As the Economy Recovers, the Stars Align for Investment in Industrial Energy Efficiency

[From aceee.org/blog] The economy took center stage at times during this year’s presidential debates, but scant attention was paid to the manufacturing sector, which remains an important driver of economic growth as well as energy use. Evidence of a resurgent, domestic manufacturing sector has strategic implications for energy policy as well as the economy. Understanding Industrial Investment Decision Making, a new research report by ACEEE, examines the dynamics of capital investment that drives industrial energy use and competitiveness.

There’s no question that the manufacturing sector struggled during the past decade, as revealed in macroeconomic data. However, we find uneven changes in output as some industries advanced while others declined. Interestingly, almost all industries boosted their productivity during this time period, due in part to the closure of older, less efficient facilities. In the short run, this leads to higher capacity utilization as surviving production facilities take up the slack, but another force may accelerate this trend.

Rising costs of foreign operations are causing a growing number of corporations to “re-shore” production facilities back in the U.S. These corporations also have the capital to finance this infrastructure, due to the $2.2 trillion cash balances accumulated by public corporations over the past decade. Together, these trends suggest “the stars are aligning” to drive capital investment in new, domestic manufacturing production facilities.

This industrial renewal is an opportunity to lock in energy savings for a generation for the U.S., and should be taken advantage of by state and utility energy programs. Manufacturing activity remains a significant factor in regional energy supply and demand balances, and energy efficiency potential abounds throughout the manufacturing sector. This manufacturing energy efficiency opportunity will be a challenge for industry managers who tend to prefer low- and no-cost improvements because it’s easier to secure approval for those measures. A more strategic approach would fold energy efficiency into the design and construction of new production facilities and modernization of existing plants. Energy efficiency program outreach may need to evolve accordingly to realize this opportunity.

Energy efficiency programs that address capital investment activity can support these opportunities. To help start a dialog, Understanding Industrial Investment Decision Making presents results from a survey of industry stakeholders that identifies the nature of capital investment decision-making. With a better understanding of capital investment dynamics, program administrators can work in concert with industry managers to build more efficient and productive manufacturing facilities on U.S. soil to create a more efficient and competitive manufacturing base for the future.

The Romney Camp's Take on Energy Efficiency

Consider this Romneyism: "Energy efficiency is a solution looking for a problem... if it saved money, people would do it on their own." (Source)

The assumption that consumers make "rational decisions" relies on an unstated assumption, to wit: the consumer has complete custody of every step in the decision-making process. This means that the consumer (1) detects some lapse of utility, (2) recognizes the cause[s] of that lapse, (3) seeks and evaluates a remedy, (4) procures the remedy, (5) implements the remedy, and (6) at the end of the day is able to reap the benefits of it.

Especially with regard to energy, rarely are all these stages embodied in one decision-maker. A single-person residential setting comes closest, but even then there may be disconnects-- look no further than centrally-metered apartment units. The rational decision-making assumption is shot down in flames when pondering the commercial/industrial sector. In this case, the six stages listed above usually manifest randomly across departmental lines. The decision stages belong to a management diaspora in which each individual makes energy-related choices that optimize their individual, departmental interests as opposed to being harmonized for the organization as a whole. For example, this paraphrase comes from a chemical plant energy manager who we interviewed last summer: "Our first priority is to ensure that we distribute in a timely and accurate manner all our energy acquisitions across our facility to all the points of production that need them... this is a goal that can sometimes be at the expense of 'efficiency'."

My point: the Romney statement is a non-starter only because the "rational decision maker" is not properly established. Without clear and conscious custody of the decision process, one cannot expect rational decisions to be made. The take-away is that energy efficiency opportunities are directly linked to market failures that can and should be addressed by public policies and programs.