UNDERSTANDING THE ENERGY EFFICIENCY INVESTMENT DECISIONS OF SMALLER MANUFACTURERS: A REPORT ON A SERIES OF ENERGY EFFICIENCY INDUSTRY ROUNDTABLES Ted Jones, Alliance to Save Energy Malcolm Verdict, CEM, Alliance to Save Energy FOREWORD This report documents findings from a series of industry roundtables conducted by the Alliance to Save Energy with representatives of smaller manufacturers to explore the incentives and obstacles to investing in energy efficient process improvements. The report follows closely behind an Alliance to Save Energy analysis of industrial energy efficiency in small- and medium-sized firms, Getting in Gear, How Energy Efficiency Can Help Smaller Manufacturers Compete in the Global Marketplace. As such, it supports the Alliance's renewed efforts to draw attention to this issue for an important, but difficult to reach market -- small- and medum-sized manufacturering firms. INTRODUCTION America's manufacturing companies use energy-efficient manufacturing equipment and process technologies to boost manufacturing productivity, lower production costs and minimize pollution. While many large corporations have the financial and technical resources to implement efficiency measures, smaller manufacturers have more constraints and are less likely to make similar improvements. Smaller manufacturers (those employing 500 or less) accounted for almost half of the manufacturing sector's total energy bill of$61 billion in t 991. According to DOE surveys, the potential savings for smaller plants are great because small and medium-sized companies use over 42 percent ofthe nationfs manufacturing energy and represent over 98 percent ofall u.s. manufacturing plants. Smaller manufacturers often pay more for energy per unit ofproduction than larger firms for several reasons -­ they do not qualify for the large volume discounts, they use less efficient equipment and processes, and they lack the capital and technical expertise to invest in efficiency improvements. Because of these resource differences, there is an untapped "gold mine" ofenergy efficiency opportunities in smaller firms. There are a number of federal, state, and utility-sponsored programs that offer energy efficiency assistance to smaller manufacturing firms. For instance, through the Energy Analysis and Diagnostics Center/Industrial Assessment Center (EADC/IAC) program the Department of Energy provides smaller companies with no-cost energy audits and recommends appropriate energy conservation measures. Over the past decade, the EADe program has conducted over 5,000 energy audits at smaller-manufacturing plants and has helped save over half a billion dollars in energy costs. However, only 40-50 percent of EADC audit recommendations are implemented on average. Reasons for this gap between what is technically cost-effective and what businesses actually implement---the industrial "efficiency gaptt - - are not well understood among providers of energy efficiency services. Understanding exactly why the t1 efficiency gap" exists requires a better understanding of how industry makes these investment decisions. Very little is known about how company situations, market conditions, environmental regulations, utility programs, and other factors inhibit or encourage energy efficiency investments for process-related improvements. To gain a better insight into the decision-making process of 293 smaller manufacturing firms, the Alliance to Save Energy, in cooperation with the U.S. Department of Energy Office ofIndustrial Technologies, conducted three industry roundtables. METHODOLOGY Over 68 people participated in the Alliance-DOE Industry Roundtables -- 26 of them from industry. State and federal government energy offices with programs relating to industrial conservation as well as local utility representatives were also invited to present and share their views. Each· roundtable was held in a different region to determine how responses varied across different business and utility supplier environments. Roundtables were held in Houston, Boston, and Portland, Oregon. The objective ofeach industry roundtable was to identify key factors which encourage or discourage small- and medium-sized manufacturers to invest in energy saving technologies for manufacturing processes. Improvements in building envelope, lighting and comfort related technologies do not generally impact the quality or expense of the plant output and were not a focus of this study. To address this information, each industry roundtable followed a similar format. Each roundtable nleeting was kicked-off with a short presentation from a utility representative or EADC/IAC staff member and then focused on decision making in small and medium-sized manufacturing firms. A few of the firms participating in the roundtables had greater than 500 employees -- such as Compaq Computers in Houston, Texas. Their insights, however, also appear to be applicable for small- and medium-sized companies. Roundtables were structured to address seven general discussion topics: 1. Origin of Energy Efficiency Projects 2. Evaluation Techniques 3. The Role of Risk and Uncertainty 4. Access to the Right Information 5. Operations and Maintenance Training for New Equipment 6. Utility Demand Side Management (DSM) Programs 7. Environmental Considerations In addition to providing insights on these topics, the roundtables enabled plant decision makers to learn about different energy efficiency improvements and exchange insights about industria! energy efficiency opportunities. Several industry representatives said that they participated in the roundtables to help improve the level of service offered by government programs, utilities, trade associations, the energy efficiency industry, and state energy offices. FINDINGS The following report summarizes the numerous responses from roundtable participants to each of the seven discussion topics listed above. 1.. The of Energy Efficiency Projects The origin of energy efficiency projects vary dramatically in small and medium manufacturing firms. They originate from both inside the plant and outside the plant. Energy Efficiency Ideas Originating From Inside the Plant Participants generally said they preferred to rely on internal resources for energy efficiency ideas. One roundtable participant claimed that everyone in his plant has contributed ideas on how to save energy including the plant engineers, production managers, the chief operating officer, and the chief financial officer. In fact, many project ideas have come directly from the president. According to another participant, the company's controller and vice president ofmanufacturing are the most likely to identify new efficiency opportunities. 294 In a few companies, innovative committee structures had been developed to help solicit ideas from employees. One industry participant described a gains sharing program that encourages everyone in the plant to identify energy efficiency as well as other types of projects that will improve the operating performance of the plant. Everyone in the plant is encouraged to complete a standardized form describing their ideas. Each project idea is then reviewed by committee with selected projects recommended to management for implementation. Another industry representative described a similar plant committee structure that focused solely on energy projects and was a key source ofenergy efficiency project ideas in the plant. Several ofthe manufacturers mentioned that regular energy monitoring and reporting helped to identify projects to help keep costs down. For instance, one industry representative said that energy efficiency projects were identified on a "cost driven" basis at his plant. If energy prices are high or there is a spike in energy costs the comptroller will focus plant resources toward controlling the increase through efficiency measures. For this reason, semi-monthly and weekly reporting is crucial to the firm in order to identify any irregularities in energy consumption4 Several of the manufacturers mentioned that regular energy monitoring and reporting helped identify projects to keep costs down. In cases where smaller firms were owned by large corporations, it was not uncommon for the smaller firms to adopt corporate strategies and goals to increase energy efficiency. In these instances, parent companies frequently provided financing and technical expertise in addition to guidance on energy efficiency investments. This type ofsupport is extremely helpful to smaller manufacturing firms. Several participants expressed frustration in getting fundamental information about energy efficiency projects. They complained about the difficulty and expense involved in finding efficiency projects that were worth serious investigation. Smaller plants often lack the resources to adequately research energy efficiency opportunities to an extent that an investment decision can be made by management. When they do investigate projects, they are likely to get conflicting answers. One energy manager told of investigating a cogeneration system and receiving very different advice from equipment vendors and the company's local utility representative. As a result, he did not know who to believe. Peers Offer Valuable Insights into Energy Efficiency Technologies Colleagues and peers in the industry were identified as being a very valuable resource for new energy efficiency ideas and insights into equipment performance, operations and maintenance requirements, training needs, etcu Several roundtable participants commented