| TOPIC PAPER #5 INDUSTRIAL EFFICIENCY On July 18, 2007, The National Petroleum Council (NPC) in approving its report, Facing the Hard Truths about Energy, also approved the making available of certain materials used in the study process, including detailed, specific subject matter papers prepared or used by the Task Groups and their Subgroups. These Topic Papers were working documents that were part of the analyses that led to development of the summary results presented in the report's Executive Summary and Chapters. These Topic Papers represent the views and conclusions of the authors. The National Petroleum Council has not endorsed or approved the statements and conclusions contained in these documents but approved the publication of these materials as part of the study process. The NPC believes that these papers will be of interest to the readers of the report and will help them better understand the results. These materials are being made available in the interest of transparency. The attached Topic Paper is one of 38 such working document used in the study analyses. Also included is a roster of the Subgroup that developed or submitted this paper. Appendix E of the final NPC report provides a complete list of the 38 Topic Papers and an abstract for each. The printed final report volume contains a CD that includes pdf files of all papers.These papers also can be viewed and downloaded from the report section of the NPC website (www.npc.org).
Executive Summary This report presents the findings of the Industrial Efficiency Subgroup of the NPC Global Oil & Gas Study Demand Task Group. The subgroup examined industrial energy use trends, the potential impact of energy efficiency technologies, and barriers to their adoption. The industrial sector is a large and price responsive consumer of energy. As a result, its future is uncertain. The industrial sector consumes roughly one third of the energy used in the United States. US energy intensive industry and manufacturers in associated value chains rely on competitive natural gas supplies to remain globally competitive. As naturalgas prices have risen in the US, manufacturers with energy intensive processes have responded in two ways: 1) by increasing the efficiency of their operations, and/or 2) by shifting a greater proportion of energy intensive industry outside the US. The future US industrial demand for energy, particularly natural gas, is uncertain. Credible scenarios would result in increases in industrial energy consumption, and others in decreases. As a result, the fraction of the world’s energy used by manufacturers in currently developing markets is equally uncertain. There are significant impediments to greater industrial efficiency. First, US government funded energy R&D has fallen at least 70% in real terms from its peak in the late 1970’s. Second, price volatility makes approval of efficiency projects difficult. Finally, lack of adequate technically trained human resources impedes implementation of efficiency projects. Energy efficiency opportunities of 5 Quad’s/yr, or over 15% of industrial energy use, exist broadly across the industrial sector. While 40% could be implemented now, further research and development is required to implement the rest. Fostering research, development, demonstration and deployment of energy efficiency technologies and practices in the industrial sector could significantly reduce industrial energy demand. Areas of opportunity include waste heat recovery, separations and combined heat and power. Making the research and development tax credit permanent will encourage private investment in industrial energy efficiency. Industrial energy consumers play an important role in mitigating energy price volatility.Manufacturing provides a quick acting buffer against supply or demand shocks in the energy industry. However, this role has been reduced as the U.S. capability for fuel switching has fallenover the past ten years, in both the power generation and industrial sectors. Relying too heavily on natural gas for power generation could tighten supply demand balances, exacerbating already high volatility, and further displace energy intensive manufacturing. Supporting indigenous fuel sources will better match US needs for power with its energy endowment. The ability to import fuel and switch fuel type will reduce volatility in times of domestic supply interruption. Offsetting demand growth through energy efficiency and conservation could help avoid difficult tradeoffs. Policymakers should consider policies that encourage energy efficiency improvements, including metrics to measure progress. US science education programs should be strengthened and incentives offered to aid those seeking engineering and other technical degrees. Framing Questions / ApproachThis report addresses the following major questions based on a review of publicly available studies and projections (see reference section): 1. How do trends in industrial energy use affect prospects for the US and global economies? 2. What is the potential impact of energy efficiency technologies (existing and emerging) on industrial energy consumption?
Findings Industrial energy use trends: Ø The industrial sector consumes roughly one third of the energy used in the United States, over 30 Quad’s/yr including electricity losses. Ø US energy intensive industry and manufacturers in associated value chains rely on competitive natural gas supplies to remain globally competitive. Ø As natural gas prices have risen in the US, manufacturers with energy intensive processes have responded in two ways: 1) by increasing the efficiency of their operations, and/or 2) by shifting a greater proportion of energy intensive industry outside the US. Ø The future US industrial demand for energy, particularly natural gas, is uncertain. Credible scenarios would result in increases in industrial energy consumption, and others in decreases. The fraction of the world’s energy used by manufacturers in currently developing markets is equally uncertain. Role of industrial energy users in the broader energy economy: Ø Manufacturing provides a quick acting buffer against supply or demand shocks in the energy industry. Ø The U.S. capability for fuel switching has fallen over the past ten years, in both the power generation and industrial sectors. Fuel switching in the short term and diverse sources of energy in the longer term will mitigate price volatility. Efficiency opportunities: Ø Energy efficiency opportunities of 5 Quad’s/yr, or over 15% of industrial energy use, exist broadly across the industrial sector. While 2 out of the 5 quads/yr could be implemented now, further research and development is required to implement 3 Quad’s/yr. of these opportunities. Ø The EIA’s AEO 2006 reference case projects an almost 40% reduction in energy intensity per dollar of real GDP over the next 25 years, with a 5% increase in efficiency. Ø Despite its thermal efficiency advantages, CHP implementation in the US industrial sector totals 72 GW, which is about 50% of the total potential for CHP in the industrial sector. Impediments to greater industrial efficiency: Ø US government funded energy R&D has fallen 70% in real terms from its peak in the late 1970’s. Ø Price volatility impedes implementation of efficiency projects. Ø Lack of adequate technically trained human resources impedes implementation of efficiency projects. Proposed Policy Options Ø The US should adopt a national goal to improve energy efficiency, and fund research, development and deployment (RD&D) of industrial energy efficiency improvements. Ø US science education programs should be strengthened, and incentives offered to aid those seeking engineering and other technical degrees. Ø Incentives should be provided for private investment in energy efficiency, and the R&D tax credit should be made permanent. Ø Incentives should be provided for increasing fuel diversity and fuel switching. Ø Longer term, government should partner with industry and academia to help fund research, development and deployment of viable alternative energy sources, including clean coal technology, combined heat and power, advanced nuclear power, and renewables. 
Organization The Industrial Efficiency Subgroup is an integral part of the National Petroleum Council Global Oil & Gas Study Demand Task Group and includes team members from Dow Chemical (Edward Stones and Michelle Noack) and Texas Industries of the Future (Kathey Ferland). Grateful acknowledgement is also made to Bill Finger of Cambridge Energy Research Associates, Keith Barnett of Merril Lynch, Karl Bletzacker of American Electric Power, Lowell Ungar of the Alliance to Save Energy and Tom Eizember of Exxon Mobil. Background Industrial Energy Use Trends The industrial sector consumes roughly one-third of the energy used in the United States, over 30 quadrillion BTUs per year (including electricity related losses). The manufacturing sector accounts for most of industrial demand, where energy is used as both fuel and feedstock. As energy prices have risen in the US, manufacturers with energy intensive processes have responded in two ways: 1) by increasing the efficiency of their operations (shown as intensity on the graph below), and/or 2) by shifting a greater proportion of energy intensive industry outside the US (shown by flat to declining industrial use).
Despite this increase in efficiency, energy-intensive manufacturers in the U.S. struggle to remain competitive in a global marketplace. Manufacturers are investing for strategic growth in regions of the world where energy costs are lower. For example, over the last 10 years, the U.S. has gone from one of the world's largest exporter of chemicals to an importer. Although less dramatic, trends are similar in the paper and metals industries. The following chart tracks the aggregate trade balance for the steel, paper and chemicals industries compared to the price of natural gas. The correlation between the two data series is = 89%, showing clearly that high has prices have hurt US competitiveness in these industries. Among other studies, The Escalating Cost Crisis - An Update on Structural Cost Pressures Facing U.S. Manufacturers and Lost US Manufacturing - the Impact on the Business of Chemistry detail the effect of high and volatile natural gas prices on US manufacturing competitiveness, and suggest a loss of 157,000 chemical industry jobs by 2015. In the second study, Acenture concluded: Chemical and energy represent 10% of the costs of the 17 industries Accenture analyzed in this groundbreaking study. Since these industries have total revenues of almost USD 4 trillion, it is plainly imperative that the US chemical industry remains viable. Making hydrocarbons available at competitive prices and encouraging legislation that favors domestic chemicals investment would go a long way to ensuring the industry's future.  US industry is at a cross-road today. The US can no longer competitively export energy intensive products (chemicals, steel, etc.), but the extent to which US industry can continue to compete for the domestic market is unclear. In refining also, future trends in import balances are uncertain. Although imports have provided 40% of the increase in gasoline use over the last 10 years, this may not continue (EIA, Supply and Disposition of gasoline tables). Other factors such as the macro supply and demand balances for oil and natural gas, geopolitical issues, the advent of disruptive technologies, and the evolution of the world’s economies are unknown. The uncertainty in US industrial energy consumption carries through to global balances: since consumption is unlikely to decline, product needs which are unmet by local production will be met by imports. Projecting historical industrial energy patterns forward may illustrate this uncertainty. In the first scenario (called Stays), industrial use grows as it did between 1983 and 1996. In the second (Flight), industrial consumption declines as it did between 1996 and 2005. These projections are intended to bound the AEO base case projection. Energy use growth rates for each are shown below and depicted in the following figure. | Growth Rates: 1949- 1973 1996- 2005 1983- 1996 Base 2005-30 Flight 2005-30 Stays 2005-30 | Total Energy 3.0% -1.1% 1.7% 0.7% -1.1% 1.7% | Oil 3.9% 0.5% 1.4% 0.4% 0.5% 1.4% | Gas 4.8% -2.2% 2.7% 0.7% -2.2% 2.7% | | Source: EIA Table 2.1.d Industrial Sector Energy Consumption, 1949-2005 and AEO 2007 - Report #:DOE/EIA-0383(2007). Note: Growth rates average 2004/2005 values as a starting point to minimize the impact of hurricanes Katrina and Rita on growth rate calculations |
How Industrial Energy Demand Affected the US Energy Markets
Manufacturing provides a quick acting buffer against supply or demand shocks in the energy industry, which would be threatened if manufacturing’s share of energy consumption declines further. Historically, if demand rose or supply fell, price sensitive manufacturing reduced its energy consumption, mitigating price increases felt by other consumers. If industrial users become a smaller portion of the US energy economy, their ability to dampen energy price volatility will be greatly reduced. In turn, as price volatility increases, the attractiveness of the US as a base for energy intensive industrial manufacturing would be further eroded. As more industry left, the volatility would get worse. The following chart shows the industrial response to the 2005 hurricane season, in which industrial demand was reduced by ~1000 BCF over the period July 2005- November 2006. MMS reported in their final Shut In Report (June 19, 2006) that 940 BCF of gas had been shut in by Katrina and Rita in federal waters. Hence it appears that industry absorbed much of the effect of the 2005 hurricanes on natural gas production. 
The U.S. capability for fuel switching has fallen over the past ten years, in both the power generation and industrial sectors. Many projections envision lower industrial buffering of energy shocks in the future. Since individual fuel (oil, gas, coal, etc.) supply, demand and prices are highly volatile, flexibility in fuel choice mitigates price spikes during periods of market tightness. In short, if one fuel becomes scarce, its price rises, which causes those with flexibility to use other fuels, reducing the extent to which the scarce fuel’s price rises. Without buffering by industry, the effect of supply or demand shocks would be felt more directly by retail consumers. Industry relies on stable and secure energy sources in both the short and the long term. Encouraging fuel switching in the short term and alternate sources of energy in the longer term are necessary steps towards this stability.
Efficiency opportunities Bandwidth studies conducted for the U.S. Department of Energy on the most energy intensive manufacturing sectors (chemical, petroleum and forest products industries) suggest energy efficiency opportunities of up to 5 Quad’s/yr, or just under 15% of 2005 industrial energy use. Of these opportunities, approximately 2 Quad’s/yr are available without significant research. Adopting existing technology for combined heat and power systems and implementing best practices for steam systems would each yield savings of about 1 Quad/yr without requiring significant research. Despite its thermal efficiency advantages, CHP implementation in the US industrial sector totals 72 GW, which is about 50% of the total potential for CHP in the industrial sector (CHP Installation Database and Onsite Energy, 2000) 
PART 2 COMING IN AUGUST 2009
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