6. Barriers to energy efficiency in Mechanical
Engineering
This section summarises the evidence for barriers to energy efficiency in the mechanical
engineering sector. The results from the UK, German and Irish case studies are reported in
turn. Full results from each country and sector are contained in the relevant case study reports
(Annex 1).
In each country, 4-7 case studies were conducted of energy management practices within
individual breweries. The first stage was to ask the energy manager or equivalent to complete
a brief questionnaire. This contained questions on energy consumption, energy management
practices, the adoption of specific technologies and perceptions of barriers to energy
efficiency. Following this, interviews were conducted on site with one or more members of
staff from each organisation, including the energy manager. Each interview was semistructured and based around detailed protocols based on the theoretical framework for the
project (Sorrell, 1999). Follow up telephone interviews were also used as a means of
resolving ambiguities or seeking additional information.
The results reported in this section are based primarily on the questionnaire and interviews.
However, this is supplemented with additional information from a variety of sources,
including interviews with sector specialists.
The discussion in each of the following sections is structured as follows:
• Characterising the mechanical engineering sector: The key features of the mechanical
engineering sector in each country are described, including size, structure, ownership,
production mix, trends, patterns of energy use, and energy efficiency performance.
• Case studies of energy management: The results from the individual case studies in the
sector are summarised in a structured way. The organisation of energy management in the
sector is described and its effectiveness is evaluated, including an identification of
strengths and weaknesses. The topics discussed include: energy policy; environmental
policy; information systems; accountability and incentives; capital budgeting and
investment criteria; awareness and culture; purchasing and policy integration; and the use
of ESCOs
• Evidence of barriers: The case study results are then analysed using the theoretical
framework developed in section 3. The evidence for each of the barriers is discussed in
turn and an attempt is made to identify which of these barriers is most important in the
sector. The latter are summarised in a table, together with an identification of the specific
instances where they occur and suggested policy measures to address them.
• Policy implications: Policy initiatives which may help overcome the identified barriers are
described. These fall into three categories: a) within individual organisations; b) via sector
associations and other bodies; and c) national/EU policies for encouraging energy
efficiency. Given the range of potential barriers, initiatives at all three levels are likely to
be required. But there are synergies between them: for example, national initiatives may
assist organisations in developing improved energy management.
124
The results from Germany contain additional work on the prospects for ESCOs within the
mechanical engineering sector.
125
6.1 BARRIERS TO ENERGY EFFICIENCY IN THE UK MECHANICAL
ENGINEERING SECTOR
6.1.1 Characterising the UK mechanical engineering sector
The mechanical engineering sector encompasses an extremely wide range of industries,
extending from miniaturised precision components to complete manufacturing plants. Over
half of the products manufactured by the sector are finished capital goods (e.g. machine tools,
furnaces, engines etc.), while the remainder consist predominantly of components for capital
goods. Most machinery and equipment is characterised by considerable design effort, great
complexity and precision in production. Competitiveness rests primarily on product quality
and innovation.
Dependence upon capital goods means that the sector experiences sharper cyclical
fluctuations than other branches of industry. For example, it was particularly hard hit during
the recession of the early 1990s. The UK industry is suffering at present as a consequence of
the high value of sterling and relatively high interest rates. Exports have dropped and
companies have reduced margins to reclaim market share. Cost cutting has been achieved
through staff redundancies, reducing R&D and reducing capital expenditure. There is a risk,
therefore, that short term cost cutting will undermine long-term competitiveness.
The UK has the fourth largest mechanical engineering industry in the EU with 11% of
production. In 1995, there were 14,628 enterprises, employing 350,300 people and with a
gross output of £28 billion. The total value added was ~£10 million, or £28k per employee.
The sector accounted for 8.3% of UK manufacturing employment and 7.0% of output. The
majority of companies in the sector are very small - for example, 83% have less than 19
employees. However, the 2% of companies with more than 200 employees account for more
than half of gross output and capital expenditure. Many of the larger companies are
subsidiaries of foreign owned multinationals. It is these companies which are the focus of the
empirical research.
Data on energy use in the mechanical engineering sector is relatively poor. The Digest of UK
Energy Statistics estimates that total energy use in the ‘mechanical engineering and metal
products’ sector was 80PJ in 1997, corresponding to 5.1% of industrial energy use and 0.8%
of total UK final demand. Hence, while the sector is not energy intensive, the overall energy
consumption is very large. The average fuel to electricity ratio was 1.7 and fossil fuel use
was dominated by natural gas. Energy use declined by 21% over the period 1990-1997, but
this masks a complex set of trends. For example, rationalisation and site closures have
reduced consumption, but automation has increased electricity consumption. Unfortunately,
the heterogeneity of the sector makes it difficult to define a suitable measure for specific
energy consumption (SEC).
Data from the most recent Energy Purchases Inquiry suggests that, in 1989, energy costs
formed on average only 1.7% of total production costs. With declining energy prices, this
proportion will have declined during the 1990s. Clearly, costs this low invite neglect.
126
Estimates from ETSU suggest that, in the Engineering sector as a whole, 45% of energy use is
production related while 55% is buildings related (space heating, lighting, ventilation etc.). At
many sites, particularly those dominated by assembly production, the buildings related
proportion will be much higher. The main energy users in production are forming (cutting,
pressing, machining etc.) and finishing (heat treatment, painting etc.). These are estimated to
account for 11% and 29% respectively of total sector energy consumption. Non-production
uses include space heating (39% of consumption), lighting (6%) and air conditioning (3%).
Up to 60% of electricity consumption may be in motors and drives - often within machines
that are themselves supplied by the sector.
A variety of estimates are available which suggest there are substantial opportunities for cost
effective efficiency improvements in the sector. For example, cost effective retrofit and
refurbishment of industrial buildings could reduce consumption by ~40%. The majority of the
relevant efficiency opportunities are generic technologies (lighting, heating, motors etc.)
rather than being process specific.
6.1.2Case studies of energy management in the UK mechanical engineering sector
Case studies were undertaken of energy management practices within five companies, drawn
from a number of subsectors. All had more than 250 employees and all were subsidiaries of
large multinationals, with varying agrees of independence. Annual energy bills ranged from
£137k to £750k. The following table summarises the key features of each case study.
Table 6.1 Summary of UK mechanical engineering case studies
Feature
Main products
No. of employees
Turnover (£m)
Annual energy
consumption (GJ)
Energy spend (£k/year)
SEC (GJ/employee)
SEC (£/employee)
Self assessment score
Main responsibility for
energy
Average
score
for
technology adoption1
Payback criteria
Qualitative assessment
Company A
Materials
handling
750
250
?
Company B
Machine
tools
285
35
16285
Company C
Power
transmission
~1000
50
115217
Company D
Engines
350
?
50717
Company E
Materials
handling
340
40
20444
750
137
694
239
152
?
1000
1.0
Facilities
manager
3.7
57.1
.0
0.8
Works
Engineer
3.0
115.2
690
0.8
Maintenance
Supervisor
2.9
144.9
668
0.6
Facilities
Manager
1.6
60.1
447
0.4
Works
Engineer
1.8
2 years
Average
3 years
Average/
Poor
2 years
Average
3 years
Poor
3 years
Poor
Notes:
1. Based on a list of 37 energy efficient technologies. Score 5 for extensively adopted, to 1 for not adopted.
Some of the main features of the case study results are as follows:
• Organisation: None of the sites had a dedicated energy manager. Instead, energy
management was one of a number of responsibilities of the Works Engineer or equivalent.
Energy was generally given a very low priority and the management time devoted to it was
substantially less than best practice recommendations. Furthermore, the bulk of the
127
•
•
•
•
•
•
available time was taken up with energy purchasing. In no case was there a dedicated
budget for efficiency investment and interviewees emphasised that efficiency
improvements usually resulted from investment undertaken for other reasons (e.g.
replacement & refurbishment). A dominant theme was the severe time constraints on staff.
These had been exacerbated by the difficult business situation and by cost cutting through
redundancies.
Energy policy: Neither the case study companies or their parent companies had formal
energy policies, although Company D included energy objectives within a broader
environmental policy. This company was also the only one to have established quantitative
targets for energy consumption.
Environmental policy: Three of the companies had some form of environmental policy and
Company D had achieved accreditation to ISO14001. Companies A & E were working
towards accreditation, although they were at a relatively early stage, while Companies B &
C were considering it. One driver was concerns about the corporate image of the parent
company, but of much greater importance was supply chain pressure from large customers
such as motor manufacturers. These companies were increasingly requiring suppliers to
implement environmental management systems. Accreditation had improved energy
management in company D and there was an expectation that it could do so in other
contexts.
Energy information systems: Information on energy consumption was poor in all the case
study companies. All but the largest company (C) metered electricity solely at the site level
and none analysed consumption data in a useful way. Company C was also the only
company to have effective energy controls (via a BEMS). In three cases, additional
submetering had been rejected given the uncertain and potentially small returns.
Information on efficiency opportunities was also considered to be poor, with limited use of
available information sources such as the Energy Efficiency Best Practice Programme
(EEBPP). Only one company had undertaken a recent energy audit - this was for a
compressor system alone and no action had resulted.
Accountability & incentives: None of the companies charged cost centres for energy
consumption and none had sufficient submetering to do so. Company C charged for
estimated energy costs, based on available submetering data, and considered that charging
for actual consumption would create useful incentives. But accountability had not been
considered in the other companies and there was considerable scepticism that it would
make any difference - energy costs were just too small.
Capital budgeting and investment criteria: None of the companies had a dedicated budget
for efficiency investment and all appeared to spend less on energy efficiency (as a % of the
utilities budget) than is recommended in best practice publications. Pure energy saving
investments were relatively rare. Three companies used 3 year payback criteria for cost
saving investments and two used 2 years. These criteria were often applied fairly rigidly by
the parent. Capital rationing within the business was a dominant theme, with energy
efficiency being given a much lower priority than strategic investments (such as new
production machinery) and non-discretionary investments such as health & safety.
Purchasing & policy integration: There were no formal requirements to consider energy
efficiency in equipment purchases, or to use whole life costing. Consultation with the
Works Manager was at best informal. While little information could be obtained on the
impact of this, it is likely to be detrimental to efficiency improvement. For example, no
site had a policy to specify energy efficient motors in new equipment.
128
• Awareness & culture: The level of energy awareness among employees was uniformly
reported to be very poor - energy was seen as a ‘necessary evil’. Only one company had
used an awareness campaign and this was considered to be ineffective. In most cases, the
only activity on housekeeping was encouraging security staff to turn lights off.
Housekeeping was considered of limited value when energy was such a small proportion
of total costs.
• Energy services and outsourcing: Several companies contacted out equipment
maintenance since they lacked on-site skills. Company D had a broad based facilities
management contract, but the potential for this to improve energy efficiency had yet to be
fulfilled. The decentralised heating system at Company C had been installed by an ESCO
on a shared savings contact and had proved highly successful. While most companies fell
below the normal size threshold for an energy services contract, there was less scepticism
towards the concept than had been found in higher education and brewing.
6.1.3 Evidence of barriers in the UK mechanical engineering sector
The empirical results have been interpreted in terms of the theoretical framework for the
BARRIERS project. This framework groups barriers under 12 broad headings (section 3.8).
The barriers found to be of particular importance in the UK mechanical engineering sector
are:
•
•
•
•
•
Access to capital
Hidden costs
Risk
Principal-agent relationships
Power
Table 6.2 elaborates this list by identifying the particular instances where these barriers
operate.
129
Table 6.2 Barriers considered to be of high importance in the UK mechanical engineering sector
General category
Specific instance
Comments
Access to capital
Availability of capital to the
company
Borrowing rarely contemplated for small investments. Reluctance to borrow may derive
from the difficult business situation and concerns about increased gearing. But difficult to
assess whether this represents rational behaviour for small, low risk, high return efficiency
investments.
Energy efficiency has a very low priority. Business development investment, such as new
production machines, and non-discretionary investment, such as health & safety, tend to
take precedence.
Salary overheads may be significant and may need to be recovered from savings on
investment projects. It is difficult to justify devoting additional time to energy management
in small organisations where energy costs are a small percentage of turnover. Cuts in staff
numbers to reduce salary overheads have resulted in severe time constraints on remaining
staff. This provides one of the biggest obstacles to efficiency improvements.
Commonly used rationale for strict payback criteria. Many companies are operating in a
difficult business situation, with unfavourable interest and exchange rates leading to
reduced margins. But stringent paybacks are also used by companies not in this situation.
Companies use very strict investment criteria and have difficulties in monitoring the
performance of efficiency investments. All the case study companies are subsidiaries of
multinationals and both investment criteria and budget approval are decided at Group level.
So this may provide an explanation for strict criteria, but other factors are also at work.
Low status leads to limited time and limited access to funds, thereby constraining what can
be achieved. Throughout the sector, top management has very little interest in energy
efficiency.
Allocation of capital within
company
Hidden costs
Overhead costs of energy
management
Risk
Business risk
Principal-agent
Monitoring & control
problems may lead
principal to specify strict
investment criteria
Low status of energy
management staff
Power
130
The subsequent sections briefly summarise the evidence for the full list of 12 barriers. The
barriers considered of high importance are discussed first, followed by the remaining
categories of barrier.
Barriers considered of high importance in the UK mechanical engineering sector
• Hidden costs: These fall into two broad groups:
• The overhead costs of energy management was found to be a very significant
factor, as is clearly demonstrated by the overwhelming prevalence of time
constraints. These were widely considered as getting worse. While none of the
sites could justify a full-time energy manager, none gave a proportionate allocation
of management time. Smaller sites had a particular difficulty as they could not
recruit a fraction of a post, but could not justify a full one. In the context of severe
time constraints, costs associated with identifying opportunities, analysing cost
effectiveness and tendering were also significant.
• A number of examples were given where the cost of production disruptions was
important. But while maintaining production was an overriding priority, it was not
possible to assess what proportion of potential efficiency opportunities were
affected by this. In contrast, no examples were given where the loss of benefits
associated with energy efficient technologies was important.
• Access to capital: From the perspective of the case study interviewees, limited access to
capital provided one of the biggest barriers to energy efficiency improvement. There are
two possible explanations for this. First, the firm may be reluctant to borrow as this would
increase the level of gearing, thereby increasing risk and raising the firm’s cost of capital.
Second, discretionary cost saving investment, such as energy efficiency, may be given a
low priority in comparison to strategic and non discretionary investment. Capital shortages
have been exacerbated by the overall cutback in capital expenditure in the sector resulting
from the difficult business situation. It does not follow from this, however, that the
decision not to borrow for efficiency investments represents rational behaviour by the
firms. Also, the current business situation is not the only explanation: capital shortages
were also evident in companies that were doing well, and stringent payback criteria were
in place prior to recent business difficulties.
• Risk: Falling exports, adverse exchange rates and interest rate changes have depressed
profits and created considerable uncertainty in the sector, which is expected to continue.
Business risk could therefore provide a justifiable rationale for stringent investment criteria
if there was uncertainty over the company’s future. Again, however, the stringent criteria
predate the recent problems. In contrast, there was no evidence that the technical risk of
energy efficient technologies was an important barrier in the sector.
• Principal-agent relationships: There is clear evidence of stringent investment criteria
being set by a remote principal (Group headquarters) in the context of severe information
asymmetry. In some companies, even relatively small projects required approval by the
parent. But the importance of this is difficult to assess as alternative hypotheses for
stringent investment criteria (e.g. risk) also appear to have some validity.
• Power and status: There were no examples of conflicts between different groups acting as
a direct barrier to efficiency improvement. Instead, the overwhelming theme was the low
status of energy management and the consequent lack of funds and management support.
Barriers considered of less importance in the UK mechanical engineering sector
• Heterogeneity: The results suggest that heterogeneity is not an important obstacle for most
of the selected technologies in the organisations studied. All interviewees considered that
there were a wide range of opportunities with 3 year paybacks and pointed to other reasons
why these had not been taken up.
• Imperfect information: Information on all aspects of energy use was poor. Metering and
information systems were crude, energy awareness was low and no sites had conducted
detailed energy audits. Information on generic efficiency opportunities was mixed, with
many information sources being overlooked. In all cases, lack of information was linked to
time constraints and salary overhead costs, although an increase in management time
would appear justified.
• Split incentives: Split incentives appeared in two main forms: i) lack of departmental
accountability for energy costs; and ii) lack of accountability for energy costs by
equipment purchasers. The first of these was not generally considered to be a major
obstacle - energy costs were so low that improved accountability would have little effect.
The second reflects the neglect of energy throughout the organisation, including the
absence of policy, targets, benchmarks and information. This suggests that policy
interventions such as minimum performance standards for certain types of equipment may
be more appropriate in this sector.
• Adverse selection: This occurs where purchasers have difficulty in identifying the energy
performance of a good. Not all relevant purchasing decisions could be examined through
the case studies and the results were insufficient to identify the importance of this problem.
• Bounded rationality: Bounded rationality provides a more realistic account of decisionmaking than that assumed in conventional economic models. We have already noted: i)
severe time constraints; ii) incentive structures dominated by product quality and
production targets; iii) declining energy prices; and iv) an absence of effective information
and management systems. In this context, bounded rationality encourages the neglect of
energy in organisational routines.
• Form of information, credibility and trust: Severe time constraints place a premium on
simple and concise information. Establishing trust through personal contacts is more
difficult in this sector as individuals lack the time to attend workshops.
• Values and organisational culture: There was some evidence that accreditation to
ISO14001 had improved energy management, despite energy being a secondary
environmental concern. The potential for improvement derives largely from the fact that
the companies are starting from such a poor base. Accreditation is pursued for pragmatic
reasons as a result of supply chain pressure. There was no evidence that environmental
values or ‘product champions’ played an important role.
It would also be desirable to assign the barriers to one of three categories: a) market failure;
b) organisational failure; and c) non-failure (section 3.2.8). But in practice, these distinctions
are blurred. In general, we can say that most of the barriers under the headings heterogeneity,
hidden costs, and risk can be considered to fall within the first category. This is important as
both risk and hidden costs are identified as very important barriers in this sector (Table 6.2).
There are problems with this however. It is far from clear that the costs and benefits of staff
cuts (including lost opportunities for efficiency improvement) have been adequately assessed.
Similarly, business risk cannot be the sole reason for stringent paybacks. The extent to which
reluctance to borrow (access to capital) represents rational behaviour is particularly difficult
to assess.
6.1.4 Policy implications
Some key policy initiatives at the organisational, sector and national levels are highlighted
below.
Organisational level
The potential for overcoming barriers by organisational change alone is more limited in this
sector than in higher education or brewing. This is due both to the small size of the average
company and the low level of energy costs. The potential is greatest within the larger
companies in the sector (> 200 employees), particularly those which are subsidiaries of
multinationals as the parent may be able to offer technical support.
A subset of recommendations from the best practice literature may be appropriate. Of
particular importance are the adoption of an environmental policy, adequate resourcing for
energy management, conducting an energy audit, improving energy information systems and
including energy efficiency criteria in purchasing procedures. Many companies will be too
small for an energy services contract, but there may be scope for outsourcing facilities
management.
Sector level
At the sector level, the greatest potential appears to lie in encouraging accreditation to
environmental management systems and improving the marketing of EEBPP information.
• Environmental management systems (EMS): These are increasing in importance in the
sector, largely as a consequence of supply chain pressure. Such developments could be
encouraged and, in particular, attempts could be made to ensure that energy efficiency
receives appropriate attention within EMS. Possible routes include highlighting the cost
saving benefits of EMS through case study publications and providing guidance on energy
efficiency to EMS certification bodies.
• Energy Efficiency Best Practice Programme (EEBPP): The priority here is to improve the
marketing of cross-sectoral publications, such as those on compressed air and lighting. A
particularly important route is via the Engineering Employers Federation. Other possible
dissemination routes include professional bodies, journals, supply chain initiatives and
local support bodies such as Chambers of Commerce. A key objective should be to
encourage top management interest in energy efficiency. This should be facilitated by the
climate change levy (below).
• Benchmarking: It is difficult to benchmark such a heterogeneous sector. But there does
seem scope for survey and research work to improve the data on energy use and to develop
benchmarks where possible.
National level
The above measures can be supported and encouraged by broader climate policy measures at
the national and EU levels. A combination of fiscal, regulatory and information measures are
required. The following elements of the emerging UK climate strategy are of particular
importance.
• Climate Change levy (CCL): The CCL is a revenue neutral business energy tax to be
introduced in April 2001. Average electricity prices will rise by around 11% and gas prices
by 27%, with corresponding reductions in employers’ national insurance. The overall
financial impact on the mechanical engineering sector should be fairly marginal, but it will
have the important effect of raising the profile of energy management. At the same time,
the tax is unlikely to a huge impact on energy efficiency as energy will remain a very small
proportion of total costs.
• Support for audits: £50m of the annual CCL revenue receipts will be used for a range of
promotional activities based on the EEBPP. Of particular importance is the allocation of
funds to support energy audits in SMEs. Since overall coverage of SMEs will be thin, a
balance is required between this and broader activities that can reach widely within a
sector.
• Capital allowances: £100m of the annual CCL revenues will be used for a system of 100%
first year capital allowances for investment in qualifying energy efficient technologies. By
addressing the primary obstacle of access to capital, this may be more effective than
increased energy prices or enhanced information programmes. A way of multiplying the
effect would be a requirement that, to qualify for the allowances, companies should
undertake an energy audit and commit to implementing the recommendations.
• Market transformation programmes: Most of the initiatives discussed above aim to
improve energy management within companies. But the nature of the sector means there
are severe limits to what can be achieved through this approach. An alternative is to
simplify decision-making (reduce transaction costs) for the organisations by transforming
the market for energy using goods. Options include energy labelling, mandatory efficiency
standards, or efficiency improvements through voluntary agreements. Of particular
importance are improvements in motor energy efficiency, since these account for as much
as 60% of electricity use within the sector. Such measures are currently underway in the
UK, but most measures will require action at EU level due to the implications for
competitiveness and the single market.
6.2 BARRIERS TO ENERGY EFFICIENCY IN THE GERMAN MECHANICAL
ENGINEERING SECTOR
6.2.1 Characterising the German mechanical engineering sector
Mechanical engineering is part of the capital goods industry. The German ME produces a
wide range of products including rolling bearings and fittings, metal working and packing
machines, combustion engines, turbines, and agricultural machinery. In 1996, there were
5500 larger firms (>20 employees) in the sector employing ~960,000 people and with a total
turnover of 213.1 billion DM. Smaller firms (<20 employees) accounted for ~100,000
employees and with a total turnover of 15.7 billion DM. Employment and turnover is
concentrated in the largest firms. For example, the 2.5 % largest firms account for almost
33 % of turnover, and about 38 % of employees. Based on the number of employees
(15.4°%), as well as on the turnover (11.9°%), the ME sector is the largest sector within the
capital goods industry. Within the ME sector the largest sub-sectors (by employees) are
materials handling technology (8.1 %), engine technology (7.8 %) and machine tools (6.9 %)
Energy consumption is characterised by the high share of space heating/hot water generation,
which accounts for about 60% of fuel consumption, and 36 % of total energy consumption.
Compressed air, and lighting account for 4-5 % of energy consumption, each, and production
processes account for 52 %. The most energy-intensive processes are separation (19 %),
cutting (11 %), and drying (11 %). The share of energy costs in gross output usually ranges
between 1 % and 2 %, but the variation is high. There is a clear trend towards the substitution
of fuel by electricity.
Large energy savings potentials exist for space heating and hot water generation through
boiler replacement, thermal insulation and ventilation control. Additional measures include
lowering temperatures overnight, turning off the system at weekends, and installing automatic
controls with temperature compensation. Measures to reduce energy consumption for lighting
include more efficient lighting systems, better use of daylight, and improved controls.
Avoiding leakages and part-load operation can reduce energy consumption for compressed
air. For production processes, important saving measures include use of energy efficient
motors, correct sizing of drives, avoiding idle operation and load management. Measures to
reduce fuel consumption include insulation of furnaces, kilns, and dryers, correct
dimensioning, and regular maintenance. Heat recovery from heating and drying processes
may be possible in some instances.
Thus, energy savings measures in the ME sector are primarily generic (cross-cutting)
measures.
6.2.2 Case studies of energy management in the German mechanical engineering sector
Four companies were chosen for case studies, representing the larger end of the size range.
Key features of these companies are summarised in Table 6.3.
Table 6.3 Summary of German mechanical engineering case studies
Feature
Number of employees
Turnover (Mio. Euros)
Energy consumption
Share of energy costs on
turnover
Payback criteria
Use of benchmarks
EMAS
Qualitative assessment
Company A
3,000
600
112.2 GWhfuel
78 GWhel
1.5 %
Company B
470
N/A
13.6 GWhfuel
9 GWhel
N/A
Company C
1,300
200
26.8 GWhfuel
10.1 GWhel
0.5 %
Company D
340
45
2.9 GWhfuel
0.95 GWhel
0.5 %
3-4
years,
flexible
yes
yes
very good/good
2 years
3-4
years,
flexible
yes
yes
very good/good
flexible
yes
no
average
yes
yes
good
The case study results may be summarised as follows:
• Organisation: Organisation of energy management varies and is, roughly speaking, either
located in the maintenance department, or the environmental department, but there is no
dedicated energy manager. In either case, energy management is only one of many tasks. In
most companies formal or informal cross-departmental committees or working groups
meet to discuss energy and environmental issues. At the better performers, the top
management was involved or regularly informed about environmental and energy
performance.
• Energy policy/environmental policy: Three of the companies had an environmental
management system in place and were certified under EMAS. Costs were the main barrier
to company B gaining simplification. For company A, the costs of implementing EMAS
were considered to be higher than the benefits, partly because environmental performance
was already fairly good.
• Energy information systems: All companies regularly measured and controlled energy
consumption and compared consumption figures with targets. Also, all companies
compared their specific consumption with benchmarks. Energy consumption for steam,
compressed air, hot water, cooling, and electricity were generally reported monthly. The
extent of submetering varied considerable. Electricity consumption often is metered at the
level of cost centres, and, in some cases, for individual equipment.
• Accountability & incentives: Most companies charged cost centres for energy
consumption. In some cases this was based on actual measurement, but more usually it
was based on estimates or fixed shares. The incentive to reduce consumption is thereby
diluted.
• Capital budgeting and investment criteria: No company had a budget specifically
dedicated to investments in energy efficiency. Often, investments, which resulted in energy
savings, were carried out for other reasons. Investment in energy efficiency usually had to
meet the same investment criteria as other types of investments. Exceptions for
investments with long life-times are rare. Although, in some cases (company D),
environmental and social aspects are considered, in the end profitability matters most.
Life-cycle costing is not routinely applied.
• Purchasing & policy integration: The technical department/staff selects the equipment,
which, in larger companies, is purchased through a central purchasing department. Except
for company B, energy efficiency is considered in new purchases. In theory the
environmental managers have a say on purchasing decisions, but in practise lack of time
does not allow for that.
• Awareness & culture: Most of the interviewees were sensitive towards environmental
issues and, in some cases, highly motivated by environmental concerns. For all companies,
saving energy was part of the normal business, and primarily a means to improve
competitiveness rather than to improve environmental performance. Awareness campaigns
exist in all companies and are an efficient means to motivate employees, but they rarely
resulted in new ideas.
• Energy services and outsourcing: Only company B has experience with contract energy
management (CEM) offered by an energy service company (ESCO), but the experience
was not good. Companies A and D believe that they have the financial and human
resources to carry out the projects themselves and keep the profits. Company C would
welcome ESCOs, but the considered CHP plant showed a pay-back period that was too
long (8 years). Company A is reluctant because it fears to lose control over some parts of
its production process (see below).
Since mostly good performers participated in the study, the observations and results may not
be representative of the ME sector in general.
6.2.3 Evidence of barriers in the German mechanical engineering sector
The empirical results have been interpreted in terms of the theoretical framework for the
BARRIERS project. This framework groups barriers under 12 broad headings (section 3.8).
The barriers found to be of particular importance in the German mechanical engineering
sector are:
•
•
•
•
•
Access to capital
Hidden costs
Risk
Imperfect information
Power
Table 6.4 elaborates this list by identifying the particular instances where these barriers
operate and potential policy responses.
Table 6.4 Barriers considered of high importance in the German mechanical engineering sector and proposed policies
General category
Lack of capital
Hidden
costs
transaction costs
Risk
Imperfect
information
Power
Specific instance/comments
Allocation of capital within
company
/ Lack
of
time,
manpower,
management costs
Costs for gathering information,
identifying savings potentials etc.
Business risk
Lack of information about RUEtechnologies, specific applications
and public funding opportunities
Low status of energy management
(less of a problem in the case
study)
Policies
Profitability analyses; LCC; energy cocktails and benchmarking to get topmanagement interested;
ESCOs; energy audits; consultants;
Subsidies for audits; targeted information programmes; ESCOs; networks; bestpractice seminars; federal energy agency; labelling; standards
Not a barrier that justifies policy intervention
Networks; subsidies for networks; information campaign; energy agency;
Benchmarking; energy cocktails; certified energy/environmental management
systems;
The subsequent sections briefly summarise the evidence for the full list of 12 barriers. The
barriers considered of high importance are discussed first, followed by the remaining
categories of barrier.
Barriers considered of high importance in the German mechanical engineering sector
• Access to capital: There was no indication that access to capital for the company was a
major barrier. Instead, priority setting and capital budgeting procedures seems to be a
problem. The main reason is that the same pay-back periods are required as for other
investments – with some exceptions at companies A and D. This does not seem
appropriate for two reasons. First, the risk associated with investments in generic RUEmeasures should be lower than for the core production process. Second, using a pay-back
period, which is actually a risk criterion rather than a profitability criterion, of 2-3 years
means that investments with long lifetimes and good profitability performance are
neglected
• Hidden costs: The overhead costs of energy management were found to be important, as
indicated by the prevalence of time constraints, even for the good performers. Also, costs
for training and replacement of employees seem to be a problem in smaller companies.
Similarly, transaction costs for identifying savings potentials, finding RUE-measures,
conducting profitability analyses, seem to be relevant, again particularly for smaller
companies. However, the extent to which these hidden costs are significantly higher for
RUE-measures than for standard measures remains unclear. By contrast, reliability of
RUE-technology and quality aspects were generally not a problem. The reason is probably,
that most RUE-technologies are cross-cutting and not part of the core production process.
Likewise, production interruption was a relevant barrier for one company only.
• Risk: The German ME industry is very cyclical, highly export-dependent and thus sensitive
to currency fluctuations and economic conditions in other countries. Business risk may
therefore be significant, but it did not seem to the a dominant theme in the case studies.
Liberalisation of energy markets has created uncertainty and led to the possibility that
electricity prices may fall. There was no indication that technical risk for RUEtechnologies was an obstacle. RUE-technologies are mostly generic, thus, less risky than
process-integrated technologies.
• Imperfect information: Information on current energy use is generally satisfactory.
Electricity is often measured at the level of individual equipment, but measuring energy
consumption for cooling, compressed air and steam is more difficult, making it harder
assess energy savings. All companies regularly measure and control energy consumption,
and they compare consumption with targets and benchmarks. However, benchmarking is
primarily useful for companies with a similar production and output structure. For processintegrated RUE-measures energy savings are hard to calculate because the reference case is
not clearly defined. Awareness of energy consumption is good in all the companies, but
information about RUE-measures could be improved. Even good performers indicated a
lack of information on general overviews about relevant RUE-technologies, on specific
applications, demonstration projects, and on public funding opportunities.
139
Barriers considered of less importance in the German mechanical engineering sector
• Heterogeneity: The interview results suggest that heterogeneity is not an important barrier
to the rational use of energy in this sector. A likely reason is that most RUE-technologies
the ME sector are cross-cutting technologies such as compressed air, lighting, insulation,
etc. But since the sector is so diverse, proposed RUE-technologies may not always fit.
• Power and status: The status of energy management is more relevant for add-on, rather
than for process-integrated RUE-measures, since the latter are often an automatic byproduct of technological progress in companies. The status of energy management was
generally high, but this may also be the result of the sample selection.
• Split incentives: Split incentives may arise from the fact that cost centres are not
accountable for energy costs, which cannot be measured adequately. Also, individuals’
behaviour has more of an impact on energy consumption in the ME sector than in brewing
(e.g. space heating, compressed air). Installing the submetering for devolved budgeting
appears to be cost effective in companies of this size. In some cases, conflicts arose with
the purchasing department, which primarily considered initial outlays instead of quality
and life-cycle costs.
• Adverse selection: There was little evidence gathered during the interviews on this point,
but there seems to be less of a problem in obtaining information on the energy
performance of equipment than in ensuring that energy is considered when a purchase is
made. The extent to which this occurs varies with technologies.
• Organisational principal-agent relationships: Although, the investment criteria are a
function of many factors, there was no evidence that organisational principal-agent
relationships were a problem. By contrast, the larger and more hierarchically organised
companies (A and C) required less stringent criteria. Similarly, there was no evidence that
RUE-investments worth required more stringent investment criteria than other
investments.
• Bounded rationality: Bounded rationality is a function of many factors and generally, it is
difficult to assess its relative importance. A majority of the companies interviewed (A, C
and D) are certified under EMAS, so there are standardised rules and procedures for the
inclusion of environmental and energy considerations in equipment operation and
purchasing. But using the same investment criteria for RUE-measures as for other more
risky investments, may be a sign of bounded rationality, as may use of simple payback
rather than NPV or IRR.
• Form of information, credibility and trust: The most trusted sources of information are
informal networks of energy managers across subsidiaries of the same parent company.
Also useful are the chambers for industry and commerce, regional networks on
environmental issues, trade associations, and the association of environmental managers in
companies (VBU). Usually, networks consist of firms from different sub-sectors, so
valuable information is not shared with other rival companies (unlike the brewery sector,
since markets are not regional).
• Values and organisational culture: Investments in RUE are rarely a consequence of
environmental values and the establishment of environmental policies. Instead, they are
seen as a way to improve competitiveness. Thus, a green touch is not necessary (e.g.
company A), but it makes for a better organisational environment for RUE. EMAS helps
to raise awareness, generate interest in RUE and get employees involved in projects. But it
may not be cost-efficient for good performers, and be too expensive for small companies.
140
Environmental awareness at the company level was generally high, but this is likely to be
the result of the sample selection.
6.2.4 The role of energy service companies in the German mechanical engineering sector
This section is based on the case study interviews and on additional interviews with four
energy service companies (ESCOs). The main reasons why ESCOs may help to improve
energy efficiency in the ME sector include:
• ESCOs generally accept longer payback times than companies in the ME sector.
• Especially in smaller companies, ESCOs may help overcome the barriers lack of capital,
lack of know-how and lack of manpower.
• The tendency of larger companies in the ME sector to concentrate on the core business
provides ESCOs with business opportunities, in particular the operating of all energy
equipment.
• Since most RUE technologies in the ME sector are generic, the potential for economies of
scale is large.
But there are also obstacles to contract energy management and ESCOs in the ME sector:
• Many SMEs in the mechanical engineering sector do not have sufficiently large energy
bills to be of interest to ESCOs.
• Companies fear to lose control over some part of the production process.
• Many company owners are conservative and want to own all their equipment (especially in
SMEs).
• In smaller companies, financial risk for ESCOs is sometimes prohibitive.
• SMEs lack information and knowledge about energy efficiency in general and CEM in
particular.
• Large ME companies have generally the financial strength and the technical know how to
operate energy equipment.
• Falling electricity prices and increased uncertainty in liberalised energy markets may
dissuade companies from entering into long-term contracts.
• ESCOs suffer from a lack of credibility and trust.
• Savings potentials identified by ESCOs reflect poorly on those in charge of energy
management in the company.
• ESCOs do not know the needs of the energy users as well as those within the company.
6.2.5 Policy implications
A general observation from studying the good performers in the case studies is that successful
energy policy has to encompass more than just subsidies and grants. It has to take into
account that realising RUE-measures often implies a communicative, organisational and cooperative challenge to the companies. This implies a wide range of policy instruments.
Some key policy initiatives at the organisational, sector and national levels are highlighted
below.
141
Organisational level
Policy recommendations at the organisational level include the following:
• Integrating energy efficiency objectives into investment projects and routine maintenance.
• Environmental management systems can help poor performers, but the costs may be
prohibitive for smaller companies.
• For smaller companies, or those lacking technical know-how, manpower, and time,
companies could have an on-site energy audit to identify efficiency opportunities or use
consultants for technical advice
• Contracts with ESCOs may be suitable for larger companies, but not SMEs.
Successful strategies for RUE include: i) making one person responsible for the realisation of
RUE-measures; ii) realisation of synergy effects (higher productivity, safety, image); iii)
communicating with and integrating of the relevant staff in RUE-projects; and iv) appointing
energy representatives in each department, who may sit on an energy committee.
Generally, measures to raise awareness and motivate people are likely to be more effective
here than in brewing since energy consumption is less technology-driven.
Mechanical engineering sector level
Policy recommendations at the sector level include the following:
• Sector networks: External actors may play an important role in getting (particular small)
companies to consider RUE- measures These external actors include networks at the local
or regional levels as well as branch-specific working groups, but also supplier and user
associations, such as the VDMA. In particular, they should co-ordinate and intensify their
efforts in providing companies with specific information about RUE, about where to get
relevant information and consulting services, about financial assistance for energy audits
and for investments in RUE, or about successful pilot projects.
• For useful benchmarking the database COmLUX®MBV needs to be further developed to
allow for comparison of companies by production processes, energy-consuming processes,
output (in physical units), or size at a more disaggregated level.
• Voluntary agreements are unlikely to work for the entire ME sector because of the large
number of heterogeneous companies and the absence of a single dominant trade
association.
National level
The effectiveness of the measures at the organisational and at the sectoral level will be
enhanced if they are embedded in a broad based and long term oriented national climate
policy. This could include:
• Energy pricing: Increasing the price of energy will render RUE-measures more costeffective and raise awareness at the top management level. Such price policies include the
continuation of the ecological tax reform in Germany. Increasing tax rates on fuels and
electricity also reduce the financial risk associated with investments in energy efficiency
and allow for long term planning.
142
• Motivation: To inform and motivate top management, special events adapted to business
customs, such as evening receptions (energy cocktails) combining social events with
concrete information on specific energy issues could be organised within a broader based
programme for energy efficiency.
• Information: To facilitate diffusion, the government could grant financial support for
networks and the communication infrastructure. Public programmes subsidising energy
audits and the implementation of energy management systems could be modified to allow
for higher grants, or be extended to larger companies. In any case, these programmes need
better promotion and less administrative requirements.
• Regulations: Relevant regulatory measures include the continuous tightening of the
standards set in the ordinance for thermal insulation or the planned energy saving
regulation, the re-examination of technical standards required for heating, ventilation, air
conditioning and cooling services to avoid over-sizing, and the introduction of minimum
efficiency standards and labels for energy-consuming equipment, such as electric motors.
• Energy agency: The federal energy agency, which has just been founded, could initiate
and co-ordinate information programmes, education programmes, best-practice
programmes, pilot projects, support networks, etc. with respect to RUE measures in the
ME sector.
143
6.3 BARRIERS TO ENERGY EFFICIENCY IN THE IRISH MECHANICAL
ENGINEERING SECTOR
6.3.1 Characterising the mechanical engineering sector in Ireland
With a gross output of £869 million and employing 11,900 people, the mechanical
engineering sector in Ireland accounts for 1.9% of total manufacturing gross output and 4.9%
of total Irish manufacturing employment. In terms of its share of total manufacturing, the
sector is less important in Ireland than it is in the EU as a whole. Most of the firms consist of
a single local unit or factory and a large part of the sector consists of subsidiary branches of
foreign-owned multinational companies.
Foreign-owned firms account for one-sixth of the sector’s local units or factories, about 46%
of employment and 57% of output, which is not an unusual degree of foreign ownership for
Ireland. These foreign-owned firms with average employment of 108 persons tend to be larger
than the Irish-owned ones, which employ an average of 25 persons. A very large majority of
the local units in the sector are small or medium-sized and only about one third of
employment by the sector is in establishments with 200 persons or over.
The mechanical engineering sector in Ireland is spread across a wide range of product
categories, with no major specialisation in any one. At the same time there also significant
gaps in the product range. Toolmaking is a significant component, as is manufacture of nondomestic cooling and ventilation equipment, lifting and handling equipment and engines and
turbines.
The sector is very export-oriented and the data suggest that it is internationally competitive in
the areas of specialisation. Some 72% of its production is exported, with nearly a quarter of
exports going to the UK and a half going to the rest of the EU. Recent average output growth,
while faster than that for industrial production in the EU as a whole, is below the average rate
for Irish manufacturing.
Policy intervention to support energy efficiency investment in general had declined in the
mid-eighties reflecting the softening of oil prices, but was re-launched in the EU Operational
Programme that supported energy efficiency over the period 1994-1999, at a cost of £34
million. Co-ordination and implementation of the energy efficiency programme was the
responsibility of the Irish Energy Centre (IEC) which ran a series of schemes including the
Energy Audit Grant Scheme, the Energy Efficiency Investment Support Scheme, the Energy
Self-Audit and Statement of Energy Accounts Scheme and the Best Practice Programme.
Mechanical engineering has not been heavily targeted by the Irish Energy Centre as it is not
energy intensive. An enhanced role for the Irish Energy Centre has recently been announced,
though the details are not yet known. Fiscal policy is broadly neutral in relation to energy as
an input to industrial and commercial output, except that the relevant excise taxes on fuels in
Ireland are lower than those in most EU countries.
Electricity forms the largest component of energy costs in the sector, followed petroleum
fuels. Piped gas is increasing its share with extension of the grid. Energy intensity does not
appear to have declined over the early part of the decade, but accurate data is hard to come by.
144
Energy is largely for generic use, that is, for heating and lighting and for use of machinery and
equipment. Efficiency opportunities lie in such measures as low-energy lighting, Building
Energy Management Systems (BEMS) in those firms where the energy bill exceeds £10,000
per year, and variable speed drives for pumps, fans and other applications. These measures,
along with a detailed energy audit, purchase of energy efficient equipment, programming of
heating and ventilating controls, and specification of high standards of energy efficiency in
new buildings, formed a shortlist of seven measures that was used to determine the extent of
implementation of energy efficiency measures by the firms that were studied.
6.3.2 Case studies of energy management in the Irish mechanical engineering
Seven firms were selected for case studies, representing some 12% and 16%, respectively, of
employment and sales in the sector. The firms indicated that they were anxious not to devote
much time to the study and only two persons per firm were interviewed on average.
A summary of the case study firms is given in Table 6.5. Firms were asked how many energy
efficiency measures they had implemented. Firms were subsequently coded according to their
ranking on adoption of measures, with firm 1 having introduced the most measures on the
shortlist, firm 2 the next most, down to firm 7 with the least. Calculations of energy use per
employee and per unit of sales showed remarkable variation. If any pattern is to be discerned
it is that the first three firms that have implemented most efficiency measures tend also to be
the most energy intensive. A high share of energy to sales motivates firms, perhaps. They also
tend to be the largest firms and size is likely to determine whether a company can afford a
person to specialise in energy management.
Table 6.5 Ranking of firms by number of measures implemented, and firms’ perceptions of
their energy management, barriers to energy efficiency and opportunities
Firm 1
Firm 2
Firm 3
Firm 4
Firm 5
Firm 6
Firm 7
Tools
Lifting+handling equipment
Precision engineering
Agricultural Equipment
Equipment motors
Engine components
Heavy machinery
Number of
measures
implemented
from shortlist
6.5
5
4.5
4
2
2
0(1)
SelfAssessed
Profile
2+
2
1+
10+
0+
1
Number of
barriers
“often
important”
2
5
3
12
5
12
12(8)
Opportunities
exist with
Payback
< 3yrs?
Disagree
Disagree
Agree
Neutral
Agree
Agree
Agree
Firms were asked to self-assess their management practices and they received a high score
when they said that they had implemented certain reporting routines, monitoring systems and
the like. As Table 6.5 illustrates, firms with the highest management scores were also likely
to have introduced most efficiency investments. They also perceived there to be less barriers
and were unlikely to state that there were untapped investment opportunities with a payback
of under three years.
Looking in more detail at energy management behaviour, summarised in Table 6.6, the
overall impression is that there is scope for improvement in most firms.
145
Table 6.6 Energy information systems in Irish mechanical engineering case studies
Firm 1
Firm 2
Firm 3
Firm 4
Firm 5
Firm 6
Firm 7
Monitor
trends?
Yes
Yes
Yes/no
Yes
No
No
Yes
Electricity
metered at
Site
Bldg+equip
Bldg
Site
Bldg
Site
Site
Use monitoring
and targeting?
No
Yes
No
No ans
No
No
No
Use
benchmarks?
No
No
Yes
No
No
No
No
Undertook
audit?
Yes
Yes
Partial
Yes
No
Partial
Not yet
As shown, energy trends are monitored to some extent but electricity is generally only
metered at site level or at building level, rather than by function or department. Monitoring
and targeting and benchmarks were barely used at all, partly due to the heterogeneous nature
of the sector. Audits had been undertaken by about half of the firms.
6.3.3 Evidence of barriers in the Irish mechanical engineering sector
The empirical results have been interpreted in terms of the theoretical framework for the
BARRIERS project. This framework groups barriers under 12 broad headings (section 3.8).
The barriers found to be of particular importance in the Irish mechanical engineering sector
are:
•
•
•
•
Access to capital
Hidden costs
Imperfect information
Values/ organisational culture
Table 6.7 elaborates this list by identifying the particular instances where these barriers
operate, together with potential policy responses. The latter are discussed further in section
6.3.4.
146
Table 6.7 Barriers found to be of high importance in the Irish mechanical engineering sector and proposed policies
Barrier category
Hidden costs
Access to capital
(Related barriers are:
Risk,
Principal agent problems,
Bounded rationality.)
147
Specific instances
Management time/other priorities.
Identifying/analysing/tendering.
Production disruptions/hassle.
Staff replacement/retraining.
Poor performance of equipment.
Information on equipment.
Comment: Lack of time and other priorities were the most quoted
reasons for not implementing energy efficiency investments.
Other priorities.
Lack of capital.
Strict adherence to budgets.
Comments: Paradoxically, access to borrowing is apparently not
restricted, but the three-year payback rule restricts some good
investments. NPV, IRR or ‘reasonable’ length of life are rarely used.
The imposition of a simple rule may be due to risk, stemming from
market uncertainty, indicating that risk is indirectly important. The rule
may also be due to principal-agent problems stemming from concerns
about control. A situation where there is no risk but the rule prevails is
an instance of bounded rationality.
Policies
User-friendly and reliable information and procedures
are required. Bodies including the Irish Energy Centre
are in a good position to develop their roles (aided by
regular feedback).
The trade associations and journals relevant to
mechanical engineering, and associated with some of
the main processes used, could negotiate programmes
of intervention, including by ESCOs. (ESCO report).
Fiscal reform to correct the failure to charge for energy
use’s external costs will help the bottom line in any
appraisal of energy efficiency investment. Nonadoption would become increasingly irrational.
A reward system within firms could promote better
decision-making.
Use of proper investment appraisal methods should be
encouraged in firms.
Imperfect information
(Related are:
Adverse selection,
Form of information,
Credibility of information
and trust.)
Values and organisational
culture
(Related are:
Power and status of the
energy manager,
Split incentives.)
148
On current energy use.
On opportunities for energy saving.
On opportunities in buildings.
On energy use of equipment.
Comments: The form of information is important in order to avoid
having to spend a lot of managerial time absorbing it. Adverse selection
of equipment results when agents are poorly informed. Low take-up of
energy efficiency opportunities was associated with not undertaking
audits and not consulting with specialists such as the Irish Energy
Centre.
Attitude of top management.
No identifiable person with responsibility for energy.
Accountability.
Comments: Performance declines where top management is not
concerned about energy/environmental matters.
Absence of incentives or rewards is associated with low performance.
Lack of accountability is perceived as a barrier, though overcoming it
could be impracticable except at construction or refurbishment stage.
Encourage firms to undertake energy audits (and the
audits themselves need to be of a high standard).
Relevant ‘before and after’ case studies and half-day
seminars would help to make advice believable and
counteract the related barrier of lack of credibility and
trust.
Benchmarks of energy use, even if rather general in
nature (such as per £1m turnover or per m2, or related
to generic uses such as heat treatment) should be
available.
Equipment requires better energy labelling.
Firms need to be encouraged to delegate responsibility
for energy to an identifiable person. Support with
benchmarks and procedures set up by a body such as
the Irish Energy Centre would help energy managers.
Investigate ways to encourage the environmental image
of firms to become an issue, e.g. by promoting ‘ethical’
or ‘green’ investments/unit trusts.
Appropriate standards for refurbishment and new
buildings need to be established.
Below we briefly summarise the evidence for the full list of 12 barriers. The barriers
considered of high importance are discussed first, followed by the remaining
categories of barrier.
Barriers considered of high importance in the Irish mechanical engineering
sector
• Access to capital: This was considered the most important barrier to cost effective
investment yet, paradoxically, access to capital in general terms was not a problem.
The real problem seemed to lie in the investment criterion employed. A three-year
payback rule tended to be used, though a longer payback was allowed in some
cases. Application of such a criterion ruled out a number of potential projects with
good NPVs. Projects deemed “essential” or an “environmental imperative” would
receive precedence. Consideration of the investment’s worth over its lifetime did
not seem to occur. However, four firms said that there were unexploited energy
efficiency opportunities with paybacks of less than three years so that the rule does
not explain everything.
• Hidden costs: These costs can be real and/or perceptions about them can constitute
a real obstacle. In descending order of importance the following hidden costs were
found to exist. Expense of time and the existence of other priorities that would
have to be foregone was judged the most serious hidden cost. This relates to the
salary overhead cost of energy management. Respondents pointed to the hidden
costs of identifying opportunities, analysing cost effectiveness and tendering as
being important, as well as the costs of production disruptions, hassle and
inconvenience. Hidden costs of staff replacement, retirement and retraining were
judged important especially by firms that had implemented least efficiency
measures. Possible poor performance of energy saving equipment was only
considered to be sometimes important, one firm citing an example of variable
speed drives taking time to get back to full speed. An attempt was made to quantify
the amount of time spent on investment in energy efficiency but isolating the
energy saving part of the investment proved difficult. As the bottom line for firms
is net income, activities entailing suspected hidden costs are at a disadvantage.
• Imperfect information: As already seen, information on current energy use is
mixed and only about half the firms had undertaken audits. Two of the responding
firms, which ranked highly on implementation of energy efficiency measures, felt
that they had access to excellent or good information on opportunities from the
Irish Energy Centre. Two others named the Electricity Supply Board as a source.
The latter would include information on tariffs and hence on saving money and not
purely on saving energy. Five firms considered that the problem was not the
information but the time required to use it. Views were mixed on the availability of
information on energy use of equipment; on compressors it was felt to be poor, but
good on boilers. Information on energy use of buildings and refurbishment was not
considered good. Professional associations, technology centres, trade and technical
journals (Plant Engineer), technical conferences and seminars and the energy
supply industry were also held in high regard. Views on consultants varied widely.
• Values and organisational culture: The values of key individuals and the
organisational culture of the company do indeed appear to influence performance.
149
If the key person belonged to an environmental group and if direction came from
the top, whether for cost-saving reasons only or directed by head office to improve
corporate image, these had an effect. It has to be said however that these firms were
also large energy users. Image was cited as affecting share prices now that the
public, rather than only financial institutions, were buying shares. Consciousness of
share value is growing with employee share ownership, however energy efficiency
is not always seen as being an environmental issue or as being important.
Barriers considered of less importance in the Irish mechanical engineering sector
• Heterogeneity: Heterogeneity would not be expected to be very significant since
most energy uses are generic in type, such as compressed air and space heating.
However the fact that the sector is itself so varied means that heterogeneity needs
to be borne in mind. Two of the firms reported that certain energy efficient
technologies were inappropriate at their site. In one case this was because they
outsourced a function and in another because a proposed machine was not relevant
for their purposes.
• Risk: Technical or non-market risk, in the sense that the new technology might be
found wanting or become rapidly outdated was not perceived to be a serious
barrier. Examples of risk mentioned were stiff new environmental legislation and
machines not performing. Market risk was considered to be only slightly more of a
consideration, with reduced demand being cited along with currency fluctuations
and increased competition. Given that business risk is a possible rationale for short
paybacks, the importance of risk may not have been overtly acknowledged.
• Split incentives: Lack of accountability for energy costs on the part of departments
within firms was seen as an issue of some importance and respondents felt that
behaviour would change if accountability prevailed. That said, they did not think
that large savings were being foregone. Job rotation did not appear to be a barrier
because jobs seemed stable in general, neither did leasing of buildings arise in this
context.
• Adverse selection: Evidence on this score was limited. Information on certain types
of equipment was mediocre and may give rise to adverse selection.
• Principal-agent relationships: Monitoring and control problems lead principals to
require stringent criteria for the agent to follow that might not be conducive to
optimising behaviour. The three-year payback rule might be an example though, as
stated, risk also could have been a factor in the adoption of this criterion. It seems
that rather than implement rules, it is possible to implement a reward system. In
three firms, energy efficiency (or environmental) performance of their employees
was rewarded in various ways and these were the firms that ranked highest.
• Bounded rationality: Bounded rationality results from constraints on an actor’s
ability to process information. This is quite a realistic situation resulting from
constraints on, for example, technical ability or time. Technical ability to analyse
and implement measures was indeed considered to be often important by most of
the firms that had not adopted much by way of energy efficiency improvements.
Use of payback as an investment criterion, rather than NPV or IRR, might be
another instance of bounded rationality.
150
• Form of information, credibility & trust: Most respondents indicated that they
receive a lot of information, but have little time to absorb it. The Irish Energy
Centre and the Electricity Supply Board were both trusted sources of information,
though it was those firms that used the Irish Energy Centre that had installed most
energy efficiency measures. The Clean Technology Unit in Cork and the EPA were
also mentioned as credible sources. Case studies with ‘before and after’
information, which seems to be elusive, would help to make advice believable.
• Power and status: Performance will be influenced by the power and status of the
person or persons responsible for energy matters. Sometimes the relevant person
with responsibility for energy was not easily identified in the firms, reflecting the
low status of energy management. Similarly if power was felt to lie with
‘production’, energy managers would feel that their influence was limited. Time
constraints would sometimes override energy considerations even when the energy
manger had the power and status. Declining energy prices in real terms over the
last decade and a half have reduced the importance of energy management.
It is important to determine which of the barriers represent rational behaviour by the
organisation and which represent an organisational or market failure. Barriers within
the first category include business risk, hidden costs and heterogeneity. Hidden costs
include costs that are real and irreducible, such as the costs of staff replacement,
retirement and retraining. On the other hand the hidden costs of identifying
opportunities, tendering and production disruptions might be reduced to some extent
if reliable and user-friendly information and procedures are in place. Not only should
policy reduce the costs, but it should also reduce the perceived costs where these are
exaggerated.
6.3.4 Policy implications
Some key policy initiatives at the organisational, sector and national levels are
highlighted below.
Organisational level
Responsibility for energy matters should be clearly vested in a person or persons.
Implementation of energy efficiency improvements tended to follow on from an
energy audit and this would be a useful starting point for firms. The Irish Energy
Centre would be a source of information, along with other impartial sources. Firms
thought that there were untapped opportunities with good paybacks but that they had
insufficient time to find out about them. They should therefore encourage their
sector’s trade association and journals to focus on energy efficiency opportunities and
perhaps negotiate (supervised) programmes of intervention by ESCOs.
In their day-to-day energy management firms could set up procedures for the
calculation of their performance according to certain benchmarks. Firms could also be
more demanding of information on energy use from designers and architects and from
equipment suppliers.
Unless the firm perceives that it risks not being in business in three years time, it
should calculate the NPV or IRR of energy efficiency investments with a realistic
assumption about the length of life of the equipment. Accountability, through
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separate metering, could be improved if it is installed when refurbishment or new
building is underway.
Sectoral level
Policy recommendations at the sector level include the following:
• Information: Because many firms in the sector are small and varied, centralised
supply of information relevant to them is desirable. This would consist largely of
information of a generic nature such as heat treatment, compressed air and so on.
Not being able to afford full-time energy managers, the sector’s personnel charged
with responsibility for energy matters need advice that is especially succinct and
relevant. Respondents said that information should not be theoretical or merely
pilot studies, but should be targeted at their specific activity and technology,
relating to equipment and describing other people’s methods. Case studies and
‘before and after’ analyses were considered to be desirable. Analysis of their bills
(by energy suppliers) and half-day seminars could provide the desired focus.
• Audits: An energy audit is possibly the most useful way for firms in this sector to
obtain information. However the audit needs to be done well. The Irish Energy
Centre is in a good position to specify how audits should be undertaken and the
material that they should cover. It is also well placed to assimilate and disseminate
relevant trustworthy information and to oversee information services.
• Benchmarks: The sector needs to be provided with benchmarks, even if rather
general in nature. The Irish Energy Centre or the sector’s trade associations could
investigate suitable benchmarks to cope with the heterogeneous nature of the
sector.
National level
The link between energy and environment in the public mind needs to be encouraged
by government through information and awareness conflicts. Increased ownership of
company shares by the public could raise awareness of environmental behaviour and
this could be nurtured so that image becomes an issue in the boardroom.
A general requirement that there be readable and relevant information on energy use
of buildings and of equipment could help understanding. A similar general measure
would be to require bills to be clear and informative so that the population becomes
more energy numerate.
The perceived problem of access to capital could be addressed by awarding subsidies
for audits, with careful follow up to check the outcomes. Paperwork needs to be
minimised in view of the fact that take up among small firms can be disappointing if
programmes are not carefully presented. National fiscal policy on energy needs
gradual pre-announced correction to address the failure to charge for energy use’s
external costs, with suitable compensation for the vulnerable where called for. The
Irish Energy Centre would then find firms were more receptive. Energy saving would
be more worthwhile and development of efficiency technology would benefit.
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