Executive Summary

There is considerable room for improving the efficiency of industries in the United States. Studies have shown that the energy savings potential in the U.S. industrial sector in the years 2010 and 2015 range from 11-37% relative to a business-as-usual scenario. Several other studies have estimated the electricity savings potential in the industrial sector as between 9-38%.

There are many reasons why the majority of industrial firms do not capture the energy savings still available in the industrial sector. Energy costs are generally a small fraction of total industrial costs, which means that the typical firm pays only limited attention to their energy bills. Additionally, for most firms, capital is scarce. Because the links between improvement in energy efficiency and high priority goals such as improvements in plant productivity, product quality, environmental emission requirements, and labor and materials efficiency are generally not understood, energy-efficiency projects are considered non-strategic and take low priority when industrial firms allocate capital. A one- to three-year payback is often required for cost- saving investments such as energy-efficiency projects. Capital rationing, a common budgeting approach, further hinders energy-efficiency investments, since fewer investments are undertaken that would be justified by more conventional budgeting analysis.

Many industrial firms also have concerns about the long-term persistence of savings of energy-efficiency measures, the amount of downtime that will result from measure installation and maintenance, and the effect of process changes on productivity and ongoing operations. For some firms, there are doubts as to whether the technologies even save energy. The lack of easily accessible information on the availability and/or economic and technical viability of energy-efficiency measures under full-scale, actual usage conditions amplifies the skepticism. Smaller-sized firms in particular often do not even know about the specific technologies that are available. In particular, many small- to medium-sized industrial firms do not have the expertise on their staff nor the time to address energy efficiency in isolation from more strategic concerns.

Due to these barriers, there is justification for outside parties, such as utilities, to step in and encourage adoption of cost-effective energy-efficiency technologies. The field of utility demand-side management (DSM) has evolved to the point where utilities now have both the resources and the interest to play an important role in improving the energy efficiency of the U.S. industrial sector. In response to the growing interest in industrial DSM, this report documents utility experience with industrial DSM programs and provides recommendations to utilities and other key players on steps that could be taken to advance the field of industrial DSM.

Analysis of Incentive-Based Industrial DSM Programs

In order to analyze experience to date with industrial DSM, a survey of utilities was conducted and a database of industrial DSM programs was prepared. More than eighty utilities and thirdparty organizations were interviewed. Data were collected via phone, fax, and/or mail from the utilities and entered into a database. In order to limit the scope of this study, the database contains incentive-based, energy-saving programs and not load management or information-only programs (including technical assistance programs).

Programs in the database were divided into four categories: two "prescriptive rebate" categories and two "custom rebate" categories. Prescriptive rebate programs are those programs which offer fixed financial incentives to participants who install utility-defined energy-efficiency measures (i.e. specific lighting or motor-related measures). Custom rebate programs are those DSM programs which offer a financial incentive to encourage the design and implementation of site-specific energy-efficiency projects within a participant's facility. Incentives are typically paid for each kW or kWh of savings.

The primary measures of program success adopted for this study of industrial efficiency programs are high participation rates and/or high electricity savings as a percent of 1989 industrial electricity sales, at levelized costs below the avoided costs of most utilities.

Caveats

There are a number of important caveats associated with the data. Perhaps most importantly, these is significant variation in the quality of the industrial program data and the methods with which different utilities track data. Additionally, for about one-third of the programs in the database, the energy savings results are highly approximate because, for many of the joint commercial and industrial (C&I) programs in the database, a formal delineation of industrial versus commercial savings has not been performed. Other key issues include the fact that the number of participants, free riders, indirect costs, and customer costs are frequently not tracked.

Database Results

The database contains 31 incentive-based, energy-saving industrial DSM programs offered by 17 utilities. The appendix to this report summarizes the results of approximately 60 industrial DSM programs. Most of the programs included in the appendix, but not in the database, are either C&I programs for which commercial and industrial data were not disaggregated or new industrial DSM programs for which data are not yet available. One-half of the programs in the database offer custom incentives, one-third offer prescriptive rebates, and one-fifth offer both custom and prescriptive rebates. The average industrial program for which quantitative results were available (based on average database values and excluding remote outliers) has been offered for 4 years, has annually saved 0.2% of a utility's industrial 1989 electricity sales, has a 4% participation rate, and has a levelized utility cost of $0.019/kWh saved.

A total of 12 "successful" programs were identified in the database. These programs meet one or more of the following four criteria and cost the utility no more than $0.045/kWh saved: (a) annual participation rate of at least 8%; (b) annual savings as a percent of 1989 industrial sales of at least 0.5%; (c) cumulative participation rate of at least 12%; and/or (d) cumulative savings as a percent of industrial sales of at least 0.&%. The average annual savings as a percent of 1989 industrial sales for these "successful" programs are 1.1%, the average annual participation rate is 9%, and the levelized utility cost is $0.014/kWh saved. The successful programs have therefore achieved roughly six times the savings and two times the participation of the average program in the database, at lower cost. Features that appear to distinguish these twelve programs from others include addressing the industrial customer's perspective, using effective marketing strategies, offering a flexible program package, offering financial incentives, and performing extensive marketing research and program evaluations.

Steps To Advance Industrial DSM

There are a number of important steps which can be taken by particular parties to improve the field of industrial demand-side management. These include the following:

1. Utilities should improve industrial DSM program design by addressing customer concerns, improving marketing techniques, focusing on program flexibility, and offering financial incentives;
2. Utilities should improve data tracking methods and program evaluation techniques;
3. There should be improved information exchange among utilities through industrial DSM workshops and an industrial DSM conference;
4. Adjoining electric utilities should coordinate industrial DSM efforts to reduce customer and vendor confusion, and electric and gas utilities should coordinate joint industrial energy audits;
5. Utilities should establish better links with industries by attending industrial energy conferences and coordinating with industrial trade associations and state industrial efficiency programs;
6. Utility industrial DSM staff should receive education and training on industrial process materials and energy flows, the budgeting cycles of different industries, the general perspective of the industrial customer, and the links between improved energy efficiency and increased productivity and reduced environmental emissions;
7. The quality and quantity of data on industrial energy use patterns should be improved;
8. State-of-the-art energy-efficient industrial technologies should be demonstrated and monitored more widely; and
9. Links should be forged between energy efficiency and important industrial concerns.

120 pp., 1993, $25.00, U931

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