Just like some print columnist run classic columns when they are on vacation, I’m rerunning this inspirational energy efficiency story, first posted July 25, 2008.
Energy efficiency is by far the biggest low-carbon resource available. It is also, as we’ll see, every bit as renewable as wind power, solar photovoltaic, and Concentrated solar thermal power 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 4.
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.
This post was originally part of my multipart efficiencies series from last year. Part 3 explains why efficiency is The only cheap power left, and Part 4 explains How California does it so consistently and cost-effectively. Part 5 explains why efficiency has the highest documented rate of return of any federal program.
- McKinsey must-read: U.S. can meet entire 2020 emissions target with efficiency and cogeneration while lowering the nation’s energy bill $700 billion!