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Energy efficiency, Part 2: The limitless resource

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"Energy efficiency, Part 2: The limitless resource"

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Energy efficiency is by far the biggest low-carbon resource available (see Part 1). It is also, as we’ll see, every bit as renewable as wind power, solar photovoltaic, and solar baseload.

People who have little experience with what serious energy efficiency investments can do for a company or a state — this means you, neoclassical economists who consistently overestimate the cost of climate mitigation! – think it is a one-shot resource wherein you pick the low hanging fruit. In fact, fruit grow back. The efficiency resource never gets exhausted because technology keeps improving and knowledge spreads to more and more people.

After leading the country in comprehensive efficiency efforts that have kept per capita electricity demand flat for three decades, California does not merely believe it can continue at this pace, they plan to accelerate their efforts and actually keep electricity demand itself flat. I have discussed California’s efforts and plans in previous posts (see Policies in Need of Californication and California makes efficiency “business as usual”), and will discuss them further in Part 3.

The focus of this post is the best corporate example of the inexhaustible nature of the energy efficiency resource — Dow Chemical’s Louisiana division.

You might have predicted that by 1982, after two major energy shocks, if any company in the country had captured the low-hanging fruit of energy savings, it would be one as energy intensive as a world-class chemical manufacturer. Nonetheless, energy manager for the division’s more than 20 plants, Ken Nelson, began a yearly contest in 1982 to identify and fund energy-saving projects. His success was nothing short of astonishing.

The first year had 27 winners requiring a total capital investment of $1.7 million with an average annual return on investment (ROI) of 173%. After those projects, many in Dow felt that there couldn’t be others with such high returns. The skeptics were wrong. The 1983 contest had 32 winners requiring a total capital investment of $2.2 million in a 340% return – a savings of the company’s $7.5 million in the first year and every year after that.

Even as fuel prices declined in the mid-1980s, the savings kept growing. Contest winners increasingly achieved the economic gains through process redesign to improve production yield and capacity. By 1988, these productivity gains exceeded the energy and environmental gains. The average return to the 1989 contest was the highest ever, an astounding 470% in 1989, 64 projects costing $7.5 million saved the company $37 million a year — a payback of 11 weeks.

Anyone would predict that after 10 years, and nearly 700 projects, the 2000 employees would be tapped out of ideas. Yet the contest in 1991, 1992, 1993 each had in excess of 120 winners with an average our ally of 300%. Total savings to Dow from the projects of just those three years exceed $75 million a year.

Here’s the shocking part:

Far from instantly spreading throughout the chemical industry, Nelson’s techniques have hardly even spread through Dow. Worse, in 1993, Nelson retired; reorganization wiped out his coordinating committee; and any continuing efforts can no longer be tracked.

Dow’s loss was, however, the Department of Energy’s gain because 1993 happened to be the year I came to the DOE as special assistant to the department’s chief operating officer, the deputy secretary. After benchmarking a number of the best companies, it was obvious that Dow’s approach was one of the most successful. The only question was whether the department could duplicate Dow’s results?

As a 15 billion-dollar agency, the Department of Energy is involved in a variety of activities that consume energy and generate waste, from basic research to the production of electronic equipment. Although our various divisions had robust pollution prevention programs, I was certain that some of the largest opportunities were being missed. To find and fund the project with the highest return on investment, we reorganized our Waste Minimization and Pollution Prevention Executive Board, with the department’s chief operating officer as the chair and myself as the Executive Director.

We hired Ken Nelson to train several of our facility staffed around the country on Dow’s program. We held a “Return-On-Investment” contest. As at Dow many in the department were skeptical that such opportunities existed. Yet, the first two rounds of the contest identified and funded 18 projects that cost $4.6 million and provided the department with $10 million in savings every year, while avoiding more than 100 tons of low-level radioactive pollution and other kind of waste. In addition, one special project identified by the contest but funded separately cost $4.2 million to implement a provider department a one-time savings of 37.6 million, a stunning 1300% ROI.

Finally, on the basis of the success of this headquarters-based program, many of DOE’s regional operating officers decided to run their own contests. They funded 260 projects costing $20 million that have been estimated to achieve annual savings of $90 million a year.

If an organization as big and bureaucratic as the US Department of Energy could do this, any company can. So whenever the country gets really serious about high energy prices and global warming, I expect we will achieve energy savings beyond what even the biggest technology optimists believe.

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12 Responses to Energy efficiency, Part 2: The limitless resource

  1. kenlevenson says:

    Wow – that’s really inspiring! Really.

    While I’d hope the next administration readopts these strategies across the board – it would be great if someone like a Bloomberg picked it up NOW for both for NYC and his company or partner with some NYC based corporations…and made a real demonstration project of it.

    American society needs just this sort of game-changing – shift in perspective.

  2. Brooks B. says:

    In a way, it’s incredibly depressing. How can such wonderful news be so consistently ignored? Why wasn’t Ken on the cover of Time?

    This story needs to be used as a 2×4 to knock sense into government officials, economists, and business people at every level.

    I’ll start by giving a copy of the article to our new mayor.

  3. kenlevenson says:

    I’d like to add that Ken Nelson’s story would make a great New Yorker article.

    Joe, you should pitch it to them – to Elizabeth Kolbert probably…. Loved her article on the conservative farming Danish island going carbon negative:
    http://www.newyorker.com/reporting/2008/07/07/080707fa_fact_kolbert

  4. This is such an important point.
    It would be cool to have a list of some of the best examples, from Dow and from the DOE, so people could see the kinds of mundane things that yield these big savings.

  5. David B. Benson says:

    Impressive. Why don’t more companies do it?

    Related, in this quarter’s issue of CalTech’s E & S magazine, there is an article mentioning that an additional $4 per square foot in construction costs for a new CalTech building going up is projected to save $67 per square foot over 20 years. That’s a decent ROI.

  6. Tim Walker says:

    Great post, Joe. The more I think about results like these, the more I believe that energy efficiency might follow a curve something like that of Moore’s Law. Not saying results will double every 18 months forever . . . but there’s no reason to think that there’s not a LOT of headroom for improvements.

    Thing is, cheap-cheap energy, which we had for a century-plus, tended to keep us from thinking / worrying about efficiency. But once you do start thinking of it — the sky’s the limit.

    At some point, I hope, this will become such conventional, obvious wisdom that non-green business managers will automatically pursue energy efficiency in the same way that they now look for competitive low bids from product vendors.

  7. David B. Benson says:

    Not limitless, but there is certainly a lot of room for improvement.

  8. Jonas says:

    Lol at “solar baseload”.

    The Bellona Foundation sees energy efficiency as the biggest wedge in a scenario that aims to reduce carbon emissions by 85% by 2050. Efficiency can contribute around 25%.

    The second biggest wedge is carbon-negative bioenergy, which provides 20%.

    The third biggest wench is all other non-biomass renewables combined (solar, wind, CSP, hydro), which provides around 10%.

    So, as an individual blogger, Romm is not that far off the mark set out by a professional group of scientists.

    Good job!

  9. R. Shamel says:

    Ken Nelson should give workshops on his methods–or write a book. (One problem is that companies don’t want their competitiors to know how much money they’re saving with these measures.) Ken’s methods would also be great to teach in a production course at the likes of Harvard Business School, Sloan, Tuck, Wharton and etc. Wow, what a beautiful win-win!

  10. Hal Levin says:

    Great story. Thanks Joe. I have no doubt that Dow and others can do that and more. But what made that possible is that they were wasting so much before. We are a nation of energy and resource wasters, both individually and as public and private organizations. The potential for saving is correspondingly large.

    Joe, you wrote about the low-hanging fruit of conservation: “In fact, fruit grow back. The efficiency resource never gets exhausted because technology keeps improving and knowledge spreads to more and more people.”

    I take exception to the use of “never” there. There is only so much fruit on a tree, and the new technology can still only be used to harvest some (or perhaps all) of what is still on the tree.

    At a manufacturing company, you have to be using [read "wasting"] a lot to save a lot unless you simply stop operating/producing. Surely there is an enormous amount of waste due to inefficiency and a lot more due to foolish use and there are still a lot of low-hanging fruit falling off the trees and piling up and rotting around our ankles, as Amory Lovins wrote just a few years ago [http://www.rmi.org/images/PDFs/Energy/E05-16_EnergyEndUseEff.pdf].

    But eventually you will be “lean and mean;” if you are really lean and mean and not using much, there may not be much room for improvement. Waste won’t grow back unless you are careless. There is some point of diminishing returns as you asymptotically approach zero total use.

    It’s a little like tax deductions. My father taught me that you have to have income to benefit from deductible expenses. You need to use and waste a lot to save a lot. Of course you can simply turn whatever is running off, but then aren’t doing (producing) anything if your business is manufacturing. Supply of materials will still have to be delivered, even if by very efficient rail, and product will have to be exported, again by some means consuming some energy.

    Think about it. Once your house is energy neutral (like mine) due to careful consumption, energy-efficient appliances and equipment, a solar hot water heater (paid for partly with California’s incentives of the late 70s and early 80s), and 2500 watts of PV panels on the roof (1/3 paid for by CA rebates and federal tax breaks), there is not much here that more conservation is going to save. Sure, LEDs and the next generation refrigerator will help.

    Of course America is full of houses with lots of room to save by employing these and similar measures; I would guess that somewhere well beyond 2/3 of current residential building energy consumption could be eliminated rather easily and a similar value for most non-residential buildings. But then it starts to get rough to find ways to save. Especially since buildings are being designed and built assuming that they will be air conditioned (more than 80% of U.S. homes and a similar or higher fraction of offices and schools) and in so much in places where air-conditioning is considered essential – the desert southwest, the deep south, Florida, etc.

    About 20 to 25% of the energy loads in buildings are electric plug-in devices, and most of them could be more efficient, like my present refrigerator which uses half the energy used by the 20-year old one it replaced 7 years ago. That first half was easy. Something like a 5- to 7-year payback. The next quarter is probably on the horizon. But after that, it’s an uphill battle without a quick payback – unless and until the cost of electricity goes out of sight.

    Sitting here typing on the only computer I ever use anymore, either at home or on the road, a very small (10.1 inch screen) laptop with extremely low power consumption, I know my old 17″ CRT and 19″ LCD are simply not plugged in anymore. I don’t miss them at all. But LCD and plasma televisions have been getting bigger and bigger, so there’s at least one new place to save with conservation down the road.

  11. Tim Walker says:

    @Hal Levin — You make a good point when you talk about diminishing returns. But I would offer a few thoughts in reply:

    1. There is SO much being wasted right now — in many cases, simply because energy use was seen as so cheap and so consequence-free in earlier decades — that it’s going to take a LONG time to reach a society-wide point of diminishing returns. This is especially so since the key industries that will have to enact these efficiency gains (construction, electric utilities, etc.) are constrained by enormous capital costs, slow evolution of infrastructure, and a general cultural resistance to change.

    2. Another metaphor that might work in place of the fruit tree is Moore’s Law. Part of the power of Moore’s observation is that it has held and held and held long after the obvious initial improvements to efficiency and miniaturization were made. I have little doubt that in a couple of decades, your energy-neutral house will be much closer to the norm, and that early adopters like yourself will have moved on to arrangements that routinely return energy to the grid, take carbon out of the atmosphere, etc.

    3. Related to #2: When Jack Welch instituted the practice at GE of firing the bottom 10% of performers in each department every year, the process was easy for the first couple of years. Consider if you were the line manager of a team of ten: In Year 1, you get rid of the sorehead who never did much anyway, and everybody’s happy. In Year 2, you get rid of the nice guy who’s just not that good, and while it’s a little painful on a personal level, it’s fairly easy to justify from a performance standpoint. But then in Year 3, you dig in your heels and swear up and down that there’s no more fat to cut. But the underlying principle behind the system is that you *always* dismiss the bottom 10%, and by doing so you constant redefine — upward — the overall performance of the team and the organization as a whole.

    My summary: as we get better and better, I predict, we will see more and more that we can be doing. Yes, there will be diminishing returns at some point — but we’re so very far from hitting that point that it need not concern us for at least several decades.

  12. Dozens of these types of stories on profitable business energy efficiency improvements used to be published every month in Energy User News back in the 1980′s, when for example, Northeast Utilities had their Energy Action Program. I agree that the opportunities for constant improvements to facilities as technology and designs improve is vast, and is especially so for new construction. Lets get going. And policy matters.