This is the first in a series of three Policy Updates on the potential for increased energy efficiency in the region's manufacturing sector. This one reviews current consumption patterns and the uptake of energy efficiency improvements. The second examines near-term energy infrastructure, policy, and market changes that may affect the manufacturing sector. The third focuses on near-term opportunities to increase the adoption of energy-efficiency measures.
Metropolitan Chicago's manufacturing cluster plays an important role in the regional economy, as highlighted by CMAP's manufacturing cluster drill-down report. Among the state's economic sectors, manufacturing is the highest energy consumer and accounts for 30.9 percent of total energy consumption. The drill-down recommended that manufacturers increase their energy efficiency and reliability initiatives both to maintain their competitive advantage and to make the region more energy efficient.
Energy makes up a small proportion of total costs for most manufacturers, although this may change because energy costs have been found to increase over time. Currently, manufacturers most frequently install energy efficient improvements to improve power reliability, satisfy regulatory requirements, or fulfill the sustainability requirements of larger manufacturers in the supply chain. In addition, the benefit of energy efficiency improvements is strongest for energy-intensive industries like primary metals, chemicals, food manufacturing, and petroleum and coal products. More extensive investment in energy efficiency upgrades is limited by a combination of low energy costs and a focus on short-term costs and benefits, which can be mitigated by incentives. While Illinois gas and electric utilities provide energy efficiency incentives, manufacturers interviewed for this analysis and a Delta Institute analysis of Cook County manufacturers indicate that limited options and complex processes constrain their use of those programs.
Industrial energy costs in the region are variable
In 2011, the Illinois industrial sector ranked sixth among U.S. states for total energy consumption. According to CMAP analysis of data from the U. S. Energy Information Administration (EIA), overall industrial energy use in Illinois has declined at a moderate annual rate of 0.5 percent since 1970, though recent increases in energy use signify the cluster's recovery from recessionary lows. Long-term declines in Illinois industrial energy use are likely due to two key factors: declining manufacturing employment and increasing energy efficiency among manufacturing industries.
In 2011, the Illinois industrial sector was most reliant on natural gas, petroleum, and retail electricity for its energy inputs. These sources respectively comprised 32 percent, 29 percent, and 17 percent of total industrial energy used that year. CMAP analysis of historical EIA data indicates that, in contrast to the downward trend for other energy sources, industrial reliance on purchased electricity has consistently increased over the last several decades.
Illinois industrial energy prices are highly variable. For example, February 2014 electricity prices for the state's industrial sector were 3 percent lower than the national average. According to CMAP analysis of EIA data, within the last five years, Illinois industrial electricity prices have been as high as 8 percent above national levels. In contrast, natural gas prices in Illinois are often slightly below or on-par with national trends. But natural gas prices have fallen more than 40 percent nationwide and in other Midwestern states over the last five years, while Illinois has experienced a lesser decline of 33 percent.
Energy efficiency upgrades and incentives are an underutilized resource
Manufacturer opportunities for energy use reduction vary based on energy sources and plant processes. But, there are a number of low-cost and easily-utilized options within standard systems. For example, a Delta Institute analysis found that, among Cook County manufacturers, utilities most commonly recommended the following energy efficiency measures: upgrading lighting, eliminating leaks from gas lines, installation of compressed air and steam lines, electric motor upgrades, and occupancy sensor installations. These measures typically have shorter payback periods – one to one and a half years – and have relatively straightforward incentive application processes.
CMAP's manufacturing drill-down report also recommended enhanced incentives for installation of combined heat and power systems (CHP) to help the region's manufacturers reduce energy costs, improve reliability, and gain a competitive advantage. CHP systems generate electricity and can improve system energy efficiencies by 60 percent to 80 percent. Current low energy prices are also a significant barrier to CHP adoption, as operation of CHP systems can cost more than energy provided by utilities. For example, one CMAP region manufacturer adopted a cogeneration system to specifically avoid power disruptions. This manufacturer reported that running their cogeneration operation costs three to four times more per hour. Unless incentives increase, energy prices rise, or regulations create new demand for and innovation in CHP systems, adoption rates are likely to remain low.
Despite the available options, uptake of energy efficiency improvements has been low among Illinois manufacturers. According to the U.S. Department of Energy's Industrial Assessment Centers, Illinois manufacturers averaged a 40 percent adoption rate of energy efficiency reduction measures recommended by IACS assessments between 1986 and 2014. The study ranked Illinois 49th among U.S. states (and Puerto Rico) in terms of adoption rates.
Incentives offer one avenue to increase energy efficiency among the region's manufacturers. The State of Illinois Energy Efficiency Portfolio Standards require utilities both to meet energy use reduction goals at an increasing rate through 2018 and to offer incentive programs for meeting those goals. Each utility has a mix of prescriptive industrial rebates for common items like steam traps or air compressor upgrades and of custom rebates that are adapted per plant specifications. Because there is significant opportunity in this area, Illinois utilities have recently expanded the incentives for common industrial equipment like compressors and designed those incentives to reduce payback periods to less than one year.
Manufacturers interviewed for this analysis perceive utility-provided incentives as beneficial, but challenging. Consistent with other recent studies, manufacturers report frustration with accessing incentives for custom projects. In some instances, the manufacturers implemented an energy efficiency project without an incentive due to a perceived cumbersome application process. Furthermore, manufacturers indicate that efficiency contractors and the utility representatives have inconsistent knowledge about incentives, requiring multiple contacts to obtain complete information. The Delta Institute report Energy Efficiency and Cook County Manufacturers confirms these findings and also indicates that utilities do not provide consistent resources and staffing for their industrial incentive programs.
Manufacturer size often affects implementation of efficiency opportunities
The size and staff capacity of a manufacturer have a strong impact on its use of efficiency initiatives. To better assess this, CMAP interviewed five industrial facilities that had recently implemented energy efficiency improvements and reviewed the results of surveys within the Delta Institute's report, "Energy Efficiency and Cook County Manufacturers." Large manufacturers typically have the most accurate understanding of their energy consumption because they can commit full-time staff to identifying and implementing energy reduction measures. They may also have an internal sustainability strategy and take on higher-cost improvements to meet that strategy. They may also require their suppliers to meet specific sustainability targets. Overall, large manufacturers tend to have the most advanced adoption of efficiency measures and the potential to influence changes through the entire supply chain.
In contrast, the mid-sized manufacturers interviewed for this study place less value on energy efficiency improvements. While these manufacturers have a relatively clear understanding of their energy consumption at the unit-cost level, they indicated that energy efficiency upgrades do not affect profitability as strongly as other potential production changes do and prioritize decisions accordingly. The mid-sized manufacturers consider long-term energy cost savings, but not as a primary factor in their investment decision-making. For example, consider a moderate-sized bakery that makes and distributes artisan bread throughout the region. The company has a strong understanding of their energy costs but views them as a controllable, minor cost of production. Like other moderately-sized manufacturers interviewed for this analysis, the bakery implements energy reduction measures under limited circumstances -- when the payback is less than a year, when new regulations or major suppliers require changes, or when the improvement meets internal sustainability goals.
Upcoming market and policy changes provide the potential for broader uptake of energy efficiency improvements
Energy efficiency adoption is lower in Illinois compared to national figures. In the absence of high energy costs, factors such as power reliability, regulatory changes, and large manufacturer requests for their supply chains are major drivers of efficiency improvements. But energy is a cost factor for some key industries in the region, and enhanced technology and improved incentives will be critical for their long-term competitiveness.
Changes in energy prices, improved technologies, regulatory changes, and Smart Grid installations may further drive the uptake of energy efficiency or combined heat and power systems throughout the region. For example, as residential incentive opportunities are exhausted, the industrial sector provides substantial potential for utilities to meet their statutorily-required energy use reduction targets. More details on these changes will be discussed in the second Policy Update in this series.