Skip to main content

Advertisement

SpringerLink
Log in

Return on investment from industrial energy efficiency: evidence from developing countries

  • Original Article
  • Published:
Energy Efficiency Aims and scope Submit manuscript

Abstract

Energy efficiency is a foundation of any good energy policy. The economic, security, and environmental benefits of energy efficiency have been recognized for decades. We explore energy efficiency investments derived from survey work in developing countries in 119 projects across nine manufacturing subsectors. The methodology utilizes financial return calculations to highlight gaps and opportunities for meeting the potential of energy efficiency projects in the manufacturing sector. We find a generally very high level of internal rates of return at a project level—with payback periods ranging from 0.9 to 2.9 years; but note that these metrics do not always appropriately influence corporate decision-making for a number of well-understood reasons.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. The sample includes firms from different industries: food manufacturing, building materials, steel manufacturing, paper manufacturing, chemicals manufacturing, and textile manufacturing.

  2. Follow-up phone and face-to-face interviews were conducted with selected firms to deepen the understanding of their investment decision-making and EE operations.

  3. Investments in EE projects totaled US$613.7 million, and individual investments ranged from US$100 to 73 million (UNIDO 2011).

  4. Profitability is in the study proxied by a standard measure of price–cost margin, defined as value added net of labor costs over total production.

  5. World Bank enterprise surveys are conducted regularly in a large number of developing countries. Details of the database are available at www.enterprisesurveys.org/.

  6. Firm level variables included age, number of workers, value of investment in equipment, ownership (foreign or domestic) and whether the company exported or had ISO 90000 certification for good management practices (Cantore and Cali 2011).

  7. A significance level of 5 % is accepted as the highest level where the null hypothesis is still rejected.

  8. Cantore and Cali (2011) takes this as evidence of a no-trade off relationship between the adoption of energy saving technologies and profitability irrespective of the country’s average adoption rate of energy saving techniques in firms. A comprehensive debate on the optimal timing of the adoption of new technologies exists in the economic literature (see, e.g., Choi 1994; Farrell and Saloner 1986; Koski and Nijkamp 2000).

References

  • Abadie, L. M., Ortiz, R. A., & Galarraga, I. (2012). Determinants of energy efficiency investments in the US. Energy Policy, 45, 551–566.

    Article  Google Scholar 

  • Ayers, R. U. (2010). If energy efficiency pays, why is it not happening? Background paper prepared for the UNIDO 2011 Industrial Development Report. Vienna: United Nations Development Organization.

    Google Scholar 

  • Banerjee, R. (2005). Energy efficiency and demand side management (DSM) in India. Background paper submitted to Integrated Energy Policy Committee, Government of India 2005.

  • Barney, J. B. (2001). Resource-based theories of competitive advantage: a ten year retrospective of the resource-based view. Journal of Management, 27(6), 643–650.

    Article  Google Scholar 

  • Brealey, R. A., Myers, S. C., & Allen, F. (2008). Principles of corporate finance (9th ed.). New York: McGraw Hill.

    Google Scholar 

  • Cantore, N. (2011). Synthesis: Energy efficiency in developing countries for the manufacturing sector. Vienna: United Nations Industrial Development Organization. WP 15/2011.

    Google Scholar 

  • Cantore, N., & Cali, M. (2011). Profitability and energy efficiency: a firms fixed effect approach. In N. Cantore (Ed.), Synthesis: Energy efficiency in developing countries for the manufacturing sector. Vienna: United Nations Industrial Development Organization. WP 15/2011.

    Google Scholar 

  • Choi, J. P. (1994). Irreversible choice of uncertain technologies with network externalities. The RAND Journal of Economics, 25(3), 382–401.

    Article  Google Scholar 

  • Decanio, S. J. (1993). Barriers within firms to energy-efficient investments. Energy Policy, 21(9), 906–914.

    Article  Google Scholar 

  • Decanio, S. J. (1998). The efficiency paradox: bureaucratic and organizational barriers to profitable energy-saving investments. Energy Policy, 26(5), 441–454.

    Article  Google Scholar 

  • De Simone, G. (2010). Industrial energy efficiency in Colombian and Peruvian companies. Background paper prepared for the 2011 Industrial Development Report. Vienna: United Nations Industrial Development Organization.

    Google Scholar 

  • Ellingson, M., & Hunter, L. (2010). Compendium of best practices: sharing local and state successes in energy efficiency and renewable energy from the United States. Vienna: Renewable Energy and Energy Efficiency Partnership; Washington, DC: Alliance to Save Energy; Washington, DC: American Council on Renewable Energy.

  • Farrell, D., & Remes, J. (2009). Promoting energy efficiency in the developing world. McKinsey Quarterly Economic Studies, February.

  • Farrell, D., Remes, J., Bressand, F., Laabs, M., & Sundaram, A. (2008). The case for investing in energy productivity. New York: McKinsey Global Institute.

    Google Scholar 

  • Farrell, J., & Saloner, G. (1986). Installed base and compatibility: innovation, product preannouncements, and predation. American Economic Review, 76(5), 940–955.

    Google Scholar 

  • Fokeer, S. (2010). Industrial energy efficiency in Tunisian companies. Background paper prepared for the 2011 Industrial Development Report. Vienna: United Nations Industrial Development Organization.

    Google Scholar 

  • Gielen, D. (2009). Design of a financing instrument for energy efficiency and renewables in Indian SMEs. Vienna: United Nations Industrial Development Organization.

    Google Scholar 

  • Ghosh, D., & Roy, J. (2011). Approach to energy efficiency among micro, small and medium enterprises in India: Results of a field survey. Vienna: United Nations Industrial Development Organization. WP 08/2011.

    Google Scholar 

  • Gudowska-Nowak, E., Papp, G., Brickmann, J., & Thompson, P. B. (1997). Evaluating energy efficiency investments: accounting for risk in the discounting process. Energy Policy, 25(12), 989–996.

    Article  Google Scholar 

  • Harris, J., Anderson, J., & Shafron, W. (2000). Investment in energy efficiency: a survey of Australian firms. Energy Policy, 28(12), 867–876.

    Article  Google Scholar 

  • Hu, Y. (2012). Energy conservation assessment of fixed-asset investment projects: an attempt to improve energy efficiency in China. Energy Policy, 43, 327–334.

    Article  Google Scholar 

  • Jackson, J. (2010). Promoting energy efficiency investments with risk management decision tools. Energy Policy, 38(8), 3865–3873.

    Article  Google Scholar 

  • Jochem, E., & Gruber, E. (2007). Local learning-networks on energy efficiency in industry—successful initiative in Germany. Amsterdam: Elsevier.

    Google Scholar 

  • Koski, H., & Nijkamp, P. (2000). Optimal timing of adoption of network technologies. Ricerca Operativa, 29(90), 3–38.

    Google Scholar 

  • Le, H. V. (2010). Industrial energy efficiency in Vietnamese companies. Background paper prepared for the 2011 Industrial Development Report. Vienna: United Nations Industrial Development Organization.

    Google Scholar 

  • Lefley, F. (1996). The payback method of investment appraisal: a review and synthesis. International Journal of Production Economics, 44(3), 207–224.

    Google Scholar 

  • MacLean, J., Tan, J., Tirpak, D., Sonntag-O’Brien, V., & Usher, E. (2008). Public finance mechanisms to mobilise investment in climate change mitigation: An overview of mechanisms being used today to help scale up the climate mitigation markets, with a particular focus on the clean energy sector. Nairobi: United Nations Environment Programme, Sustainable Energy Finance Initiative.

    Google Scholar 

  • Makinson, S. (2006). Public finance mechanisms to increase investment in energy efficiency. Basel: United Nations Environment Programme, Basel Agency for Sustainable Energy.

    Google Scholar 

  • Masselink, D. J. (2009). Industrial energy efficiency in Nigerian companies. Background paper prepared for the 2011 Industrial Development Report. Vienna: United Nations Industrial Development Organization.

    Google Scholar 

  • Masselink, D. J. (2010). Barriers to investments in industrial energy efficiency: Focus on developing countries. Background paper prepared for the 2011 Industrial Development Report. Vienna: United Nations Industrial Development Organization.

    Google Scholar 

  • Nair, G., Gustavsson, L., & Mahapatra, K. (2010). Factors influencing energy efficiency investments in existing Swedish residential buildings. Energy Policy, 38(6), 2956–2963.

    Article  Google Scholar 

  • Nelson, K.E. (1989). Are there any energy savings left? Chemical Processing, January.

  • Nelson, R. R., & Rosenberg, N. (1993). National innovation systems: A comparative analysis. New York: Oxford University Press.

    Google Scholar 

  • Okafor, E. E. (2008). Development crisis of power supply and implications for industrial sector in Nigeria. Journal of Tribes and Tribals, 6(2), 83–92.

    Google Scholar 

  • Prindle, W. R. (2010). From shop floor to top floor: Best business practices in energy efficiency. Arlington, VA: PEW Center on Global Climate Change.

    Google Scholar 

  • Remer, D. S., & Nieto, A. P. (1995). A compendium and comparison of 25 project evaluation techniques. Part 2: ratio, payback, and accounting methods. International Journal of Production Economics, 42(2), 101–129.

    Article  Google Scholar 

  • Rohdin, P., Thollander, P., & Solding, P. (2007). Barriers to and drivers for energy efficiency in the Swedish foundry industry. Energy Policy, 35(1), 672–677.

    Article  Google Scholar 

  • Sandberg, P., & Söderström, M. (2003). Industrial energy efficiency: the need for investment decision support from a manager perspective. Energy Policy, 31(15), 1623–1634.

    Article  Google Scholar 

  • Sanstad, A. H., Blumstein, C., & Stoft, S. E. (1995). How high are option values in energy-efficiency investments? Energy Policy, 23, 739–743.

    Article  Google Scholar 

  • Scott, M. J., Roop, J. M., Schultz, R. W., Anderson, D. M., & Cort, K. A. (2008). The impact of doe building technology energy efficiency programs on U.S. employment, income, and investment. Energy Economics, 30(5), 2283–2301.

    Article  Google Scholar 

  • SEFI (Sustainable Energy Finance Initiative) (2011). Global trends in sustainable energy investment 2010. Nairobi: United Nations Environment Programme, Sustainable Energy Finance Initiative; London: Bloomberg New Energy Finance.

  • Sethi, G., & Ghosh, A. M. (2008). Towards cleaner technologies: A process story in the firozabad glass industry cluster (p. 238). New Delhi: The Energy and Resources Institute.

    Google Scholar 

  • Sorrell, S., Mallet, A., & Nye, S. (2011). Barriers to industrial energy efficiency: A literature review. Vienna: United Nations Industrial Development Organization. WP 11/2011.

    Google Scholar 

  • Taylor, R. P., Govindarajalu, C., Levin, J., Meyer, A. S., & Ward, W. A. (2008). Financing energy efficiency: Lessons from Brazil, China, India, and Beyond. Washington, DC: World Bank.

    Book  Google Scholar 

  • Teece, D. (1981). Internal organization and economic performance: an empirical analysis of the profitability of principal firms. The Journal of Industrial Economics, 30(2), 173–199.

    Article  Google Scholar 

  • Tonn, B., & Peretz, J. H. (2007). State-level benefits of energy efficiency. Energy Policy, 35(7), 3665–3674.

    Article  Google Scholar 

  • UNECE (United Nations Economic Commission for Europe) (2010). Financing Global Climate Change Mitigation. Geneva.

  • UNEP (United Nations Environment Programme) (2006). Improving energy efficiency in industry in Asia: A review of financial mechanisms. Nairobi.

  • UNIDO (United Nations Industrial Development Organization). (2011). Industrial energy efficiency for sustainable wealth creation: Capturing environmental. Vienna: Economic and Social Dividends.

    Google Scholar 

  • USDOE (United States Department of Energy) (2010). Industrial technologies program. Washington, DC. Available at: www1.eere.energy.gov/industry.

  • Vine, E. L. (2003). An international survey of the energy service company (ESCO) industry. Berkeley, CA: Lawrence Berkeley National Laboratory.

    Google Scholar 

  • Waide, P., & Buchner, B. (2008). Utility energy efficiency schemes: savings obligations and trading. Energy Efficiency, 1(4), 297–311.

    Article  Google Scholar 

  • Weber, L. (1997). Some reflections on barriers to the efficient use of energy. Energy Policy, 25(10), 833–835.

    Article  Google Scholar 

  • Worrell, E., Laitner, J. A., Ruth, M., & Finman, H. (2001). Productivity benefits of industrial energy efficiency. Berkeley, CA: Lawrence Berkeley National Laboratory.

    Google Scholar 

  • Worrell, E., van Berkel, R., Fengqi, Z., Menke, C., Schaeffer, R., & Williams, R. (2001). Technology transfer of energy efficient technologies in industry: a review of trends and policy issues. Energy Policy, 29(1), 29–43.

    Article  Google Scholar 

Download references

Disclaimer

The views expressed herein are those of the author(s) and do not necessarily reflect the views of the United Nations Industrial Development Organization.

Author information

Authors and Affiliations

  1. United Nations Industrial Development Organization, Wagramer Strasse 5, P.O. Box 300, 1400, Vienna, Austria

    Ludovico Alcorta, Morgan Bazilian, Giuseppe De Simone & Ascha Pedersen

Authors
  1. Ludovico Alcorta
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Morgan Bazilian
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Giuseppe De Simone
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Ascha Pedersen
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ascha Pedersen.

Appendix

Appendix

Table 4 Profitability and energy efficiency
Full size table
Table 5 Profitability and energy efficiency, regressions by manufacturing sector
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Alcorta, L., Bazilian, M., De Simone, G. et al. Return on investment from industrial energy efficiency: evidence from developing countries. Energy Efficiency 7, 43–53 (2014). https://doi.org/10.1007/s12053-013-9198-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12053-013-9198-6

Keywords

Search

Navigation