Energy efficiency, the low hanging fruit that grows back

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.

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9 Responses to Energy efficiency, the low hanging fruit that grows back

  1. Allow me to hold myself up as an example here in the great energy saving state of California. I blogged about my own tasty treat from the low hanging fruit just a few weeks ago as my electric bill hit another all time monthly low:

  2. David B. Benson says:

    Why don’t more organizations do energy efficiency stuff?

  3. paulm says:

    Chasing to the cut….

    UN climate change deal needs more sacrifices by West

    Vital UN climate change talks in Copenhagen are likely to collapse unless rich nations agree a “social justice deal” built around equalising emissions per head in each country, according to Prescott.

    …far greater sacrifices by rich nations…“Rich countries are showing great reluctance to face up to the reality of what rationing carbon means for levels of growth and prosperity in their countries. It is going to be a fundamental change.”

    China now emits more carbon than America in absolute terms, owing to the size of its population, but in per capita terms the US emits four or five times as much. Prescott warns: “Rich countries are showing great reluctance to face up to the reality of what rationing carbon means for levels of growth and prosperity in their countries. It is going to be a fundamental change.”

  4. paulm says:

    Copenhagen, he argues, will represent a major infringement on free market economies, even though it will use market mechanisms such as cap and trade to set a price for carbon through rationing.

    “What we are beginning to witness is a whole new set of rules for economics, based on rationing resources.”

  5. TokyoTom says:

    Joe, great post. I`m pretty sure I saw this the first time, as well as similar stories about Dupont and IBM.

    Shareholders at all firms ought to be demanding these kind of internal review/incentive programs, but why doesn`t CP/CFAP consider starting a competitive program that provides publicity bennies to participating firms and prizes to the winners? One can easily imagine a cycle of virtuous competition getting started and snowballing.

  6. Jim Beacon says:

    C’mon… resources have *always* been “rationed” throughout human history — it’s just that the rationing mechanism has always been the ability of individuals/organizations/nations to exploit those resources, with wealth being the big determining factor. Up until now, the bottom line was “If you can afford it, you have the “right” to use as much of a resource as you can find or buy” — while those who couldn’t compete with your wealth experienced “rationing” of what little you left them.

    Now, under the pressure of having 7 billion people living on the planet and the undeniable proofs that our pollution is going to render the place much harder to live in if we don’t control things on a coordinated, global scale, we are finally being forced to move towards an era where rationing of resources will be done using some additional criteria that look towards the common good for a change.

    But that pressure doesn’t mean that money won’t continue to determine who gets how much of any particular resource (or pollution license). That system will carry on for quite a bit longer, perhaps too long, with only some minor restraints. We’ve only just started out on the road to more rational, responsible and “fair” resource use/rationing. Let’s hope we still have enough time at our current snail’s pace to where we really need to be before the old ways kill us all.

  7. BBHY says:

    Since the end of WWII, most of the worlds economy has been driven by demand. In turn, demand has been artificially promoted through planned obsolescence, conspicuous consumption, and massive marketing. For many products, the majority of the cost is in the advertising used to sell it.

    We are soon facing the largest economic upheaval in the history of the human species, as the entire world is going to have to transition from a demand driven to a resource limited one. Capitalism as we know it will either die or be so fundamentally changed that it will be unrecognizable.

    In a demand driven economy, efficiency has little value. In fact there are many cases where it has negative value, at least to some. A more efficient automobile is not a welcome innovation to the oil industry, to cite just one of many examples. The health insurance industry, with overheads costs of 30%, is absolutely against a more efficient single payer system that has on overhead cost of 3%.

    In a resource limited economy, efficiency is of great value. In some cases efficiency will have greater value than anything else. If you need a resource, and it simply is not available in any form at any price, efficiency improvement may be the only alternative.

    Some of this economic transition will be made smoothly, without much trouble, but other parts could very well precipitate violence, civil unrest, rebeliions, even (probably) wars.

  8. Bob Gilbert says:

    Great article and the seed of a great idea.

    Use the spriit of competition to create contests, awards and recognition for EE at all levels of society.

    Yes, EE is a RENEWABLE RESOURCE.The fastest cheapest and most reilable on the planet. Period. While others COST MONEY EE actually has a net positive ROI !

    In our over 20 years of experience we have seen the promise of EE born out as a Renewable Resource where we go back to clients again and again
    with new options and opportunities to improve their operations and icnrease their efficiency.

    All the best

    Bob Gilbert, Pres.
    Efficiency 1st
    Raleigh NC

    Efficient Lighting Specilaist

  9. Carey A. Buckles says:

    I was an employee at that Dow site during the Ken Nelson Energy Contest years and the recipient of several of the awards. Ken’s strategy was relatively simple in that he identified boundaries and how values were calculated then gave employees, especially the younger, eager to make a name for themselves crowd, a tremendous amount of positive reinforcement for their efforts. It was challenging, competitive, fun, and economically productive all at the same time. It did puzzle me as to why it was eliminated and didn’t really catch on at other sites. Ken was a ‘champion’ for it in the Louisiana site and I assume equivalent ‘champions’ never materialized at the other sites. Either way, efficiency improvement is still a large nut to crack in American industry circles. People talk a good story, but it’s still not one of the core elements of our technical culture,…not yet.