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Are We Promoting the Right Kind of Energy Efficiency?

20% of industrial consumers adopted a new energy efficiency software tool.

If you had asked me 10 years ago where I thought there were more opportunities for energy efficiency improvements – homes or factories – I would have answered homes, without question. Factories are in business to make money, and energy is like any other input – the less of it you use per unit of production, the more money you make.

On the other hand, I assume most homeowners are like me. We have had a notice on our mail table for the past 2 weeks offering duct cleaning with a promise that it will pay for itself in lower energy bills in 6 months. After our savvy friends verified that we are not being sold “free” snake oil, we decided we would like to do this. But, when it comes down to it, other things are more important. Driving my daughter to lacrosse, laundry and finishing Season 1 of This is Us, took precedence this weekend.

I’m not the only one who favored homeowners. Nationwide, fewer than 10% of energy efficiency programs specifically target industrial users, even though industry accounts for about a third of energy demand.

Together with Michael Greenstone (University of Chicago) and Christopher Knittel (MIT), I am evaluating an energy efficiency program in the industrial sector in California. Recently, we achieved a milestone that I was unsure we would ever make.

Here’s the gist of our study. We are partnering with Lightapp, a startup that uses remote sensing and cloud-based data analytics to provide industrial facilities real-time insights on their energy consumption. For example, Lightapp will alert a factory manager if production went down over the weekend but energy consumption didn’t correspondingly dip.

We are focusing on compressed air, because it is pretty much ubiquitous in industrial facilities and typically accounts for approximately 20% of energy consumption. We’ve seen it used, for example, to blow a puff of air between sheets of cardboard as they’re fed into a label-printing machine. With information from a bunch of facilities, Lightapp can tell managers whether they’re using more energy per unit of compressed air than other facilities, and this benchmarking might nudge them towards efficiency improvements. (Though our project focuses on compressed air, Lightapp’s software works for all types of industrial energy consumption.)

With a grant from the California Energy Commission, we set out to recruit 100 industrial facilities in California. Facilities that agreed to participate received free monitoring and sensing equipment (paid for by our grant). With the equipment installed and communicating data to Lightapp, companies began to receive discounted Lightapp services for one year. Some received the service for free, while others paid 75% of Lightapp’s standard fee. To qualify, factories had to have at least 200 horsepower of compressed air, be located in either Pacific Gas & Electric’s or Southern California Edison’s service territories, and be randomly selected for the project.

So, how many factories did Lightapp call to recruit 100? If we were offering subsidized energy efficiency audits to homeowners, previous work suggests they would have had to call about 10,000 homes to get 100 audits. But, they called fewer than 500 factories and convinced 20% of them to sign up for the project. Because we are interested in studying why firms do and don’t invest time and effort in energy efficiency, we carefully controlled the recruitment process. For example, we only gave Lightapp about 8 facilities per week to contact and insisted that the sales be completed in 40 days. If they were doing it on their own terms, I suspect they would have gotten more than 100 out of the 500. Some of the facilities seemed interested, but reported long corporate approval processes that didn’t fit with the project’s deadlines.

Just think about this. These facility managers are so interested in getting insights into how to save money that they let some unknown startup muck around with their equipment to install meters and communication equipment. Some of them received the equipment and services for free, but there wasn’t a huge drop-off in take-up at the facilities that had to pay. Factory managers must really value the ability to get better information on their energy consumption.

But, maybe the reason I thought factories wouldn’t be interested in energy efficiency is exactly why they are. They are interested in saving money, they just didn’t have the information about how to minimize their energy consumption.

100 might not seem like a huge number, but the recruited facilities use an average of about $100,000 of electricity per month and consume about 1 million kilowatt-hours, nearly 1,000 times the typical US household.

It’s still too early to tell how much energy the factories are saving with Lightapp’s energy management system and how these savings compare to the cost of Lightapp’s service. We’ve set this up as a randomized controlled trial and should have reliable, statistically valid results about energy savings in a little more than a year (we just recruited our 100th facility this month).

Here’s an example of how the feedback works. One facility received energy consumption data about their air compressors that looked like the graph below, where the blue and the pink lines represent two compressors. I won’t get into the details here, but if this compressor system were working well, the lines would be tracking one another, balancing the load between the two units. This was clearly not happening.

After seeing Lightapp’s data, the facility tuned the compressors and got the energy consumption to look like this.

In our ongoing work, we will quantify average energy savings provided by adjustments like this. Lightapp’s hope is that plants can save energy by tuning, adjusting and optimizing, and without major investments in new equipment.

Ah, you may be thinking, especially if you’re a California taxpayer, this all sounds interesting, but why is the government paying for these installations? (It’s actually utility ratepayers, through the California Energy Commission.) Lightapp is a for-profit company, so why isn’t a venture capitalist funding free equipment and discounted services?

This is a good question. There are several possible answers. Two of the leading candidates are:

  • Capital market failures and spillovers. Rolling out a new product, like an industrial energy management system, involves a lot of unknowns, learning and education. Lightapp is educating potential customers about the security of sending data (including production information) to the cloud and the value of real-time feedback, for example. But, this type of education doesn’t just benefit Lightapp, it also benefits any other company that comes along with a similar product. (And, this is a hot area – an example of the “Industrial Internet of Things.”) Because of these information spillovers, venture capitalists might not want to invest in one firms’ two-year learning and education process.
  • Pollution. Because electricity production creates pollution, including greenhouse gases, current energy prices may be too low. This is a classic example of an externality. Factories under-invest in saving energy because they’re not paying the price that the pollution imposes on society. So, the government can benefit all citizens by stepping in to encourage factories to use less electricity. But, Severin and Jim’s research, which will be presented at our upcoming POWER conference, suggests that isn’t the case for California consumers.

Our ongoing study attempts to quantify potential spillover benefits, as well as benefits to the participating customers, and compare them to the cost of the system. In general, we all have a lot to learn about energy efficiency, including which types of customer classes offer the lowest hanging fruit and which policies are best at finding potential opportunities. It’s possible, for example, that current approaches to measuring energy efficiency savings have led to policies that emphasize things, like new lightbulbs, HVAC equipment or machinery. Many regulators rely on engineering estimates of savings, and it’s much easier to apply an engineering estimate to a new lightbulb than a bunch of adjustments that industrial facilities may or may not make to their existing equipment. Given that most climate mitigation plans rely heavily on energy efficiency, it’s essential to figure this out.

Catherine Wolfram View All

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

14 thoughts on “Are We Promoting the Right Kind of Energy Efficiency? Leave a comment

  1. “Because electricity production creates pollution, including greenhouse gases, current energy prices may be too low.”

    Catherine, that depends on what you use to produce electricity.

    Nuclear electricity creates no pollution. And because electricity prices invariably rise when it’s replaced by natural gas, current energy prices are not too low, but too high.

    • The example of nuclear power illustrates how hourly energy markets misvalue actual power procurement costs. The true marginal costs are represented by the full capital costs of new resources as a complete package, not as a sum of different parts, e.g., a CT for capacity, a CCGT for energy, a solar plant for RECs, etc. Then we see the real value of a broad assortment of assets.

  2. I am glad to see an EI blog addressing industrial energy efficiency in particular that of small to medium industrial facilities. These facilities tend to have energy costs of 5 – 10 % of production cost depending on type of industry. These firms have strong interest in cost savings but lack the capacity in-house to conduct utilities billing verification, seek lower rates and demand charges through PF correction, etc. leave alone perform energy analysis. At the same time, such facilities are generally unwilling to pay for an energy audit or plan. Worse still, these facilities are captive to the utilities planning and design parameters of the era the facility was designed and built with no mechanism to review energy consumption and specially facility utilities’ configuration as planning parameters change. In addition, plant utilities upgrade projects may enter the firm’s capital program but are universally assigned low priority due to low ROR they bring and hence are rarely undertaken except for must-do projects. A major concern these facilities express is with disruption energy efficiency retrofits may bring to production. One approach we have witnessed overseas is where governments mandate facilities to assign energy mangers and report energy consumption in accordance with published energy metrics. Market failure as well as the regulatory framework stands to explain lower efficiency technology choice and not taking advantage of heat recovery and inter-fuel substitutability but does not necessarily explain the day to day energy management of the firm addressed by this project. The key advantage I see this project bring the facilities is to lead them to establish energy efficiency functions, assign accountability for end-use energy consumption and establish and implement energy metrics.

  3. This is a great project. Industrial users are also good candidates because they are quite willing to make investments, and even modest changes in their operating practices, if they are presented with persuasive analysis. They are also chronically short of engineering resources for exploring non-strategic issues, so it’s not surprising that they are interested in Lightapp’s information.

    Your compressed air application is clever — homogenous, common, uncomplicated, and 20% of consumption. You don’t mention it, but compressed air is an example of “storage-type loads,” where the total work done over a period is fixed by demand, but the timing of that work is very adjustable. Hence it is a good candidate for real time prices, contributing to spinning reserves, and so forth. Pumping water is another storage-type load.

    Finally, the key investment for responding to variable prices is probably as simple as a large air tank! Empty space is cheap, especially with the cost of a better compressor. So a small investment could have a sizable economic value. Compared with storing energy in a battery, compressed air and pumped water are much cheaper per kwh equivalent.

  4. Catherine, what’s not clear from the graph of the two compressors is whether total energy use is higher or lower after “tuning” the system. Variable frequency drives (VFDs) can be throttled but older and more common constant speed motors cannot so using both compressors might actually increase energy consumption.

    • Air-compressor one alone is oversized for the demand and therefore inefficient. Air compressor two has a vsd and is very efficient but sometimes too small for supplying air demand, therefore needing to be supplemented by air compressor one. Running both compressors together and alternating leads at varying demands has been found to be the most efficiency, improving energy efficiency by 30%.

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