Firm-level Perspective of Energy Efficiency Barriers and Drivers in UK Industry Indications from an Online Survey

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1 Firm-level Perspective of Energy Efficiency Barriers and Drivers in UK Industry Indications from an Online Survey Pranab Baruah 1, Nicholas Eyre 1, Jonathan Norman 2, Paul Griffin 2, Geoffrey Hammond 2, 3 1 Environmental Change Institute, University of Oxford, OX1 3QY, UK 2 Department of Mechanical Engineering, University of Bath, BA2 7AY 3 Institute for Sustainable Energy and the Environment (I-SEE), University of Bath, BA2 7AY. ABSTRACT An online survey of production process related energy efficiency barriers, drivers and the decision-making process was carried out among a number of UK industrial sector stakeholders. Survey responses indicated that access to capital, regulatory uncertainty and long/uncertain paybacks are major barriers to energy efficiency investments in UK industry. Cost savings and long-term strategy were found to be primary drivers of energy efficiency. Average payback criterion for energy efficiency investments was about three years and was slightly higher than other typical investments. In companies where energy efficiency was strategically important, decision-making was found to be more integrated into the mainstream business process. Energy and environmental audits followed by external consultants and colleagues in the industry were viewed as the most credible sources of energy efficiency information, whereas energy companies were viewed with least credibility. Drawing from existing studies and inputs from industrial energy experts, this study presents a taxonomy of barriers, drivers and decision-making attributes for investigation of industrial energy efficiency from a firm-level perspective. Introduction The industrial sector in the UK is responsible for ~21% of total delivered energy and ~29% of CO2e emissions. The last three decades have seen a ~50% fall in the UK industrial energy consumption. While part of the decrease is attributable to structural shift to a service-sector oriented economy and the decline of heavy industries, improved industrial energy intensity, aided by energy efficiency, has been one of the principal reasons for this decrease despite falling energy prices [1]. Even with this impressive improvement, there is evidence of further energy efficiency potential in the UK industry. At the European level, Altmann et al. [2] suggests a remaining economic potential for energy efficiency improvements of 6-17% in major sub-sectors, such as paper, steel, chemicals and food, with the former two stated to be at a very efficient state. Similarly, Energy Research Partnership [3] reported cost-effective energy efficiency potential between 10-20% over next 20 years across UK energy-intensive industries with some sub-sectors presenting better opportunities than others. Despite this existing potential and availability of cost-effective energy efficiency measures at current prices and market interest rates, an energy efficiency gap - the difference between current and optimal energy use - remains. Worldwide there are number of studies that have categorised and assessed energy efficiency barriers in industry. In the UK, Sorell [4] conducted an empirical study on energy efficiency barriers in the UK brewery sector. Both

2 Dyer et al. [5] and Timmis [6] have suggested possible barriers in the UK industry based on existing sector studies. Barriers to low-carbon heating alternatives in the UK process industries were indicated in [7] based on stakeholder inputs in With these exceptions however there is no known empirical study on barriers to and drivers of energy efficiency in the UK industry undertaken since the very large changes in ambition for climate policy in the UK (through the Climate Change Act 2008) and the significant rise in fuel prices over the last decade. In this article, we present empirical insights on production process related energy efficiency investment barriers, drivers and the decision-making process in the UK industrial sector from an online survey of relevant stakeholders. Before describing the survey and the results, a brief overview of energy efficiency barriers with an industrial context is given below. Barriers to industrial energy efficiency Most scientific literature categorises energy efficiency barriers from one or more of three broad perspectives economic, behavioural (social) and organisational [8][9][4]. Economic approaches conceptualise barriers as either market failures or market barriers [10]. The concepts of market barriers and market failures are useful for understanding how the identified barrier relates to economic efficiency, but is usually less useful for understanding its origins and potential remedies [11]. It has been argued that other social sciences are required to do so [12]. Behavioural approaches seek to use insights from psychological sciences and have been primarily used in addressing energy efficiency in households. Decision-making in non-domestic settings is more clearly collective and therefore the noneconomic literature derives much more from organisational and management theories. Whilst the main focus has often been non-domestic buildings, there is also a literature relevant to industrial processes, emphasizing the importance of management processes [13], corporate strategy [14] and sectoral attitudes and values [8]. However, generalizing energy efficiency barrier dynamics can be complex in industry due to its highly heterogeneous nature. There can be marked differences (even when producing similar products) in energy intensiveness, technologies, processes, decision-making structure, culture and socio-technical networks across industrial firms and sub-sectors. Moreover, there is often a stronger decision-making hierarchy in industry compared to the residential or services sectors. Competition for resources among business divisions, especially in large firms, is also not uncommon. This means energy efficiency projects and the respective barriers can be industry-, plant-, process- and region-specific. Despite the heterogeneity, a review of 160 studies on industrial energy efficiency barriers revealed that access to capital and hidden costs (e.g. costs of extra staff time involved and production interruptions) were top barriers in industry, especially in energy-intensive ones [15]. Insights were drawn from a wide range of previous studies (including the ones cited above) to select and classify the barriers and drivers of industrial energy efficiency and to carefully formulate the survey questionnaire.

3 Survey methodology Heterogeneity of the industry sector posed challenges as it made identification of a representative cross-section of sectors and companies problematic for surveying. Within some important (i.e. energy intensive) sectors there are a very small number of key companies, and therefore a statistically significant number of responses was not feasible. Moreover, there are very limited incentives for the relevant decision makers to respond to researcher surveys: the effort involved in responding may be significant (although the survey was kept as simple as possible, to limit this effect) and, perhaps more importantly, there are commercial sensitivities where energy is an important factor of production. The identification of a company energy efficiency decision maker was itself problematic. Energy managers, environment managers, energy intensive process managers, engineering directors and finance directors can all claim that title in different situations; they legitimately have different interests in and perceptions of the risks of energy efficiency and therefore may conceivably give different responses even within the same company. The goal of a statistically representative set of responses across the sectors, company types and relevant job descriptions was therefore not realistic. Instead the study focused on identifying decision makers who were likely to be well-informed, in important energy using sectors. The focus was on a qualitative understanding of the drivers and barriers rather than in seeking a high level of quantitative precision on the parameters of energy efficiency investment decisions. Survey context Different academic disciplinary frameworks represent the decision making process in the way that decision makers in industry may not immediately recognize. For example, a high hurdle rate for energy efficiency investment returns can be characterised as a capital market failure by economists or a prioritisation of core activities over more marginal ones by an organisational theorist. To an industrial energy manager, it is more likely to be seen as a simple fact of life. With this recognition, the survey intended to capture firm-level perspective where investments are decided based on external conditions, internal capability and potential for wealth creation for their shareholders. Energy efficiency is often not seen as a (direct) revenue generator therefore we considered only major cost and price attributes of energy efficiency as variables of wealth creation. Target information and answer choices The survey questionnaire was designed to capture insights on production process related energy efficiency from UK industry sector stakeholders by asking information on a number of items, including the following for which results are presented in this paper: (a) (b) (c) (d) (e) (f) Company/association profile Perceived barriers and their importance Present and future drivers of energy efficiency and their importance Relative cost of energy and economic decision-making criteria Actors involved and their power level Perceived credibility of information sources for energy efficiency measures

4 Table 1 lists the three functional categories and sub-categories of barriers selected for this survey with the firm-level investment perspective. Technology related barriers were excluded due to their variability and specificity to industrial sub-sectors. Table 1 Industrial energy efficiency barriers used in this study Barriers in this study (company perspective) Cost / price barriers Access to capital external financing, budget funding etc. Long / uncertain payback of energy efficiency investments Disruption to production and inconvenience Cost of gathering information and analysing opportunities Cost of implementation and monitoring Internal (organisational) barrier Lack of staff time or need additional skills Not a strategic priority - no energy / carbon reduction goals Energy objectives not linked to bonus or purchasing decisions Long decision chain within company External barriers Regulatory uncertainty - sudden changes in regulation Poor information on energy efficiency opportunities Obtaining planning permissions Unreliable equipment supply or maintenance Low market demand for lower carbon products Associated barrier in economic theory [15] Access to capital Risk Hidden costs Hidden costs Hidden costs Hidden costs Bounded rationality Split incentives Hidden costs / bounded rationality Risk Imperfect information Hidden costs Risk Failure to internalise externality Choice of questions and answers involved a multi-stage collate-review-eliminate-reviewfinalise process. After consulting existing studies and stakeholder inputs, potential questions were collated and piloted with 6 project stakeholders with expertise in industrial energy systems, energy policy and energy behaviour in the UK. From approximately 30 initial questions, 12 core questions were finalised for the survey. Profile of respondents A web-based questionnaire was sent to 46 respondents consisting of decision makers in major industry sector corporations and trade associations. 41 started the survey and 9 full responses were accepted as valid (~20% response rate). Notable responses are as follows: - A trade association of an energy-intensive sub-sector - A manufacturer with largest UK market-share of an energy-intensive sub-sector - A world-leading motor vehicle manufacturer with significant UK market share

5 Results and Discussion Out of 9 available responses, 6 responses were classed as energy-intensive 1 (EI) (2 Fortune 500 and 3 large multi-national corporations; 1 trade association) and 3 responses were classed as non-energy intensive (non-ei) (1 medium and 2 small enterprises). Given the number of responses, the results are not statistically significant. However, for the reasons set out in Methodology, we have reasonable confidence that the responses provide sufficient data to draw solid qualitative inferences, as well as to provide useful guidance for further quantitative investigations. Barriers and drivers of energy efficiency Figure 1 shows the relative rank of the barriers investigated. Access to capital, long/uncertain payback and regulatory uncertainty emerged as the strongest barriers. Among the energyintensive group, access to capital and regulatory uncertainty were given the highest scores, with indications that energy/carbon reductions are already of high priority (lowest score to Not a strategic priority ). Hidden costs, such as implementation and monitoring costs, lack of staff time and production disruptions, score high (3 or higher). Cost of gathering information, obtaining planning permission and unreliable equipment supply or maintenance follow closely behind. Poor information on energy efficiency is seen as a moderate barrier by all respondents (score ~2.5) with market demand for low carbon products scoring slightly higher. Energy intensive sector respondents All respondents Long / uncertain payback of energy efficiency investments Access to capital external financing budget funding etc. Regulatory uncertainty - sudden changes in regulation Lack of staff time or need additional skills Cost of implementation and monitoring Disruption to production and inconvenience Low market demand for lower carbon products Energy objectives not linked to bonus or purchasing decisions Not a strategic priority - no energy / carbon reduction goals Unreliable equipment supply or maintenance Poor information on energy efficiency opportunities Cost of gathering information and analysing opportunities Obtaining planning permissions Long decision chain within company Score (1: Least important, 5: Most important) Figure 1. Barriers and their rankings as perceived by all and energy intensive respondents Figure 2 shows the importance of various drivers viewed by respondents. One respondent from an energy-intensive multinational indicated that when choosing regulatory uncertainty, 1 Defined here as corporations/sectors with energy costs of 3% or more of total production costs

6 he/she also thought about the lack of sufficient incentives or financial support in addition to current carbon price support. For example, in order to meet EU emission targets, the steel industry would need to deploy potential breakthrough technologies currently at pilot stage but not available at commercial scale, and a much higher carbon price (than currently under EU ETS) or other financial supports would be required to justify required investments [16]. Cost-savings and long-term strategy are viewed as the strongest drivers of energy efficiency both currently and in future (Figure 2), indicating an acknowledgement of energy efficiency s importance in corporate strategy. All drivers are given relatively high importance among the energy intensive group. 5 non-ei - in 5 years EI - in 5-years non-ei - current EI - current Payback (years) - typical Decision making time (months) Payback (years) - energy efficiency Energy cost - % of production cost Score (1: Least important, 5: Most important) Needed upgrade Tighter regulation Competitive pressure Corporate responsibility Long term strategy Cost savings Payback: years Decision time: months Energy cost: % of production cost All EI non-ei Respondent Figure 2. Present and future drivers ranked by energy-intensive (EI) and non-ei respondents Figure 3. Average energy payback, energy costs (as % of production cost) and decision-making time among respondents Energy cost, payback period and decision-making time Among the energy-intensive group, energy costs as a percentage of production costs varied between 3-9 % (Figure 3). Energy efficiency investments enjoy a slightly longer payback criterion than typical investments. The payback for general investments lies in the range of 2-4 years. Six respondents indicated a required payback period of 4 years for energy efficiency investments. The energy intensive group, consisting of large corporations, show a much longer time for decision making, more than 7 months on average (5-13 months), reflecting the complexity of measures and organisational process involved in this category. Small enterprise respondents cite about a month on average for investment decision-making. Typical proposer and approver of efficiency measures The typical proposer varies across the respondents. One company identifying as SME indicated Board as both proposer and approver of energy efficiency measures, which is expected to be typical for a small enterprise. In the energy intensive group, responses about the proposer included Engineering Director, Senior Management, Anybody and Depends on the level of investment. When it comes to approval, C-level management is primarily seen as holding the key to final say on investments.

7 Two respondents from energy-intensive sectors indicated that decisions are made at different levels within the organisation depending on the type of investment. A senior manager of an energy-intensive corporation indicated that anybody within the company has the ability to bring forward and initiate an idea for an energy efficiency project and the whole workforce is encouraged to do so. Middle managers and above then take forward projects to follow through on ideas that receive favourable review. Schemes range from a few thousands at (sub-) plant level to 100 million+, and correspondingly approvals occur at multiple levels in the organisation. Another respondent, a Director of a trade association in an energy-intensive industry sector, indicated that the proposer depends on the level of investment. The proposal could be simple good ideas put forward by anyone in the organisation at any level and could be implemented following agreement and sufficient funds in budget at plant management level. Larger investments are subject to greater scrutiny and approval at higher levels. Relative variability in the proposer of energy efficiency investments reflects the wide range of types of project, company and sector, but shows the likely importance of staff with technical responsibilities. CXO and above as majority approvers reflects the expected governance of investment decisions in most companies. The two specific responses from energy intensive industries show that, in companies where energy efficiency is strategically important, energy efficiency decision-making and even innovation is integrated into the mainstream management processes and can occur in different levels depending on the size and type of investment. Energy efficiency and employee bonus In 50% of responses, employee bonuses were not found to be connected to energy efficiency savings, or the answer was Don t know (implying this is likely). In 25% of responses the two were connected at mid-management level. One world-leading motor vehicle manufacturer stated that bonuses were tied to savings at all levels. That employee bonuses are not connected at all levels in the majority of responses indicates that split incentives (or at least a lack of incentive) for energy savings remains an issue in much of the sector, but the company with the most sophisticated and developed approach to employee participation has extended this to energy management. Credible information sources for energy efficiency measures Respondents were asked to choose top 3 credible information sources for energy efficiency information from a given list. The majority of respondents viewed energy and environmental audits as highly credible, followed by consultants and colleagues in the sector, while energy companies were viewed as the least credible source of information. One respondent from an energy-intensive sector indicated the existence of an internal ranking system where 'most reliable' sources are listed internal audit belongs to this level. Next levels are identified as external audit, suppliers and consultants in that order. None of the respondents from the nonenergy intensive groups selected colleagues, journals, conferences and energy companies as one of the sources for energy efficiency information. This highlights the limited withinorganisation knowledge in this group and limited access to the specialist information sources enjoyed by their energy-intensive peers.

8 Attractiveness of energy efficiency measures Respondents were also asked to choose the top three energy efficiency measures from a list deemed financially attractive in coming years. Process-equipment change, staff training on energy efficiency/conservation, building improvements, efficient motors and drives and monitoring and management practices emerged as top investment choices in the past and future, with the first three seen to produce the fastest financial payback. The high attractiveness of options with significant and relatively easier savings potential aligns with the selection of cost-reduction as the strongest driver and Lack of staff time and skills as a strong barrier (related to staff training). Long term strategy as a top driver justifies the highest attractiveness of process/equipment modification and change, which often requires high capital investment, conversely leading to the top barrier of access to capital. Concluding remarks Survey responses indicate that access to capital, regulatory uncertainty and long/uncertain payback are the strongest barriers to energy efficiency investments among the UK industrial sector stakeholders surveyed. The main drivers of energy efficiency were found to be cost savings and long-term strategy. Among the respondents, energy intensive enterprises view a large number of drivers with relatively equal importance while the non energy intensive enterprises view tighter regulation and competitive pressure as key future drivers. Energy efficiency investments have an average payback criterion of about three years, slightly higher than other typical investments. Large energy intensive enterprises have a longer term perspective as well as longer decision making time for energy efficiency investments. The variability of proposers of energy efficiency investments reflects the wide range of types of project, company and sector, but shows the likely importance of staff with technical responsibilities. Top executives are usually required to approve investments. However, in companies where energy efficiency is strategically important, investment decision-making is more integrated into the mainstream management processes. The survey provided valuable stakeholder insights on the barriers and decision-making process of industrial energy efficiency. Taxonomies of barriers, drivers and key decisionmaking attributes with a firm-level perspective are presented for future studies. Further studies should focus on un-packing dynamics of major barriers that can be the manifestation of other incumbent processes in the sector. For example, access to capital can be the manifestation of incumbent budgeting or cost-accounting methods and/or decision-making heuristics. Such processes may not be suitable for capturing full financial and co-benefits of energy efficiency, thereby producing weaker business cases to financiers and decisionmakers. Similarly, the perception of long/uncertain payback can be a product of other dominant barriers (such as uncertain regulatory environment), a dominant production-centric thinking in the sector and/or a gap between perceived and actual risks among decisionmakers. A whole systems approach to energy efficiency appraisal (in contrast to a purely engineering approach) that captures its synergy savings and co-benefits, as well as better decision-maker friendly communication of these benefits have increasingly been seen as ways to address many of these barriers.

9 Acknowledgement The survey and the research described in this paper were funded by the UK Energy Research Centre through the Industrial Energy Use from a Bottom-Up Perspective project. References [1] Hammond, G. P. and Norman, J. B Decomposition analysis of energy-related carbon emissions from UK manufacturing. Energy, 41(1), [2] Altmann, M., Michalski, J., Brenninkmeijer, A. and Tisserand, P Overview of Energy Efficiency measures of European industry. European Parliament, 51 pp. [3] ERP Industrial Energy Efficiency. Energy Research Partnership, UK, 9 pp. [4] Sorrell, S Reducing barriers to energy efficiency in private and public organisations - barriers to energy efficiency in the UK brewing sector. Science and Technology Policy Research, University of Sussex, 151 pp. [5] Dyer, C. H., Hammond, G. P., Jones, C. I. and McKenna, R. C Enabling technologies for industrial energy demand management. Energy Policy, 36(12), [6] Timmis, A US-UK Comparison : Technologies, Attitudes and Barriers in Industrial Energy Efficiency. E-Futures DTC, University of Sheffield, 5 pp. [7] Walsh, C. and Thornley, P Barriers to improving energy efficiency within the process industries with a focus on low grade heat utilisation. Journal of Cleaner Production, 23(1), [8] Palm, J. and Thollander, P An interdisciplinary perspective on industrial energy efficiency. Applied Energy, 87(10), [9] Rohdin, P., Thollander, P. and Solding, P Barriers to and drivers for energy efficiency in the Swedish foundry industry. Energy Policy, 35(1), [10] Jaffe, A. B., Newell, R. G. and Stavins, R. N Economics of Energy Efficiency. In C. J. Cleveland (Ed.), Encyclopedia of Energy 2:79-90 (Vol. 2, pp ). Elsevier Science. [11] Eyre, N Barriers to energy efficiency more than just market failure. Energy and Environment 8(1): [12] Shove, E Gaps, barriers and conceptual chasms: theories of technology transfer and energy in buildings. Energy Policy 26(15): [13] DeCanio, S. J Barriers within firms to energy-efficient investments. Energy Policy, 21(9), doi: / (93)90178-i [14] Cooremans, C Make it strategic! Financial investment logic is not enough. Energy Efficiency 4(4):

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