Evidence from the industrial assessment program on energy investment decisions by small and medium-sized manufacturers

Abstract

This paper highlights the results of a detailed analysis of investment decisions regarding energy efficiency measures at small and medium-sized manufacturing plants participating in the US Department of Energy's Industrial Assessment Center (IAC) program. This paper is drawn from a larger study that found that most small and medium-sized plants participating in the IAC program will invest in an energy efficiency measure only if the investment's capital cost can be paid back in operational savings within two years. The most frequently recommended and implemented measures have payback periods of one year or less. Implementation rates appear to drop off only slightly with increasing payback periods. Moreover, the average payback period associated with implemented measures does not appear to increase with plant size or annual energy cost. First cost appears to be more important than payback period in determining whether a recommended measure will be implemented. For most recommended energy efficiency measures, a payback period of up to two years implies an implicit (real) discount rate of about 50 percent, which is higher than the values typically used to characterize industrial investment decisions in energy-economic models.