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The energy efficiency gap

As everyday Australians battle to absorb the cost of electricity price rises, part of the answer to reducing energy costs may lie with business. UTS Business School PhD student Patrick Crittenden explains how better support for corporate energy efficiency programs may mean lower electricity bills for us all, and reduce greenhouse gas emissions along the way.

We might reasonably expect businesses to do all they can to reduce their operating expenses. However, there is plenty of evidence to suggest this is not typically the case when it comes to managing energy use.

Energy has long been treated as a fixed cost even though there is much that firms can do to reduce their energy use while maintaining, or even improving, the delivery of their products and services. The difference between actual and optimal energy use in firms is commonly referred to by researchers as the ‘energy efficiency gap’.

By using more energy than they need, firms contribute to higher energy prices as additional investment is required in energy infrastructure, such as electricity poles and wires. Also, as the International Energy Agency continues to highlight, energy efficiency is the best chance we have to reduce greenhouse gas emissions in the short term because in many cases appropriate technology is available and much of it is cost effective.

So why aren’t firms implementing more energy efficiency projects when they can reduce their operating costs and benefit their bottom line? Researchers have been interested in that question since the energy crisis of the 1970s, when oil prices rose rapidly and dampened economic growth in many countries.

However, much of the research that has been done borrows assumptions about change in organisations from conventional economic theory. That is, decision makers in organisations are assumed to be ‘rational’ – acting in the best interests of their firms and driven by ‘market forces’. Recent history has demonstrated this isn’t always the case. And yet many policies focus on price and other market factors as the primary mechanism for changing industry practises.

The carbon tax is one such example. By putting a price on carbon dioxide and other greenhouse gas emissions, the price of more carbon-intensive products and services is intended to rise. As a result, it is assumed managers will select less carbon-intensive products and services because they will be relatively cheaper. Since much of Australia’s energy use is generated by coal-fired power stations, the carbon tax should improve the financial case for implementing energy efficiency projects as electricity prices rise.

Public reports from companies required to assess their energy use under the Energy Efficiency Opportunities Act (2006), show they have identified projects with a good financial return that have the potential to reduce their energy use by an average of 10 per cent.

If implemented, these projects would reduce Australia’s total energy use by 2.4 per cent and reduce greenhouse gas emissions. Analysis of the 252 corporations that had publicly reported at the end of 2011, shows corporations had only implemented around half of the energy savings they had identified.

These results continue to raise questions about why so many cost-effective energy efficiency projects have yet to be implemented and the extent to which a carbon price is likely to encourage energy efficiency in firms when profitable projects are already available.

When I commenced my PhD research to examine these questions, I was surprised to find there were very few studies examining the practises of managers charged with delivering energy efficiency improvement in their organisations. I call them ‘energy efficiency practitioners’.

As part of my research, I analysed the case studies presented by company representatives of 20 firms at public workshops hosted by the Australian Government in September last year. Their experiences provide further evidence that while price signals are important, they will only go part of the way towards encouraging the implementation of energy efficiency projects in firms.

For example, there are challenges associated with influencing the mind set of senior managers in firms. Often these managers are unfamiliar with, and even disinterested in, energy efficiency.

Change practices applied by practitioners include conducting regular management briefings on the business risks associated with the introduction of the carbon price, the future impact of rising energy costs and the wider business benefits delivered through energy efficiency projects already implemented in the organisation.

Many described a level of initial disbelief by senior managers who assumed energy costs were already well managed as a part of everyday operational practices.

The case studies also described a number of challenging structural issues within firms. In some cases the up-front investment in energy efficiency comes from the budget of one department, with the benefits accruing to another. Also, investment criteria may encourage investment in core business priorities rather than energy- and cost-saving projects.

Successful practitioners are implementing change management strategies that include establishing cross-functional teams, organisation-wide communication programs, and some even managed to modify existing capital expenditure procedures to improve access to the funding required to implement their energy efficiency projects.

Organisational challenges such as these highlight the need for policies that address organisational barriers and management capability, as well as price and market failures. Although the government rationale for the Energy Efficiency Opportunities Act (2006), has been to ensure decision makers have the information they need to make informed decisions on energy projects, the case studies highlight ways in which the legislation has helped to address other organisational barriers as well.

For example, by requiring firms to involve people with appropriate expertise from across the organisation in the energy efficiency assessment process, firms are encouraged to address the functional and professional boundaries that typically limit the identification and implementation of energy efficiency projects.

For companies themselves, the case studies highlight the importance of establishing comprehensive management systems to manage energy use. These must go beyond the traditional approach to energy efficiency which typically involves engineers or technical officers working in isolation to identify and quantify the energy savings associated with energy efficiency benefits.

Considering the organisational barriers described in the case studies, it’s no surprise such approaches lead to reports being left on the shelf rather than supporting the implementation of projects. Managers need to communicate the multiple benefits of energy efficiency projects, including reducing the costs associated with the carbon price and rising energy prices. Structural changes may also be needed to ensure decisions can be made based on what is best for the firm rather than what is best for particular individuals or divisions.

In conclusion, the current debate about the carbon tax and Australia’s transition to a low-carbon economy has focused on the costs to business. Instead, there should be closer scrutiny of the unrealised energy saving opportunities that have been available to businesses for some time and which will be even more compelling with the introduction of a carbon tax.

Without firms optimising their energy use they will continue to undermine their own competitiveness and contribute to higher energy prices for us all.

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