The Boardroom Perspective: How does Energy Efficiency Policy Influence Decision-making in Industry?

January 30, 2012 | 00:00

The Boardroom Perspective: How does Energy Efficiency Policy Influence Decision-making in Industry?

Improving energy efficiency (EE) in the industry sector enhances competitiveness and productivity, and provides a range of ancillary benefits. While many investments bring some EE benefits, their aim generally is to enhance core business through an increase in production or replacement of old equipment rather than deliver energy efficiency improvements.

The rationale for an individual company making an investment that will reduce energy consumption varies considerably and depends on a range of factors. These include the return on investment; market conditions; sector; company size; energy intensity; cost of energy relative to overall production costs, whether EE improvement is an incidental or ancillary benefit of a process or equipment upgrade (or part of a concerted effort to implement an EE programme); the financial state of the company, whether it is in a growth or sunset sector; and access to finance.

While recognition that energy efficiency is a powerful tool to cut operating costs, improve the economy and reduce environmental pollution has never been greater; the implementation of energy efficiency measures in the industry sector is slow to materialise (IEEFP, 2009). This is due to a range of barriers including insufficient information, competing priorities within the company and the lack of commercially viable financing options. Policies have a role to play to address many of the existing barriers.

Typical policies that target industrial energy efficiency include regulations and voluntary agreements that directly compel actions; economic policy instruments such as taxes and tax incentives, directed financial support (e.g. subsidies and loans) and differentiated energy prices that seek to influence the cost‐effectiveness of technical actions; and informational policies, which help to establish a favourable environment for industry to implement EE actions.

This report explores the factors that influence companies to invest in energy savings and proposes a methodology to evaluate the effectiveness of a country’s policy mix from the perspective of an industrial company’s boardroom. In other words, are companies made more aware of EE benefits and more motivated to invest in energy efficiency projects – which are otherwise normally neglected –as a result of one or a combination of policies?

Essentially, the “boardroom perspective” delves into the major factors or driving forces that decision makers within a large industrial company take into account when deciding to make new investments. In order to assess whether policy packages are effective through this boardroom perspective, the corporate decision‐making process is simplified and represented by using five driving forces as proxies:
 The financial imperatives of a company.
 The policy obligations placed on the company to achieve environmental compliance.
 The knowledge of energy‐savings opportunities within the company.
 The commitment of the company to the environment and energy efficiency.
 The demands of the public and market to improve the company’s environmental or energy
performance.

The boardroom perspective reflects the premise that the effectiveness of energy and climate policies is ultimately determined by the ability of policies and the policy mix to stimulate the boardroom to maximise the implementation of energy efficiency measures when making investment decisions. By exploring policy effectiveness through the five driving forces, the report came to a number of findings. Depending on the type of EE investments, the relative importance of drivers may be different. For example, a company may not know which simple no‐ or low‐cost EE measures it could take, i.e. the knowledge driver may be more important than other drivers, for instance the financial driver.

In such a case, policies that require the appointment of an energy manager or information policies on energy management best practices may play an important role. By contrast, financial subsidies might not influence the level of skills of the energy manager or the attractiveness of existing no‐ or low‐cost investments. As such, the needed policy mix might not be the same for all sectors and in all countries.

The fact is that policies and the overall policy mix cannot always be effective in triggering all drivers. Numerous commercial and business drivers (i.e. the public and market driver) may or may not be affected by policy. In order to assess the need for additional policy intervention for a given country, the evaluation methodology from the boardroom perspective would involve:  Identifying the type of EE investments the industry needs to make to achieve the country’s
objective.
 Mapping the characteristics and circumstances of the country with respect to the different
industrial sectors, and assessing the relative importance of the drivers of boardroom
investment decisions, considering the sector’s characteristics and the type of EE investment.
 Analysing the country’s policy mix; assessing its impact on the drivers for investments in EE
within a sector; and identifying whether policies could further influence the drivers.

Only by focussing at a sub‐sectoral level can policy makers estimate whether policies have an effect on the most important drivers in that sector (e.g. financing, policy obligation or knowledge).

By applying the methodology to the industry sector as a whole in the Netherlands, this report found that the Dutch policy package addresses all five drivers to a greater or lesser extent. Currently, the main trend is that the impact (on commitment and knowledge) of the Dutch covenants in boardrooms is decreasing, whereas the financial and policy obligation impacts of European Union Emissions Trading Scheme (EU ETS) are growing as the greenhouse‐gas (GHG) mitigation targets are becoming more stringent.

Could a stronger policy obligation for energy savings in combination with a change in economic policies be the key to improving the energy efficiency performance of companies in the Netherlands? The analysis presented in this report should be considered alongside some caveats. The main framework used, namely the “boardroom perspective”, is a theoretical perspective based on a literature review. While an illustrative application of the perspective has been undertaken for the Netherlands, several in‐depth case studies and interviews with experts and quantitative policy evaluation studies – using the evaluation methodology described above – are needed to validate the boardroom perspective as an authoritative framework for evaluating policy packages to maximise energy efficiency levels.

The present assessment focuses broadly on industry as a whole, while the importance of the drivers is likely to be subsector‐specific. A follow‐up study could consider how these drivers operate in different sectors and if the policy maker can influence boardroom decisions on whether to invest or not. If additional policies are effective in triggering the drivers for investments, evaluating the costs and benefits of such policies would also help policy makers to design a new policy.

To read the full report, click here.

 

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