Energy Efficiency Opportunities in Manufacturing Could Increase GDP

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Saturday, May 30th, 2015
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Two key focus areas of the Federal Government are increasing Australia’s GDP and enhancing its manufacturing sector.

Yet since the last election, car manufacturing giants Toyota, Holden and Ford have announced closures of their Australian plants, resulting in the loss of up to 50,000 direct skilled jobs, $21 billion of GDP and imminent recessions in several regions. Additionally, in the 2014 budget, the abolition of the Innovation Investment Fund (IIF) and Commercialisation Australia were announced. IIF funds manufacturing innovation precinct META and food innovation precinct FIAL, both designed to transform these key Australian industries into global leaders.

In an attempt to reduce Australia’s deficit, the Federal Government has been snapping up low-hanging fruit by cutting funding in health, education, innovation, arts and foreign aid. On Sunday, May 18, tens of thousands of protestors gathered around the country to demonstrate anger at the cuts, revealing growing concern for Australia’s future.

Yet one key opportunity is being neglectfully overlooked.

Australia’s building energy waste costs the country billions of dollars per year and reduces economic growth potential. If the country were able to increase energy efficiency by a mere one per cent, it would increase GDP growth by 0.1 percentage points, roughly equivalent to $1.5 billion per year. This is an opportunity that businesses can take up, even without government support. With that in mind, what is preventing them from reaching for this particular low-hanging fruit?

ClimateWorks Australia produced a report back in December 2012 highlighting sectors where the highest energy savings could be made. It identified the manufacturing sector as presenting the biggest opportunity to Australian GDP, with most projects identified having a payback period of two years. However, when questioned as to why they were not taking up these savings, CEOs gave reasons such as lack of access to internal capital and external finance, lack of skills and capacity to implement projects and lack of policy support. Payback periods and opportunity costs were also identified as barriers.

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The Federal Government’s Direct Action, Emissions Reductions Fund (ERF) white paper was released on April 24. Robin Archibald, COO of Ecosave, Australia’s largest independent Energy Services Company (ESCO), attended Greg Hunt’s briefing to the Energy Efficiency Council (EEC) on the paper, to find out how new policy would affect energy efficiency.

“Under the ERF scheme, businesses will be offered a contract by the government to purchase Carbon Credit Units (CCUs) for five years,” Archibald said.

“The scheme administrator will run a series of Reverse Auctions to determine the price the government is prepared to pay for CCUs. Pricing information will be announced after each Reverse Auction and market expectations for the value of CCUs will be set accordingly. The CCUs will initially come from the Carbon Farming Initiative. We are looking forward to seeing the outcome of the first ERF Reverse Auction process, but have some concerns over whether value attributed to CCUs will provide sufficient incentive to stimulate activity in the energy efficiency space.”

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Can lack of policy really be considered a hindrance if other potential barriers for business are removed? Is access to information the bigger problem? Archibald addressed the concerns raised by CEOs in the ClimateWorks report.

“Some ESCOs now offer project financing, new technologies that provide greater savings, full project management services and guarantees that savings will be delivered,” he said.

The guarantees Archibald mentions come from an ESCO’s rigorous management of a client’s energy consumption after upgrades have been implemented. If the savings are not meeting expectations, the project is immediately reviewed by the ESCO.

Additionally, with delivery models such as Ecosave’s, businesses receive a free energy assessment and a business case with the potential savings. They are able to start seeing the savings straight away, with no financial contribution required upfront. Ecosave recently worked with legal and financial partners to create a unique financing model that allows energy efficiency projects to be categorised as an operating expense rather than a capital expense, which effectively means that the projects are taken off balance sheet.

Primo and Visy are examples of manufacturers that have recently benefited from energy efficiency projects. Improvements have included refrigeration plant upgrades, HVAC and voltage optimisation, lighting upgrades and boiler, steam and hot water upgrades, where energy was saved through waste heat recovery. This project generated savings of $1.4 million per year and was partially funded by the Clean Technology Investment Program (CTIP). Another project was a lighting upgrade and refurbishment project which generated savings of $158,000 per year and was funded through an on-bill financing programme with Origin Energy.

When asked about the ERF affect on the manufacturing industry, an industry media insider noted that, “the fund is too small to have an impact. Schemes under the last government were wide ranging and created a broad demonstration affect, by continually presenting businesses with successful case studies and keeping energy efficiency schemes front of mind. Reducing the 2050 20 per cent emissions reduction target will have a detrimental impact on clean energy companies, a further blow for the manufacturing sector.”

“However, energy prices are rising considerably, particularly gas, which the manufacturing sector has relied upon for years for cheap energy. This is likely to send a signal to industry that they need to be engaging in energy reduction projects, regardless of government support. If businesses like Nestlé are already engaging and payback periods are reasonable, other manufacturing businesses should follow suit. It’s about better business management and access to information.”

While industry is keen to see how the ERF evolves and whether it can make a valuable contribution to growth in the energy efficiency sector, Government has indicated that it wants businesses to be more proactive. With accessible financing options now available directly from ESCOs, businesses would be wise to enquire about how they can access the potential savings available to them with no upfront costs.

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