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Appendix D
Conservation Supply Curves for Industrial Energy Use
Relatively little analysis has been undertaken to address
systematically the costs of achieving energy savings and consequent
CO2 emission reductions for the
industrial sector. This is due in part to the extraordinary
heterogeneity of this sector (e.g., in contrast to the buildings or
transportation sector) and to the often proprietary nature of
industrial process technology. Thus, although technical aspects of
industrial energy use have been studied extensively, economic
assessments remain largely lacking at this time, especially with
regard to fundamental process design changes, which offer some of
the potentially most significant energy reduction measures.
Electricity Use
The economic analyses available focus primarily on the use of
electricity in selected manufacturing processes. A key assumption
in such analyses is the rate of return, or discount rate, needed to
induce capital investments in energy conservation. Empirically, the
discount rates required for the industrial sector appear to be on
the order of 30 to 50 percent, equivalent to payback periods of
only 2 to 3 years (Ross, 1990b). In some cases, the desired rates
of return may be as high as 100 percent (Ayres, 1990). Although
financial decision-making criteria in industry are not very well
understood, U.S. manufacturers appear to be more reluctant to
invest in energy-saving equipment than would be suggested by
standard financial analyses using more typical rates of return
(e.g., 10 to 20 percent). Part of this behavior stems from the fact
that energy costs for most industries represent only a small
portion of overall expenses. Hence, the reliability of energy
supplies is often more critical than energy costs. For the United
States, there is little empirical basis to assess investment
behavior for substantially
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higher energy prices than those now prevalent (e.g., electricity
prices 2 to 3 times higher).
An estimate of the electricity conservation potential of the
overall U.S. manufacturing sector has been developed by Ross
(1990a), based on an aggregation of results for aluminum
production, fabrication/assembly processes, and other selected
process industries, and assuming a capital recovery rate of 33
percent. Figures D.1 to D.3 show the electricity conservation
supply curves first developed for individual manufacturing
industries. The curve for fabrication and assembly (Figure D.1),
developed from studies of the automobile industry, was assumed to
apply to a number of other industry groups as well. The results
from Figures D.1 to D.3 were then combined by using energy weights
based on 1985 electricity consumption (i.e., 1260, 190, and 768
× 1012 Btu for process
industries, aluminum, and fabrication/assembly, respectively (Ross,
1990b)). This yielded the overall manufacturing sector curve shown
in Figure D.4.
The curve in Figure D.4 can also be transformed into a
cost-effectiveness curve for CO2
reductions similar to those presented in Chapter 21 for residential
and commercial buildings. The electricity savings percentages on
the x-axis are first converted to kilowatt-hours by
employing the total 1985 manufacturing electricity use of 653
billion kilowatt-hours (BkWh) (which was the basis for the
estimates of Ross). Current (1989) electricity use is
FIGURE D.1 Supply curve: Fabrication and
assembly.
SOURCE: Ross
(1990b).
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FIGURE D.2 Supply curve: Primary aluminum.
SOURCE: Ross
(1990b).
FIGURE D.3 Supply curve: Process industries
excluding aluminum.
SOURCE: Ross
(1990b).
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Representative terms from entire chapter:
energy savings
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FIGURE D.4 Electricity conservation supply
curve: Manufacturing.
SOURCE: Ross
(1990a).
roughly comparable in magnitude. Then, a utility fuel mix must
be assumed to convert kilowatt-hours (on both axes) to equivalent
CO2 emissions. Figure D.5 shows the
results based on the current U.S. average fuel mix and carbon
content for electricity production (equivalent to 0.7 gCO2per kilowatt-hour consumed, as derived in
Chapter 21). By using Ross's original curve for a 33 percent
capital recovery factor (which corresponds to a discount rate of 30
percent over a 10-year project life), curves for real discount
rates of 3, 6, and 10 percent were also developed, based on a
10-yearproject life. The capital recovery factors (CRFs) for these
three discount rates are 0.117, 0.136, and 0.163, as found from the
expression
where d is the discount rate and n is the project
life. Because annual operating and maintenance cost savings are
negligible in Ross's cost curve, the results for a 33 percent CRF
can be adjusted to other values by simple proportion:
where p1 and p2 are the equivalent electricity prices of
the annualized capital investment.
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FIGURE D.5 Electricity conservation supply
curve: Manufacturing (excluding energy management and
co-generation).
As discussed earlier for the buildings sector, the discount
rates of 3, 6, and 10 percent do not reflect actual consumer
practice. Rather, they are intended to indicate what might be
possible if government policies could induce action at these
effective rates of return. Thus the maximum electricity savings of
30 percent (200 BkWh) reduces CO2
emissions by about 140 megatons (Mt) at an average cost of about
$175/t CO2 at a 30 percent discount
rate, $85/t at a 10 percent discount rate, and about $60/t at 3
percent.1
Offsetting this cost is the savings in electricity use. The
value of this savings depends on the price of electricity. By
following the method elaborated in Chapter 21, two electricity
prices are used to estimate a net cost of CO2 reduction. For the 30 percent discount
rate, reflecting actual industrial practice, the current average
price of electricity for the industrial sector (4.8 cents/kWh) is
used to reflect typical savings to industry. For the lower discount
rates, reflecting a societal perspective, the average U.S.
electricity price of 6.4 cents/kWh is used to estimate savings. As
discussed in Chapters 21 and 22, the current average electricity
prices are implicitly taken to be a long-run marginal cost of
supply. To the extent that actual marginal costs are higher in the
future, the current estimates of net cost are conservative.
For the maximum electricity savings of 200 BkWh, Figure D.5
shows a net negative cost for the 3, 6, and 10 percent discount
rates of -$30, -$20,
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and -$7/t CO2, respectively. For
example, at a 6 percent rate of return, the cost of conservation is
equivalent to 5 cents/kWh, but the value of electricity saved is
6.4 cents/kWh, leading to a net savings of -1.4 cents/kWh. Dividing
by the fuel mix factor of 0.7 kg CO2/kWh and then adjusting units yield the
net savings of -$20/t CO2.
Similarly, a net positive cost of $106/t is found for the 30
percent discount rate, based on an actual electricity cost of 4.8
cents/kWh for the industrial sector. Note that significant
uncertainty still surrounds all these estimates and that a more
refined analysis would also have to consider the fuel mix on a
regional basis, as noted in Chapter 22.
The electricity savings and costs derived from Ross (1990a) are
comparable to those reported by the Electric Power Research
Institute (EPRI) in a study of the maximum technical potential for
electricity savings (Electric Power Research Institute, 1990).
Figure D.6 shows the composite conservation supply curve developed
for the residential, commercial, and industrial sectors. For
industry, a maximum electrical savings of about 277 BkWh was
estimated for the year 2000, corresponding to 24 to 38 percent of
projected industrial electricity use, depending on the assumed
growth rate. The technologies considered in the EPRI analysis were
largely the same as those considered by Ross: adjustable speed
drives for electric motors, high-efficiency motors, waste heat
recovery including recouperators, diaphragm and membrane cells in
chlor-alkali production, more efficient electrolytic cells in
aluminum reduction, and more efficient lighting technologies
(Barakat and Chamberlin, Inc., 1990).
Figure D.6 shows the average cost of the energy conservation
measures to be about 3 cents/kWh for a 5 percent real rate of
return. This is similar to the costs shown in Figure D.5 at a
comparable rate of return. Again, however, it must be stressed that
significant barriers remain to actually achieving the magnitude of
savings suggested by Figures D.5 and D.6.
Co-Generation
Rough estimates of the cost and CO2 reduction potential from increased use
of co-generation in the industrial sector are derived based on the
assumptions in Table D.1. This approach takes the societal
perspective discussed earlier, and reflected in the Chapter 29
results using a 6 percent real discount rate. Thus the fuel savings
and investment cost of co-generation are evaluated relative to a
reference case where steam and electricity are generated separately
using natural gas.
Using the data in Table D.1, the annualized capital cost is
$87.2/kW-yr and the levelized annual fuel savings is $140.9/kW-yr,
yielding a net cost of -$53.7/kW-yr. With no fuel cost escalation
the net cost is -$11.4/kW-yr. The corresponding range of CO2 reduction costs (based on the carbon
content
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FIGURE D.6 The cost of saving.
SOURCE: Electric
Power Research Institute (1990).
of natural gas) is -$30 to -$6/t CO2. Based on an incremental co-generation
capacity of 25,000 MW, the total fuel energy savings would be
approximately 0.82 quads. For natural gas the corresponding
overallCO2reduction would be 45 Mt.
To the extent that oil rather than gas is the fuel backed out in
some co-generation applications, the corresponding CO2reductionwould be somewhat greater.
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TABLE D.1 Assumptions for Co-generation Analysisa
Parameter
Value
Energy source
Natural gas
Base case efficiency
10,500 Btu/kWh
Co-generation efficiency
5,500 Btu/kWh
Capital investment
$1000/kW
Current fuel price
$3.00/M Btu
Fuel price escalation
4%/yr (real)b
Plant capacity factor
75%
Plant lifetime
20 years
Real discount rate
6%c
Total new capacity
25,000 MW
aRepresentative values are based on information from the
following sources: California Energy Commission (1990), U.S.
Department of Energy (1984), Electric Power Research Institute
(1989), Larson and Williams (1985), and RCG (1991).
bThe
20-year levelization factor is 1.43.
cThe
20-year capital recovery factor is 0.0872.
Other Energy Savings
Industrial fuel savings from improvements to current process
operations are estimated using the results of three case studies of
energy-intensive industries (Ross, 1987; Larsen, 1990; K. C.
Nelson, Dow Chemical USA, Plaquemine, Louisiana, personal
communication, January 1991). These studies are used to estimate
the net cost of achieving different levels of total energy savings.
In the absence of more comprehensive data for the industrial
sector, rough estimates of the overall CO2 reduction potential for the industrial
sector are obtained by applying these results to current (1989)
CO2 emission.
1. Steel Mill (Ross, 1987). From Figure 22.9a
(Chapter 22), the most costly project has an incremental cost of
$14/t-yr and an energy savings of 3 percent. The reported total
specific energy for this plant is 31 MBtu/t; so the energy savings
is 0.93 MBtu/t. Assuming a project life of 10 years and a discount
rate of 6 percent (CRF = 0.136), the project investment cost is
$2.05/MBtu saved. Escalating this cost from 1982 dollars to the
present gives a cost of approximately $2.60/MBtu for a 25 percent
energy savings. Similarly, using Figure 22.9b for a 15 percent
savings, the cost is approximately $1.00/MBtu.
2. Petroleum Refinery (Larsen, 1990). Use Figure
22.9a and perform the same calculations as above. The reported
total specific energy for this plant is approximately 1.0 MBtu/bbl.
The cost of a 15 percent energy savings is then about $1.80/MBtu,
and the cost of a 25 to 30 percent savings is $2.70/MBtu (assuming
a 6 percent discount rate).
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3. Petrochemical Plant (Nelson, 1989, personal
communication, 1991). Use the data shown in Table 22.7 (Chapter
22). While no details of cost versus savings are available for
specific projects, the data give a rough indication of the capital
cost per unit of energy saved. For recent years an approximate
figure is $1.25/MBtu assuming a 6 percent discount rate and a
5-year project life. Assume this investment cost applies to an
overall energy savings in the neighborhood of 15 percent.
4. Overall Summary. Assume the results above apply
generally to the industrial sector. Because actual discount rates
used for industrial investments are substantially higher than the 6
percent value assumed here, many of the investments that are
possible still have not been made (e.g., see Table 29.2 for costs
at a 30 percent discount rate). To estimate net costs and CO2 reductions, use the current
fuel-weighted price of industrial energy of approximately
$3.00/MBtu and the current total of 1150 Mt CO2 from industrial fuel combustion (Edmonds
and Ashton, 1989). For a 15 percent overall energy savings the
average cost for the three cases above is $1.35/MBtu. The
fuel-weighted average CO2 emissions
are 0.07 t/MBtu. This yields a net cost of -$24/t at an overall
CO2 reduction of 173 Mt/yr. If a
real fuel price escalation were assumed, the net cost savings would
be still greater.
For a 30 percent overall energy savings, extend the (nonlinear)
steel plant data from 25 to 30 percent and average that cost with
the refinery data (which shows a generally linear slope). The
average investment cost is then about $3.05/MBtu. Use this as a
rough estimate. The net cost is then 5 cents/MBtu, assuming no
price escalation for the average fuel mix. This is equivalent to
about $1/t CO2 at an overall
reduction level of 345 Mt. With fuel price escalation the net cost
would be slightly negative for a 6 percent discount rate,
indicating an overall savings from the energy efficiency
investments.
Note
1. Throughout this report, tons (1) are metric; 1 Mt = megaton =
1 million tons.
References
Ayres, R. U. 1990. Energy conservation in the industrial sector.
In Energy and the Environment in the 21st Century: Proceedings of a
Conference at Massachusetts Institute of Technology. Cambridge,
Mass.: MIT Press.
Barakat and Chamberlin, Inc. 1990. Efficient Electricity Use:
Estimates of Maximum Energy Savings. Report EPRI CU-6746. Prepared
by Barakat and Chamberlin, Inc. for Electric Power Research
Institute. Palo Alto, Calif.: Electric Power Research
Institute.
Page 726
California Energy Commission. 1990. Staff Testimony on
qualifying Facilities/Self-Generation Forecast. Docket No. 88-ER-8.
Sacramento, Calif.: California Energy Commission.
Edmonds, J., and W. Ashton. 1989. A Preliminary Analysis of U.S.
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Electric Power Research Institute. 1990. New push for energy
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Larsen, W. G. 1990. Energy Conservation in Petroleum Refining.
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