Boardroom Perspective

Energy Efficiency Series
THE BOARDROOM PERSPECTIVE: HOW DOES ENERGY EFFICIENCY POLICY INFLUENCE DECISION MAKING IN INDUSTRY?
INFORMATION PAPER
Julia Reinaud and amelie GoldbeRG, institute foR industRial PRoductivity
2011
November
THE BOARDROOM PERSPECTIVE: HOW DOES ENERGY EFFICIENCY POLICY INFLUENCE DECISION MAKING IN INDUSTRY?
Julia Reinaud and amelie GoldbeRG, institute foR industRial PRoductivity

This information paper was prepared for the IEA Working Group for Energy Efficiency in October 2011. It was drafted by the Institute for Industrial Productivity (IIP) in collaboration with the IEA. This paper reflects the views of the International Energy Agency (IEA) Secretariat, but does not necessarily reflect those of individual IEA member countries. For further information, please contact Lisa Ryan, Energy Efficiency Unit at: lisa.ryan@iea.org or Julia Reinaud, IIP at: julia.reinaud@iipnetwork.org.
INFORMATION PAPER
2011
November
Second Edition March 2012
INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its primary mandate was and is two-fold: to promote energy security amongst its member countries through collective response to physical disruptions in oil supply, and provide authoritative research and analysis on ways to ensure reliable, affordable and clean energy for its 28 member countries and beyond. The IEA carries out a comprehensive programme of energy co-operation among its member countries, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agencys aims include the following objectives: n Secure member countries access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions. n Promote sustainable energy policies that spur economic growth and environmental protection in a global context particularly in terms of reducing greenhouse-gas emissions that contribute to climate change. n Improve transparency of international markets through collection and analysis of energy data. n Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy efficiency and development and deployment of low-carbon technologies. n Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry, international organisations and other stakeholders.
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TheBoardroomPerspective:HowDoesEnergyEfficiencyPolicyInfluenceDecisionMakinginIndustry?
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TheInstituteforIndustrialProductivity(IIP)isaglobalnonprofitorganisationwhosemissionisto help decisionmakers in government and industry develop and implement policies and corporate practicesthatwillsignificantlyreducegreenhousegasemissionsandimproveeconomicefficiency in the industrial sector. IIP works with energyintensive industries and governments on technologiesandpoliciesthatreduceenergyintensity. IIPhascreatedaglobalhubofexpertiseandinformationonpolicyinitiatives,investmentoptions andinnovativetechnology.ThefollowingareIIP'stargetedservices: Policy assistance. IIP's services support policy makers in the development and implementationofsuccessfulindustrialenergyefficiencypoliciesandprogrammes. Financialexpertise.IIPhelpsgovernmentsandfinancialinstitutionsdesignenergyefficiency financialmechanismsandassistscompanieswithaccesstoexistingfinancialproducts. Technical support. IIP provides technical and research assistance on the best available technologies. Best practices.We cooperate with the worlds top experts to track industrial energy efficiencyandclimatemitigationadvancesandsharethemostsuccessfulideasthroughour communitiesofexperts,publications,meetingsandonlinelibraries. Funding. We ensure that timely and indepth analysis is undertaken in areas where informationgapsexist. The Institute for Industrial Productivity has offices in Washington DC, Paris, Beijing and New Delhi.IIPistheprincipalvoiceonindustrialefficiencyfortheClimateWorksNetwork,aglobalgroup of organisations (Best Practice Networks and Regional Climate Foundations) that work in the nationsandeconomicsectorswiththehighestpotentialforlowcarbon,economicgrowth. www.iipnetwork.org
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Acknowledgements
A team of people from the Institute for Industrial Productivity, Ecofys and the International Energy Agency worked together to produce this publication, which examines how energy efficiency and greenhouse gas mitigation policies can influence decisionmaking in the Page|4 boardroomsofindustrialcompanies. Julia Reinaud and Amlie Goldberg from the Institute for Industrial Productivity are the lead authorsofthisreport. Bart Wesselink, Fieke Geurts and Maarten Neelis from Ecofys provided extensive research and analytical material on what factors influence boardrooms to take energy efficiency actions and make investments, and came up with the boardroom perspective framework, illustrating the five drivers reflecting the boardrooms decisionmaking process. Clive H. J. Mason from the InternationalFinanceCorporation(IFC)providedkeyinputanddraftedmaterialonthefinancial aspectsofboardroomdecisionmaking. ThispublicationbuildsontheworkoftheIEA,whichconductedananalysisonenergyefficiency policies for industry in an internal report titled Energy efficiency policies and measures for industrywithcasestudyofenergymanagementbestpracticesdevelopedbyKanakoTanakaand coauthoredbyJohnNewman. TheprojectwasmanagedbyJuliaReinaudfromtheInstituteforIndustrialProductivityandLisa RyanoftheIEA.NigelJollands,formerlyoftheIEA,providedstrategicguidance. ThetopicofthispublicationwasproposedandconsideredbytheIEAsEnergyEfficiencyWorking Party (EEWP) in September 2010. A draft of the publication was considered by the EEWP at its meetinginMarch2011.TheteamwouldliketothankallthoseintheEEWPforprovidingvaluable comments. ThispublicationwaseditedbyIlzeB.RaathandformattedbyMaryRoseCleereandJennyGell, undertheguidanceofMarilynSmithoftheIEACommunicationsandInformationOffice.Corinne Hayworthcompletedthelayoutandgraphicsofthereport.
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Tableofcontents
Acknowledgements..........................................................................................................................4 Executivesummary...........................................................................................................................7 Introduction......................................................................................................................................9 Page|5 Theeffectofpoliciesfromaboardroomperspective.............................................................13 Fivedrivingforcesimpactinginvestmentdecisions................................................................15 Illustrationofdriversinfluencingdecisions.............................................................................23 EvaluatingenergyefficiencyandGHGmitigationpoliciesusingthe boardroomperspectivemodel......................................................................................................27 Policytypes..............................................................................................................................27 Prescriptivepolicies.................................................................................................................28 Economicinstruments.............................................................................................................32 Informationpolicyinstruments...............................................................................................37 Summaryofpolicyimpactondrivingforces...........................................................................39 Howtoapplytheevaluationmethodology...................................................................................45 Applicationoftheframeworktoatestcasestudy:theNetherlands..........................................47 ThepolicymixintheNetherlands...........................................................................................47 Conclusions.....................................................................................................................................53 Appendix1......................................................................................................................................55 Informationoncountrycharacteristicsandcircumstances:theNetherlands........................55 Acronyms,abbreviationsandunitsofmeasure............................................................................59 Acronyms.................................................................................................................................59 Abbreviations ..........................................................................................................................59 . Unitsofmeasure.....................................................................................................................59 References......................................................................................................................................60 ListofFigures Figure1Policyeffectivenessfromapolicypackageperspective...................................................12 Figure2Howpoliciesinfluenceboardroomdecisionsonenergyefficiency..................................13 Figure3Illustrationofthefivedriversreflectingtheboardroomsdecisionmakingprocess.......14 Figure4IFCsportfolioofmeasuresandpolicies...........................................................................20 Figure5Illustrationofthefivedriversreflectingindustrialboardroomsdecisionmaking processonenergyefficiencymeasuresintheNetherlandstoday...................................47
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Listoftables Table1Energyefficiencyactionandinvestmentexampleswithincreasingcosts........................10 Table2DistributionofrequiredpaybackperiodsbyfirmsintheNetherlandsandGermany ......19 . Table3Illustrationofdrivingforcescompetingforasingleinvestmentdecision intheboardroom...............................................................................................................25 Page|6 Table4Differentpolicyinstrumenttypes......................................................................................27 Table5Differentnormsandstandards........................................................................................29 Table6Differentobligationsandcommitments............................................................................30 Table7Differentvoluntaryandnegotiatedagreements...............................................................31 Table8Differenttaxesandtheirimpactonthedrivers.................................................................33 Table9Impactofdifferentsubsidiesonthedrivers....................................................................34 Table10Impactoftradablepermitsonthedrivers.....................................................................36 Table11Impactoflabellingonthefivedrivers...........................................................................38 Table12Impactofinformationpoliciesandmeasuresonthedrivers..........................................38 Table13Generalevaluationoftheinteractionbetweendrivingforcesanddifferenttypes ofpolicies..........................................................................................................................39 Table14Netherlands:Interactionbetweendrivingforcesanddifferenttypesofpolices (status:2010)....................................................................................................................50 Table15SolvencyandreturnonequityofDutchindustrialsectors,20062008 ..........................57 .
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Executivesummary
Improving energy efficiency (EE) in the industry sector enhances competitiveness and productivity, and provides a range of ancillary benefits. While many investments bring some EE benefits, their aim generally is to enhance core business through an increase in production or Page|7 replacementofoldequipmentratherthandeliverenergyefficiencyimprovements. The rationale for an individual company making an investment that will reduce energy consumptionvariesconsiderablyanddependsonarangeoffactors.Theseincludethereturnon investment;marketconditions;sector;companysize;energyintensity;costofenergyrelativeto overallproductioncosts,whetherEEimprovementisanincidentalorancillarybenefitofaprocess or equipment upgrade (or part of a concerted effort to implement an EE programme); the financialstateofthecompany,whetheritisinagrowthorsunsetsector;andaccesstofinance. While recognition that energy efficiency is a powerful tool to cut operating costs, improve the economy and reduce environmental pollution has never been greater; the implementation of energyefficiencymeasuresintheindustrysectorisslowtomaterialise(IEEFP,2009).Thisisdue toarangeofbarriersincludinginsufficientinformation,competingprioritieswithinthecompany andthelackofcommerciallyviablefinancingoptions.Policieshavearoletoplaytoaddressmany oftheexistingbarriers. Typical policies that target industrial energy efficiency include regulations and voluntary agreements that directly compel actions; economic policy instruments such as taxes and tax incentives, directed financial support (e.g. subsidies and loans) and differentiated energy prices that seek to influence the costeffectiveness of technical actions; and informational policies, whichhelptoestablishafavourableenvironmentforindustrytoimplementEEactions. This report explores the factors that influence companies to invest in energy savings and proposes a methodology to evaluate the effectiveness of a countrys policy mix from the perspective of an industrial companys boardroom. In other words, are companies made more aware of EE benefits and more motivated to invest in energy efficiency projects which are otherwisenormallyneglectedasaresultofoneoracombinationofpolicies? Essentially, the boardroom perspective delves into the major factors or driving forces that decisionmakerswithinalargeindustrialcompanytakeintoaccountwhendecidingtomakenew investments. In order to assess whether policy packages are effective through this boardroom perspective, the corporate decisionmaking process is simplified and represented by using five drivingforcesasproxies: Thefinancialimperativesofacompany. Thepolicyobligationsplacedonthecompanytoachieveenvironmentalcompliance. Theknowledgeofenergysavingsopportunitieswithinthecompany. Thecommitmentofthecompanytotheenvironmentandenergyefficiency. The demands of the public and market to improve the companys environmental or energy performance. The boardroom perspective reflects the premise that the effectiveness of energy and climate policies is ultimately determined by the ability of policies and the policy mix to stimulate the boardroom to maximise the implementation of energy efficiency measures when making investmentdecisions.Byexploringpolicyeffectivenessthroughthefivedrivingforces,thereport cametoanumberoffindings.DependingonthetypeofEEinvestments,therelativeimportance
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ofdriversmaybedifferent.Forexample,acompanymaynotknowwhichsimplenoorlowcost EEmeasuresitcouldtake,i.e.theknowledgedrivermaybemoreimportantthanotherdrivers, forinstancethefinancialdriver. In such a case, policies that require the appointment of an energy manager or information policiesonenergymanagementbestpracticesmayplayanimportantrole.Bycontrast,financial Page|8 subsidies might not influence the level of skills of the energy manager or the attractiveness of existingnoorlowcostinvestments.Assuch,theneededpolicymixmightnotbethesameforall sectorsandinallcountries. The fact is that policies and the overall policy mix cannot always be effective in triggering all drivers. Numerous commercial and business drivers (i.e. the public and market driver) may or maynotbeaffectedbypolicy.Inordertoassesstheneedforadditionalpolicyinterventionfora givencountry,theevaluationmethodologyfromtheboardroomperspectivewouldinvolve: Identifying the type of EE investments the industry needs to make to achieve the countrys objective. Mapping the characteristics and circumstances of the country with respect to the different industrial sectors, and assessing the relative importance of the drivers of boardroom investmentdecisions,consideringthesectorscharacteristicsandthetypeofEEinvestment. Analysing the countrys policy mix; assessing its impact on the drivers for investments in EE withinasector;andidentifyingwhetherpoliciescouldfurtherinfluencethedrivers. Only by focussing at a subsectoral level can policy makers estimate whether policies have an effect on the most important drivers in that sector (e.g. financing, policy obligation or knowledge). By applying the methodology to the industry sector as a whole in the Netherlands, this report found that the Dutch policy package addresses all five drivers to a greater or lesser extent. Currently, the main trend is that the impact (on commitment and knowledge) of the Dutch covenants in boardrooms is decreasing, whereas the financial and policy obligation impacts of European Union Emissions Trading Scheme (EU ETS) are growing as the greenhousegas (GHG) mitigationtargetsarebecomingmorestringent. Couldastrongerpolicyobligationforenergysavingsincombinationwithachangeineconomic policies be the key to improving the energy efficiency performance of companies in the Netherlands? The analysis presented in this report should be considered alongside some caveats. The main framework used, namely the boardroom perspective, is a theoretical perspective based on a literaturereview.Whileanillustrativeapplicationoftheperspectivehasbeenundertakenforthe Netherlands, several indepth case studies and interviews with experts and quantitative policy evaluationstudiesusingtheevaluationmethodologydescribedaboveareneededtovalidate the boardroom perspective as an authoritative framework for evaluating policy packages to maximiseenergyefficiencylevels. The present assessment focuses broadly on industry as a whole, while the importance of the drivers is likely to be subsectorspecific. A followup study could consider how these drivers operate in different sectors and if the policy maker can influence boardroom decisions on whether to invest or not. If additional policies are effective in triggering the drivers for investments,evaluatingthecostsandbenefitsofsuchpolicieswouldalsohelppolicymakersto designanewpolicy.
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Introduction
Energyefficiencyinindustry
Industrialenergysavingsmeasuresareknowntodeliverbenefits:costsavingsfromenergybills Page|9 (i.e.intermsofenergycostperunitofproduct,thoughoverallenergybillsmaystillincreaseas production increases); minimising the impact of energy price rises; and increasing longterm productivityandcompetitiveness. Energyefficiencyalsoleadstobenefitsbeyondareductioninenergycosts.Researchamong95 companies conducted by the Pew Centre (Prindle, 2010) found that the benefits of energy efficiency go beyond dollars saved and carbon emissions reduced, to product quality and productivityimprovements. For many types of industrial investments, energy efficiency is an inherent benefit of facility upgrading. Investing in replacing old or obsolete technology brings about integrated improvements in productivity, product quality, overall plant efficiency, improved energy efficiency (i.e. measured as energy use per unit of production), and broader innovation and process improvements within a company (Prindle, 2010). For highenergy intensive industries suchasprimaryaluminium,steelandcement,energyefficiencygainsalonemaybeasufficient driverfornewinvestment. Energy savings in industry can be achieved through better management as well as new investments.Insomesectors,noorlowcostimprovementsinenergymanagementcanleadto significantsavingsevenbeforeanyinvestmentisneeded. Energyefficiencyprojectsrefertoinvestmentsinequipment,systemsandservicesthatresultina reduceduseofenergyperunitofproductorservicegenerated(e.g.replacinganoldboilerwitha newboiler).Severaltypesofinvestmentincreasetheenergyefficiencylevelsofcompanies: Increase in process efficiency: investment in projects that will increase the efficiency of the process. Industrialprocesschange:whereaplantofahigherproductioncapacitybuthigherefficiency replacesanexistingproductionline(witholdunitsbeingretired). Facilityreplacement:anewfacilityreplacesanoldfacility,regardlessofitslocation,andthus theoldfacilityisclosed. Electricity/gas generation and distribution efficiency: investments that reduce energy systemlossesandimprovesystemefficiency. Some investments will have a very short payback period, which is useful for demonstrating to seniormanagementthebenefitsofenergyefficiencyimprovements.Otherinvestmentswillhave higher costs, possibly leading to a change in production technology and process, resulting in additional gains on labour costs, and improvements to product quality. The different types of energyefficiencyinvestmentdecisionsareillustratedinTable1.
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Table1Energyefficiencyactionandinvestmentexampleswithincreasingcosts Levelofinvestment Simple housekeeping

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Action/investment Turningofflightsandotherequipmentwhennotinuse Organisationalchange,e.g.switchingtolowrateovernightpower,where available Replacementlightswithcompactfluorescentlightbulbs(CFLs) Variablefrequencydrive(VSD)motors,newpumps Heating,Ventilation,andAirConditioningreplacement Newboilers,refrigerators Backupgeneratorreplacement Cogeneration Processequipmentupgradesandselectiveequipmentreplacement Replacementofcompleteproductionlines Newpowergenerationunits,ifoffgrid,onsiterenewableenergygeneration Onsitepowertransmission Newplant,newfacility
Lowercost investment Mediumcost
Highercost Highcost
Highestcost
Source:Mason,2011.
Cobenefitsofinvestmentsthatimproveenergyefficiencylevels ThroughtheInternationalFinanceCorporations(IFC)energyefficiencyfinanceprogrammeinRussia, acommercialbakerysoughtfinancingtoreplaceoutdatedandenergyinefficientovensandboilers. Thenewequipmentproducedsignificantenergyefficiencygains,butalsoproducedarangeofother benefitsthathadnotbeenfactoredin,yetfinanciallywerejustassignificant,ifnotmoresothanthe energy efficiency gains. The new ovens had an even temperature throughout, resulting in evenly bakedproductsofbetterquality.Wastagefromovercookedorunderbakedproductswasreduced, resultinginlesswastefordisposalandsavingsiningredients.
Source:IFC.
This report focuses on energy savings that are achieved through both changes in management practices(i.e.trainingstaffonnewenergymanagementpractices)andenergyefficiencyprojects thatrequireinvestmentsintechnologiesorequipment.Assuch,itexploreswhethercompanies have the capacity to continuously identify energy efficiency improvements as well as oneoff technologychoices.
Challengestomaximisingtheenergysavingspotentialinindustry
Bothonaregionalandglobalscale,ithasbeenestimatedthateconomywideenergysavingscan potentially contribute up to half of the GHG abatement needed to achieve longterm GHG reductionsin2050(Ecofys&Fraunhofer,2010;IEA,2010). Althoughstudieshaveshownthatinvestingtodayinenergyefficienttechnologieswillgenerate fuel savings that significantly outweigh the initial investment cost over the lifetime of the purchase,companiesoftendonotmakeinvestmentsthatimprovetheirenergyefficiencylevels to their maximum potential. Practicing energy efficiency management often makes economic sense,butmaystillnotbeadopted.
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Investmentsthatmaximiseenergyefficiencyarenotundertakenduetoeconomic,behavioural, technical and organisational barriers, or because companies prefer alternative investments in growth or business development above these. For example, when companies replace technologies, while some may bring additional benefits in terms of energy savings at small incrementalcost,theyoftenforegotheseoptions. Theextentofthisparadoxwilldependonthemarket,theindustrialsector,thesizeofcompanies, Page|11 and their energy use as a proportion of their overall production costs. Sectors where energy represents a higher cost of production than others will have greater incentives to implement energyefficiencymeasurestoenhanceormaintaintheircompetitiveness.Accesstofinanceand thecostofcapitalarebothkeyissuesinemergingmarketsinparticular. Whencompaniesdonotmaximiseenergyefficiencylevelswhentheymakeinvestmentdecisions, theremaybeapotentialroleforgovernmentpolicies.
Thetimelyroleofpolicymakers Many[US]industrieswilleventuallyenteranewperiodofmajorcapacityinvestment.Thisperiodwill representamajoropportunitytoinfluencetheenergyefficiencyofthesefacilitiesforgenerationsto come. The challenge is that [industrial energy efficiency policy] programme managers must begin engaging their industrial companies now, so the programmes are positioned to exploit a rare opportunitytochangeenergyusepatternsfortheyearstocome.
Source:ACEEE,2008.
Policypackagesarenecessarytofullystimulateenergyefficiencyinvestments Investmentinenergyefficiencyentailsacomplexprocessduetomanybarriersanddecisionmakers. To achieve a greater impact the implementation of several complementary measures that will help address all steps towards efficient deployment. These packages of measures should combine information and communication actions, regulations, subsidies, soft loans, training and certification andshouldbeimplementedsimultaneouslyandnotoneafteranother.
Source:WorldEnergyCouncil,2010.
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Aimofthereport
The aim of this report is to explore the factors that influence companies to invest in energy savingsanddevelopapolicyevaluationframeworkfromanindustryboardroomperspective. A variety of methods are already applied in expost policy evaluation.1 The methodology to Page|12 evaluate policies presented in this report provides a new perspective: it assesses a countrys policypackageaccordingtotheindustrialboardroomdecisionmakingprocess.
Figure1Policyeffectivenessfromapolicypackageperspective
The boardroom perspective reflects the premise that the effectiveness of energy and climate policies is ultimately determined by the ability of policies and the policy mix to stimulate the boardroom to maximise the implementation of energy efficiency measures when making investmentdecisions. The relationships between the characteristics and design of a policy (policy instrument characteristics),acountryspolicymix(policypackage), andwhatdrivesabusinesstomakethe investments (driving forces) are critical in analysing the effectiveness of a policy package. The frameworkisdevelopedtoanswerthequestion:
Methodsinclude: 1. Distanceorprogress,totarget:analysesofaggregatedindicatorsonenergyconsumptionpersectororcompany areassessedagainstthepolicytarget,e.g.abaselinedevelopmentoranabsolutetarget. 2. Effectiveness evaluations: focussing on the quantitative impact of policy packages in relation to targets set (includingteasingoutwhatthepolicycontributedtotheprogresstotarget,andwhichisduetoexternalfactors). 3. Efficiency evaluations: assess the costs of implementing policies, and whether the desired effects of the policy couldhavebeenrealisedatlowerimplementationorsocialcosts. 4. Implementation evaluations: in which the whole policy implementation process of specific instruments or programmes is unravelled in detail (Khan et al, 2007). This reveals deeper insight into where something went wrongintheprocessofpolicydesignandimplementationandwherethekeysareforimprovingtheimpactand costeffectiveness(Harmelinketal,2008).
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How balanced and effective is this countrys policy package in stimulating the industrial boardroomsdecisionstoinvestinenergyefficiencypracticesandtechnologies? Section2introducestheboardroomperspectiveandexploreswhichdrivingforcesplayarolein the industrial boardrooms decisionmaking process for investments that maximise energy efficiency.
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Figure2Howpoliciesinfluenceboardroomdecisionsonenergyefficiency
Section 3 introduces a policy instrument typology and describes how driving forces for energy efficiencyinvestmentdecisionsareinfluencedbythecharacteristicsofthesepolicytypes. Section4collatesthisinformationintoamanualonhowtoapplythepolicyframeworktoassess theeffectivenessofacountryspolicypackagetoincreaseindustrialenergyefficiency. In Section 5, the evaluation framework is tested and applied to the Netherlands as a country example. The Conclusions section summarises how policy makers can take into consideration the factors thatdriveindustrialcompaniestomakeenergysavingswhendesigningpolicies. The Appendix provides a list of questions to help policy makers characterise their country and industrysectorinordertoapplytheboardroomperspectivemethodology.Asanillustration,the questionsarethenappliedtotheindustrysectorintheNetherlands.
Theeffectofpoliciesfromaboardroomperspective
Competitivenessistheoverallbusinesscaseforincreasingtheenergyefficiencyoftheindustry sector.Byinvestingintechnologiesorpracticesthatimprovetheoperationalefficiencyofplants, companies benefit from increased productivity, innovation and the creation of new streams of customer and shareholder value (Prindle, 2010). This paper proposes that the effectiveness of policy instruments and the overall policy package ultimately depends on whether energy efficiency policies influence companies investment priorities. In other words, can policies help companies recognise the real value (in terms of benefits and returns) of normally neglected energyefficiencyprojectsandchangetheirinvestmentprioritiesifoneinvestmentcarriesmore energy efficiency benefits than another? This perspective differs from other policy evaluations that typically focus on barriers to the uptake of energy efficiency, rather than what drives companiestoact. Essentially, the boardroom perspective delves into the major factors, or driving forces that decision makers within a large industrial company take into account when deciding on new investments. A driving force is defined, for the purpose of this study, as a mechanism that influences (either positively or negatively) the boards decision to invest in the most energy efficient practices or technologies. The five driving forces selected to represent the decision makingprocessare:
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Financials Knowledge Commitmenttotheenvironmentandenergyefficiency Publicandmarketdemands

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Policyobligation Figure 3 provides an illustrative example of a boardroom where each director/officer is responsibleforconsideringaparticulardrivingforceinthedecisionmakingprocess: The Financial Director is responsible for conducting a thorough analysis of any financial decision that the company may take (e.g. capital investment requirements) and serves as a keyadvisortocompanymanagement. TheChiefTechnologyOfficerisresponsibleformaintainingtheoptimalknowledgeonhowto runandimprovetheproductionprocess. TheCEOisthepersoninchargeofthemanagementofacompany,includingitscommitments. TheMarketingDirectorisresponsibleforcommunicatingthelevel,timingandcompositionof public and market demand to decision makers, and advising the company on the course of actionitshouldtaketoupholditsreputation. TheRegulatoryAffairsOfficerhastoensurethatthecompanycomplieswithpolicyandlegal obligations.
Figure3Illustrationofthefivedriversreflectingtheboardroomsdecisionmakingprocess
Chief Technology Officer Do we know what energy efficiency practices and technologies are available? Driver: knowledge
Financial Director Do we have the money to invest and are we willing to spend it on EE? Driver: Financials
CEO Are we committed to prioritize EE above other investments? Driver: Commitment
Marketing Director Do the public and market demand us taking EE measures? Driver: Public and market demand
Regulatory Affairs Officer Does this government policy require us to take EE measures? Driver: Policy obligation
Source:Ecofys,2011
Inreality,thestructureofcompaniesdiffersandtherangeofdriversthataffectdecisionmaking islikelytobelessclearcut(e.g.notfocussolelyonenergyefficiency).Moreover,theprioritiesof differentbusinessesdependonthedecisionmakersthemselves.Forexample,eveniftheboard agrees that there are financial benefits from investments that improve energy efficiency performance,thecompanywilllikelycomparethisinvestmentdecisionagainstotherscompeting
Ecofys(2011).Materialprovidedforthisreport.
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for the companys resources. Further, a smaller firm may not have all these staff functions in place. Despitethesecomplexities,thisperspectiveisausefulwaytounderstandbroadlyhowatypical industrial boardroom operates and thus constructively inform policy design so that policies can effectivelystimulateboardroomstomaximiseenergyefficiencyinvestments. Selectionofthefivedrivingforces Ananalysisoftheliteratureprovidedtheselectionoffivedrivingforces.Inparticular,twomajor studiesinfluencedthechoice: ThepolicyanalysisframeworkModelEffectivenessofPolicyInstrumentsforEnergySavingin Industrydevelopedby theDutchRIVMinstitute andUtrechtUniversity describesseven factors(ordrivers):policypressure,thecomplexityofthetechnology,financialandeconomic pressure, market pressure, knowledge level, social pressure and the commitment to social issueslikeenvironmentandenergy(vanWijketal.,2001;Elzengaetal.,2003). Corporate strategy analyses also detail the elements that influence the industrial environment.Grant(2010)describessixfactors:policies,legalissues,technology,economics, naturalenvironmentandsocialissues. While a broad range of possible driving forces exist and were examined, the selection was narrowed to five by organising the various drivers into major themes, and combining related drivers.Thisallowedacleareranalysisofhoweachdrivingforcecouldbeinfluencedbydifferent policies.Narrowingtheselectiontofivedriverswasbasedonthefollowing: Theavailabilityandthecomplexityoftechnologyisaveryimportantfactor,mentionedinboth studies. The scope of this work evaluating the effect of policies on energy efficiency investments assumed that energy efficiency technology is available. It is mainly the knowledgeoftheexistingtechnologiesthatwillplayarole. Socialandmarketdemandswerecombinedintoonedrivingforce. Socialissueswithinthisstudysscopefocusonenvironmentalissuesduetoenergyuse. Severalexamplesofindustrialpracticesaregiventhroughoutthereportintextboxesthatexplain howthedrivingforcesworkinpracticeatthecompanylevel.
Swedishstudyonbarriersanddriversforenergyefficiencymeasures Results from this study highlight a number of factors that inhibit the degree of implementation of energyefficiencymeasuresintheSwedishnonenergyintensivemanufacturingindustry,suchasthe cost and risk associated with production disruptions, lack of time and other priorities, lack of sub meteringinlargerorganisations,etc.Thestudyalsofindsanumberofdrivers,suchastheexistence ofpeoplewithrealambitionandalongtermenergystrategyatsitelevel.
Source:RohdinandThollander,2006.
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Fivedrivingforcesimpactinginvestmentdecisions
In this section, these driving forces are discussed separately, but in practice they interact. For example, when a long payback time (or low internalrateofreturn, IRR) is applied, this may reflect thestrongdriversofcommitment,knowledge,policyobligations,andpublicandmarket demand.
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Financialconsiderations
Dowehavethecapabilityand/orwillingnesstoselffinanceorborrowmoneytoinvestandare wewillingtospenditonthemostenergyefficientmeasures?theFinancialDirectorasks. The financial situation of a company is determinative when it comes to making investment Page|16 decisions regarding energy efficiency. This section identifies the key considerations of the financialdecisionsonenergysavingsinvestments: Internalsourcesoffunding. Access to finance (borrowing from a bank and the institutions willingness to lend for these investments). Financial viability of the energy efficiency projects (and other identified benefits, such as improvedproductquality,processefficiencyandproductivity). Priorityoftheenergyefficientinvestmentoverotherprojects/investmentsthatarecompeting forthecompanysfinancialresources. Amountofinvestmentnecessaryandwhetheritcanbefinancedfromtheoperatingbudgetor asacapitalexpense.
Sourcesoffunding
The primary financing options available for companies to finance energy efficiency projects are typically: Internalfundingthroughthecompanysoperatingandcapitalbudgets.Thisisrareformajor capital intensive projects in many private companies due to internal hurdle rates, requiring significantreturnsoninvestment.Usinginternalfundsisnotuncommonforsmallerprojects. Bank loans based on the companys credit history and borrowing capacity. This allows the banktohavefullrecourseforloanrepaymentasanonbalancesheettransaction. Leasingfromathirdparty. Sharedandguaranteedsavingsstructuresofferedbyenergyservicescompanies(ESCOs)with a guarantee of cash flow for the company. These types of transactions are common in the UnitedStates(seeboxbelow). Toestimatewhichsourcesoffundingwillbeused,thesolvencyratioisoftenused.Thisratioa company's aftertax income, as compared to its total debt obligations indicates how much of the companys assets are financed via own capital, instead of debt finance. In recent years, a solvencyratioofabove30%to45%hasbeencommonwithbiggercompanies(Ecofys,2011).3A bank will be less willing to lend if the solvency ratio is low.4 Typically, banks view lending for energyefficiencymeasuresastheywouldviewanyothertypeofcorporateloan,unlessthereisa majorfreestandinginvestmentthatcouldbefinancedthroughprojectfinancethatusesaspecial purposeinvestmentvehicle.5Thiswouldbefinancedoffbalancesheet.
Nonetheless, different sectors have different solvency ratio levels. Bank lending will be based on a whole range of factors:assets,currentdebt,credithistory,etc. 4 Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greaterthan20%isconsideredfinanciallyhealthy.(www.investopedia.com) 5 A project that is separated legally from the general activities of a corporation to permit lending and equity investments.Corporationscanusesuchavehicletofinancealargeprojectwithoutputtingtheentirefirmatrisk.
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Internalsourcesoffunding
Anothercriteriathatwilldeterminetheextenttowhichcompanieswilluseequitytofinancetheir investment, is the return on equity (ROE). ROE is a ratio that measures how much the shareholders earned from their investment in the company and an important parameter for longterminvestmentdecisions.Thehighertheratiopercentage,themoreefficientmanagement isinutilisingitsequitybase,andthebetterthereturnistoinvestors.TheROEperformanceofa Page|17 certain (national) production facility is an important indicator for the (international) parent company when deciding to provide investment capital. For most of the 20th century, the Standard&Poors500,ameasureofthelargestandbestpubliccompaniesinAmerica,averaged aROEof10%to15%.Inthe1990s,theaveragereturnonequitywasinexcessof20%.
Accesstoexternalfinance
Energy efficiency/conservation investments often results in additional cash flow not due to a newsourceofrevenue,butbyreducingcost.Withanenergyefficiencyinvestmentproject,cash inflows are calculated on estimated savings that are based on actual energy usage measurements, historical energy usage records, andvalidated and warranted equipment performance.Consequentreductionsinmaintenanceandlabourcostsincreasetheabilityofthe company to repay the loan. These cost savings can be significant for many industries. Unlike powerprojectsthatgenerateastreamofadditionalrevenue,energyefficiencyprojectsgenerate a stream of savings. Thus, it is important for the company to identify and demonstrate to the bankthebasisfortheadditionalcashflow(whichisthenusedforloanrepayment).
Accesstofinance Recognitionofenergyefficiencyasapowerfultooltocutoperatingcosts,improvetheeconomyand reduceenvironmentalpollutionhasneverbeengreater;yet,theimplementationofenergyefficiency measures is slow to materialise. Once the necessary legal and regulatory environments, including availabilityofinformation,areinplace,thesinglegreatestreasonforthisslowprogressaroundthe worldistheabsenceofcommerciallyviablefinancing. Source:IEEFP,2009.
World Bank Group experience of working with financial institutions, both public and private, suggests that banks often do not have the inhouse technical capacity to evaluate energy efficiency,renewableenergy,orcleanerproductioninvestmentprojects.Bankscanfinditdifficult todevelopandstructureappropriatefinancialproductsduetolimitedunderstandingofspecific types of sustainable energy investments, making it difficult for them to estimate performance risk. In addition, energy efficiency equipment often has less collateral value than other investments. Normally, if a borrower defaults on an equipment loan the bank repossesses the assetfinanced.Energyefficiencyequipmentmaybedifficulttorepossessandhaslimitedresale value. Commercialbanksinemergingmarketsmayberelyingonshorttermdepositsascapital,which limits their ability to structure financial products that allow flexibility in loan repayment terms. There are rarely any strategic partnerships between banks and technical service providers. This oftenresultsinalackofrecognitionofthetechnicalissuesandtechnologyinvolved. Commercialbanksmaybereluctanttolendmoneyforenergyefficiencyprojects,whichtypically do not involve physical assets that would have a ready resale market or conventional revenue
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streams. Despite cost savings, relatively low capital costs and short payback times, energy efficiencyprojectsstillhavesomeupfrontcostbarrierssuchasthecostofaninvestmentgrade energyaudit,whichentailspreparinganinvestmentplanandascheduleofinvestmentprojects. This is especially the case for SMEs and residential consumers. The fundamentals of energy efficiency projects are usually sound, so often it is a case of overcoming typical SME lending Page|18 barriersinthesecountries.WhereSMEsaresupportedbybanklending,theSMEfinancingand project financing may be linked to similar loan conditions: shortterm loans only with a high collateralcoverage;andahigherequitytodebtratio.Evenbankswithprojectfinancecapability, i.e.,thecapacitytoappraiseprojectsandlendoncashflowmaybeunwillingtodosoforenergy efficiencyprojectsowingtotheirsmallsizeanddoubtsaboutsavingscashflows(IEA2010a).
TheInternationalEnergyEfficiencyFinancingProtocol TheInternationalEnergyEfficiencyFinancingProtocolprovideslocalbanksandfinancialinstitutions (LFIs) with standard methods to evaluate risks and quantify the benefits of energy efficiency investments.TheobjectivesofIEEFParetocreateabetterunderstandingamongstLFIsof: howenergyefficiencyprojectsgeneratereliablesavingsinoperatingcostsofenduseenergy consumingfacilityowners(Hosts),and howsuchsavingsequatetonewcashflowandincreasedcreditcapacityforHoststorepay energyefficiencyprojectloansandinvestments.
Source:IEEFP,2009.
Financial scale is another challenge to investment as these projects are typically small, thus resulting in disproportionately high transaction costs. This can make energy efficiency finance unattractive.Forlargeremergingmarketcompanies,additionalinvestmentforenergyefficiency orproductionimprovementsislikelytobesoughtthroughcorporateloanswherethecompany has a strong enough balance sheet. Beyond bank loans, energy services companies (ESCOs), as describedintheboxbelow,canalsoofferexternalfundingforenergyefficiencyprojects.
EnergyServiceCompanies(ESCOs) TheUSNationalEnergyServiceCompanyAssociation(NAESCO)describesanESCOasabusinessthat develops,installs,andarrangesfinancingforprojectsdesignedtoimprovetheenergyefficiencyand maintenancecostsforfacilities.TheESCObusinessmodelreliesonachievingtheidentifiedenergy savingsdirectlyasaresultoftheproject.Thetypesofperformancecontractaredescribedasshared savings (where the ESCO and companyhave a share of energy costs saved) or guaranteed (ESCO is paidafixedremunerationbasedonachievingdefinedenergysavings).ESCOsorbanksmaybearthe risk of the energysavings performance, or it may be shared. This depends on the business model beingusedandmaybedefinedbyregulation. ESCOs provide energy efficiency finance services to companies/utilities unable to finance energy efficiencyprojectsthemselves.Theyoffertoreduceacompanysenergyuse,whichisusuallyfinanced through performance contracting. With these contracts, energy savings are measured and produce cashflowsthatpayforthepurchaseandinstallationofanynewequipment,andprovideareturnfor the ESCO. The main drawback with many ESCOs is that they are unlikely to have a large enough balancesheettosupportthedebttheymusttakeontopurchasetheequipment,unlesstheESCOis sufficientlywellcapitalised,orbackedbyalargerparentcorporation.
Source:Mason,2011.
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Financialviabilitycriteria
When financial capital is available, either from the bank, the (international) parent company or own capital, the question is what criteria are used to calculate whether an energy savings measureisprofitable.Someofthecommonlyusedcriteriaincludepaybackperiod,internalrate ofreturn,netpresentvalue,andreturnoninvestment. Many energy efficiency projects can reduce a companys operating costs sufficiently to cover 100%oftherequireddebtservice. Thesimplepaybackperiodislengthoftimerequiredtorecoverthecostofaninvestmentandis the ruleofthumb criterion, widely used in firms for assessing smaller projects. However, this methoddoesnottakeintoaccountthelongertermbenefitsofenergyefficiencyprojects.Most firmshavefairlyshortpaybackperiodcutoffs(seeTable2). Based on a survey amongst almost 800 manufacturing firms in six European countries, CPI & Climate Strategies (2011) reported that, on average, firms apply a payback time for energy savingsmeasuresofuptofouryears.Firmsatthe90thpercentileallowapaybacktimeofseven years, whereas firms at the tenth percentile require a payback period of one and a half years. Payback times also vary systematically among sectors and countries (CPI & Climate Strategies, 2011).Blok(2007)reportedsimilardata(seeTable2).
Table2DistributionofrequiredpaybackperiodsbyfirmsintheNetherlandsandGermany
%of companies Germany Netherlands 12yrs 8% 12% 3yrs 27% 15% 4yrs 13% 31% 5yrs 27% 29% >5yrs 15% 12%
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Source:Blok,2007(reproducedwithpermissionfromTechnePress).
Forlargerinvestments,itiscommonpracticetouseinternalrateofreturn(IRR)criteriainstead ofsimplepaybackcriteria.6TheIRRofaninvestmentistheinterestrateatwhichthenetpresent valueofcosts(negativecashflows)oftheinvestmentequalsthenetpresentvalueofthebenefits (positivecashflows)oftheinvestment.CompaniestypicallydemandIRRvaluestobehigherthan 10%upto25%. However,IRRisnotacompleteguide.InanexamplefromIFC(Figure4),acompanyidentifieda portfolioofmeasuresandprojectsthatneedtobeimplementedtoreduceenergyconsumption. Thecostsofthemeasuresvary,asdotheindividualreturnsoninvestment(ROI).Thenewpower unithasareturnoninvestmentof30%,butismoreexpensivethansomeoftheothercheaper measures that have poorer return on investments which may be insufficient to meet internal project financing approval. However, if the company does implement new ovens, lighting and HVAC,thentheenergysavingsmayresultinasmallerandcheapernewpowerunit.Overall,the portfolio of measures has a reasonable ROI of 22%, which may meet the company and banks eligibilityrequirements. Overall,evenwhereanenergyefficiencyprojectornewseriesofenergyefficiencyinvestments mayseemrealistic,thequestionofaccesstofinancearises.Thissectionillustratedonlysomeof the issues small companies have to deal with. Policy makers may want to consider how and if
ThepaybacktimeandIRRarerelated,althoughthelifetimeoftheprojectisnotaccountedforinthepaybackperiod. Asaruleofthumb,theIRRisslightlyhigherthantheinverseofthepaybackperiodforprojectswithalifetimeofmore than15years.
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policies and incentives could be developed to encourage banks to lend for projects with a significantenergyefficiencypotential.However,thisisbeyondthescopeofthisreport.
Figure4IFCsportfolioofmeasuresandpolicies
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Source:Mason,2011.
Knowledge
Do we know what energy efficiency practices and technologies are available? asks the Chief TechnologyOfficer. Inordertoinvestinenergyefficiencymeasures,itiscriticalforcompaniestogatherinformation onallavailabletechnologyoptions,thebenefitsandcostofeachoptionandtheimpactefficient technologieswillhaveonproductionprocesses(e.g.discontinuationoftheproductionprocess). In practice, to identify energy efficiency opportunities, a company will often engage an energy consultant or auditor. In many countries e.g. Thailand, Vietnam, the United States of America, this service may be subsidised to encourage the uptake of energy efficiency audits. An initial energy use review (often performed first) may then lead to a detailed energy audit being commissioned. Theenergyefficiencyauditspecifiestherangeofmeasures(includingenergymanagement,plant operation and investments needed) from low to higher cost. Detailed audits should include sufficient information so that the companys management team can make an investment decision.Typically,thisshouldcoverboththetechnicalandprojectfinancingcomponents: Detailsofproposedenergyefficiencymeasures. Financialanalysis:estimatedsavingsandbreakdownofcosts. Savingscalculationmethodology. Energymanagementandoperatingstandards. Fundingoptionsandcashflows. Implementationplanwithmaintenanceproceduresandenergyusemonitoring.
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Afirmsaccesstoknowledgecanbeestimatedthroughanumberofindicators.Firstly,theshare of energy in the total production cost is an indicator since energy intensive companies tend to spendmoreresourcesonidentifyingenergyefficiencytechnologiesandequipmentvendors.The presence of energy management practices within a company is another indicator, such as the assignmentofenergyand/orenvironmentmanagersorcoordinators,theimplementationofan energymanagementsystem,orthecapabilityandtrainingofstafftomanageenergy.Finally,the Page|21 presenceofsectorspecificresearchinstitute(s)orknowledgecentrescanindicatethatfirmshave accesstotheinformationtheyneedtomakedecisionsonenergyefficiency.
Theneedtoincreaseknowledgeofenergyefficiencymeasures About30%ofthefirmsindicatethattheyarenot,oronlytoalesserextent,awareofexistingnew technologiesthatarenotyetbeingusedinpracticebyanyfirm.Ofcourse,asmallerpercentageof 20%haveonlylimitedknowledgeoftechnologiesthatarecurrentlyusedbyotherfirms.Theseresults suggestthatfuturepolicycanimprovethesituationbyprovidingfirmswithrelevantinformationon investmentpossibilitiesinenergysavingtechnologies. 7 Source:DeGrootetal.1999.
Commitmenttotheenvironmentandenergyefficiency
Are we committed to giving priority to investments with energy efficiency benefits over other investments?askstheCEO. Investments to improve energy efficiency are likely to bring about numerous benefits. The challengeistoidentifytherangeofmeasuresandinvestmentsandthenprioritisethemaccording to cost, company investment policy, simple payback and IRR. A commitment to environmental protection determines whether or not companies will make energy savings a priority. This commitmentfacilitatestheapprovalofefficiencyprojectscomparedtootherinvestmentoptions (Prindle,2010).Thisdriverisdefinedasthedegreeofwillingnesswithinasectororcompanyto invest in energy saving measures. Frontrunners show clear leadership when it comes to energy efficiencyobjectives.Whenthereislittleornocommitment,firmswillhaveanaturaltendencyto prioritise other, more financially appealing investments (using conventional financial analyses) overenergysavings,suchasincreasingproductionratherthanreducingoperatingcosts.Actions suchasparticipationinbusinessNGOpartnershipsshowahighlevelofcommitment.
Commitmentisneededtomakeenergyefficiencyapriority HighcommitmentshowswhenCEOstalkaboutenergy:theyareeloquent,committed,andknowkey facts.Committedfirmsmakeenergysavingsapriority,andforcetheorganisationsdecisionmakers toresettheirinvestmentprioritiestofavourefficiency.Commitmenthelpsefficiencyprojectstoget approved even when conventional financial analyses make them appear less favourable compared withotherinvestmentoptions. Todays best energy efficiency strategies of companies break down walls between functional units, businessunits,andotherorganisationaldomains. Source:Prindle,2010.
Basedonasurveyamong135industrialcompaniesintheNetherlands.
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WorldWildlifeFundClimateSaversprogrammepromotescorporatecommitment Leading corporations are partnering with WWF to establish ambitious targets to voluntarily reduce theirgreenhousegas(GHG)emissions.Collectively,ClimateSaverspartnerswillreduceCO2emissions byover50milliontonnesbytheendof2010.Byincreasingefficiency,ClimateSaverscompaniesare saving hundreds of millions of dollars, proving again that protecting the environment makes good businesssense.
Source:WWF,2011.
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Commitmentisneededatalllevels ButDowshareswithothercompaniesthechallengeofpersuadingproductionmanagerstoconsider changes in operating practices and technologies. Production staff are focussed on product quality, productionvolume,andreliabilityofequipmentandsystems.Energyimprovements,betheychanges inoperatingormaintenanceproceduresornewtechnologies,posepotentialriskstotheseironclad principles. Source:Prindle,2010.
Demandsofthepublicandthemarket
Doesthemarketorthepublicrequireustotakeenergyefficiencymeasures?askstheMarketing Director. Pressureanddemandsfromthepublicandthemarketplayacrucialroleindrivinginvestmentsin energy efficiency projects. The public and market demands refers to the pressure from institutions such as nongovernmental organisations, shareholders, the media and market on companiestosaveenergy. Therearethreetypesofdemands: Public awareness of CO2 emissions, energy use or pollution issues. The public is increasingly concernedwiththeenvironmentalperformanceofbusinesses. Thepressureofpeersorcompetitorsthatincreasesacompanysawarenessofitscompetitive position.Thiscanoriginatefrom: benchmarking the energy or emissions performance of companies, which is often an integralpartofthepolicy(e.g.benchmarkingundertheEUEmissionsTradingScheme(EU ETS)); the publication of carbon exposure risks by creditrating companies. The investor communityisincreasinglyrequestingsuchdata;and corporateinitiativese.g.theCarbonDisclosureProject,whichidentifycompaniesthatare activelytakingstepstowardalowcarboneconomy. Pressurefromtheproductionchain.Suppliersorclientsmayrequestemissionsreductionsor energy conservation efforts. Suppliers of industrial equipment may also be subject to regulationsthatrequiremoreefficientequipment/appliancesbeingproduced.
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Companiesactonenvironmentalissuestokeepupwiththeircompetition ACEOwhowaitsfor[government]guidanceontheseissueswilllagbehindacompetitorwhotakesa more active approach []. In the end, [energy] inefficiencies show up as business costs []. Even thoughtheprimarydrivermaybepublicpolicy,businessbenefitsfromtheexercise.
Source:DellandTechtarget,2010.
The global investor community continues to request more data on direct and indirect emissions as well as climate changeprogress, effectively raising the carbondisclosure bar. Institutional investors are moving beyond corporate commitments, assessing investments in forwardlooking, climate changerelatedbusinessstrategies.
Source:CDP,2009.
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Policyobligation
Dopoliciesrequireustotakethemostenergyefficientmeasures?askstheRegulatoryAffairsOfficer. Policy obligation is defined as the regulatory pressure companies face to improve their energy performance(e.g.behaviouralenergyefficiencystandardsorobligations).Regulatoryobligations canbetechnologyprescriptiveasinthecaseofequipmentstandardsandprocessconfiguration prescriptions; managementprescriptive regarding auditing, conservation planning and energy managementstandards;orperformanceorientedasinplant,firmorsectorregulationtoachieve absoluteenergysavings.
RegulationsforEquipmentRetrofittingandReplacementinChina Withinthe11thFiveYearPeriod(2006to2010),China'sstrategicplanforenergyefficientindustrial processes involves equipment renovation, and the design and implementation of process optimisation and management measures. As regards specific equipment, the Chinese government alsomandatedtheefficientuseofexhaust,pressureandheatfromminingandindustrialprocesses. For example, iron and steel enterprises should apply: coke dry quenching (CDQ) and toppressure recoveryturbine(TRT),renovateallblastfurnacegaspowergeneration,andimplementconvertergas recovery to save 2.66 million tonnes of standard coal; and install each year30 setsof mediumand lowtemperatureexhaustheatpowergenerationequipmentinconcreteproductionlineswithadaily yieldof2000tonnes. In1999,thecentralgovernmentaskedthatallshaftkilnsinthecementindustrywithadiameterof lessthan2.5metersbeshutdownforbothenergyefficiencypurposesandslowingdowneconomic development.Manyshaftkilnswereretrofittedtolargerdiameteronesbecausetherewasastrong demandforfromthemarket(Wang,2006).Althoughthegovernmentadoptsadministrativemethods topromoteorlimitdevelopmentinsomeaspects,themarketforceplaysthedecisiverole.
Source:IEA,2008b.
Withintheboardroomperspectiveframeworkusedinthispaper,thisdriverreferstocompanies obligationstoundertakeenergyefficiencymeasuresinhouse.Whileotherpolicies(e.g.subsidies forefficientequipmentortaxesonenergyuse)maymotivateacompanytotakeenergysavings actions, such policies do not hold specific targets or obligations for energy savings, or require companiestotakemeasures.
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RegulationsfortheuseofBestAvailableControlTechnologies(BACT) The Clean Air Act requires that all new major sources, and all major sources undertaking modificationsthatresultinasignificantincreaseinemissions,obtainpreconstructionpermitsand install best available control technology (BACT) for all pollutants subject to regulation. Large industrialfacilitiessuchaspowerplantsandoilrefinerieswillrequireapermitasofearly2011for projectsthatincreaseGHGemissionssubstantially.
Source:Danishetal.,2010.
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Clarityonfuturepolicyobligationsmakescompaniesact To remain effective, standards must be regularly updated. Indeed, there is no incentive for manufacturers/constructors to go beyond what is required if no stricter standards have been plannedforthefuture.Itisthereforeessentialtoreviewandreinforcestandardsatregularintervals asawayofstimulatingtechnicalprogressandtoensureasteadyimprovementinenergyefficiency.
Source:WorldEnergyCouncil,2008.
Inthenextsection,theconceptofdrivingforcesiselaborateduponandshowshowpoliciesandthe characteristicsofeachcanaffectthedifferentdriversofinvestmentdecisionsforenergyefficiency.
Illustrationofdriversinfluencingdecisions
The rationale behind an individual companys decision to make an investment that reduces energy consumption varies considerably across sectors. Decisive factors include: the size of a company; energy intensity; cost of energy related to overall production costs; whether energy efficiency improvement is an incidental benefit of process equipment upgrade or part of a concertedefforttoimplementanenergyefficiencyprogramme;financialstateofthecompany; whetheritisinagrowthorsunsetsector;andwhetherithaseasyaccesstofinance. Industrialcompaniescanundertakedifferenttypesofenergyefficiencymeasures:eachdriverwill influencethedecisionmakingprocessdifferently.Forexample: Whencompaniesconsideroneoffinvestments(e.g.equipmentupgrading)aretheyawareof themostefficienttechnologies(knowledge)?Dotheyhavethefinancialcapacity(financials) andwillingness(commitment)toinvestintechnologythatmaybemoreexpensivethanothers? Tocontinuouslyidentifyenergyefficiencyimprovements(e.g.throughanenergymanager)do companiesknowwhichenergymanagementpracticesareoptimal(knowledge)? However, the relative importance of each driver may not be the same, and depends on the sectors characteristics and the type of energy efficiency measures. For example, for simple housekeepingmeasuresorlowcostinvestments,themainbarriertoinvestmentmaybealackof knowledge of energy efficiency opportunities if a policy does not oblige and hence help companiestoinvestintheselowhangingfruits.Asthecostofinvestmentsincreases,financing becomesamoresignificantbarriertoinvestmentdecisions. To illustrate, consider a situation (see Table 3) where three options with the same investment costs compete for a single investment decision: (1) a production line for a new sustainable product (i.e. impacts the environment less than its substitute products); (2) improve energy efficiencyoftheexistingproductionline;or(3)installingairpollutionabatementtechnology.
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Table3Illustrationofdrivingforcescompetingforasingleinvestmentdecisionintheboardroom Investment Drivingforce (1)Productionline foranew sustainableproduct (2)Improveenergyefficiencyof productionlineofexisting product (3)Laststageofinstalling airpollutionabatement technologyonproduction site Accesstomoneyis difficultandfinancing onlyprovidedifthe investmentimproves businessprospects. Measurehasanegative paybacktimeandIRR.
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Financials
Accesstomoney Accesstomoneyisdifficultand isdifficultand financingonlyprovidedifthe financingonly investmentimprovesbusiness providedifthe prospects. investment Paybacktime<2years. improvesbusiness IRRofabout40%withaproject prospects. depreciationperiodof5years. Paybacktimeof about5years. IRRabout17% withaproject depreciation periodof20 years.
Knowledge
Productionlineis Severalonsiteprojects;mostare standardandbought technicallystraightforward;will underguaranteed improveoverallperformance. performance conditions. Sustainability(broad Thereisstillcommitmentfor definition,e.g. energysavings,onsite,aspartof reducingfootprint)is avoluntaryagreement. reallythenew companysprofile.
Establishedabatement technology.Boughtunder guaranteedperformance conditions. Reducingairpollutionwas thecommitmentofthe past.Thefirmnow considersitselfaclean producer;nofurther investmentsareneeded toconfirmthisposition. Thepublicandthemarket donotpressurethe companytomakenew investmentsinefficient technology.
Commitment to environment andenergy efficiency
Public andMarket demands
Increasingcallfor sustainableproducts fromclientsandthe public.The companyspeersare alsoconsidering settingupinnovative productionlines. None
Thepublicisnotinterestedin energyefficiency.Somepeer pressurefromparticipatingina voluntaryagreement.Inthe future,clientsmaydemandhigher energyefficiencyproducts.
Policy obligation
Thereisavoluntaryagreementon Obligationtoinstall energyefficiency,butnoreal betweennowandnext5 obligationtoact. years. Inpractice,thereis mediumenforcementof theobligationandthe5 yearlimitmaybe negotiable.
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Intheexample,theenergyefficiencyimprovement(2)ismostadvantageousinfinancialsterms. Bycontrast,thecommitmenttoinvestandthedemandsfromthemarketandpublicarepointing towardsinvestinginanewproductionlineforasustainableproduct(1).Atpresent,policiesdo not oblige the company to invest in any of the three options, but installing air pollution abatementtechnology(3)willprobablybeenforcedwithinthenextdecade.
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Thisarbitraryexampleillustratesthecomplexityofconditionsanddriversthatsettheprioritiesin theboardsdecisionandalsounderlinestheneedforamixoftailoredpoliciestoprioritiseenergy savings.8 In order to make any investment decision, the company has to be in a healthy, commerciallyviablestate,independentofthetypeofenergyefficiencyinvestment.Anotherkey factormayalsobecontinuingbeliefingovernmentpolicyanditsimplementationorlackofit,for promotersandfinancierstomakelongerterminvestmentdecisions.Furthermore,thechoiceof technology and whether a company is energy efficient are likely to be driven by other factors such as compatibility, ease of maintenance, life cycle cost, and overall costeffectiveness, of whichenergyconsumptionmaybeapart,butnotthesolereason. Inthenextsection,theconceptofdrivingforcesiselaborateduponanditisshownhowdifferent policiescanimpactthedrivingforcesofinvestmentdecisionsforenergyefficiency.
Apart from the difficulty of finding finance for energy efficiency, companies often prioritise investing capital or utilisingtheircreditcapacitytofinancecorebusinessactivities.EvenenergyefficiencyprojectswithveryhighIRRsof 25%to30% canfinditdifficult tocompetewithoneyearinternalhurdlerateofreturnsprojectedforcorebusiness investments of many large industrial companies even though the risk factors associated with projected returns on corebusinessinvestmentsaremuchhigherthanthelowriskofinvestinginenergyefficiency.
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EvaluatingenergyefficiencyandGHGmitigation policiesusingtheboardroomperspectivemodel
Inthissection,thewaythecharacteristicsofdifferentpoliciesinfluencethefivedrivingforcesare Page|27 described,accordingtoapolicyinstrumenttypology.
Policytypes
A countrys policy package can be classified in different ways: prescriptive (or regulatory), economic,andinformationinstruments.Withinourframework,thispolicyinstrumenttypologyis proposedtosimplifythediverserangeofdifferentpolicies,therebyenablingananalysisofhow different policies, and the characteristics of each policy, can influence the driving forces of corporatedecisionmakingdescribedinSection2.
Table4Differentpolicyinstrumenttypes Type Subtypes Norms/standards Mandatorytargets Voluntarytargets (negotiatedagreements) Obligations/commitments Equipment Productionprocess Product Energyauditing Energymanagement Technologyimplementation Technologyphaseout Other Taxes Incentivesandsubsidies Energy CO2/GHGemissions Subsidiesandgrants Preferentialloans Earlydepreciation Thirdpartyfinancing Economic Taxcreditsandexemptions Tradablepermits Labelling Other GHGemissions Whitecertificates Educationandoutreach Datacollectionandaudits Capacitybuilding
Source:AdaptedbyIIPandSQConsultfromTanaka,2009.
Information
Prescriptive
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Various types of policies and policy instrument characteristics have different effects on the driving forces. For each policy type, its impact on the five driving forces for company decision makingisanalysed.
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Prescriptivepolicies
Policies that involve regulation can either communicate expectations or oblige industry, companies and/or associations to take action. These can be technologically prescriptive, for example, equipment standards and process configuration prescriptions; management prescriptiveasinthecaseofauditing,conservationplanningandenergymanagementstandards; or performance oriented as in the case of plant, firm or sector regulation, and agreements concerningbenchmarktargetsandabsoluteenergysavingsgoals.
Normsandstandards
Norms and standards impose minimum efficiency performance standards on equipment, products and the production or energy management process. Regulations on equipment efficiencywhichcommonlytaketheformofminimumefficiencyperformancestandards(MEPS) orTopRunnertypeprogrammesinJapanaregenerallyappliedtoproductsintheresidential, commercialandautomotivesectors. Inindustrialpractice,mostregulationsareappliedtobroadlyusedequipmentorprocesses,such aselectricmotorsandboilers.Regulationsaffectequipmentmanufacturersandimportersmost directly,thuspreventingthemfromsellinginefficientequipment. Several governments (e.g. Denmark, Ireland, the Netherlands, Sweden and the United States) prescribe generic compliance with energy management (standard) procedure (e.g. ISO energy managementstandards). Table5illustratestheimpactnormsandstandardscanhaveonthefivedrivers.Itisevidentthat thehighestimpactisonthePolicyobligationdriver.
Obligationsandcommitments
Several governments require companies to implement energy efficiency actions through commitments or obligations, for example, through mandatory energy auditing or energy management programmes.9 Such programmes require the appointment of a certified energy manager in companies, or obligatory, regular energy auditing, as in China and India. Again, this category of policy instruments has the highest impact on the driving force Policy obligation (Table6).
Energymanagement(EM)isaloosecollectionofbusinessprocesses,carriedoutatplantsandfirms,anddesignedto encourage and facilitate systematic, continuous improvement in energy efficiency. They help managers and staff to identify, carry out, monitor and learn from technical actions. Among the typical elements are: strategic plans; maintenancechecklists;manualsdocumentingprojects;energypurchase,useanddisposalprocedures;measurement processes; performance indicators and benchmarks; progress reporting; energy coordinators; and demonstration projects(Priceetal,2007).
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Table5Differentnormsandstandards Driver Financials Impact ondriver Low Descriptionandpolicycharacteristicsinfluencingtheimpact onthedriver10 Normsandstandardsdonotdirectlyinfluencetheeconomicsofenergy efficiencyoptions,thereforetheimpactonthefinancialdriverislow. Asnormsandstandardsusuallyimposeminimumefficiency performancestandards,thepolicyobligationishigh.Inpractice,the effectofthepolicyobligationdependsonthefollowingcharacteristics: Policyobligation High Knowledge Commitment Public&market demands Medium N/A Ambitionlevel:arelevelsbasedonaveragefirmperformance()or toprunner(+).Arethelevelsrevisedperiodically(+)? Legalforce:doesnoncomplianceresultinsanctions? Levelofexecutionandenforcement.
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Ahighlevelofexecutionandenforcementwillincreasethelevelof knowledgeconcerningenergyefficiency. Verycasespecific. Publicandpeerpressure,orpressurefromthechaindoesnotplaya significantroleinnormsandstandards.Ifnormsaresetforconsumer products,theycouldindirectlyaffectthedemandsonenergyefficient production.
Low
Obligationstoreportenergyefficiencyopportunities UnderAustralias Energy EfficiencyOpportunities (EEO)programme,companies that use more than 0.5petajoules(PJ)ofenergyperyeararerequiredtoundertakeenergyassessments.Theseidentify opportunities for projects of up to four years payback, quantify these opportunities and state the companys business response to these opportunities. The results of the assessments must then be periodicallycommunicatedtothepublicandthegovernment.
Source:DRET,2010a.
Theinformationandquestionsinthethirdcolumnofthetablesinthissectionprovideaguidelineforanindepth policyevaluationofcasestudies.(+)indicatesanincreaseoftheinstrumentseffectonadrivingforce;()indicatesa decrease.
10
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Table6Differentobligationsandcommitments Driver Financials

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Impacton driver Low
Descriptionandpolicycharacteristicsinfluencingtheimpact onthedriver Obligationsandcommitmentsdonotinfluencetheeconomicsof energyefficiencyoptions.So,theimpactonthefinancialdriverislow. Thescopeoftheobligationandthelevelofenforcementdeterminethe actualimpactofaspecificpolicyinstrument.Afterreceivinganenergy efficiencyauditreport,manycompaniesmayconfinethemselvesto onlyimplementingnoorlowcostmeasures,andmaymissouton majorenergyimprovementsthatrequiresignificantinvestment. Obligationsonenergymanagementorauditswillincreasethe understandingonenergyefficiencyoptionsandopportunities. Thispolicydoesnotdirectlyaffectacompanyscommitment. Obligationstoimproveacompanysinternalprocessesdonotinfluence thepublicormarket.So,theimpactonthisdriverislow.
Policyobligation
High
Knowledge Commitment Public&market demands
Medium N/A Low
Voluntarytargetsandnegotiatedagreements
Negotiatedandvoluntaryagreementsofteninvolvecontracts(orcovenants)betweenindustrial sectors and governments, which outline energy use or CO2 emissions targets and schedules for industry.SuchagreementsareinplaceinJapan,theNetherlandsandChina.
Industrialenergyefficiencyprogrammesincreaseaccesstoknowledge Countries with strong industrial energy efficiency programmes provide information on energy efficiencyopportunitiesthroughavarietyoftechnicalinformationsources,includingenergyefficiency databases, software tools, and industry or technology specific energy efficiency reports. [] In the LIENprogrammeinIreland,seminarsandworkshopsareheldtoshareinformationfromexpertsand other specialists, to demonstrate tools and resources for implementing or improving energy efficiency, and to address specific issues such as plastics processing, energy markets, renewable energy for industry, and staff awareness campaigns. In the Netherlands, knowledge sharing is supportedthroughnetworksthatfocusonenergyefficiencyimprovementsinspecificareasthathelp toprepareroadmapsforsectors.
Source:Horvathetal.2010.
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Table7Differentvoluntaryandnegotiatedagreements Driver Financials Impacton driver Low Descriptionandpolicycharacteristicsinfluencingtheimpact onthedriver Theimpactofvoluntaryornegotiatedagreementsonthefinancialdriver dependsonwhetherthegovernmentprovidesfinancialincentivesor penaltiestoimplementtheprogramme. Policy obligation Low Supplyofresourcescouldbepartoftheprogram(+)oralevyincase ofnonparticipation().
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Generally,policyobligationislowasparticipationinnegotiated agreementsis,inprinciple,voluntary. Thethreatorpenalty(e.g.notaxexemption)incaseofnon compliance(+).Theexemptionfromotherpoliciesisanincentivein Denmark,Finland,Germany,Switzerland,theNetherlands,United KingdomandUnitedStates.Threatsoffutureregulation,shouldthe negotiatedenergyorCO2targetsnotbemet,arethebasisof negotiatedagreementsinBelgium,Japan,KoreaandtheNetherlands. ThestringencyoftheenergyorCO2targetsofnegotiatedagreements vary:fromveryambitious(+)tolessso().Thecovenantprogramme requiresthat,onaverage,companieswillneedtodoubletheenergy efficiencyimprovementratecomparedtobusinessasusual.The presenceofanenergyagencyhastheroleofhelpingtoenforcethe negotiatedagreementsandcovenants(+). Thethreatofpublicisingnoncomplianceinformation,thustarnishing industries'orcompanies'publicimages(+).Thisisanincentivein negotiatedagreementsinJapan,SwedenandtheUnitedStates.
Knowledge
High
Ingeneral,negotiatedagreementsstronglyfocusonknowledgebuilding, usuallythroughthefollowing: Supportfromgovernmentinstitution(EnergyAgencyorconsultancies) tofacilitatetheimplementationoftheagreement(+). Preparationofsectoralroadmaps(+). Preparationofknowledgeexchangeplatformsoractivities,e.g. workshops,developmentoftools(+). Requirementtoundertakeenergymanagementaspartofagreements; sometimesthisisstandardised.
Commitment Medium
Voluntaryagreementspositivelyaffectcommitment,astheyare multilateralinstruments,wherebygovernmentandindustryworktogether onimprovements. Isthetargetambitionsetbythesector/firms(+)ormoreorless imposed()? Doestheagreementincludepreferentialtreatment,e.g.exemptions fromtaxes(+)?
Public& market demands
Medium
Voluntarytargetsinfluencethemarketmainlyviapeerpressure,as companieswithinasectorcomparetheirperformancewithothers.The effectonthisdriverismainlydeterminedbytheextenttowhichasectors performanceismadepublic.Morepublicinformationwillgenerate increasedpublicandmarketpressure.
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Mandatorytargets
Theanalysisoftheimpactofmandatorytargetsonthedrivingforcesisthesameasabove(for voluntarytargetsandnegotiatedagreements),exceptthatthepolicyobligationishigh.
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Economicinstruments
Economic policy instruments include taxes and tax reductions, directed financial support (e.g. subsidies and loans), greenhouse gas (GHG) prices with GHG emissions capandtrade schemes, and differentiated energy prices which seek to influence the costeffectiveness of technical actions.Theseinstrumentscanbefocusedonspecificsectorsorappliedgenerallyacrossmultiple sectors. Thefinancialflows(andsometimestaxreductions)canbetechnologyprescriptiveasinthecase ofequipmentspecificsubsidiesormanagementprescriptiveasinthecaseofsubsidisedaudits.In general,taxesandtaxreductions,andcapandtradeschemesareperformanceoriented,aimed at energy savings or energyintensity improvement goals, but lack any prescription for technologiesormanagementpractices.
Taxes11
AllIEAmembercountriestaxfueland/orelectricitywithvalueaddedtax(VAT)andexciseduties. Denmark,Finland,theNetherlands,Norway,Sweden,Switzerlandandthe UnitedKingdomalso havetaxesontheCO2contentofenergy. Abolishing energy subsidies, which were initially designed and applied to stimulate national economicdevelopment,canhavethesameimpactonenergyefficiencyasintroducinganenergy tax.Higherenergypricesthroughenergytaxesortheabolishmentofsubsidiesraiseenergycosts as a share of a companys operating costs and sends a stronger price signal to the company to reduceenergyconsumption. While there is a trend among OECD countries to cut these subsidies, energy prices for industry maybedistortedinmanyemergingeconomies,thusremainingloworsubsidised.Consequently, investments in improving energy efficiency are unlikely to be a key priority for industry. This policy intervention is treated in the same way as applying energy tax, and is likely to have the sameeffectondecisionsmadeintheboardroom.
Energytaxesincreaseenergycostsby5%to15% InmostOECDcountriesandformostfuels,theshareofenergytaxesintotalenergycostsforindustry isbetween5%and15%,upto30%.Inafewexceptionalcases,thisshareismorethan40%,whereas somecountrieshaveverylowornotaxesforcertainfuelsources.
Source:IEA,2011.
11
Import duties/taxes on energy efficiency related technology are not considered in this report. Nonetheless, they representasignificantbarrierinsomeemergingcountrieswherethesetaxesarehigh.
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Energypricesubsidycuts In many emerging economies where energy prices for industry may be distorted, remaining low or subsidised,investmentsinimprovingenergyefficiencyareunlikelytobeakeypriorityforindustry. Consequently,energyconservationandeffortstoencourageenergyefficiencyneedtobesupported by an energy policy and energy pricing framework. Tariff arrangements need to be robust so that separate cost components for generation, transmission, distribution, and businesses can be identified.Ifnot,thentariffsmaynotbeupdatedperiodicallytopassthroughchangesinsupplycosts andreflectthecostforeachbusiness.InVietnam,forexample,electricitypricesjumped11%in2009 soonaftercrosssubsidieswerecut.
Source:Mason,2011.
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Table8Differenttaxesandtheirimpactonthedrivers Driver Financials Impacton driver High Taxesdirectlyinfluencethefinancialparametersofinvestmentin energyefficiency.Theimpactdependsontheshareofenergycostin anindustrysectorandthesizeofthetax. Althoughcompaniesareobligedtopaytaxes,suchpoliciesdonot forcecompaniestotakethemostenergyefficientmeasures.So,the policyobligationonenergyefficiencymeasuresislow. Taxesdonotaffecttheknowledgelevelofenergyefficiency. Thispolicydoesnotdirectlyaffectacompanyscommitment. Taxeshavelittleinfluenceonthepublicdemandforenergysavings measures.Typically,thefirstordereffectoffueltaxistoimprove thefuelefficiencyofthefueluser;asasecondordereffect,firmsor consumersdownstreammayalsobeaffectedbypricesbeingpassed downthechain.Thepotentialimpactontheirenergyefficiency performanceislessdirect.
Policyobligation
Low
Knowledge Commitment
Low N/A
Publicandmarket Medium demands
Incentivesandsubsidies
TheindustrialsectoroftenreceivesreductionsfromenergyorCO2taxes,duetoconcernsabout the impact of taxes on international competitiveness. Sometimes, countries tie favourable tax treatmenttoindustrysenergysavingefforts,suchasmeetingsectoralenergyorCO2targets(e.g. innegotiatedagreements)andmakingenergyefficiencyinvestments. Governments also use other, nontax, financial incentives, such as subsidies, preferential loans and research and development funds to encourage companies to identify energy efficiency opportunities and make energy efficiency investments. Subsidies are very popular measures in many countries. Preferential loans or loan guarantee schemes for energy efficiency investment areusedinfewercountriesbutareontherise.Table9demonstratestheimpactofsubsidieson thedriversandshowsthat,ascanbeexpected,thebiggestimpactisonthefinancialsdriver.
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Table9Impactofdifferentsubsidiesonthedrivers Driver Financials

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Impacton driver High
Subsidiesdirectlyinfluencethefinancialparameterofinvestmentsin energyefficiencymeasures. Theimpactofthesubsidyorincentivedependsonthevalueof thesubsidyontechnologycosts:byhowmucharecostsfor energyefficiencymeasuresreducedandtheireffectonpayback periodsandIRR. Incaseoftechnologyspecificsubsidies,themorethelistis targetedandupdated,thehigherthechancethatthesewill createadditionalinvestmentsandlessenfreeriderbehaviour. Freeridersusethesubsidyforinvestmentstheywouldhave takenanyway.
Subsidiesforenergyauditswillalsoreducetheircosts. Policyobligation Low Applyingforsubsidiesisvoluntaryandtheinstrumentdoesnot requireindustrytotakeenergyefficiencyactions.Hence,thepolicy obligationislow. Incentivesandsubsidieshaveaneffectoncompaniesknowledgeof energyefficientoptions,becauseitdrawstheirattentiontoenergy efficiencyopportunities(inthecaseofsubsidisedaudits),andto thosetechnologiesthatareeligibleforthesubsidy.Otherspecific policycharacteristicsaffectingknowledgeare: Commitment N/A ifthesubsidyisforanewtechnology(+)orfortechnologythatis wellknownandonthemarket(noeffect);and theavailabilityoftechnologylistsanddescriptionsavailable underthesubsidy(+).
Knowledge
Medium
Thispolicydoesnotdirectlyaffectacompanyscommitment.
Publicand marketdemands
Low
Technologysubsidieshavealimitedeffectonthepublicandmarket demands.
Prescriptivesubsidiesshouldbepreciselytargeted Technologyspecific subsidies can be substantially improved in terms of their effectiveness by avoiding the subvention of technologies that are already profitable without the subsidy. In other words,thecharacteristicsofthesubsidisedtechnologyhavetobeanimportantsteeringfactorwhen designingsubsidyprogrammes.
Source:Bloketal.,2004.
12
12
Basedonsurveyof>800firmsintheNetherlands.
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Developingnewtechnologiesthroughsubsidies ThegovernmentoftheNetherlandscurrentlypromotestheuseofenergyefficienttechnologies.For thisreason,theMinistryofEconomicAffairshasdecidedtomakeafivemillioneurosubsidyavailable forbuildingtheHisarnatestplant."Thisisnotafullscaleblastfurnace,butitisn'talaboratorysetup either,"saysprojectleader,KoenMeijer.Themainquestionthatneedstobeanswerediswhether Hisarna can compete with existing blast furnaces economically and also its impact on the environment.
Source:TataSteel,2010.
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Tradablepermits
Greenhouse gas emissions trading schemes (ETS) are now running in the European Union, Norway,northwestern UnitedStates(RGGI)andNewZealand.Inothercountries,schemesare beingpreparedorpiloted. The Indian Perform Achieve Trade (PAT) scheme (launched in 2011) will set specific energy consumption (SEC) targets for large industrial and power installations. Those exceeding their energyperformancegoalscansellthesurpluscreditstothoseinstallationsthatfailtomeettheir requiredcuts. DifferentdesignsofETSschemesarepossible.Themaindesignparametersinclude: Theimplementationofanabsoluteemissionscap(thecapandtradeGHGschemes)(inthe European Union) or caps relative to output (baselineandcredit schemes or performance targets)(inIndia)(seeIEA2010bformoredetails). Thevolumeofoffsettingthatisallowedinthescheme.Thisreferstothenumberofpermits fromoutsidetheschemethatcanbeusedforcompliance. Whetherpermitsareallocatedfreeofchargeorauctioned. Table10showsthattradablepermitscanhaveahighimpactonthefinancialsdriverbutalsotoa lesserextentonthepolicyobligationandpublicandmarketdemandsdrivers.
ETSregulationstimulatesthecreationofpublicallyavailableinformation Allowance prices represent information about the economy wide marginal cost of emissions reductionsthathasneverbeenavailablepreviouslytoregulators,butthusfarprogrammeshavenot foundawaytoreadilyadapt,giventhisinformation.
Source:Burtrawetal.,2009.
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Table10Impactoftradablepermitsonthedrivers Driver Financials

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Impact ondriver High Whatarethecostsofthepermitsthatneedtobeboughtfor compliance? Ifallpermitsareauctioned,participantsinthetradingsystemwill havetopayforallemission(orenergy)permits.Thiswillhavea highimpactonthefinancesofthecompany(ReinaudandPhilibert, 2004). Insomecases,belowanabsoluteGHGemissions(orenergy)cap, permitswillbeprovidedforfree(e.g.basedonhistoricalemission levels,calledgrandfathering).ThiswilllowertheimpactETShave onthefinancesofacompany(Reinaud,2008).
Policyobligation
Medium
IfthecapandtradeschemecoversGHGemissions,theinstrument doesnotrequireindustrytotakeenergyefficiencyactions immediately.However,companieswillconsidertheopportunity costsofreducingemissionsversustakingresponsibilityforits emissionselsewherethroughtrading.Twodesignfeatureswill increasethiseffect: Anambitiouscap,andconsequenthighCO2pricewillputinhouse energyefficiencymeasuresforwardasthebestcomplianceoption. Ahighlevelofexecutionandenforcementusuallythecasefor tradablepermitswillincreasethepolicyobligation.
Ifthecapandtradescheme(orbaselineandcreditscheme)covers energyuse,companieswillbeimmediatelyrequiredtoimprovetheir efficiencylevelsorpurchasepermitsfromthosewhohaveover achievedrelativetotheirtarget. Knowledge Low Ingeneral,theeffectoftradablepermitsonacompanysknowledgeof energyefficiencymeasureissmall. Incaseofbenchmarkbasedallocation,theinteractionof governmentandsectorsinestablishingthebenchmarks increasesindividualcompaniesknowledgeoftheirrelative performance.
Commitment Publicandmarket demands
N/A Medium
Thispolicydoesnotdirectlyaffectacompanyscommitment. Typically,thefirstordereffectoftradablepermitsistoimprovethe energyorcarbonefficiencyofthefueluserand/orcarbonemitter. Asasecondordereffect,companiesorconsumersdownstream mayalsobeaffectedbyforwardedpricesignals(thoughthe potentialimpactontheirenergyefficiencyperformanceisless immediate). Thepolicyinstrumentincreasespeerandpublicpressureon companiesthroughthepublicdisclosureofcompaniesemissions orenergyperformance.
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Informationpolicyinstruments
Informationpolicies(ormeasures)aimtoincreaseknowledgeofenergyefficiencyopportunities and consist of informational, analytical and institutional measures which help to establish a favourable environment for industry to implement energy efficiency actions. Examples of information policies or measures are: identification of opportunities (e.g. energy use data Page|37 collection,energyauditsandbenchmarking)andbestpractices,capacitybuilding,labelling,public disclosure,andcooperativemeasures(e.g.governmentindustrychallengesandpartnerships).
Labelling
Differenttypesoflabellingexist:labelsthatindicatetheenergyorGHGemissionsperformanceof appliances; footprint labels that cover the performance of a product throughout its production anddistributionphase;andtheenergyperformanceofproductionfacilities.Efficiencylabelsfor manufacturing equipment (e.g. motors) are used in Canada, the European Union and United States.OthercapacitybuildingprogrammesareusedinIreland,GermanyandtheUnitedStates (Tanaka,2009).
Koreangovernmentalinstituteintroducescarbonfootprintlabel Followinganinemonthpilotprogramme,theKoreaEnvironmentalIndustryandTechnologyInstitute (KEITI) 13introducedacarbonlabelinFebruary2009.Sofar,morethan230goodsandserviceshave been labelled. The labelling covers, amongst others, consumer goods, transport services, electronic appliances and production goods. In May 2010, the law for Low Carbon Green Growth became effective. It obliges the state to invest at least 2% of Gross Domestic Product (GDP) in lowcarbon productionandconsumption.
Source:PCFWorldForum,2011.
TheENERGYSTARlabelformanufacturingplants AnENERGYSTARqualifiedfacilitymeetsstrictenergyperformancestandards,setbyEPA,anduses lessenergy;islessexpensivetooperate;andcausesfewerGHGemissionsthanitspeers.Toqualify for the ENERGY STAR, a building or manufacturing plant cement plants, container glass manufacturing,flatglassmanufacturing,andpetroleumrefineriesmustscoreinthetop25%based onEPA'sNationalEnergyPerformanceRatingSystem.
Source:EPA,2011.
Otherinformationpoliciesandmeasures
Informationpoliciesentailbestpracticeinformationsharing,consultancyservices,decisionaids, and education and training. They are often supported by energy efficiency opportunity identification tools (e.g. data collection, energy audits and benchmarking). These policies help companieslackingtheresourcesorinteresttobuildtheirowninhouseexpertisetoassessand implementtechnicalmeasurestoimproveenergyefficiency.Moreover,theyhelpcompaniesto assess their performance compared to their peers. In some cases, capacity building is used in
13
KEITIisasubsidiarygovernmentalinstitute.ThemainroleoftheKEITIistopromotetheprojectsforthedevelopmentof greenenvironmentaltechnologyandthepromotionoftheenvironmentalindustry.
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combination with prescriptive (e.g. in Portugal and Turkey) and economic measures (e.g. in CanadaandNewZealand)(Tanaka,2009).
Table11Impactoflabellingonthefivedrivers Driver
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Impacton driver Low Low LowHigh
Labellingdoesnotinfluencetheeconomicsofenergyefficiency options.So,theimpactonthefinancialdriverislow. Aslabellingdoesnotprescribethatenergyefficientmeasuresor technologiesshouldbeapplied,thepolicyobligationislow. Thelabellingofaconsumerproduct,e.g.acarbonlabeltriggers theknowledgedriverofadownstreamfirm(i.e.oneclosetothe market).Thiseffectdecreaseswhengoingupstream(e.g.toa steeloraluminiumproducer).Thelabellingoftheenergy performanceofindustrialfacilitieshasamuchmoredirectimpact ontheknowledgedriverofproductionindustry. Thelabellingofindustrialequipmentsenergyperformancemay helpcompaniesidentifythemostefficientequipment.
Financials Policyobligation Knowledge
Commitment Publicandmarket demands
N/A LowHigh
Thispolicydoesnotdirectlyaffectacompanyscommitment. Labellingproducts(e.g.aCO2footprintlabel)aimstoinfluence consumerchoices.Whenlabellingreallyaffectsconsumers choices,itwillgiveamarketsignaltoproducerstoimprovethe energyefficiencythroughouttheproductionchain.
Table12Impactofinformationpoliciesandmeasuresonthedrivers Driver Financials Impacton driver Low Ingeneral,informationpolicyinstrumentsdonotinfluencethe economicsofenergyefficiencyoptions.So,theimpactonthefinancial driverislow. Informationpoliciesdonotprescribethatenergyefficientmeasuresor technologiesshouldbeapplied.So,thepolicyobligationislow. Informationpoliciesaredesignedtoincreaseknowledge,so,the impactonthisdriverispotentiallyhigh.Ifaninformationpolicy involvesbenchmarkingacompanysperformance,itcanbetter identifyprojectswithpotentialforsavings,andhelpassessthe effectivenessofanyinvestmentrecommendedtoimprove performance. Thispolicydoesnotdirectlyaffectacompanyscommitment. Ifaninformationpolicyisdesignedtoaffectenergyefficiency improvementsthroughtheproductionchain,thispolicymayinfluence thepublicdriver.
Policyobligation Knowledge
Low High
Commitment Public&market demands
N/A Medium
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Summaryofpolicyimpactondrivingforces
In this section, the way policies and their characteristics typically affect the driving forces of investment decisions are summarised. This analysis can be used as a default and tailored to a countrys sector specific situation. Only the high and medium impacts on the drivers are given, leavingoutpolicytypesthathavealowimpactornorelationshipwiththedrivingforce. Page|39
Table13Generalevaluationoftheinteractionbetweendrivingforcesanddifferenttypesofpolicies Policyobligation Type Publicandmarket demands Medium Medium High Medium
Prescriptive
Norms/standards Negotiatedagreements Obligations/commitments e.g.mandatoryenergyaudits Taxes Incentivesandsubsidies Tradablepermits Labelling Otherinformationmeasures
High High High
High High Medium
Medium High Medium Medium High High
Medium
The conceptual evaluation methodology can help initiate a discussion on policy improvements; i.e.whetherthecurrentpolicypackageaddressesthekeydriversofboardroomdecisionmaking. In general, a suite of complementary policies is needed to effectively address all driving forces identified in this study (see Table 13). However, an analysis of the relative importance of each driverwithineachsectorislacking,assomemightbemoreimportantthanothers,dependingon thetypeofenergyefficiencyinvestmentthatisrequired(i.e.loworhighcostinvestment). Furthermore, individual policies may have no or limited effect on the various driving forces, in somecases.Acompanysdecisiontomakeaninvestmentmaydependprincipallyonadifferent setoffactors,rangingfromthebroadinvestmentclimateestablishedbythegovernmenttothe marketandthecompanysfinancialhealth.
Bestpracticescombinetaxandfiscalpolicies Overall, the best practices internationally are those that combine tax and fiscal policies into an integrated programme that provides clear economic signals and incentives that raise management awareness so that industries are motivated to reduce the costs associated with consumption of pollutingenergysourcesandtoimprovetheenergyefficiencyoftheirfacilities.
Source:Priceetal.,2005.
Information Economic
Commitment
Knowledge
Financial
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Inpractice,theimpactofpoliciesoneachdriverwilldependontheirspecificcharacteristicssuch as the ambition level (targets and standards), legal force, compliance flexibility, level of enforcement and magnitude of financial incentives and taxes. Despite this, the authors found thatcertainpolicytypesaremorelikelythanotherstoinfluenceparticulardrivingforces.
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Impactonfinancials
Severaleconomicpolicyinstrumentscanaffectthefinancialparametersofinvestmentsinenergy efficiencymeasures.Subsidiescanbeusedtoincentivisecleantechnologies,whilepricingaimsto discourageGHGemissionsorenergyuse.14 Here, financial constraints e.g. taxes, cutting energy price subsidies, or emissions trading, are differentiatedfrompositivefinancialincentives,e.g.subsidies,loanguarantees,taxexemptions, taxreductionprovisions,oraccelerateddepreciation. Importantinstrumentcharacteristicsare: The level of the financial incentive. Ideally, this instrument characteristic would be assessed againstdatasuchas: thetotalrequiredinvestmentstosignificantlyenhanceenergysavings(e.g.doubleenergy savings)forpositiveincentivessuchassubsidiesandtaxdeductions15;or energycosts:forpolicyincentivesliketaxesorcarbonprices. Atailoreddesignoftheincentive: Fortechnologyspecificsubsidies:themoregovernmentstargetaspecifictechnology,the greater the chances that these will trigger additional investments and reduce free rider behaviour(i.e.subsidiesareusedbyacompanyforinvestmentsthatarealreadyfinancially feasible).
Impactonenergysavingobligations
Hard policies such as standards, obligations or tradable permits affect the energysavings obligationdrivingforce.Companiesareeitherincitedtocomplywiththepolicyrequirementsfor fearofaheftypenaltyorlossoflicence,ortoundertakeinhousemeasurestomeettheirtargets withinacapandtrade(orbaselineandcredit)schemeifthereisahighprice. Whetherpoliciesobligeafirmtotakeinhouseenergyefficiencymeasuresisdeterminedbythe followingcharacteristicsofapolicyinstrument: Coverage:doesthepolicycoverGHGemissionsorenergysavings. Ambitionlevel:theeffortrequiredfromcompanies(distancetotarget)ortheextenttowhich thepolicyinstrumentrequiresachangeinbehaviour.
Possible policy interventions could also focus on encouraging banks to increase their energy efficiency loans. This wouldmeritfurtheranalysis,butitisbeyondthescopeofthisstudy. 15 Howdoesonejudgethesizeofafinancialpolicyincentive?Isa100millioneuroperyeargovernmentsubsidyfor industrial energy efficiency a significant amount? Ideally such a number should be compared against the total investmentsthatarerequiredtosubstantiallyincreasesavings,forexampleadoublingofenergysavingsratefrom1% peryearunderbusinessasusualconditionsto2%peryear.Aballparkestimateoftherequiredinvestmentsmaybe obtainedfromthefollowingdataandassumptions:sectoralprimaryenergyusedata,oilprice,thetargetedadditional savingsandthepaybacktimeoftheseinvestments.FortheNetherlands,thisleadstoaballparkestimateof:20Million tonnesofoilequivalent(toe,annualprimaryindustrialenergyuse)x0.01(1%extrasavings/yr)x65(oilprice/barrel) x7.2barrel/toe/1000x5(paybacktime)=450millionperyearofinvestments.Note,thatamoredetailedestimate should,forexample,includefueltaxes.
14
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Legalforce:whatwillhappenifcompaniesdonotcomplywiththepolicyrequirements?Does thepolicyinstrumentincludesanctions,suchaspenalties?Forexample,theconsequencesfor evading taxes or the emissions trading schemes are often considerably greater than the consequencesfordefaultingonacovenant. Complianceflexibility:thelimitationsthatdifferentpolicyinstrumentsplaceonacompanys choices.Forexample,technologyprescriptivepoliciesprovidelittleflexibilitywhereassectoral Page|41 targetsunderacovenantprovidesomewhatmore.Emissionstradingschemesoftenprovide thegreatestdegreeofflexibility. Level of execution and enforcement: how rigidly do public bodies monitor a companys efforts to comply with policies? How strictly is compliance enforced and noncompliance reprimanded? Anumberofpolicyinstrumentsdonotspecifytargetsforenergysavingsorrequireenergysaving actionssuchasinformationpolicies,andeconomicpolicyinstruments(e.g.subsidiesortaxes.to beundertakenwithinthe company).Thesepolicyinstruments,however,mayaffectenergyuse throughthefinancialdriver.Withinthescopeofthisframework,thesepolicyinstrumentsdonot contributetothepolicyobligationdriver. An exception is GHG emissions trading, an economic policy instrument with strong regulatory characteristics that affect the policy obligation driving force. GHG emissions trading does not requiredirectenergyefficiencymeasures.However,theindirectenergyefficiencyrequirements ofthispolicyinstrumentarepotentiallyhigherthanallothereconomicpolicyinstruments,ifthe ambition level is high; public reporting systems are transparent; and the execution and enforcementregimesarerobust.
Impactonknowledge
Most regulatory and information policies such as norms, obligations and labelling instruments affect the knowledge driving force. Subsidies for energy audits also raise awareness of energy efficiency opportunities. Regulatory policies are likely to incite companies to be informed of opportunities available as to remain in compliance, whereas information policies are soft policiesthatsupportcompaniesthroughinformationandtechnicalresources,shouldtheywishto implementenergysavingactions.Somepoliciesbuildcapacityandactivelyincreaseknowledge, including pilot project subsidies, energy management requirements, benchmarking obligations andtechnologycataloguesorlists. Whenpoliciesarestronglyenforced,thesearchforandacquiringofknowledgeisenhanced.For instance, the more frequently an authority or auditor visits a company and the more knowledgeablethatauditor,themoreknowledgeofenergysavingscanbeexchangedbetween companyandauditor. Nationalenergyefficiencyagencies,orotherentitiesthatadministerindustrialenergyefficiency programmes,playanimportantroleinpromotingknowledgeexchangeanddatacollection.
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Examplesofexecutionandenforcement Several lessons from the SO2 and NOx [US emissions trading] markets emerge for the regulation of otherpollutantssuchasCO2[].Transparentdatasystems,publicaccesstoinformation,andstrict andcertainpenaltiesfornoncompliancehaveledtoavirtuallyperfectcompliancerecord.
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Source:Burtrawetal.,2009.
Monitoring, Reporting & Verification requirements differed by programme. Participants in the Irish EAParerequiredtohavetheircompliancewiththeenergymanagementstandardcertifiedbyathird party.ThemembersoftheFrenchAERESprogrammecommittedtopublishtheircurrentemissionson anannualbasis,whichwasverifiedbyanindependentorganisation.IntheNetherlands,participating companies were required to provide their energysavings plans, monitoring reports, and company level energy efficiency index calculations to NOVEM where they were reviewed for accuracy and completeness.
Source:Horvathetal.,2010.
We have examined regulation for small and medium enterprises in the Netherlands (General Administrative Order, requiring all energysavings measures that can be reasonably asked). We foundthatintheoverwhelmingmajorityofcasestheresponsibleagency(i.e.themunicipality)isnot veryactiveinenforcingcompliance.Theagencysknowledgeoftheproblemseemstobelimitedand lowpriorityisgiventoenergyefficiencyimprovement.
Source:Bloketal.,2004.Chapter4.
16
[TranslatedfromDutch]AccordingtotheVoluntaryAgreementsbetweengovernmentandindustry,a participatingfirmshouldimmediatelyimplementallmeasureswithapaybacktimeunderfiveyears. Inpracticethoughthisisanemptyformality[].Wesimplydonthavecompliancecopsinthisarea.

Source:VroegeVogels.
StandardsforEnergyManagementSystem(EnMS)aspartofvoluntary/negotiatedagreements Several countries have developed EnMS standards as a core requirement of energysavings agreements between government and enterprises. The proper adoption of EnMS standards greatly facilitates the identification of energysaving opportunities, especially through changes in operating practices,whichgofarbeyondwhattheenterpriseshadbeenabletoachievethoughselfdesigned systems.Companiesthatobtainedcertificationoftenrealiseenergysavingsbeyondtheexpectation oftheagreement,typicallysavingsof10%to20%withinthefirstfiveyears. Denmark,SwedenandIrelandarecurrentlyusingtheEuropeanstandardEN16001tounderpintheir energysavingsagreements.TheISO50001,dueforreleaseinthethirdquarterof2011,couldserve asasignificantunderpinningforgovernmentledenergysavingsprogrammeswithindustry.Basedon experience in Sweden, Ireland and Denmark, standardised EnMS may achieve its highest value, if implemented as a core, interrelated part of the governmententerprise energysavings agreement and related activities. For example, theSuperior EnergyPerformance programme is being set up in theUnitedStatestoserveasameanstoencourageISO50001adoptionbyenterprises. Source:Goldbergetal.,2011.
16 Surveyof11municipalitiesintheNetherlands.
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Impactonthecommitmenttotheenvironmentandenergyefficiency
Theeffectofpoliciesonthecommitmentdrivingforceislessclearcut. However, policies developed through stakeholder processes and extensive consultations, especiallyatanearlystage,createcompanyownershipand,therefore,increasethecommitment ofacompanytoapolicy(referredtoasamultilateralpolicy).Certainpolicyinstrumentshavea Page|43 more multilateral nature than others. Typically, governments interact quite strongly with industrial stakeholders when discussing and deciding on the distribution rules of permits under theETS,ordevelopinganegotiatedagreement.
Policyinstrumentsdevelopedmultilaterallyimprovecommitment Staff members of SenterNovem in the Netherlands conveyed that in their experience, companies providedargumentsagainstsuchprogrammespriortotheircommencement.Thecompaniesstated that they already knew what they could achieve; they had already implemented all possible measures; or they would need to close due to the restrictiveness of the agreements. Now, after participatingintheprogrammeforanumberofyears,thecompaniesareveryenthusiasticabout the Dutch Long Term Agreements (LTAs), especially because no similar support based programmes are offered through the European Union Emissions Trading Scheme, in which some of them participate.ThecompaniesespeciallyseethebenefitsoftheknowledgesharingplatformsintheLTA programme.
Source:Horvathetal.,2010.
Policiescanalsoimprovecommitmentbyrequiringthatdecisionmakersfromtopmanagement becomeinvolved:
ReportinganddecisionmakingunderAustraliasEEOProgramme The EEO programme takes a wholeofbusiness approach that involves staff from across different functionsincludingseniormanagers.Theresultsoftheassessmentsmustbeproperlyconsideredby decision makers, who are then required to make clear decisions on timing and implementation of energy efficiency opportunities. In addition, the company must communicate the results of the assessmentsandassociatedbusinessdecisionstoitsboard,internalemployeesandthepublic.
Source:DRET,2010a.
Reporting to the Board and CEO was identified as being helpful to force senior management/executives to make decisions on energy efficiency, rather than leaving this with operationalteams(althoughnotallcorporationsadhered,andsomeidentifiedtheongoingneedto furtherengageseniormanagement).
Source:DRET,2010b.
Similarly,labellingmaypositivelyaffectcompanycommitmentascompanyeffortstosaveenergy canbeshowcasedviathelabel.
Impactonthedemandsofthepublicandthemarket
Finally, many policy types can affect the public and market demand driving force in different ways. The impact on the energy efficiency of products and production processes is generally indirect.
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Onecandistinguishdifferenttypesofpoliciesthataffectpublicandmarketdemandsforgreater energyefficiency: Policies that oblige firms to make energy or carbon data publically available, e.g. within ETS schemes,andnamingandshamingpolicieswillincreasepublicawarenessofgoodandbad performers.
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Policy incentives to benchmark the energy or CO2 performance against competitors will increasepeerpressure,forcingfirmstoimprovetheirefficiency. Regulations on industrial equipment suppliers will inevitably affect the industrial buyers of thesetechnologies. The effect is similar for energy efficiency labels or carbon footprinting, although the impact maybesmallerorlessimmediatethanthatofregulations.Suchpoliciesaimtoincreasethe demand for more energy efficient products across the supply chain of industrial equipment. Nonetheless, it is unclear whether such labels have an impact on the energy intensity of commodities(e.g.steelandaluminiumslabs);pressurefromthemarketwillultimatelydrive efficiencylevelsofthesecompanies.
Regulationsonindustrialequipmentsuppliers TheEuropeanCommissionadoptedtodayfourecodesignregulationstoimprovetheenergyefficiency of industrial motors, circulators, [...]. The regulation on motors sets energy performance requirementsformostoftheelectricmotorsusedinindustrialapplications.Furthermore,itwillfoster the use of "variable speed drives" adjusting the motor output to the actual needs, instead of operatingalwaysatfullcapacity.Theenergysavingstriggeredbythemotorregulationareabout135 TWhperyearby2020.
Source:EuropeanCommission,2009.
PublicreportingunderAustraliasEEOProgramme The aim of the public reports under Australias EEO programme is to increase business and community awareness of the potential energy savings, financial benefits and reductions in greenhousegasemissionsthatcanarisefromthecorporationsenergyefficiencyassessments.Both reportsdemonstratelegislatedcompliancewiththeprogramme.
Source:DRET,2010a.
Apositivefactorregardingcorporationsapproachtoenergyefficiencyisthepublicandcommunity awareness ofenvironmental and sustainability issues, which is creatinggreater expectations of and withincorporationswithrespecttoenvironmentalsustainabilityandclimatechangeissues.
Source:DRET,2010b.
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Howtoapplytheevaluationmethodology
Inthissection,theinformationoftheprevioustwosectionsisconsolidatedintoaguidelinefor applyingthepolicyevaluationmethodologytoindustry.Theframeworkdescribedcanbeapplied onmultiplescales: afirm; agroupoffirms(e.g.frontrunnersorlaggards); agroupoffirmswithsimilarproductsorcharacteristics(asectororsubsector);or acountrysindustryasawhole. Ideally,themethodologywillbeappliedtoasectororgroupoffirmswithsimilarcharacteristics inasinglecountry. Applyingourframeworkinapolicyevaluationincludesthefollowingsteps: Identifythetype(andcosts)ofenergyefficiencyinvestmentsthattheindustryhastomake tomeettheparticularcountrysobjective. Map the characteristics and circumstances of the country, with respect to the different industrialsectors,andassesstherelativeimportanceofthedriversofboardroominvestment decisions, considering the sectors characteristics and the type of energy efficiency investment. Analysethecountryspolicymix,assessitsimpactonthedriversforinvestmentsinenergy efficiency,andidentifywhetherpoliciescouldfurtherinfluencethedrivers. Anindepthpolicyevaluationwillbebasedonmanydifferentsources(literature,internet,expert knowledge,etc.).Ideally,theresultsshouldbetestedbymeansofinterviewswiththefollowing experts: Keyrepresentative(s)fromindustry(theboardroomsperspective). Keyrepresentative(s)fromthegovernment(thepolicymakersperspective). Keyexperiencedpolicyevaluator(s)(theevaluatorsperspective).
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Identifyingenergyefficiencyinvestmentneedsbyindustrial sector
The first step is to determine the level of energy savings (or GHG emission reductions) that a country seeks to reach per industry, and identify the types (and costs) of energy efficiency investmentsneededtomeetthecountrysobjective.Forexample,doesthecountryaimtohave the most competitive industry and, thus encourage companies to achieve the energy intensity levelsofinternationalbestpractice?IsthecountrysprimeinteresttoreduceGHGemissions,in whichcaseenergyefficiencyinvestmentmightnotbetheprimefocus? Theabsenceofdetailedbaselineenergyconsumptiondatainmanycompaniesisamajorbarrier to identifying projects with a savings potential and later for assessing the effectiveness of any investmentrecommendedtoimproveperformance.Formanyenergyintensiveindustrialsectors suchassteel,metalssuchasaluminium,cementandglass,typicalgrossenergyconsumptiondata perunitofproductarewidelyavailableinternationally.
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Formostof thesesectors,thereareindustrybenchmarksagainstwhichpotentialprojectscanbe assessed. Data for less energyintensive sectors are less frequently available and may pose significantchallengesintryingtoidentifyenergyefficiencyprojects.
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Mappingthecharacteristicsandcircumstancesofthecountryand sectors
Thesecondstepistomapthecharacteristicsofagivencountrysindustrialsectors(i.e.shareof smallversuslargecompanies,energyintensiveversuslightsectors,etc.)andassesstherelative importanceofthefivedrivingforcesconsideringthesectorscharacteristicsandtypeofenergy efficiency investment. Questions available in Appendix 1 may help identify the drivers most pertinenttotheindustrialsectorinthecountryunderconsideration.
Assessingtheimpactofacountryspolicymixonthedriversfor investmentsinenergyefficiency(ideallywithinasector),and identifyingwhetherpoliciescouldfurtherinfluencethedrivers

Inthethirdstep,theoverallmixofindustrialenergyefficiencypoliciesinthecountryisidentified as well as the impact these policy instruments have on the drivers for investments in energy efficiencywithinasector. Descriptionofthepoliciesshouldfirstfocusonthecharacteristicsthataffectthedifferentdriving forces (e.g. policy type, enforcement, ambition level, compliance flexibility, size of financial incentives, etc.) and then be analysed within the context of a countrys overall policy mix. Outcome of the analysis could point to whether additional policies are needed and effective in stimulatingthedrivers. The following unit applies the framework to one illustrative example, the Netherlands, on the scaleoftheoverallindustry(i.e.notatasubsectorlevel).
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Applicationoftheframeworktoatestcasestudy: theNetherlands
Inthissection,theresultsofapplyingsomeelementsoftheevaluationmethodologytoacountry are discussed. This test case serves as an illustration of the methodology, rather than a Page|47 comprehensivepolicyevaluation.Inordertomaketheanalysiscomplete,thecasestudywould havetoincludethetypeofenergyefficiencyinvestmentstheindustryneedstomake(firststep), and provide a summary of the circumstances and relative importance of the different drivers throughasectoralanalysis(secondstep).However,itnotispossibletoincludethislevelofdetail here. The focus is on the policies and drivers affecting all industries in the country case study. Additional information on the countrys characteristics and circumstances is provided in Appendix1.
Figure5Illustrationofthefivedriversreflectingindustrialboardroomsdecisionmakingprocessonenergy efficiencymeasuresintheNetherlandstoday
Knowledge We really know our own EE measures. We are now increasing our knowledge of EE improvements in the production chain and have started to work on 2030 roadmaps.
Commitment We are global players, our parent companys commitment is our commitment. A couple of our parent companies are really committed to climate and energy issues.
Financials Our financial position is in general healthy, but return on equity is currently rather low. EU-ETS will really become a production cost factor from 2015 on. How can we reduce these costs?
Public and market demand Slowly we are seeing that downstream firms becoming more aware of carbon costs passed on by upstream firms. Vice versa, downstream firms increasingly want to decrease their upstream footprint.
Policy demand The legal, environmental permit, obligation to take each energy efficiency measure with a pay-back time < 5 year is not enforced. This obligation is implemented via much more flexible and less binding covenants.
Source:Ecofys,2011 .
17
ThepolicymixintheNetherlands
EUEmissionTradingScheme(EUETS)
Since 2005, the majority of industry in the Netherlands must meet GHG emission reduction obligationsestablishedundertheEUETS.
17
Materialprovidedforthisreport.
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Enforcement of the EU ETS obligations (monitoring, reporting, annual compliance) is strong and falls under the National Emissions Authority (there are currently 60 to 80 fulltime employees). Ambitionlevel.Since2005anduntilphase3(startingin2013),theambitionlevelofETSfor companies in the Netherlands is fairly low. The reason is that participants, who received a Page|48 moregenerousamountoffreepermitsinphases1and2ofthescheme,willbeabletobank theseallowancesforfuturecomplianceafter2012.However,from2015,Dutchfirmsexpecta shortageofallowances.Today,theextentofthisshortageandtheassociatedproductioncost risearestillunknown.18 Compliance flexibility. A characteristic of the ETS is its high compliance flexibility, as participants can meet their obligations either by reducing emissions within their own installationorbypurchasingpermitsgeneratedfromreductionselsewhere(whicheverismost cost effective). Some firms report that the ETS in phase 3 will incentivise additional energy savings measures because a larger share of measures becomes profitable. This is because energy savings lowers energy bills, but also carbon costs. Others may search for alternative compliancestrategies,suchasfuelshiftorbuyingadditionalallowancesonthemarket.19
Negotiatedagreementsforenergyintensiveindustry
IndustryintheNetherlandshasparticipatedinaseriesofnegotiatedagreementssince1991.The main features throughout the longterm agreements are that firms are required to develop energyefficiencyplans;executemeasureswithapaybackperiodoflessthanfiveyears;andthe continuoussupportofthegovernmentenergyagencytoimplementmeasures.Theagreements aredividedintothreephases: 19912000:Thelongtermagreements(calledMJA)setenergysavingstargetsof20%in2000 comparedto1989forthesectorsoverall.Firmshadtoimplementcosteffectivemeasures(i.e. withapaybackperiodoffiveyearsorshorter). 20002010: Individual benchmark obligations were contained under the voluntary benchmarkingcovenantforlargerindustrialcompanies(calledcovenantbenchmarking).The targetforsignatorycompanieswastobeamongthetop10%intheworldintermsofenergy efficiency in 2012. Target setting at the firm level implied lower compliance flexibility compared to the previous period, which set sectoral (rather than individual) targets and required firms to implement both costeffective measures and less costeffectiveness measures. 20102020: Longterm agreements on energy efficiency for companies are subject to the EU ETS(calledMEE).Theselongtermagreementsdonotincludespecifictargets,butfirmsshould significantlycontributetoimprovingenergyefficiency.Comparedtothepreviouscovenant, the scope is extended by including efficiency improvements in the production chain and establishinglongtermenergyefficiencyroadmapsfor2030.
Negotiatedagreementsforsmallerfirms
Forasmallernumberofindustrialfirms(i.e. thosenotunder EU ETS),the voluntary,longterm agreements will continue to 2020 (policy name: MJA3). The most important features of the agreementare:
18
Inthiscase,thepossiblepassthroughofthecostoffreelyobtainedemissionallowances(opportunitycosts)wasignored (Bruynetal.,2010). 19 InformationgatheredfromEUETSparticipantsinEcofysnetwork.
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Atargettoimproveaverageenergyefficiencyby30%from2005to2020. Sectororganisationsmustsetroadmapsfortheirsector. Government helps businesses and trade associations to set up roadmaps; monitor energy savings;implementenergymanagement;andorganiseseminars.
Economicinstruments
Taxdeductionandflexibledepreciationforenergyefficiencyinvestments(calledEIAandVAMIL) havebeeninplacesince1997intheNetherlands.Thetaxdeductionleadstoadropininvestment costsby11%to14%onaverage.Flexibledepreciationallowsforflexibilitytospreaddepreciation costsoveryears.Thegovernmentbudget,determinedannually,wasaminimumEUR150million in2010.
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EnvironmentalManagementAct
TheEuropeanIntegratedPollutionPreventionandControl(IPPC)Directive(nowmergedwiththe recent Industrial Emissions Directive) provides the legal framework for requiring companies to obtain environmental permits under the Environmental Management Act (policy name: Wet Milieubeheer, WMb). The Directive states that for installations participating in the EU ETS, MemberStatesmaychoosenottoimposerequirementsrelatingtoenergyefficiencyinrespect of combustion units or other units emitting carbon dioxide on the site (Directive 2008/1/EC, Article 9(3)). Beyond the IPPC requirements, the Environmental Management Act requires the implementationofenergysavingsmeasureswithapaybacktimeofuptofiveyears.Inpractice, firmscomplybyparticipatinginacovenantwherebytheyestablishanEnergyEfficiencyPlan(EEP) andanannualprogressreport(coordinatedbytheEnergyAgency,AgentschapNL).Thelocal or regional environmental authority, responsible for the environmental permit can, if needed, take legal action in case of noncompliance with the covenants and provisions in their EEP. In practicethough,enforcementofEEPprovisionsappearstobeweak. Firms that do not participate in covenants use between 10% and 20% of the overall energy supplies in the Netherlands. These are lowenergy intensive firms, such as supermarkets and healthcareinstitutions.Inprinciple,theDutchenvironmentalpermitrequiresthesefirmstotake energysavings measures up to the payback period of five years (similar to the requirements under the covenants). Recent evidence shows that the implementation and compliance of this legal obligation are poor, because of a lack of knowledge, priority and implementation tools administeredbylocalauthorities(VROMinspectie,2010).
Equipmentstandards
Increasingly,theEuropeanEcodesignDirectiveissettingequipmentstandardscommontoallEU MemberStatesfortheenergyefficiencyofcrosscuttingtechnologiesinindustry.TheDirective stipulates that whenever minimum energy performance standards (MEPS) are considered, so should mandatory labelling. So far, no labelling has been established under the Ecodesign DirectiveforIndustrialAppliances. For electric motors in Europe, a voluntary labelling scheme exists which was developed by the European Committee of Manufacturers of Electrical Machines and Power Electronics (CEMEP). Mostelectricmotorsaresoldtooriginalequipmentmanufacturers(OEMs).TheseOEMscouldbe manufacturersofrefrigerators,washingmachinesandotherapplianceswhereelectricmotorsare incorporatedintotheunits.AstheOEMsarenottheendusersoftheappliances,theyarelikely tofocusoncostandreliabilityofthesemotorsratherthanonthecostofelectricityusedtorun
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them.Thoughinmanycases,betterdesigned,moreenergyefficientmotorsmaybelessliableto failorrequirerepairduringtheOEMequipmentwarrantyperiod. This leads to a weak system compared to other international initiatives. As a result, from July 2011,thelabelwillnolongerbevalid.Instead,aninternationallyrecognisedtestingmethodwill beusedtobantheworstperformingelectricmotorsontheEUmarket.20
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Overallassessment
AsummaryoftheDutchenergyefficiencypolicypackageforindustryfrom2010anditsoverall impactontheindustrydrivingforcesispresentedinTable14.Nationalpoliciesstronglyfocuson increasing knowledge and commitment in the boardroom via voluntary agreements, supported bypositivefinancialincentivesandseveralinformationmeasures.Todate,thepolicyobligation to invest in the most energyefficient measures has not been strong. Despite the lack of policy obligation, the policy package has supported the Dutch industry in becoming comparatively energyefficientproducers.
Table14Netherlands:Interactionbetweendrivingforcesanddifferenttypesofpolices(status:2010) Policyobligation Financial Type Publicandmarket demands Low Low Medium
Prescriptive
Norms/standards (EnvironmentalManagement Act) Negotiatedagreements(MEE, MJA3) Incentivesandsubsidies (EIA/VAMIL) Tradablepermits (EUETS) Labelling(voluntarylabelling forelectricmotors;EUEco designnotimplementedin Netherlands) Outreachandinformation providedbyAgentschapNL (e.g.tools,guidebooks)
Low medium Low Medium
Low
Medium Low medium
High Medium
Medium
Information
Economic
Low
High
Medium
ApreliminaryanalysisindicatesthatpoliciesintheNetherlandshaveamediumpositiveeffecton the financial driver. Financial support for energy efficiency investments through tax deductions and flexible depreciation have been in place since 1997, providing a stable signal through time that investing in energy efficiency measures is attractive. The impact of the EU ETS on the
20
UsingInternationalElectrotechnicalCommissionIECstandards.
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Commitment
Knowledge
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financialdecisionsintheboardroomisincreasing.Fromthistestcase,however,theauthorsdo nothavesufficientinformationtoidentifytheimpactoftheseinstrumentsonthefinancialdriver inmoredetailandcometodefinitiveconclusions.Manycompanieswouldinvestbasedonenergy efficiency improvements alone (for competitiveness purposes), but, equally, the other cost, benefitsandimplicationswouldalsobetakenintoaccount.Certainlymoreresearchonwholelife andassociatedcosts/benefitswillbeneeded,includingthecostdifferencebetweenthemostand Page|51 leastefficientequipmentandwhetherexistingfinancialincentivesaffectthedecisiontoinvestin themostefficienttechnologies. The subsequent voluntary agreements, and the implementation support by the energy agency (Agentschap NL), have increased the knowledge level of the Dutch industry significantly. This driverseemstobewelladdressedasAgentschapNLprovidesongoingsupporttocompaniesto identify energy efficiency options. The use of benchmarking under the covenants has also ensured that companies are aware of peer performance and top performing companies in the world.Thedirecteffectofnormsorlabellingpoliciesontheknowledgelevelsofindustryappears tobelow.Theactualimplementationofthenormsisdonethroughthenegotiatedagreements. The voluntary agreements, which have been developed in partnership with industry (i.e. multilateral policies) and supported by prolonged financial policy incentives, have positively affected the commitment of Dutch industry to energy efficiency. Increasingly though, their globallyoperatingparentcompaniesdeterminethecommitmentforclimateandenergymatters. ThiscaninterferewiththecommitmentshownbyindustryleaderswithintheNetherlands.The Carbon Disclosure project showed that a limited number of the major Dutch companies fully integratedclimaterelatedprioritiesintotheirbusinessstrategy.Itisunclearwhetheradditional policies would be needed to enhance Dutch industrys commitment to the environment and energy,as theDutchcompanieshave alreadydemonstrated theiractiveparticipationin setting thevoluntarytargets. ThelatestcovenantswithindustryandtheupcomingimpactofEUETS(passingthroughofcarbon costsintheproductionchain)areexamplesofincreasingpublicandmarketpressurepushingfor energysavings.Here,itisuncleartowhatextentthemarket,peersorthepublichaveencouraged energyefficiencyimprovementswithinDutchcompanies. Policy obligations for industrial energy savings are regarded as medium to low. Beyond EU legislation, the Dutch Environmental Act requires ambitious energy savings. However, local or regional authorities do not directly enforce this: the obligation is implemented via voluntary agreements. WhethertheEU ETSaffectedcompaniesenergyefficiencyinvestmentdecisionsis unclear;theschemeprovidescompanieswithflexibilityastohowtheyreducetheirGHGs.
Currentpolicytrend
Dutch industry was, in general, among the worlds best energy performers, but is losing its position (Verificatiebureau Benchmarking Energieefficiency, 2006). In this context, the current policypackageanditstrendsmaynotbeabletorestoreitsfrontrunnerposition. Currently, the Dutch policy package addresses all five drivers to a greater or lesser extent. The main trend is that the impact (on commitment and knowledge) of the Dutch covenants in the boardroomsiscurrentlydecreasing,whereasthefinancialandpolicyobligationimpactsofEUETS are growing and will significantly affect Dutch energy efficiency investment decisions from approximately2015.Couldastrongerpolicyobligationforenergysavingsincombinationwitha changeineconomicpoliciesbethekeytoimprovingtheenergyefficiencyperformanceofDutch companies?Policymakerscanestimatetherelativeimportanceofthedrivingforcesandwhether
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additionalpolicieshaveaneffectonthemostimportantdriversinthatsectoronlybyfocusingon a subsector level. Additional policies were effective in triggering the drivers for investment. It wouldbeusefultoevaluatethecostsandbenefits,thushelpingpolicymakersdecidewhetherto designanewpolicyornot.
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Conclusions
In seeking to understand how policies can be designed to stimulate companies to save energy, this report has provided some insights into the industrial boardrooms decisionmaking process forinvestinginenergyefficiency.Therationaleforanindividualcompanymakinganinvestment that will reduce energy consumption varies considerably and depends on a range of factors. Page|53 These include the sector, company size, energy intensity, cost of energy relative to overall productioncosts,whetherenergyefficiencyimprovementisanincidentalorancillarybenefitofa processorequipmentupgrade(oraspartofaconcertedefforttoimplementanenergyefficiency programme),thefinancialstateofthecompany,whetheritisinagrowthorsunsetsector,and whetherithaseasyaccesstofinance. Acompanymayupgradeequipmenttoincreaseproductioninagrowthmarket,tosimplyreplace wornoutequipment,ortoremaincompetitiveinitsmarkets.Inthesecases,theupgradeislikely tobemoreenergyefficientthanthereplacedequipment.Inthecaseoftechnologyinvestment choices,whetheracompanygoesforthemostenergyefficientoptionornotislikelytobedriven byarangeoffactorssuchascompatibility,easeofmaintenance,lifecyclecostandoverallcost effectiveness, of which energy consumption may be a part of decisionmaking but not a sole reason. Whilecompaniesarediverseintermsoftheabovementionedfactors,theboardroomdecision makingprocessforenergyefficiencyinvestmentsproposedinthisreportcanbeunderstoodby policy makers in terms of five driving forces: financials, knowledge, commitment to the environmentandenergyefficiency,publicandmarketdemands,andpolicyobligations. To help companies make investments with the highest energy efficiency benefits, the report proposes that policy makers need to understand how and which policies can influence these drivingforces.Therelativeimportanceofeachdrivingforcewilldependonthefactorsnotedand may positively or negatively affect any investment option, thus prioritising any investment is a complexdecision.
Financials
Thefinancialsituationofacompanyisintegraltomakingenergyefficiencyinvestmentdecisions. The financial driver is determined primarily by the access a firm has to its capital and the profitability to invest in energy efficiency measures. Given the constraints on finance for many companies and their need to carefully prioritise investment unless the company has a high energy use or where energy represents a significant percentage of its operating costs a board maynotbeconvincedoftheenergyefficiencyargumentalone.Ifinvestmentsarepresentedasa rangeofmeasurestoimproveproductivity,reducecosts,andreduceenergyconsumption,then theboardmaybemoreinterested. Thecostofenergyisdrivenbybothmarketforces(e.g.thepricesofinternationaloil)aswellas government intervention. Where energy costs are rapidly increased, then companies may look closelyatenergyconservation.Energypricing,subsidiesandothersuchincentivescanenhancea companys willingness to invest in practices and technologies with energy efficiency benefits abovethosethatlacksuchbenefits. ApreliminaryanalysisoftheimpactofpoliciesonthefinancialdrivingforceintheNetherlands has shown that a stable mix of financial incentives (the EIA and VAMIL) since 1997 has helped companiestoimplementenergyefficiencytechnologies,andhassupportedtheirparticipationin otherpolicies,suchasthebenchmarkingcovenants.
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Knowledge
A companys energy efficiency actions depend on its level of knowledge of energy efficiency opportunitiesavailabletoit.Arangeofpoliciesandpolicycharacteristicscanhelpincreaselevels ofknowledgewithintheindustry.Forexample,policiesthatareeffectivelyenforced,suchasthe EU ETS, will encourage companies to stay informed and compliant. Public energy agencies and Page|54 informationpoliciesprovideobvioussupport,suchastechnologylists,asintheNetherlands.
Commitmenttotheenvironmentandenergyefficiency
A companys commitment to the environment and energy efficiency will definitely influence a companys energy efficiency actions. Positive relationships with government policies, such as multilateralpolicydevelopmentandextensiveconsultation,canhelppoliciesgarneracceptance from industry and encourage greater corporate commitment to energy efficiency. For example, the voluntary agreements between industry and governments in the Netherlands led to a high degree of industry ownership and commitment towards becoming world leaders in energy efficiency.
Publicandmarketdemand
Acompanywillbemorewillingtoimplementenergyefficiencypracticesandtechnologies,ifits peers, the public or the market place demands it. Policies that encourage companies to benchmark their performance relative to their peers (i.e. benchmarking) or provide for productionchainimprovementsbeyondtheboundsofthetargetgroupcanstimulatepublicand marketpressureforindustrialcompaniestoact.Forexample,thebenchmarkingcovenantsinthe Netherlandsshowhighandlowperformers,encouraginglowperformerstoimprove.
Policyobligation
Finally, the policy obligation that industrial companies are subject to also influences their implementation of energy efficiency technologies and practices. Hard polices such as norms and standards are likely to create greater incentives to implement energy efficiency improvementsthanvoluntaryinitiatives.Effectiveenforcementandhighambitionlevelswillalso encourageaction. Thisreporthasshownthatputtingpolicymakersintheshoesofboardroomdecisionmakerscan assist policy makers in designing new policies and improving existing policy packages. The innovative evaluation methodology proposed in this paper does not focus on barriers to investment,butratherpointstoelementsthatcaninfluencepolicymakers.Nosinglepolicycan stimulate all the necessary drivers that will stimulate companies to maximise their efficiency levels.Instead,thepolicymixneedstobedesignedtoaddress,totheutmost,thedrivingforces ofboardroominvestmentdecisions.Tohelppolicymakersprioritisethosepoliciesthatwillfilla gap, the report encourages sectoral analysis and discussions with sector representatives, which willhelpidentifytherelativeimportanceofdriversineachsector.Therealityisthatboardrooms do not weigh all drivers equally. In most cases, only two to three drivers will be of significant importance,e.g.financing,policyobligationandknowledge. The fact is that policies and the overall policy mix cannot always be effective in triggering all drivers. Only by focussing at a subsector level can policy makers estimate whether additional policies have an effect on the most important drivers in that sector, e.g. financing, policy obligationorknowledge.
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Appendix1
Informationoncountrycharacteristicsandcircumstances:the Netherlands
These questions may help policy makers characterise their country and industry sector. These wereappliedtotheNetherlands,coveringthewholeindustry.
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Characteristicsoftheindustry
Whatisthestructureofthecountrysindustrysector? Whatisthe(average)shareofenergyintheproductioncosts? Howdoestheenergyperformanceofthesector/firmcomparetothoseinothercountries?
Financial
Whataretheinvestmentcriteriaforenergyefficiencyimprovements,ifany?Isthereaspecific payback time or internal rate of return for energy efficiency measures that applies to an individualcompany,sectororcountry? How do these vary across sectors: large versus small industries; or highly or less energy intensiveindustries? Does the industry have ready access to capital or loans for investments in energy efficiency projects?Dosolvencyratiosforeachsectorplayakeypartinsecuringfinance? Are commercial banks willing to lend to energy efficiency projects which typically do not involvephysicalassetsandconventionalrevenuestreams?
Knowledge
Dosubsectorswithintheindustrialsector(e.g.cementandsteel)havetheirownknowledge centres and/or research institutes? Are subsectors in close contact with international researchinstitutes? Do firms already have energy managers, as opposed to general environment and safety coordinators? Is there a national institution (e.g. an energy agency) that supports the implementation of policiesandmeasures?
Commitment
Istheindustryactiveincorporatesustainabilitypolicies? How does the industry score on sustainability indices like the Dow Jones Sustainability Index(DJSI)ortheCarbonDisclosureProject(CDP)? TowhatdegreeareCEObonusesrelatedtoenvironmentalperformance? To what degree is the energy performance of firms or sectors proactively reported in the publicdomainandontheweb? TowhatextentisthesectorpartneringwithNGOs? Dosectorsorfirmshavetheirownenergyefficiencytargets,setindependentlyofpolicies?
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Marketandpublicdemand
Is there pressure from the public to improve their energy or GHG efficiency? (e.g. Greenpeacesclimbingthechimneysprogramme)? Is there peer pressure, through public disclosure of competitors performance, which can stimulateenergyefficiencyactions? Page|56 Istherepressurefromupordownstreamtheproductionchainorshareholders?
Policyobligations,traditionandambition
A stable policy mix builds trust and reduces investment uncertainty. Can the policy mix be characterisedas:1)stable>10years;2)stable510years);or3)changingevery5years?Does thecountryhavealongtermclimateorenergystrategy?
CharacteristicsoftheNetherlands
Dutchindustrycanbecharacterisedasenergyintensivewithdominantsectorssuchasrefineries, chemicals and base metals. The Netherlands has an inherent competitive advantage due to its locationwithastrategicallysituatedportandaccesstoseatransport. Atthestartofthe21stcentury,Dutchindustrywasamongtheworldsbestperformersonenergy efficiency. At the same time, it was reported that this leading position was weakening (VerificatiebureauBenchmarkingEnergieefficiency, 2006).Nouptodatestatisticsareavailable todeterminetheDutchindustryscurrentperformance.
Financial
The return on equity of Dutch firms in 2010 and (expected) 2011 is recovering to reach 9%to9.5%aftertheeconomiccrisisof2009(seeFigure6).Thelow(er)profitssupplyfirmswith fewerresourcestofinanceinvestments(CPB,2010). Overall, the solvency of Dutch firms is good, though the situation differs within and between sectors (see Table 15). Firms are likely to finance part of their investments with debt finance. Currently, banks are reluctant to release their criteria for debt financing (CPB, 2010). The table indicatestheshareoffirmsthatusescertainsolvencyandreturnonequitycriteria.
Energysavingsinvestmentcriteria
TheDutchEnvironmentalManagementActrequiresimplementationofenergysavingsmeasures with a payback time of up to five years. The same limit is used in the Dutch energysavings covenants, which serve as an implementation rule for the legal environmental obligation. In industrialpracticeinEurope,averagepaybackperiodsofaroundfouryearsareapplied(Martinet al.,2011;Blok,2006).
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Table15SolvencyandreturnonequityofDutchindustrialsectors,20062008 Paper Chemicalindustry Basemetal Buildingmaterials 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 Returnonequity 010% 57 43 64 39 44 43 37 30 63 48 35 38 >10% 43 57 36 61 56 57 63 70 38 52 65 62 020% 24 20 9 22 18 23 33 10 13 5 6 19 Solvency 2035% 41 27 36 22 18 17 33 30 25 48 35 29 >35% 36 54 55 56 64 60 33 60 63 48 59 52
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Note:norecentdataavailable. Source:CBS,Statline(2011).
Knowledge
The Dutch Agency (Agentschap NL) helps companies to implement voluntary agreements and benchmarking covenants, by setting up roadmaps, monitoring, implementing energy managementandorganisingseminars.Their2010budgetforassistingtheindustrywasEUR105 million(AgentschapNL,2011).Anestimated100fulltimeemployees(FTEs)areallocatedtothis work.
Commitment
MajorDutchcompaniessuchasAkzoNobelandDSMtraditionallyrankhighinthechemicalsector oftheDowJonesSustainabilityIndexandhavegreenbonusesfortheirCEOs.Themajorityof Dutch industries today are subsidiaries of an international, often globally operating, parent company.Theparentcompanyscommitmenttoenergysavingsisnotalwaysclear. TheCarbonDisclosureProjects(CDP)globalreportingmechanismidentifiescompanieswhichare actively taking steps toward a lowcarbon economy. Thirtyone out of the 50 largest Dutch companiescontributedtothemostrecentCarbonDisclosureReport21fortheNetherlands(CDP, 2010).Twentyfiveofthe31respondents(81%)receivedaperformancescore.Ofthecompanies thatreceivedaperformancescore,three(12%)areincludedinperformancebandA(Leading); 15(60%)inperformancebandB(Fastfollowing);andseven(28%)inperformancebandC(On
21 RespondentsundertheCDPprojectincludefirmsintheindustrialaswellastheservicessector.
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thejourney).CompaniesinbandAshowthehighestlevelofintegrationoftheirclimaterelated priorities into their overall business strategy. They frequently disclose targets and the highest number of actions taken to reduce their emissions. These companies also recognise the importanceofprovidingtransparentandqualityinformationtotheirstakeholders.
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Marketandpublicdemands
There is a growing trend to decrease energy use and CO2 emissions throughout the production chain, rather than for a single product, service or process. Several policies and initiatives are shifting focus accordingly. The latest covenants with industry (see the Netherlands case study), the impact of EU ETS (carbon costs being passed through the production chain) and corporate initiatives (e.g. Unilevers carbon footprinting of products they deliver to the market) are examplesofthis.22 The public pressure for industrial energy is small, except through initiatives such as the Carbon DisclosureProject.Partofthereasonisthatinformationontheenergyefficiencyperformanceof companies is, in general, not made public. While NGOs pressure companies to operate in an environmentally friendly manner, attention is given to visible measures and not so much to processimprovementsinenergyintensiveindustries.
DutchFriendsoftheEarthsuccessfullytargetenergyefficiencyofrefrigerators Friends of the Earth is campaigning for supermarkets to cover their coolers. They measured and published the area of open refrigerators per supermarket. The NGO reports that six chains (representing65%marketshare)havetakenactiontocovertheircoolers.
Source:DutchFriendsoftheEarth.
Policyobligation,stabilityandambition
Overall, the Netherlands policy package for energy efficiency in industry can be described as stable.Themajorpoliciesarethevoluntaryagreements,whichhavebeeninplacesince1992and willrununtil2020. On a more generic, crosssectoral level, the Netherlands has an economywide, energysavings targetof2%peryearbetween2011and2020(ECN,PBL,2010).Thetargetisnonbindingandnot directlyconnectedtosectorpolicies.TheNetherlandshasnogreenhousegasorenergytargets beyond2020. ThegovernmentoftheNetherlandsatalllevels(national,regionalandlocal)hasanactivepolicy of sustainable procurement of products and services. Their target is to achieve 100% procurementusingsustainabilitycriteriaby2015.
22 ConclusionbasedonhandsonEcofysactivitiesinthisfield.
25July2011
OECD/IEA2011
Acronyms,abbreviationsandunitsofmeasure
Acronyms
ESCO EUETS VSD EnergyServicesCompany EuropeanUnionemissionstradingsystem Variablefrequencydrive
Page|59
Abbreviations
CO2 GHG EE ROE GDP carbondioxide greenhousegas energyefficiency returnonequity GrossDomesticProduct
Unitsofmeasure
PJ Gt GJ/t Gtoe
TWh
Petajoules Gigatonne Gigatonnepertonne Gigatonnesofoilequivalent Terawatthours
OECD/IEA2011
References
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PaperinDutchtitledModellingtherelationshipbetweenenergysavingbehaviourofindustrialcompaniesandtheroleof environmentalpolicyinstruments.
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Energy Efficiency Series

Julia Reinaud and amelie GoldbeRG, institute foR industRial PRoductivity

Second Edition March 2012

INTERNATIONAL ENERGY AGENCY

2011 International Energy Agency

9 rue de la Fdration 75739 Paris Cedex 15, France www.iea.org and

Institute for Industrial Productivity

Table1Energyefficiencyactionandinvestmentexampleswithincreasingcosts Levelofinvestment Simple housekeeping

Lowercost investment Mediumcost

Financials Knowledge Commitmenttotheenvironmentandenergyefficiency Publicandmarketdemands

CEO Are we committed to prioritize EE above other investments? Driver: Commitment

ThepaybacktimeandIRRarerelated,althoughthelifetimeoftheprojectisnotaccountedforinthepaybackperiod. Asaruleofthumb,theIRRisslightlyhigherthantheinverseofthepaybackperiodforprojectswithalifetimeofmore than15years.

Commitment to environment andenergy efficiency

Public andMarket demands

Increasingcallfor sustainableproducts fromclientsandthe public.The companyspeersare alsoconsidering settingupinnovative productionlines. None

Thepublicisnotinterestedin energyefficiency.Somepeer pressurefromparticipatingina voluntaryagreement.Inthe future,clientsmaydemandhigher energyefficiencyproducts.

Theinformationandquestionsinthethirdcolumnofthetablesinthissectionprovideaguidelineforanindepth policyevaluationofcasestudies.(+)indicatesanincreaseoftheinstrumentseffectonadrivingforce;()indicatesa decrease.

Table6Differentobligationsandcommitments Driver Financials

Impacton driver Low

Knowledge Commitment Public&market demands

Medium N/A Low

Voluntaryagreementspositivelyaffectcommitment,astheyare multilateralinstruments,wherebygovernmentandindustryworktogether onimprovements. Isthetargetambitionsetbythesector/firms(+)ormoreorless imposed()? Doestheagreementincludepreferentialtreatment,e.g.exemptions fromtaxes(+)?

Public& market demands

Voluntarytargetsinfluencethemarketmainlyviapeerpressure,as companieswithinasectorcomparetheirperformancewithothers.The effectonthisdriverismainlydeterminedbytheextenttowhichasectors performanceismadepublic.Morepublicinformationwillgenerate increasedpublicandmarketpressure.

Publicandmarket Medium demands

Table9Impactofdifferentsubsidiesonthedrivers Driver Financials

Impacton driver High

Table10Impactoftradablepermitsonthedrivers Driver Financials

Commitment Publicandmarket demands

Impacton driver Low Low LowHigh

Financials Policyobligation Knowledge

Commitment Publicandmarket demands

Thispolicydoesnotdirectlyaffectacompanyscommitment. Labellingproducts(e.g.aCO2footprintlabel)aimstoinfluence consumerchoices.Whenlabellingreallyaffectsconsumers choices,itwillgiveamarketsignaltoproducerstoimprovethe energyefficiencythroughouttheproductionchain.

Commitment Public&market demands

Norms/standards Negotiatedagreements Obligations/commitments e.g.mandatoryenergyaudits Taxes Incentivesandsubsidies Tradablepermits Labelling Otherinformationmeasures

High High High

High High Medium

Medium High Medium Medium High High

[TranslatedfromDutch]AccordingtotheVoluntaryAgreementsbetweengovernmentandindustry,a participatingfirmshouldimmediatelyimplementallmeasureswithapaybacktimeunderfiveyears. Inpracticethoughthisisanemptyformality[].Wesimplydonthavecompliancecopsinthisarea.

Assessingtheimpactofacountryspolicymixonthedriversfor investmentsinenergyefficiency(ideallywithinasector),and identifyingwhetherpoliciescouldfurtherinfluencethedrivers

Inthiscase,thepossiblepassthroughofthecostoffreelyobtainedemissionallowances(opportunitycosts)wasignored (Bruynetal.,2010). 19 InformationgatheredfromEUETSparticipantsinEcofysnetwork.

Low medium Low Medium

Medium Low medium

Petajoules Gigatonne Gigatonnepertonne Gigatonnesofoilequivalent Terawatthours

9 rue de la Fdration 75739 Paris Cedex 15 France

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