Identifying Obstacles

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By way of an example, let us turn once again to the question of energy efficiency. The concept of improving energy efficiency has been around for a long time now. And for over two decades, the message has been more or less the same: there is a very significant potential for measures which improve energy efficiency, reduce energy-related pollution, and are economically cost-effective. As some of this potential has been taken up, more has been discovered. Even so, this considerable potential is still only slowly being exploited.

Clearly it is important to understand the reasons for this slow exploitation of apparently cost-effective energy efficiency. Over the years, therefore, quite a lot of effort has been put into identifying the barriers faced by firms and households in the implementation of energy efficiency.1

First, there are barriers to awareness and information. At the most basic level, these barriers include the failure by energy consumers even to look for energy efficiency opportunities. This failure sometimes springs from a simple lack of awareness of the technological opportunities available. Sometimes, however, there may be an absence of specific technical expertise. Each technological process has its own characteristics. Devising and implementing technological improvements in complex processes demands both technical skill on the part of engineers and creativity on the part of designers. Occasionally the absence of an appropriate skill and knowledge base leads to a lack of confidence in technological alternatives. Better the devil you know than the one you don't know. The old technology is generally tried and tested. The new one may carry the appearance of risk, particularly to the non-expert.

As technologies change and develop, therefore, continuing investments in research and education are necessary on the part of the firm, if emerging opportunities are to be identified. Equally, there must be an appropriate investment in technical education at the national level if trainee engineers are to have the relevant expertise on environmental performance. Often, these investments can be made without additional costs. Rather it is a question of reorienting training priorities to include appraisal of environmental performance. In the past, however, these matters have either been absent from engineering education or added on, like environmental technologies, only as an afterthought to the mainstream education process.

Where households are concerned, environmental awareness obviously plays a part in motivating consumers. But they also need to be aware that economic savings can be made from energy efficiency investment. In addition, they need access to information and expert advice on new appliances and technologies which might help them to improve their energy efficiency.

These kinds of impediments reside in the knowledge and confidence base of consumers and companies. But there are also economic obstacles which appear to strike at the heart of the household's or firm's economic welfare. Technical innovations often require capital outlay. Even though the sums of money involved may not be large, energy efficiency investments nevertheless have to compete with a number of other kinds of demands on company or personal capital. And even when the potential rate of return (see Box 4) on the energy efficiency investment is high, it may still be lower than the rate of return on a competing investment.

Often, the economic obstacle is no more than the absence of an appropriate accounting framework, or any means of identifying a lucrative investment. Individual householders, for example, may often be well placed to reduce their energy consumption by improving insulation, or investing in more efficient appliances. But few of them will have the experience to calculate whether or not the return on a particular efficiency investment is in their best financial interests. Even in small companies, accounting procedures may fall some way short of providing detailed financial assessments of future investments. This problem is compounded by the relatively small proportion of total costs which energy expenditure comprises. For more well-to-do households, the proportion of energy costs to total costs is so small that they probably never figure in investment choices. And for less fortunate households, the energy costs may be a higher proportion, but the absence of investment capital becomes critical.

Finally, the research has identified a number of important institutional and structural obstacles to energy efficiency These obstacles are partly to do with the way in which the energy market has been set up: as a suppliers' market in which a few big companies supply fossil fuels or electricity to a large number of customers. I shall have more to say about the implications of this fact later on. But let me also mention here an important structural problem known as the tenant-landlord problem. This term refers to the situation in which it most usually arises. The tenant in a rented property would benefit from the lower fuel costs associated with energy efficiency investment. But he or she is not generally in a position to make capital investments in the property and, in any case, may be moving out of the property before the capital investment is paid off. The landlord, on the other hand, is appropriately placed to make capital investments, but has no incentive to do so because he or she does not pay the fuel bills. Although most obvious in the situation I have described, the same difficulty is to be found whenever there is a separation of responsibility for costs from the enjoyment of benefits.

Similar kinds of circumstances are to be found in other fields of preventive environmental management. In fact, many of the obstacles to energy efficiency also appear as impediments to pollution prevention. The lack of awareness and information about pollution prevention opportunities is evident from the number of studies which, once initiated, have immediately identified cost-saving measures.

The question of technical know-how is critical. Process engineers and technical managers usually possess considerable in-depth knowledge about their own particular industrial processes. But they are not always motivated to search for improved environmental performance. This is sometimes because technical education has failed to raise an appropriate awareness of this aspect of engineering. Sometimes it is because they do not have access to information resources which would allow them to identify technical alternatives or design improvements. There is therefore a strong need for information exchanges and clearing-houses in promoting pollution prevention opportunities.2

Perhaps more crucially, process engineers and shop-floor managers may not be authorised to make the appropriate financial investments. This aspect of the problem is clearly reminiscent of the tenant-landlord problem in energy efficiency. The tenant-landlord problem refers to a separation of responsibility for costs from the enjoyment of benefits. This is a different kind of separation—the separation of expertise and opportunity from financial responsibility.

Sometimes it is corporate accounting practices which are at fault. The costs of waste disposal and the payment of environmental penalties and charges often remain invisible at the process level. They may be regarded as too small to worry about by the firm's accountants, who do not require managers to identify them on a process-by-process basis. So the responsibility for these costs remains isolated from the responsibility for process management. In these circumstances, there is no incentive for process managers to reduce waste emissions.

At other times, it is the structure of corporate responsibility which raises difficulties. Process managers are often very well aware of the need to reduce environmental emissions, and even able to identify potentially cost-saving investments at the process level. But they may have to compete for funds with other kinds of company investments, in the context of financial decision-making which remains unaware of the potential for improved environmental performance.

Many of these difficulties can be eased by appropriate government policies and committed corporate strategies. I shall have more to say about government policy in Chapter 8. But a very simple procedure which can have broad-ranging impacts is the inauguration of regular waste reduction audits (see Box 1 in Chapter 4) designed specifically to search for pollution prevention opportunities. A related, financial initiative is full-cost accounting (Box 8).3 This procedure aims to ensure that all the relevant costs and benefits (including all waste disposal costs, emissions charges, hidden costs and less easily quantifiable economic factors such as the corporate image) are taken into account in the investment appraisal.

In spite of the value of these simple but important practices, it would be wrong to suggest that all of the impediments to preventive environmental management can be addressed through straightforward procedural changes. There are certainly aspects of preventive environmental management which remain outside the influence of either process managers or company directors. And despite the examples of the previous chapter, there are also some formidable economic imperatives which operate, at times, against the best interests of preventive environmental protection.

BOX 8 ELEMENTS OF FULL-COST ACCOUNTING

CAPITAL COSTS

These are the upfront costs which must be paid for process equipment and hardware. In a full-cost assessment, these costs should also include the following elements:

• an allowance for the installation of utility systems (electricity, water, etc.)

• site preparation costs

• engineering contractors' and consultants' fees

• the costs of start-up training

• the salvage value of displaced equipment

PROCESS OPERATING COSTS

Process-related operating costs are those which are specific to the process or product line in question. These costs are usually most visible to conventional accounting frameworks. But a full-cost assessment should always make sure that the following costs are included:

• cost of raw materials and supplies

• revenues from the sale of products and by-products

• any direct disposal or handling charges paid within the process accounts framework.

OVERHEAD OPERATING COSTS

In addition to direct process-related costs, each process will incur a number of overhead operating costs. Often these overheads remain unaccounted for in conventional frameworks. A total cost assessment should always include:

• waste management costs (haulage, storage, handling, disposal charges and emission fees)

• the costs of regulatory compliance

• the costs of materials handling

• legal costs and penalties

• insurance costs

INDIRECT COSTS

Finally, there are a number of less easily quantifiable costs and benefits which should nevertheless be taken into account. These include:

• estimates of future liabilities for environmental damage

• benefits from improved company image

• benefits from enhanced technological expertise and innovation

In all probability, the 'bottom line' for corporate enterprises is an economic one. If there were always measures which would reduce environmental impact and save a company money for very little or no investment, then nobody would be happier to protect the environment than industry All the evidence in the previous chapter has shown that there are certainly some circumstances in which this will be true. However, there are certain important circumstances in which it will definitely not be the case. First, there are situations in which the structure of costs and benefits within the firm simply does not reflect an accurate picture of the economic advantages to society of pollution prevention.

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