing to market failures in uptake of ESOs. Sorrell et al (2011) established a taxonomy of barriers to energy efficiency, which was categorized into four main theoretical frameworks: economic non-market failure, economic market failure, behavioural and organizational.191 Cagno et al (2012)192 made further refinements to the Sorrell et al. (2011) taxonomy along with a crucial structural addition of perspective, categorised into external and internal to the enterprise holding the ESO as detailed in Table 5.1
Table 5.1 New taxonomy of barriers to EE and ESOs
Origin Area Barriers
External
Market
Energy price distortion Low diffusion of technologies Low diffusion of information Market risks
Difficulty in gathering external skills Government / Politics Lack of proper regulation
Distortion in fiscal policies Technology / Services
suppliers
Lack of interest in energy efficiency Technology suppliers not updated Scarce communication skills Designers and
manufacturers
Technical characteristics not adequate High initial costs
Energy suppliers
Scarce communication skills Distortion in energy policies Lack of interest in energy efficiency Capital suppliers Cost for investing capital availability
Difficulty in identifying the quality of the investments
191 Sorrell S, Mallett A., Nye, S; “Barriers to industrial energy efficiency: A literature review”; UNIDO, 2011
192 Cagno, E, Worrell E., Trianni A., Pugliese G.; “Dealing with barriers to indsutrial energy efficiency: an innovative taxonomy”; ECEEE 2012 Summer Study on Energy Efficiency in Industry
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Origin Area Barriers
Internal
Economic
Low capital availability Hidden costs
Intervention related risks
Organisational behaviour
Lack of interest in energy efficiency Other priorities
Inertia
Imperfect evaluation criteria Lack of sharing the objectives Low status of energy efficiency Divergent interests
Complex decision chain Lack of time
Lack of internal control Barriers relating to
competences
Identifying the inefficiencies Implementing the interventions Awareness Lack of awareness or ignorance Source: Cagno et al, 2012
Policymakers have been addressing barriers from an external perspective, which has resulted in policies which lack sufficient buy-in from the enterprise. This creates a situation where internal and external perspectives diverge. Although the Energy Efficiency Directive aims to address some internal issues, such as Article 8 (energy audits); there still has not been sufficient attention paid to the internal perspective, which consists of many under evaluated behavioural elements, which can lead to irrational choices from an external perspective. The barriers discussed in this chapter aims to provide an internal perspective of the key factors influencing ESO decision making.
Section 5.1 and 5.2 of this chapter elaborates further on the internal barriers: economic, organisational behaviour and barriers related to competencies and awareness. These are some of the key internal factors deterring the uptake of ESOs, even in situations where they are economically viable. Section 5.3 elaborates on the specific technical barriers of selected ESOs with the highest energy saving potential.
5.1 Economic barriers
The technical scenarios discussed in Chapter 3 illustrates the energy savings potential that would occur if all industrial processes, and equipment were upgraded with ESOs that are technically feasible, regardless of any other constraints, such as economic. Generally, many organisations only invest in ESOs if they meet an internal return on investment (ROI) (or hurdle rate). The 2 year and 5 year payback criteria have been utilised to highlight the potential savings associated with what organisations might consider an acceptable and long term payback, respectively.193 For example, economic scenario 1, reflects the uptake of projects with a 2 year payback, and might be considered as obvious cost effective opportunities that organisations should implement. However, the results illustrate that significant potential still exists across all sectors. While there are various technical, organisational, behavioural, market
193Organisations typically only invest in projects with a less than two-year payback, unless it has a productivity or growth outcome as well. This is particularly true of shareholder-based organisations where costs and profits are assessed over short periods (e.g., quarterly).
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and competency challenges limiting uptake, uncertainty about future energy prices and the savings after implementation combined with the irreversible nature of the investment decision can make the actual ROI higher than estimated.
The analysis presented in Chapter 3 only takes direct costs (i.e., cost of equipment, service, installation, operation and maintenance) into account. However, as discussed above, there are other factors which could affect investment criteria at the enterprise or site level. These factors are excluded from the study’s analyses, since they are qualitative in nature and can vary significantly across and within enterprises. The following sections discuss the factors that act to increase economic barriers, although on some occasions could also act as a driver for uptake.
5.1.1 Hidden cost
When ESOs are identified and presented (either internally or externally), often only direct costs are accounted. Indirect or associated costs are often not factored. These are referred to as hidden costs. While quantifying direct costs is relatively straightforward, hidden cost components are usually more complex to define and quantify. Hidden cost components include additional resource, training and/or equipment which may be unaccounted for when the opportunity is presented. Evaluating and implementing ESOs requires significant resource commitment. In many cases, resources would need to be diverted from the enterprise’s main business activity. Unless the ESO has a significant economic potential, diverted resources are viewed as an opportunity cost to the main business activity. For opportunities with a higher degree of complexity, new hires or additional training may be required for operation and maintenance. In some cases, additional equipment may also be required (tools, additional utility capacity, modification of existing facility) but unaccounted for when the ESO is identified.
Hidden costs may also appear as an over projection of benefits. The cost benefit of ESOs are highly dependent on key operating factors such as equipment load, operational hours, pressure, temperature and production processes. In many cost-benefit analyses, ideal parameters are used, which do not reflect actual load fluctuations, maintenance practices, and potential outage duration.
On the other hand, indirect benefits are also often unaccounted for. Indirect benefits include non-energy business gains, such as increased operational hours, production capacity, and improved environmental benefits. These are important decision making drivers, which are often overlooked or poorly presented during the evaluation stages, resulting in the undervaluation of the respective ESO.
5.1.2 Risk
The implementation of any ESO introduces additional risk to the enterprise. The risk considerations vary according to the scale and complexity of the ESO. Each stage of the ESO implementation process adds further risk for consideration and depending on how they are addressed or mitigated, will impact the expected financial returns. Risks can be categorised into three main areas: technical, commercial and financial risk. Technical risk is directly associated with the ability of the ESO to deliver the benefits of its intended technical design and application. Commercial risk relates to the risk involved in dealing with counterparties involved in the ESO implementation and financial risk relates to how the ESO impacts the enterprise’s financial position. Table 5.2 provides a general perspective of the minimum risk considerations to be taken into account when evaluating an ESO under these three categories.
174 Table 5.2 Technical, commercial and financial risk considerations
Risk categories Risk considerations Technical risks
Engineering design
■ Is the engineering design appropriate for the application?
■ What modifications are required?
■ Can the operating conditions be met on site?
■ How reliable is the design? Is the design prone to failure?
■ What impact would an ESO failure have on the main business activity?
Implementation ■ Does the implementation time frame fit into the main business activity schedule?
■ How physically obstructive is the implementation or construction work?
■ Could the construction be subject to delay?
■ How would construction affect the main business activity?
■ Are the appropriate occupational health and safety measures in place?
■ Are the appropriate permits in place?
■ Will the ESO be constructed to the design specification and quality?
Operation and maintenance
■ Will the ESO operate according to the design specification?
■ Are there appropriate resources to operate and maintain the ESO?
■ Is additional training needed to operate the ESO?
■ Are the operating parameters appropriately adjusted and monitored?
■ How can the benefits be monitored and verified?
■ How do we get support in case of failure?
■ What are the impacts to the main business in case of failure?
■ What is the expected time for corrective actions?
Commercial risks
Procurement ■ Will the cost subject to change?
■ Will all parties deliver according to its respective contractual obligation?
■ Can the ESO be procured locally?
■ Is the cost exposed to currency exchange fluctuations?
■ Do we have adequate support after procurement?
Counterparty ■ Is the manufacturer, supplier or service provider financially stable?
■ How many different counterparties are there to deal with on procurement?
■ What is the risk of the counterparty defaulting on its obligations?
Financial risks
Expected returns ■ Are the hurdle rates appropriate to the ESO?
■ Does the ESO present the best returns on financial resources?
■ Is the ESO relevant to the current and long term financial plan?
Financing structure
■ How will the ESO be financed?
■ How would the financing cost fluctuate?
■ How will the financing structure impact the enterprise’s financial standing?
■ Is the investment scale and plan within the financial budget schedule?
5.1.2.2 Technical risks
Engineering design: ESO benefits are strongly dependent on whether its design operating conditions are met (e.g. pressure, temperature, load, production capacity, operation and maintenance). In some cases, this can be difficult to evaluate or verify once the ESO has been installed. As such, careful consideration of the design reliability, equipment technology and the service provider is required. If retrofitting is involved, modification works may create further complications to the existing facility, especially for emerging ESOs with very little historical performance record. For ESOs which may have a direct impact on the main business process, implementation and operational disruption could lead to losses on a scale that minimises ESO benefits. For ESOs with a lower energy saving potential, the internal energy consumption of the ESO itself will need to be managed carefully to avoid eroding of energy saving benefits (e.g. speed drives).
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Implementation: Depending on the scale and the complexity of the ESO, there are many factors which will affect the implementation. Construction works are often subject to delays due to unforeseen circumstances on site (e.g. site difficulties, weather, safety, quality), which may affect the enterprise’s overall business performance. If permits from authorities are required, the application process will also have a significant impact on the implementation schedule. Implementation of ESOs may require strong technical know-how as it dictates the delivered quality and expected performance of the ESO.
Operation and maintenance (O&M): While design aspects are crucial, appropriate O&M ultimately dictates if the actual designed benefits of the ESO can be achieved throughout its expected operational lifecycle. If overlooked, the expected benefits may digress or in some cases lead to an operational cost. Therefore, dedicated resources with the appropriate technical expertise is required. This often requires new hires or further technical training of existing resources, adding to overhead costs. For more complex ESOs, frequent support from the manufacturer or service provider may be needed, therefore capability and trustworthiness plays an important factor in the decision making process.
5.1.2.3 Commercial risk
Procurement: The most common risk in procurement processes is the variation in cost after an investment decision is made. Some ESOs are provided through multiple parties and contracts, adding risk to the non-delivery of its respective contractual obligation. This process may also require much administrative or legal support, increasing the cost burden of the ESO.
If the ESO is sourced outside the EU, the cost is subject to foreign exchange fluctuations, occasionally causing price increases especially for ESOs with long delivery time and payment intervals.
Counterparty risk: Implementation, operation and maintenance of the ESOS relies very much on the supplier or service provider delivering according to its contractual obligation. While strong capabilities are crucial, financial stability is equally important, especially in the case of ESOs with higher complexity and a long lifespan. In the event that a supplier dissolves, this may have significant impact on the delivery or the continued operation and maintenance of the committed ESO.
5.1.2.4 Financial risk
Expected return: In the context of an ESO investment, the expected return is established in consideration of all the risk associated with the investment class. This is a measure of the investor’s opportunity cost of investing in the ESO instead of other alternative investment classes with similar risk. In general, the higher risk associated with the ESO, the higher the expected rate of return will be. In consideration of all the associated risk, investments in ESOs are usually perceived to carry a much higher risk than other investment types or classes. For example, an enterprise would rather invest on expansion or marketing of its main business activity which has the potential to generate far greater benefits in comparison with the benefits associated with the ESO, assuming that both options are perceived to carry an equivalent amount of risk. Longer investment tenures also require higher expected returns, which makes many ESOs with higher payback periods financially unattractive. Financial providers for energy efficiency investments typically prefer low risk investments, so an emphasis is placed on proven rather than new technologies.
Financing structure: Access to finance is one of the key barriers to uptake of ESOs. For larger enterprises with access to finance, capital intensive ESOs are usually financed through secured194 loans. Additional loan or debt on an enterprise’s balance sheet increases the overall risk profile of the enterprise which may be against the shareholder’s interest. Project
194 Loans which are secured using an asset as collateral.
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financing195 involves much higher costs and are applicable only for larger scale and well established ESOs. For SMEs, financing capital intensive ESOs is much more challenging as they do not have the financial capacity, as compared to larger enterprises, or access to finance. Furthermore, high transaction costs to evaluate the debt carrying capabilities to service a number of SME sized ESO projects can be high, thus discouraging the financing of EE investments. There are limited EE financial products available to support the needs of industrial customers in the current market. Although the ESCO model aims to the lower risk associated with EE finance, the majority of its success has been in the public sector. In the private sector, mortgage challenges196, and longer project development cycles have limited ESCO performance contracting uptake.
5.1.2.5 Risk perception and mitigation
The discussion of risk is highly subjective as it is a matter of perception. As perception differs, risk evaluation is exposed to different interpretation. Classic economic theory discusses the concept of loss aversion197, which refers to an individual’s tendency to strongly prefer avoiding losses to acquiring gains. In decision-making, this leads to risk aversion.
Risk aversion is compounded if the perception of key decision makers, such senior management or finance providers are not aligned, For example, a decision maker with a weak technical background may have a different perception of technical risk compared to a decision maker who has a stronger technical background.
Liquidity is another issue which deters ESO uptake. Investment in ESOs is generally non- transferable and the investment committed cannot be diversified, hence it is illiquid. Beyond the scope of the ESO, decision makers also need to consider if the ESO is aligned with the enterprise’s strategic plans. For instance, an enterprise downsizing or producing commodities that are exposed to price fluctuations will be less inclined to commit to long term ESOs.
Risk is usually mitigated through preventive actions. These preventive actions (e.g., stringent project controls, dedicated resources, trading only with reliable partners, application of established technologies) usually incur additional cost. Some risk (e.g., equipment failure, accidents), also known as residual risk, cannot be completely mitigated, and is often covered by some form of insurance. Insurance for industrial energy efficiency is still in its infancy; it is not a common product most established insurers provide.
Investment in ESOs has multiple positive benefits on the main business in addition to energy savings. Bottom line profitability is increased with lower energy cost (especially for energy intensive industries where energy costs represent a significant portion of value added or turnover). Energy security is also improved when enterprises start producing more with less.
In addition, implementation of ESOs may result in positive environmental benefits. In view of this, investment in ESOs should fundamentally reduce the risk profile rather than the contrary.
However, over-cautious financial providers typically fail to recognise this when it comes to financing ESOs198.