A Method for Measuring the Efficiency Gap between Average and Best Practice Energy Use: The ENERGY STAR Industrial Energy Performance Indicator

Abstract

SummaryA common feature distinguishing between parametric/statistical models and engineering economics models is that engineering models explicitly represent best practice technologies, whereas parametric/statistical models are typically based on average practice. Measures of energy intensity based on average practice are of little use in corporate management of energy use or for public policy goal setting. In the context of companyor plant‐level indicators, it is more useful to have a measure of energy intensity that is capable of indicating where a company or plant lies within a distribution of performance. In other words, is the performance close to (or far from) the industry best practice? This article presents a parametric/statistical approach that can be used to measure best practice, thereby providing a measure of the difference, or “efficiency gap,” at a plant, company, or overall industry level. The approach requires plant‐level data and applies a stochastic frontier regression analysis used by the ENERGY STARTM industrial energy performance indicator (EPI) to energy intensity. Stochastic frontier regression analysis separates energy intensity into three components: systematic effects, inefficiency, and statistical (random) error. The article outlines the method and gives examples of EPI analysis conducted for two industries, breweries and motor vehicle assembly. In the EPI developed with the stochastic frontier regression for the auto industry, the industry median “efficiency gap” was around 27%.