Energy use and energy efficiency in Australian industry (1998)

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                  ABARE CONFERENCE PAPER 98.21

Energy use and energy efficiency in
       Australian industry

     Shane Bush, Andrew Dickson, Luan Ho Trieu, Jane Anderson and
         Suthida Warr, Minerals, Energy and Resources Branch

               Energy Efficiency and Best Practice Workshop
                          Canberra, 30 July 1998

The purpose of this paper is to provide an overview of recent trends in energy
use and energy efficiency. In addition, some of the issues surrounding
investment in energy efficiency are briefly covered. The material presented
here is largely taken from existing published ABARE research, updated where
necessary, to cover the most recent historical data available, 1996-97. The
primary references used are: Bush, Harris and Ho Trieu (1997); Cox, Ho
Trieu, Warr and Rolph (1997); Wilson, Ho Trieu and Bowen (1993); and
Harris, Anderson and Shafron (1998).

                            ABARE project 1573


                         ABARE CONFERENCE PAPER 98.21

Current trends in energy use in Australia
Total energy consumption – national
Total (primary) energy consumption in 1996-97 is estimated to have grown by 2.3 per cent
on 1995-96 levels to reach 4610 PJ. This follows annual increases of 3.2 per cent in 1995-
96 and 4.4 per cent in 1994-95 (figure 1). Interestingly, the increase in 1996-97 exactly
matches the long term annual trend over the past twenty years, 2.3 per cent.

As illustrated in table 1, crude oil accounted for about 36    Table 1: Total energy
per cent of total primary energy consumption in 1996-          consumption, by fuel, 1996-97
97. Black coal and brown coal collectively accounted for
approximately 41 per cent, with black coal accounting                                 PJ        %
for the largest share of these two at 28 per cent. Natural     Black coal          1308.9     28.4
gas accounted for around 18 per cent.                          Brown coal           559.2     12.1
                                                               Crude oil           1641.9     35.7
                                                               Natural gas          817.8     17.7
In figure 1 the long term trends in fuel mix are also          Renewables           282.5      6.1
illustrated. Clearly very little has changed since the Total                4610.3    100.0
decline (increase) in crude oil’s (natural gas’s) share was
arrested in the late 1980s/early 1990s. The share
contributed by renewables also continues to grow at a very modest rate (1.4 per cent in
1996-97) and in fact the current share of renewables is still lower than that achieved in the

In figure 2, trends in energy consumption by major end-use sector are presented. Energy
consumption in Australia is dominated by three major sectors: electricity, gas and water;
transport; and manufacturing. In 1996-97, and indeed throughout the sample period 1973-
74 to 1996-97, these three sectors accounted for almost 80 per cent of total energy

 Figure 1: Energy consumption, by fuel

                                                                     Natural gas

                                                                     Crude oil
                                                                     Brown coal
                                                                     Black coal

          1974   1976   1978   1980   1982   1984    1986     1988   1990    1992      1994   1996
           -75    -77    -79    -81    -83    -85     -87      -89    -91     -93       -95    -97


                             ABARE CONFERENCE PAPER 98.21

In table 2, the sectoral shares of total Table 2: Energy consumption growth, by
energy consumption in 1973-74 and sector
1996-97, as well as their average growth
rates over the period 1973-74 to 1996-97,                  Annual growth     Share     Share
                                                        1973-74 to 1996-97 1973-74 1996-97
are presented. The highest average annual
                                                                        %       %         %
growth rates were in the mining (6.4 per
cent), electricity generation (3.9 per cent) Agriculture               2.4     1.5       1.5
                                              Mining                   6.4     2.3       5.4
and commercial (3.7 per cent) sectors, Manufacturing                   1.0    35.1      25.1
compared with the annual average for all Electricity generation        3.9    19.5      26.9
sectors of 2.3 per cent. Manufacturing        Transport                2.5    26.2      26.1
                                              Construction             2.5     1.0       0.9
achieved only a modest growth rate of 1 Commercial and services 3.7            3.3       4.2
per cent a year over the period and, as a Residential                  2.2     8.8       8.2
result, its share (while continuing to be Other                        0.4     2.3       1.7
relatively large) declined substantially
from around 35 per cent in 1973-74 to 25 per cent in 1996-97. This substantial shift was
brought about by a number of factors, including energy efficiency improvements and
restructuring in a number of industries, particularly the iron and steel industry. Further
discussion of these factors is provided in the section dealing with energy efficiency trends
later in the paper.

Energy consumption is also dominated by a small number of broad equipment types (figure
3), in particular boilers (which account for around 30 per cent of total energy consumption)
and mobile and stationary engines (which account for about 21 per cent). Other major
equipment types are chemical and refining equipment, metallurgical processes, and
domestic and commercial appliances.

In terms of fuels used, a trend of particular interest has been the almost complete
substitution of petroleum products by natural gas and electricity across a range of stationary

 Figure 2: Energy consumption, by sector


4000                                                                                        Electricity


2000                                                                                        Residential
        1974   1976   1978    1980   1982   1984      1986   1988   1990   1992   1994   1996
         -75    -77    -79     -81    -83    -85       -87    -89    -91    -93    -95    -97


                                     ABARE CONFERENCE PAPER 98.21

 Figure 3: Energy consumption, by equipment type

7000                                                                                                      appliances
6000                                                                                                     Domestic
                                                                                                         Chemical and
5000                                                                                                      refining equipment
4000                                                                                                     Metallurgical
3000                                                                                                     Engines


           1974     1976     1978    1980      1982   1984    1986    1988   1990   1992   1994   1996
            -75      -77      -79     -81       -83    -85     -87     -89    -91    -93    -95    -97

applications. This has occurred, for example, with boilers and kilns in the manufacturing
sector, and with cooking and heating appliances in the residential and commercial sectors.

Total energy consumption, by state
The current distribution of total energy consumption, by state, is illustrated in table 3. State
patterns of energy consumption reflect a variety of factors which include population
distribution, historical patterns of resource development and the location of major
industries and natural resources. Energy consumption per person also varies considerably
across states. Relatively high levels of consumption per person in Western Australia and
the Northern Territory reflect the large amounts of energy consumed by energy intensive
industry, predominantly in the minerals processing sector.

Table 3 also shows that over the five years to 1996-97 Western Australia, Queensland and
the Northern Territory experienced rapid growth in energy consumption, with annual
average rates of growth of 5.5, 5.0 and 4.2 per cent respectively. These high growth rates

Table 3: Energy consumption, by state, 1996-97

                                         PJ                   %              GJ per person                5 year growth
                                                                                                                 rate %
New South Wales a                   1380.5                   29.9                      209.7                              2.5
Victoria                            1202.8                   26.1                      261.2                              1.6
Queensland                           914.0                   19.8                      268.7                              5.0
Western Australia                    648.6                   14.1                      360.7                              5.5
South Australia                      299.8                    6.5                      202.6                              0.2
Tasmania                              94.8                    2.1                      200.2                              1.2
Northern Territory                    70.0                    1.5                      374.1                              4.2
a Includes the Australian Capital Territory.


                         ABARE CONFERENCE PAPER 98.21

stem mainly from the high level of activity in the mining and mineral processing sectors,
as well as higher than national average economic and population growth.

Trends in major energy consuming sectors
Electricity, gas and water
The electricity, gas and water sector was the largest energy consuming sector in 1996-97
(and has been since 1987-88), with energy consumption of 1261 PJ or approximately 27
per cent of the total (national) energy consumption. Within electricity, gas and water sector,
electricity generation accounted for around 98 per cent of the total in 1996-97.

A notable trend over the three years to 1996-97 in the electricity generation subsector was
the reduction in the use of natural gas as an input into thermal electricity production, and
the increase in the use of brown and black coals. Between 1994-95 and 1996-97, the use
of natural gas in thermal electricity production declined by around 16 per cent while the
use of brown coal increased by almost 14 per cent and black coal by almost 8 per cent.
This decrease in the use of natural gas for electricity generation, which contrasts with
longer term trends, is likely to have been caused in part by the development of the national
electricity market and the very low wholesale electricity pool prices which currently prevail
in that market.

Interestingly, carbon dioxide emissions from the generation sector also increased by
around 9 per cent over the two years to 1996-97, from approximately 141 million tonnes
to 154 million tonnes.

The transport sector is the second largest in terms of energy use and accounted for just
over 26 per cent of total energy consumption in 1996-97. As illustrated in figure 2, this
share remained almost static over the entire sample period. The transport sector itself is
dominated by road transport which accounts for over three-quarters of the sector’s total
energy consumption, and of this two-thirds is attributable to passenger vehicles. The
remainder consists of light commercial vehicles, trucks and buses.

As mentioned previously, the growth in energy consumption in the manufacturing sector
was relatively modest over the sample period, increasing from 918 PJ in 1973-74 to 1156
PJ in 1996-97. In figure 4, this overall growth, and the contribution provided by each
subsector, is illustrated.


                            ABARE CONFERENCE PAPER 98.21

 Figure 4: Manufacturing energy consumption, by sector (example only)

 800      Non metallic minerals

          Metal products
          Petroleum, coal and chemicals
          Food, beverages and tobacco
        1974   1976     1978      1980    1982   1984     1986   1988   1990   1992   1994   1996
         -75    -77      -79       -81     -83    -85      -87    -89    -91    -93    -95    -97

The industries which currently account for the largest shares of manufacturing sector
energy consumption are the metal products sector (ANZSIC 27) with 46 per cent; the
petroleum, coal and chemicals sector (ANZSIC 25) with 22 per cent; and the food,
beverages and tobacco sector (ANZSIC 21) with 15 per cent.

In the metal products sector, energy consumption is dominated by the nonferrous metals
and iron and steel industries. Over the sample period, however, these industries showed
substantially opposite trends. In 1973-74 the iron and steel industry accounted for 68 per
cent of energy consumption in the metal products sector, and the nonferrous metals
industry 32 per cent. In 1996-97 their respective shares were 38 per cent and 62 per cent.
This switch in relative importance (in terms of energy consumption) was largely the result
of major restructuring in the iron and steel industry in the early 1980s which resulted in a
significant downsizing of the industry, and the large expansion in the minerals processing
industry, and in particular aluminium smelting and alumina refining, which gained
momentum in the early 1980s.

Mining and commercial
Although the mining and commercial sectors are not large consumers of energy,
accounting for only 5.4 per cent and 4.2 per cent of total energy consumption respectively,
they have been included in this section as they fall under the umbrella of the Energy
Efficiency Best Practice Program.

As mentioned earlier (and reported in table 2), energy consumption in the mining sector
has increased rapidly over the period, growing at an annual average of around 6.4 per cent.
This strong growth mainly reflects the substantial development of natural gas resources
off the north west coast of Western Australia, and in particular the North West Shelf LNG


                         ABARE CONFERENCE PAPER 98.21

plant. Strong growth, however, has also been experienced in other mining activities, in
particular black coal mining, iron ore, nickel, gold and mineral sands.

The commercial sector comprises wholesale–retail trade, communications, finance, public
administration and defence, community services and recreation industries. This sector
accounted for only 4.2 per cent of total energy consumption in 1996-97. Energy con-
sumption growth in this sector has been relatively strong in recent years, reflecting the
relatively fast growth in this sector of the economy. As outlined in table 2, growth in energy
consumption in this sector was above average over the sample period (3.7 per cent
compared with 2.3 per cent). Over the ten years to 1996-97, however, energy consumption
grew even more rapidly, averaging around 4.4 per cent a year. While the energy efficiency
of individual appliances, applications and/or processes in this sector is continuously being
improved, these positive developments are being offset by the increased use of electrical
equipment. Two factors that have been, and continue to be, major drivers in this regard are
the increasing use of electronic data processing equipment and the deregulation of business
hours, especially in the retail trade sector.

Trends in energy intensity
In previous ABARE research, changes in energy intensity between 1973-74 and 1994-95
have been measured for the Australian economy as a whole, for the major sectors and
subsectors, and for the states and territories (see Cox et al. 1997; Wilson, Ho Trieu and
Bowen 1993). It was, and still is, thought that an understanding of past changes may
provide important insights into the potential for future improvements. In this workshop
paper, this previous work has been updated to cover the period to 1996-97.

Energy intensity can be used as an indicator of changes in energy use patterns. At the
simplest level, energy intensity is defined as the amount of energy consumed per unit of
activity or output of the whole economy (the aggregate intensity effect) and is influenced
by a number of factors, particularly the structural makeup of the economy (that is, the mix
of energy intensive and less energy intensive sectors), output and the intensity of energy
use within sectors.

Using the factorisation technique (described below), it is possible to analyse the impact of
changes in intensities on energy use while holding the structure of the economy constant,
and to analyse the impacts of changes in the structure of the economy on energy use while
holding intensities constant. This kind of comparison overcomes the major problem of
analysing trends in the ratio of energy use to economic activity — the mixing of both
intensity and structural effects.


                           ABARE CONFERENCE PAPER 98.21

Energy intensity vs energy efficiency
It is important to emphasise that energy intensity is not the same as ‘energy efficiency’. In
the past, energy efficiency has been used to refer to the energy-to-output ratio of the whole
economy (the economy’s aggregate energy intensity). However, there are a number of
weaknesses in this approach. First, as noted above, it includes in ‘energy efficiency’ the
influence of changes in the sectoral composition of the economy. A change in the structure
of the economy will influence energy consumption, even in the absence of technical
progress. This is because, as the more energy intensive sectors expand or contract, their
relative shares of total output change.

Second, the term ‘energy efficiency’ is best used as a physical measure to describe the
energy consumed in a physical process rather than in the production of output (or value
added). For example, it is appropriate in the narrow context of energy indicators to assess
the efficiency with which fuel moves a given weight of car a given distance, but not
necessarily the efficiency of travel by car (which involves a much wider range of factors
other than fuel efficiency).

Third, from a broader economic perspective, efficiency has a more specific meaning. A
production process is said to be more technologically efficient than another if it can
produce a given level of output using less of at least one input and not more of any other
input. A production process is said to be economically efficient if it minimises the cost of
producing a given level of output. It can be shown that any production process that is
economically efficient is also technologically efficient. If an industry is using more energy
per unit of output over time, there is not necessarily evidence of inefficiency. It may be
that energy prices are becoming relatively lower over time, encouraging the substitution
of energy for nonenergy inputs. Provided less of at least one other nonenergy input is used
(such as capital or labor) and not more of any other nonenergy input, the process may still
be efficient. If this latter condition does not hold, the process would be said to be inefficient.
[Such analysis is beyond the scope of this paper.]

Separating out influences
The factorisation technique is used to separate out the various factors which affect energy
consumption at the national or state level. In this approach, any change in energy use is
divided into that part attributable to changes in:

• economic activity (the production effect);

• the sectoral composition of the economy (the structural effect); and

• the energy intensities of sectors (the real intensity effect) (Schipper, Howarth and Geller


                                ABARE CONFERENCE PAPER 98.21

Figure 5 is a diagrammatic representation of how energy consumption data can be
disaggregated into these components.

The production effect is the change in energy use that would have occurred given only a
change in the overall level of activity in the economy.

Aggregate energy intensity comprises structural and real intensity effects. In essence,
factorisation involves measuring the changes in energy consumption that would have
occurred between two periods as a result of one of these effects, if the other factors had
remained constant. The structural effect is the change that occurs when sectors of different
energy intensity grow or decline disproportionately — that is, when these sectors change
their relative shares of the total output of the economy — while total output remains
constant. The real intensity effect is the change in overall energy use that occurs when the
energy intensity of one or more sectors changes while all sectoral outputs remain the same.

The real energy intensity effect can be further disaggregated into changes in energy
consumption which are attributable to changes in the fuel mix and a technical effect which
is associated with changes in technology, operational changes, conservation improvements
and the effects on consumption of structural changes within sectors of the economy —
that is, of changes in the relative size of subsectors.

Composition of energy intensity trends
In table 4 the components of changes in energy consumption over the period from 1973-
74 and 1996-97 are shown. The production effect, which represents the general increase
in economic activity, was the largest contributor, accounting for approximately 99 per cent,
or 2158 PJ, of the increase in total energy consumption over the sample period.

Figure 5: Factors leading to changes in energy use

                                                             Change in


                    Real intensity                            Structural               Production
                     Real intensity                                                     Production
                       effect                                   effect                   effect
                         effect                                                           effect

              Fuel mix            Technical
               effect               effect

            Fuel changes          Technology improvement             Sectoral output            Aggregate output
                                    Operational changes
                                  Conservation investment
                                      Subsectoral mix


                              ABARE CONFERENCE PAPER 98.21

The effect of structural shifts toward more                    Table 4: Components of changes in
energy intensive sectors accounted for only 3 per              energy consumption, 1973-74 to
                                                               1996-97 a
cent of the increase, or 65 PJ. Of this, 1.7 per
cent was associated with subsectoral changes
                                                                                                      %            PJ
within the manufacturing sector, with the
remainder accounted for by changes between                     Production effect                  99.0       2 158

the remaining sectors. (In ABARE research                      Combined structural effect           3.0            65
                                                                Manufacturing                       1.7            38
completed to date, intrasectoral changes in the                 Other sectors                       1.2            27
manufacturing sector only have been allowed
                                                               Real energy intensity effect      –13.9        –302
for due to data limitations.)                                   Fuel mix                          –5.9        –129
                                                                Technical change                  –7.9        –173
Increases in energy consumption associated a Following the approach in Wilson et al. (1993), private
                                                    transport is excluded, as output data are not available.
with the production and structural effects were,
however, partly offset by reductions in energy consumption resulting from the real energy
intensity effect (this explains why the percentage quoted above sum to greater than 100
per cent). Real energy intensity declined by almost 14 per cent over the sample period,
equivalent to energy savings of around 302 PJ. Of this, around 8 per cent is attributable to
technical change and the remainder to changes in the fuel mix (primarily the increased use
of natural gas and electricity at the expense of petroleum products).

Changes in aggregate energy intensity
The contributions made by each component of aggregate energy intensity — that is,
excluding the production effect — over the full sample period are shown in figure 6. The
figures show the proportional changes in each of these components in relation to the base
year. An index value less than 1 indicates energy savings compared with the base year,
while an index value greater than 1 indicates increased energy use.

 Figure 6: Indexes of total energy intensity: Australia

                                                                                        Structural effect
                              Aggregate intensity
         Fuel mix effect                                            Technical effect


                                                    Real intensity effect
          1974     1976    1978   1980    1982      1984     1986      1988    1990    1992    1994         1996
           -75      -77     -79    -81     -83       -85      -87       -89     -91     -93     -95          -97


                          ABARE CONFERENCE PAPER 98.21

Real energy intensity has declined steadily since the late 1970s. The increase in real energy
intensity in the late 1980s was driven by developments in the manufacturing sector and
coincided with a period of low energy prices. The increases evident since 1993-94 appear
to have been associated largely with the developments in the electricity generation sector
discussed previously.

Looking to the components of the real energy intensity effect, the fuel mix effect declined
steadily, though only slightly between 1973-74 and 1991-92, with the negative contribution
it provided to the trend in real energy intensity increasing steadily. Since 1991-92, however,
the fuel mix effect has not increased and its contribution to reductions in real energy
intensity has been relatively small since. The technical effect shows a similar, though more
variable pattern to that of the fuel mix effect. Again, however, the impact of this component
to the reduction in real energy intensity over recent years has been slight.

A possible explanation for these trends is that efforts to improve the efficiency of energy
use were made in the early 1980s when real energy prices were historically high. Since
then, either further opportunities to improve energy efficiency have been more scarce, or
perhaps lower energy prices have adversely affected the economics of further

Throughout the sample period the structural effect impacted positively on aggregate (or
overall) energy intensity. That is, the impact of the structural effect was to increase
aggregate energy intensity. Again, however, it can be seen that since the early 1990s the
contribution being made by this component lessened, and currently its contribution is only

Changes in aggregate manufacturing energy intensity
The contributions made by each component of aggregate manufacturing energy intensity
over the full sample period are shown in figure 7. In this case, the aggregate energy intensity
reported refers only to the aggregate energy intensity for the manufacturing sector, and the
structural effect reported is in effect the impact of subsectoral structural changes within
the manufacturing sector.

It can be seen that over the sample period the aggregate energy intensity in the manu-
facturing sector was more volatile than for the economy as a whole (figure 6). Substantial
declines in real energy intensity were achieved in the period between 1977-78 and 1981-
82 and again between 1990-91 and 1996-97. Between these two periods, however, many
of the gains achieved were eroded.

Overall, the results reported in figure 7 indicate that the shift toward a more energy efficient
mix of fuels was a constant (and positive) feature of the performance of the manufacturing


                            ABARE CONFERENCE PAPER 98.21

 Figure 7: Indexes of total energy intensity in the manufacturing sector

                Technical change
                                                          Structural effect


               Fuel mix effect                                                      Aggregate intensity


                                                        Intensity effect
        1974   1976    1978      1980   1982   1984     1986    1988       1990   1992   1994    1996
         -75    -77     -79       -81    -83    -85      -87     -89        -91    -93    -95     -97

sector over the sample period. In addition, the volatility in real manufacturing energy
intensity experienced over the same period resulted almost exclusively from variations in
the technical effect.

Why the aggregate manufacturing energy intensity rose sharply between 1988-89 and
1990-91, however, is not entirely clear. The main driver of this was the metal products
sector, and particularly developments in the aluminium industry. And the increase followed
a sharp decline in metals prices at that time. To say any more than this, however, requires
further detailed examination.

Between 1991-92 and 1996-97 declines in real energy intensity occurred in every
manufacturing industry, except the textile, clothing, footwear and leather industries
(ANZSIC 22). In particular, significant reductions in real energy intensity were achieved
in the petroleum, coal, chemical and associated products industry (ANZSIC 25), the metal
products industry (ANZSIC 27) and the nonmetallic mineral products industry (ANZSIC
26). Again it can be seen, however, that fuel switching was not a strong feature of this

The declines in real energy intensity achieved since 1991-92 may, in part, have been the
result of government programs aimed at improving the efficiency of energy use in the
industrial sector, such as the Enterprise Energy Audit Program (EEAP) and the Greenhouse
Challenge program.

Changes in real energy intensity
Table 5 shows the contributions of each sector to changes in the real energy intensity over
the period 1973-74 to 1996-97 and in recent years, 1991-92 to 1996-97. The bottom half


                                    ABARE CONFERENCE PAPER 98.21

Table 5: Sectoral contribution to energy intensity trends a

                                                                                          Contribution to change
                                                Energy intensity                       1973-74                         1991-92
                                                        1996-97                     to 1996-97                      to 1996-97
                                                               PJ/$b                           %                                %
Agriculture                                                     3.65                       -0.1                               0.0
Mining                                                         12.77                        2.6                               1.0
Manufacturing                                                  17.18                       –4.0                              –1.5
Electricity, gas and water                                     88.14                       –1.8                               0.6
Construction                                                    1.61                        0.2                              -0.1
Transport and storage                                          23.30                       –7.4                              –0.3
Commerce and services                                           0.77                        0.5                               0.0
Residential                                                     8.46                       –3.9                              –0.4
Australia total                                                 8.44                      –13.9 b                            –0.7 b
Manufacturing sector
Food, beverages, tobacco                                        5.86                       –0.9                              –0.2
Textiles, clothing, footwear                                    5.77                        0.2                               0.1
Wood and paper products                                         8.53                       –0.2                              –0.1
Petroleum, coal and chemical products                          39.07                       –7.5                              –2.2
Nonmetallic mineral products                                   35.33                       –1.7                              –0.3
Metal products                                                 54.19                       –2.6                              –1.0
Machinery and equipment                                         1.34                       –0.3                              –0.4
Manufacturing total                                                                       –13.0 b                            –4.2 b
a Following the approach in Wilson et al. (1993), private transport is excluded as output data are not available. A negative term
represents an improvement in energy efficiency. b Indicates percentage change in energy intensity. The figures for the sector and
subsectors indicate percentage point contribution to the total percentage change.

of the table also shows the manufacturing sector in detail and the contributions made by
individual subsectors.

Real energy intensity in Australia as a whole improved (that is, declined) by 13.9 per cent
over the period of 1973-74 to 1996-97. The transport and storage sector recorded the
highest improvement, contributing 7.4 percentage points to the total improvement for
Australia. This is followed by the manufacturing (4.0 per cent) and residential (3.9 per
cent) sectors. In contrast, the mining, construction, and commerce and services sectors
experienced increases in energy intensity. In recent years, 1991-92 to 1996-97, energy
intensity in the manufacturing sector declined considerably, while it increased in the
electricity, gas and water sector.

The real energy intensity in the manufacturing sector declined by 13.0 per cent over the
period 1973-74 to 1996-97, an annual average rate of 0.5 per cent. In the five years to 1996-
97, gains accelerated to an average of 0.8 per cent a year. The main drivers of reduced
intensity in the manufacturing sector have been the petroleum, coal and chemical sector
(ANZSIC 25) and the metal products sector (ANZSIC 27), which also happen to be the
most energy intensive of the manufacturing sectors.


                              ABARE CONFERENCE PAPER 98.21

Investment in energy efficiency
In a recent research report (Harris, Anderson and Shafron 1998) ABARE examined the
issue of energy efficiency investment by firms. It is a commonly held view that not all
economic opportunities to improve energy efficiency are taken up by firms. The focus of
ABARE’s research was to address two main questions — whether firms neglect to
implement some viable energy efficiency measures, and if some viable measures are not
implemented, why is this the case?

With an aim of increasing the information available to firms about opportunities to improve
energy efficiency, the Commonwealth government operated the Energy Efficiency Audit
Program (EEAP) between 1991 and 1997. Under EEAP, firms were provided with a
subsidy to undertake an audit of their operations, and recommendations were made to firms
about ways in which energy efficiency could be improved.

ABARE surveyed 100 firms from EEAP to investigate these questions. The main findings
are reiterated below.

Implementation of recommendations
Contrary to expectation, the level of uptake of recommendations was found to be high.
Each firm participating in EEAP received an average of just under six recommendations
and implemented just under five of them, giving an implementation rate of 81 per cent.

The types of recommendations most commonly received by firms, and the implementation
rates for the different types of recommendations are shown in figure 8. The ratio of the
number of recommendations made to the number implemented appears to be quite

 Figure 8: Recommendations and implementations

      Air conditioning
         Water heating
     Steam production
         Space heating
          Chiller plant                              Implementations
                Boilers                              Recommendations
       Process heating
   Mechanical services
  Industrial equipment
                          0   200   400   600      800        1000       1200   1400   1600
                                            Number for each savings area


                         ABARE CONFERENCE PAPER 98.21

consistent across different types of recommendations. However, there does appear to be a
relationship between the average cost of a particular type of recommendation and the
implementation rate. Generally speaking, the higher the average cost the less likely it is
that a recommendation will be implemented.

The average cost to implement all recommendations was about $121 000 per firm,
compared with only $88 000 for those actually implemented, giving a ratio of about 73
per cent. This result is intuitively appealing because higher cost recommendations might
be expected to receive more rigorous scrutiny and be postponed first if financial constraints
tighten. The average benefit, or potential savings, from implementing all recommendations
was about $82 000 and about $67 000 for those which were implemented.

Relationship between scale of implementation and firm characteristics
When examining the relationship between implementation and firm size, there is evidence
that larger firms have lower rates of implementation. Generally, the larger units, as
measured by staff numbers, energy costs, operating costs and audit costs, tend to implement
fewer recommendations.

Important sources of risk
Of recommendations that were not adopted, the most significant source of risk associated
with the investment was ‘adjustment costs during installation’, which was quoted as
important or very important by 43 per cent of respondents. This indicates that there are
costs associated with disruption to the running of the firm that involve risks great enough
to prevent particular investments from going ahead. The fact that ‘information is constantly
changing’ was regarded as important by 38 per cent of firms.

Reasons for not implementing specific
                                                    Table 6: Firms not implementing a
recommendations                                     specific recommendation
The most common reasons firms give for not
implementing recommendations are economic                               Proportion agreeing or
factors (table 6). Fifty-three per cent of firms                  strongly agreeing with reason
cited low rates of return, 45 per cent cited long                                            %
payback periods and 38 per cent did not agree       Rate of return too low                  53
with the auditor’s economic assessment of a         Payback period too long                 45
particular investment. The common view that         Auditors assessment inaccurate          38
                                                    Energy efficiency often overlooked      35
energy efficiency is often overlooked by            Investments irreversible                28
management, perhaps because it is not ‘core         Unclear how to implement                28
business’ received support by 35 per cent of        Finance unavailable                     20
                                                    Investment too risky                    20
respondents.                                        Lack of staff with expertise            17
                                                    Not our decision                        13


                         ABARE CONFERENCE PAPER 98.21

Evaluation of benefits
The net present value of EEAP to a firm is calculated using the costs and benefits provided
by the auditors of the investments actually implemented by firms. For an investment life
of five years and an interest rate of 8 per cent, the net present value of EEAP was calculated
as $174 000. To put this figure into context, the average amount spent on energy by a firm
was estimated at around $434 000 a year. So, each firm that participated in EEAP could,
on average, save 40 per cent of their energy costs over five years, or 8 per cent of the
original energy bill a year for five years.

Given that an audit was shown to be worthwhile to firms, even without the subsidy, the
main policy implication is that promotion of the type of process which occurred under
EEAP might be a useful direction to pursue (assuming that energy efficiency policies will
be pursued in future and that public provision of information is the most cost effective
general method).

Bush, S., Harris, J. and Ho Trieu, L. 1997, Australian Energy Consumption and
 Production: Historical Trends and Projections to 2009-10, ABARE Research Report
 97.1, Canberra.

Cox A., Ho Trieu L., Warr S. and Rolph C. 1997, Trends in Australian Energy Intensity,
 ABARE Research Report 97.5, Canberra.

Harris, J., Anderson, J. and Shafron, W. 1998, Energy Efficiency Investment in Australia,
 ABARE Research Report 98.2, Canberra.

Schipper, L., Howarth, R.B. and Geller, H. 1990, ‘United States energy use from 1973 to
 1987: the impact of improved efficiency’, Annual Review of Energy, vol. 15, pp.

Wilson, B., Ho Trieu, L. and Bowen, B. 1993, Energy Efficiency Trends in Australia,
 ABARE Research Report 93.11, Canberra.


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Description: Energy use and energy efficiency in Australian industry (1998)