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It’s time to move industrial energy efficiency beyond the rational economic model

The industrial manufacturing sector consumes one third of the world’s energy. International studies have found a potential for improvement of 15 to 20% in industrialized countries, which represents significant opportunities for energy efficiency.

Over the years, policy makers and program planners have developed a range of options to encourage energy efficiency in industry. The logic of most energy efficiency programs and policies assumes that industrial energy efficiency decisions will be based on the economics. Thus, if an energy saving action is in the financial interest of the organization, it will likely be undertaken. This rational economic model logic consists of two steps: 1) provide sufficient information to the decision makers, and 2) provide an incentive to perform the energy efficiency actions.

But numerous studies show significant economic potential has not been realized. Clearly, the rational economic model is only one part of industrial behaviour, and yet this model remains dominant in the industry, limiting efficiency achievements.

The impact of non-economic factors
The rational economic model does not take into account non-economic factors that may be driving decisions. Generally, industrial decision-making around energy efficiency will be influenced by the business models of the company, competitive factors, regulatory constraints, and the economic conditions in which each organization operates.

Risk aversion or concern about meeting quality or regulatory metrics is another important non-economic factor. Manufacturers are risk-averse to investing in capital-intensive experimental technologies. If the technology does not succeed, they could lose years of planning as well as fail to meet regulatory requirements. Manufacturers are more likely to make smaller replacements in their plants that may easily be undone if the replacement fails.

Highly regulated industries tend to be especially unwilling to make changes that increase even slightly the risk of non-compliance. For example, public water and wastewater treatment plant operations managers are highly risk-averse to making changes. The advantage of a cost reduction in energy bills may not be sufficient to overcome the public and personal risk of a temporary failure to meet discharge requirements. If discharge requirements are not met, there could be fines, negative publicity and a sense of failure of civic duty. The positive consequences of the cost reduction would barely be noticed by anyone, but failure could be highly embarrassing. The industry is rife with examples of situations like this, where rational economics break down.

The field of behavioral economics has developed a body of knowledge on decision-making. Psychologists have shown that rationality in human decision-making does not always best describe how decisions are made. Daniel Kahneman and other behavioral scientists in the economics field have identified common patterns that may result in decisions that don’t reflect the economic value of the project.

Policies that move beyond the limitations of the rational economic model and harness the power of industry’s needs can realize more of the potential for efficiency in the industrial sector. For example, energy management systems and energy culture change both engage industry decision-making more broadly, and provide methodologies to expand decision-making rationale. The challenge that companies like DNV GL face is to continue to develop ways to apply behavioral methods to energy efficiency policy, moving beyond the rational economic model in order to influence untapped savings in industrial markets.

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