EVALUATION OF MARKETING AND FINANCIAL BARRIERS FOR THE MANUFACTURERS OF TARGETED ENERGY EFFICIENCT PRODUCTS

INTRODUCTION

This report addresses the barrier that manufacturers are often distrustful of standards and labels, and their objections can delay ES&L efforts or result in weakening of standards. It is a proven fact that this manufacturer-related barrier is generic across the region, but must be dealt with in the context of each national economic and cultural setting.
Most Asian countries regard ES&L programs as cost-effective ways to realize their energy efficiency goals, since they provide substantial electricity peak demand reduction and energy savings with attractive cost/benefit ratios. Such programs have proven to be effective for mitigating climate change in all countries in which they have been implemented. However, they are hindered by certain persistent barriers, which can be broadly classified into the following categories:

Policy/regulatory;
Institutional;
Technical;
Information and awareness;
Market; and,
Financial.

To promote energy-efficiency improvements, action may be required at one or more levels -- from the lowest level of the consumer (residential, commercial, industrial, etc.) through the highest level of global agencies. But, barriers to the implementation of energy-efficiency improvements exist or can arise at all these levels. At the level of energy consumers, the barriers to energy-efficiency improvements are due to the ignorant, the poor and/or first-cost-sensitive, the indifferent, the helpless, the uncertain and the inheritors of inefficiency. In the case of end-use equipment manufacturers and providers, barriers arise due to the efficiency-blind and the operating-costs-blind respectively. The barriers at the level of energy-carrier producers and distributors are due to the supply obsessed, the centralization-biased and the supply-monopolists. Actual and potential co generators can be cogeneration-blind. Local/national financial institutions can be supply-biased, unfair and anti-innovation in their attitude. In the case of government or country, barriers arise from the government/country that is uninterested, short of skills, without adequate training facilities, without access to hardware and software, and short of capital in an infrastructure-poor country. Other governmental barriers involve the sales promoting regulator, the powerless energy-efficiency agency, the cost-blind price fixer, the fragmented decision-makers, the large-is-impressive syndrome and the large-is-lucrative approach. Finally, at the level of international, multilateral & industrialized country funding/aid agencies, there are barriers due to the inefficient-technology exporters, the supply-biased, the anti-innovation attitude, the large-is-convenient funder, the project-mode sponsors and the self-reliance undermines (alias the dependence-perpetuators).

BARRIERS TO ENERGY EFFICIENCY

Human, technical, financial and organizational capacities all contribute to a manufacturer’s ability to build wealth through energy efficiency. Similarly, the barriers to energy efficiency are evident when the manufacturer lacks these capacities. Manufacturers can and do make money despite inefficiencies. However, the burden of energy waste, lost income and increased exposure to operating risk are increasingly hard to bear in a globally competitive economy. The Alliance to Save Energy has researched the organizational aspects of industrial energy efficiency for more than five years. From this ongoing study, certain barriers to energy efficiency are frequently encountered:

• Misunderstanding of business value: The term “energy efficiency" is easily confused with other concepts.
Having dual-fuel capabilities in the powerhouse, for example, simply means the operator has a choice of fuels. Enlisting an energy marketer to purchase fuel usually helps to even out energy price fluctuations, but has no impact on efficiency of energy use. Consuming renewable energy sources such as wood byproducts is fine as an alternative to fossil fuel, but this consumption is equally susceptible to waste as it is converted to process work. The first hurdle to advancing energy efficiency is to understand that it is a business opportunity to reduce expenses, build revenues and control risk.

• Lack of staff and management awareness: Staff doesn’t always make the connection between energy choices and money. For example, compressed air leaks are often overlooked because “air is free," although this conclusion ignores that fact that five horsepower of electricity are consumed to generate one horsepower of compressed air. Steam system management is susceptible to similar thinking. Plant operators who assume that scrap rates are of no importance “because scrap can be melted down and used again" are not considering the excess energy consumption that this practice requires.

• Lack of cross-departmental cooperation: The manufacturer’s first priority is to make product and get it out the door, not save energy. Every position on the company’s personnel chart has a job description, accountabilities and incentives—all tied to production.

Departments within a company often compete against each other in the budget process. For example, energy efficiency projects might be expensed from the maintenance budget, but the savings accrue to the production budget. When departments do not cooperate, waste is allowed to continue. Unless top management takes action, energy efficiency is a duty that occupies the blank space on the personnel chart—the space where there are no boxes.

• Outdated accounting techniques: Many industrial facilities still have only one utility meter to measure consumption for an entire plant. In this situation, traditional accounting practices treat plant-wide energy as an overhead cost, which is then allocated across departments according to their numbers of workers or square feet of space. Early 20thcentury accounting techniques can obscure the results of 21stcentury energy use. Moreover, the cost of any one department’s energy waste is distributed to all departments. Even worse, this accounting system is a disincentive to any one department taking the initiative to improve energy efficiency, because that department’s results will be diluted by the artificial allocation of costs. Improper allocation of energy costs may distort financial decisions such as product pricing, income and tax declarations, production mix, compensation and bonuses, and capital investment allocations. But today’s advanced energy metering technologies can monitor actual consumption by substations within a facility, improving department managers’ abilities to control their energy costs.

• Restrictive budget and fiscal criteria: A manufacturer’s budget and finance functions can impose procedural barriers to energy efficiency initiatives. Operating budget strategies may simply trend each line item from year to year. The manager that saves energy this year will risk getting a reduced budget for the coming year. Low-bid or least-cost purchasing requirements may be imposed by front-office procurement personnel without thorough consultation with operations staff. Consequently, this arrangement leads to purchases based solely on upfront costs, ignoring energy and other operating costs over the life of the asset. Restrictive debt covenants can effectively limit corporate borrowing. In an effort to not “waste" borrowing capacity, debt financing may be limited to core process investments.

• Lack of management accountability: The rotation of management within companies often prevents the hard decisions from being made. “Not on my watch" is often the response to improvement proposals that won’t pay off until after the current manager’s tenure is over.

• Lack of resources: Because of limited time, money and skills, and with management accountability sometimes tied to short-term results, deferred maintenance is the order of the day. To “save money," some companies will release well-compensated, skilled workers, especially from non-core activities like energy support. The remaining, less-capable staff is ill-prepared to seek, promote and maintain energy system improvements.

• Complacency: It is easy for top managers to be lulled into complacency about energy and other support functions with which they are not familiar. Management indifference effectively abdicates control to trusted subordinates who know that it is better to report good news than bad. Who is a 35-year-old general manager to question the report of a powerhouse superintendent with 20 years on the job? These territorial relationships are barriers to energy efficiency, especially when tenured staff explains that “this is the way we’ve always done it." The most durable barrier may simply be an organization’s business culture. Few corporate leaders, if any, “save" on their way to the top. Their bias is for short-term revenue making, not cost saving. This thinking is evident in capital budgeting decisions, where growth-oriented projects are favored over expense-reduction initiatives. Decision-makers that dismiss energy efficiency overlook opportunities to grow revenue through the redirection of energy waste to more productive purposes.

Barriers to Energy Efficiency Investments

The fact that huge potentials for energy efficiency improvements exist but remain unused obviously indicates that there are barriers to the implementation of such measures.
The main barriers are the following: • Pay-back period criterion • Subsidized energy prices • Capital availability, capital costs, uncertainty and risks • Information, transaction costs and limitations in access to foreign currency • Possible disruption of production and the related “transition costs” • Unstable economy with high inflation and unstable exchange rates and taxation • Lack of skilled personnel or energy managers • “Invisibility” of the impacts of energy efficiency measures • General aversion of perceived risks

Information and Awareness Barriers

Insufficient public awareness about energy-saving equipment: The lack of public awareness stems in part from the policy barriers above: in many Asian countries, there is not a strong ES&L framework with a requirement for mandatory labeling of all equipment and gradual adoption of MEPS. As the price of oil increases, consumers become much more aware of their role in saving energy, but without even a comprehensive scheme of energy testing and labeling of appliances (let alone establishment of MEPS), the energy performance of appliances that a consumer purchases is relatively “invisible”. This barrier will be addressed largely at the policy level, through the root cause, by working to strengthen the policy context for EE technologies

Market Barriers

Market not driven to EE equipment because without labeling, energy efficiency is an invisible attribute: Without a requirement for energy labeling, there is no driver either for producers to produce energy-saving equipment, or for consumers to pro-actively select such equipment. This is because without energy labeling, energy efficiency is basically an invisible attribute and plays little or no role in the consumer selection process. This barrier will be addressed through the application and enforcement of ES&L legislation and regulations; as well as through capacity enhancement in the development and implementation of ES&L.

Limited or no market monitoring and sampling suffer due to lack of manpower and funds: Unfortunately, enforcement and compliance appears to be an afterthought in the implementation of ES&L programs. Survey respondents pointed to the lack of market monitoring and sampling as a key weak link in the chain of ES&L implementation. This barrier will be addressed through strengthening of policy context for EE technologies; application and enforcement of ES&L legislation and regulations; and capacity enhancement in the development and implementation of standards and labeling for the 5 targeted products.

Lack of knowledge about the benefits of ES&L among sellers and buyers: This barrier stems from the general lack of public awareness campaigns, which is due in large part to the lack of widespread energy labeling of products. In most of the countries surveyed, energy testing and labeling schemes were in place for only 1 or 2 products - if at all! This barrier will be addressed through application and enforcement of ES&L legislation and regulations; and capacity enhancement in the development & implementation of ES&L for the target products.

FINANCIAL BARRIERS

The origin of this problem is split burdens -- the burden of capital investments falls on the builder (or landlord) and that of paying the energy bills rests with the homeowner (or tenant). With such a difference in burdens, there is a fundamental contradiction in incentives -- the builder (or landlord) has an incentive to minimize capital costs by purchasing the cheapest equipment (which is often the most energy inefficient) and the homeowner (or tenant) has the opposite incentive to minimize operating costs by having the most energy-efficient equipment. What is required, however, is an incentive system in which the total life-cycle costs (which include both the initial capital costs and the operating costs over the entire life of the equipment) are minimized. In the first place, the tenant can articulate his market demand by scrutinizing the energy efficiency of the building and exerting his preference for low energy-consumption buildings. But, this means that prospective tenants must know the energy efficiency of buildings. In other words, buildings must be labelled so that their energy efficiencies are specified. Pressures can also be applied on the builder or landlords. Thus, the barrier of inherited inefficiency can be partly overcome by labelling equipment with energy performance data and thereby arming consumers with the knowledge to exert pressure on the equipment providers.

END-USE EQUIPMENT MANUFACTURERS
The Efficiency-Blind: Usually, the sales of end-use equipment depend far more on the first cost than upon the energy efficiency. In fact, since quite often, lower first cost means lower efficiency; sales may actually decrease with efficiency improvements. In such a situation, the motivation of manufacturers to improve the efficiency of their products is often secondary to other design changes. Also, the marketing and sales strategies of manufacturers and retailers may emphasize sales of less efficient equipment. Thus, the first cost sensitivity of consumers is responded to by manufacturers, distributors and retailers with offers of low first-cost devices and equipment with low efficiencies. As a result, energy-efficient equipment just may not be available and consumers are made victims of forced purchase decisions. Or, energy efficiency is coupled with other expensive features and made available only in the "gold-plated" or expensive brands. Such an environment encourages efficiency-blind producers of end-use devices and equipment. Part of the problem is that (unless special measures have been implemented) neither the manufacturer nor seller of end-use devices and equipment is obliged either by market pressure or by law to reveal the energy performance of devices and equipment. Thus, an Indian consumer cannot know which of a number of electric water-heaters, for example, has the lowest energy consumption. The barrier to efficiency improvement arising from efficiency-blind manufacturers can be overcome partly by government intervention enforcing efficiency standards and the labelling of end-use devices and equipment so that the prospective buyer can take the energy consumption into account before the purchase of the equipment. The consumer will be further motivated to ascertain the energy efficiency of equipment if the financing of this equipment (e.g., the interest rate) is tied to the energy efficiency. It is obvious the energy-efficiency standards for appliances to achieve savings must be updated at regular intervals (in order to keep pace with technical improvements) if they are to remain effective. Also, "near-term measures to promote energy efficiency through the use of existing energy-efficient technologies should be complemented by measures that encourage manufacturers to routinely make energy efficiency a design criterion of the innovative process.

END-USE EQUIPMENT PROVIDER
The Operating-Costs-Blind: Mention has been made already of situations where the provider of end-use equipment minimizes the capital cost of the equipment irrespective of the consequences of that decision on the energy consumer who has to pay for the operating costs. Buildings are an example of this situation. Apart from inducing the consumer to exert market pressure in favor of efficiency improvement, government interventions to influence the equipment provider are also necessary. For instance, in the case of buildings, advantage can be taken of the fact that a building project involves a number of steps of which two lend themselves easily to energy-efficiency measures: -
(1) Approval of building designs and
(2) Securing finance usually in the form of a loan. Intervention in favor of energy efficiency is possible at both these stages -- building codes can be enacted that stress energy efficiency, and the loans can take into account life-cycle costs of equipment and not merely the initial costs. Thus, legal approvals and financing that depend upon energy efficiency and standards can contribute to surmounting the barrier of equipment-providers who turn a blind eye to operating costs.

ENERGY-CARRIER PRODUCERS AND DISTRIBUTORS
The Supply-obsessed: Invariably, the producers and distributors of energy carriers (electricity, coal, petroleum products) are so obsessed with the supply of their energy carriers that they devote little attention to the utilization of these carriers. In particular, they do not bother with the efficiency with which their energy carriers are used. This supply-obsession of the producers and distributors of energy carriers is a barrier to the marketing of energy-efficiency improvement. The obsession of electrical utilities with supplies is not without a rational basis. The thinking of utilities often runs thus: "Conservation is not a natural business niche for utilities. Conservation involves equipment we do not make, which is installed on property we do not own, and requires kinds of work where we have no natural advantage. Conservation increases the cost of the commodity." More importantly, most utilities are regulated and traditional regulatory ratemaking formulas are such that profits are proportional to sales. In the USA, for instance, "the ratemaking process has the following unintended, but nevertheless perverse, incentives:
1. Electricity profits increase with every additional kWh sold.
2. Electricity profits decrease with every additional kWh saved.
3. The only financial incentive to pursue cost-effective conservation is the risk that unsatisfied regulators may disallow costs.
In this scheme of things, if an electric utility company makes investments on demand side programmes, it not only loses revenues due to decreased sales but in addition, loses returns on its investments on demand reduction.
An extreme example of this disincentive is when generation and distribution are handled by separate companies in which case the generator cannot implement demand-side measures even if they are cheaper than generation, and the distributor can only lose if sales are lowered by efficiency improvements. The problem is aggravated by the fact that the marketing of efficiency improvements is inherently more complicated than the marketing of energy supplies and conventional end-use technologies. One must be concerned not just with producing new energy-efficient devices, but with the full spectrum of relatively novel marketing problems:
1. Diagnosis of the individual consumer's needs for obtaining energy services in the most cost-effective manner and thereby identification of the technical changes that are necessary;
2. Consumer education as to the necessity of making these changes -- a task made difficult because the expected saving is often ambiguous;
3. The financing of any new devices or contractor work that may be required; after-sales servicing;
4. Monitoring of performance in the field to ascertain actual savings, with feedback that can be used to modify energy saving strategies.

Efforts should address all these aspects of the marketing of energy efficiency, i.e., the efforts should be concerned not just with the production of the hardware involved but with all the necessary supporting "software" as well.
The producers and distributors of energy carriers (the electricity boards, coal and oil companies and gas utilities) are good candidates for marketing the services required for such an effort. Already a number of the more progressive utilities in the industrialized countries have initiated energy conservation programs that include:

1) Providing advice on investments in energy efficiency;
2) Offering to arrange for contractors to carry out such work;
3) Financing such investments with low or zero interest loans; and
4) Providing rebates to consumers for the purchase of energy-efficient appliances and/or to appliance dealers for promoting efficiency improvement sales.

CONCLUSION

ACCUSTOMED to handling large quantities of capital, the producers and distributors of energy carriers are well-positioned to direct some of these resources to investments on efficiency improvements. Also, they have an administrative structure for channeling the capital to essentially all households and businesses. Moreover, the billing systems of the suppliers of energy carriers offer the opportunity for customers to invest on efficiency-improvement devices with loans from the suppliers and to pay back these loans through their energy bills.
If the charter of the producers and distributors of energy carriers is restricted to the supply of carriers, they cannot undertake the comprehensive marketing of efficiency improvements. What is required, therefore, is a conversion of energy supply agencies into energy service companies, that is, companies that market energy services (heating, cooling, lighting, etc.) in much the same way they today market energy carriers. Energy suppliers must diversify in this direction of energy services. Then, they would come to play a role originally envisioned for them by Thomas Edison when he invented the incandescent bulb -- he proposed that utilities sell illumination, thereby giving them a financial interest to provide this illumination in the most cost-effective way.