investment in energy efficiency: a survey of australian firms

qFunding for this project was provided by the Australian Common-wealth Department of Primary Industries and Energy.

*Correspondence address. 5 Irwin Street, Yarralumla ACT 2600,Australia. Tel.: #61-6-272-2000; fax: #61-6-272-2328.

E-mail address: [email protected] (J. Anderson).

Energy Policy 28 (2000) 867}876

Investment in energy e$ciency: a survey of Australian "rmsq

Jane Harris, Jane Anderson*, Walter ShafronAustralian Bureau of Agricultural and Resource Economics, GPO Box 1563, Canberra ACT 2601, Australia

Received 13 July 1999

Abstract

The &e$ciency gap' and &no regrets' are examples of terms used to describe the apparent slow di!usion of supposedly economicopportunities to improve energy e$ciency. The aims of this research are to investigate the factors which in#uence a "rm's decisionabout investing in energy e$ciency and in particular to assess the policy implications. A basic assumption is that governments willcontinue to pursue policies to improve energy e$ciency because of negative externalities associated with energy use. Despite this, littleis known about the cost e!ectiveness of alternative policies including information dissemination through energy audit programs. Thisresearch is based on a survey of 100 "rms that took part in the Commonwealth Government's Enterprise Energy Audit Program(EEAP) which ran for six years until May 1997 and was monitored by ABARE. The survey included detailed questions about each"rm's implementation of audit report recommendations. Implementation rates were found to be high and audits to be cost e!ective.Crown Copyright ( 2000 Published by Elsevier Science Ltd. All rights reserved.

Keywords: Energy e$ciency; Energy audits; Australia

1. Introduction

Energy e$ciency is often stated as a goal by govern-ments. This is because costs associated with the con-sumption of energy are not always con"ned to the users.At present, a major focus is on the costs, or externalitiesassociated with energy use.

The goal of increasing energy e$ciency is often pur-sued via the public provision of information. There isevidence that this is the most e$cient general method butlittle is known about the cost e!ectiveness of speci"calternative policies. A commonly held view is that thereare economic opportunities to improve energy e$ciencywhich have not yet been taken up by "rms. Such oppor-tunities are often termed &no regrets'.

In the academic literature, slow di!usion of apparentlycost-e!ective technologies to improve energy e$ciencyhas been termed the &e$ciency gap' or the &energy para-dox'. The &gap' can be formally de"ned as the divergence

between socially (and perhaps privately) optimal levels ofinvestment in energy e$ciency and those actually seen inpractice. Ja!e and Stavins (1993) describe the e$ciencygap as `the paradox of the gradual di!usion of apparent-ly cost-e!ective energy e$ciency technologiesa (p. 36). Insimple terms as explained by Eyre (1997, p. 26), `invest-ment in energy e$ciency is consistently observed to fallshort of levels which informed analysts assure policymakers is both possible and economica. Many re-searchers have investigated this issue and put forwardhypotheses to explain it. The literature highlights a com-plex and varied set of arguments, but with a distinct lackof consensus to date, even on some basic theoreticalprinciples. Problems with information tend to stand outas being covered by most authors albeit in di!erent waysand either implicitly or explicitly.

One policy designed to provide information to "rmswas the Commonwealth Government's Enterprise En-ergy Audit Program (EEAP) which operated between1991 and 1997 and was run by the Australian Common-wealth Government Department of Primary Industriesand Energy. Under EEAP, "rms were provided witha subsidy to undertake an audit of their operations, andrecommendations were made to "rms about ways inwhich energy e$ciency could be improved. This subsidywas 50 per cent of the cost of the audit, up to a maximum

0301-4215/00/$ - see front matter Crown Copyright ( 2000 Published by Elsevier Science Ltd. All rights reserved.PII: S 0 3 0 1 - 4 2 1 5 ( 0 0 ) 0 0 0 7 5 - 6

1A$1 was on average, equal to US$0.70 over the period 1991}1997.

of A$5000.1 Approximately 1200 "rms participated inEEAP over the six years that it operated. The auditreports were typically large documents containing manydetailed recommendations on all aspects of a "rm's en-ergy use (Commonwealth of Australia, 1991).

ABARE analysed the data generated by EEAP ona consultancy basis, during the time the program oper-ated (see for example Harris et al., 1996). During thecourse of the ABARE analysis it became clear that littlewas known about the extent to which EEAP recommen-dations had been implemented, and the ways in which"rms had made their investment decisions. However, itwas generally believed that signi"cant numbers of recom-mendations were not implemented. For example the Pro-ductivity Commission (1996) in commenting on this,stated that the conventional wisdom is audit reports&gather dust'.

It was decided that ABARE could contribute to thedebate on the &e$ciency gap', and make suggestions forfuture policy directions, by undertaking a major surveyof EEAP participants. In this paper we investigate thehypothesis that among Australian "rms there are lowlevels of uptake of apparently sound economic recom-mendations to improve energy e$ciency. There are twomain questions to be addressed. The "rst is whetherrecommendations are in fact ignored. What are the ac-tual levels of uptake of EEAP recommendations? Whilea common view is that opportunities for energy savingsin the range of 10}20 per cent can often be found (Pro-ductivity Commission, 1996), there remains much debateabout the &e$ciency gap', and whether under-investmentactually occurs, and if so to what extent (Johnson, 1994).Second, for recommendations that are not taken up, weneed to ask why. As noted above, there are many hy-potheses about why the &energy e$ciency gap' exists.Many of these are plausible, but a general consensus hasnot been reached as to which are the most important andhow they "t together.

2. Conducting the survey

In undertaking this review of EEAP ABARE surveyed100 participating "rms to gather information about howthe "rm became involved in the program, what the pro-gram entailed, its usefulness and various other aspects ofthe process. The survey was conducted by telephoneduring May and June 1997 by experienced ABARE sta!.The average length of time taken to conduct an interviewwas 30 mins.

The sample of 100 "rms was selected from a surveypopulation of approximately 1200 "rms. A strati"ed ran-dom sampling technique was applied with the population

being strati"ed by industry (10 industries). The purposewas to obtain a coverage of "rms in each industry toprovide a more robust sample than if it were selectedrandomly across the population. The sample weight allo-cated to each "rm was a proportional weight, calculatedat industry level. That is, for a particular industry, theweight was the population in that industry divided by thesample size in that industry.

2.1. Survey contents

The questionnaire was designed to cover as many ofthe hypotheses about the energy e$ciency gap as pos-sible, which are contained in the literature. It had tobe structured and worded to avoid economic jargonwhile still ensuring the economic issues were covered.The questions included in the "nal questionnaire broadlyform three groups.

The "rst group of questions was designed to obtaingeneral information about each "rm (see Box 1).

Box 1. General information questions.

The number of employees in the buildings covered by theaudit and the relative importance of energy as a propor-tion of total operating costs.

The purpose of this question was to investigate argu-ments that "rm size and/or the budgetary importance ofenergy might in#uence the way decision-making is or-ganised and its status. For example is energy use a partof core business or not.

The situation with respect to tenancy (own or lease) andthe length of lease if applicable.

The purpose of this question was to investigate hy-potheses under the &landlord}tenant' banner.

An indication of the xrms general attitude toward in-vestment risk (on a scale of 1}5 where 1 is &very conserva-tive', 3 is &risk neutral+ and 5 is a &high risk taker').

More specixc information about sources of risk in-volved with investments in energy e$ciency was gainedby asking "rms to rate the following sources of risk (ona scale of 1}5 where 1 is &not at all important' and 5 is&very important'):

f the fact that information is continually changing (pri-ces, technology, costs, etc.);

f adjustment costs during installation (e.g. disruptionto production);

f adjustment costs after installation (e.g. sta! learningto live with new equipment);

f potential costs associated with breakdown, mainten-ance and repair.

Note that this question was asked for speci"c recom-mendations which were not implemented, as explainedlater (for "rms that had implemented all recommenda-tions it was asked as a general question).

868 J. Harris et al. / Energy Policy 28 (2000) 867}876

An indication of the xrms general attitude toward theenvironment as indicated by their response (on a scale of1}5 where 1 is strongly disagree and 5 is strongly agree) tothe statement, &environmental considerations play an im-portant role in our decision-making process'.

Was the audit worthwhile? (simple yes or no answerplus the chance to comment further on the EEAP pro-gram generally).

The second group of questions was designed to elicitmore information about which &rules' "rms use whenthey make their investment decisions (see Box 2). Wewere interested in whether "rms use the traditional eco-nomic decision rules for evaluating investments such asnet present value (NPV). Note that it is possible andperhaps even likely that "rms could use the same ruleswithout calling them the same names. Firms may usediscounted cash #ow analysis but may not call it NPV.

Box 2. Decision rule questions.

We asked whether the following rules were used (yes,no or do not know).

Positive net present value, and if so, what discount rateor minimum rate of return is used to calculate NPV?NPV was de"ned as the discounted stream of bene"tsfrom an investment after investment costs have beensubtracted, assuming a particular discount rate.

Rate of return on capital, and if so what percentage?With this rule the "rm selects a speci"c rate of returnthat capital investments must return, and selects pro-jects according to this criterion.

Payback period, and if yes, what is this period? Pay-back period was de"ned as a speci"ed period of timeduring which the initial capital outlay of an investmentis recouped.

Upper limit on debt}equity ratio, and if so please spec-ify the limit. With this rule the "rm takes into considera-tion its debt}equity ratio before deciding whether toinvest and there may be a maximum level of debt}equityabove which it will not adopt new investments.

Other (please specify).

The third group of questions involved a detailed analy-sis of the implementation of recommendations(see Box 3). The focus was on recommendations that werenot implemented and the associated reasons. For each"rm in the sample a list was constructed of the recom-mendations made by the auditor and the cost of each,and this list was included in the questionnaire (10 biggestcost items only if more than 10 were made). For eachrecommendation the "rm was asked to indicate whetherthey had decided not to implement, or were not planningto implement the recommendation within the next one to

two years. For up to two recommendations that were notimplemented, detailed questions as to the particular rea-sons were then asked. These were designed to provideinformation as to why recommendations that would pur-portedly improve energy e$ciency and which had beenassessed as being economic by auditors, had not beentaken up.

Box 3. Sources of risk questions.

First, respondents were asked the same questionabout speci"c sources of investment risk as group one,but were asked to apply it to the recommendation inquestion (instead of in general terms as happened if the"rm had implemented all recommendations).

Second, respondents were asked to rate on a scale of1}5 (where 1 was &strongly disagree' and 5 was &stronglyagree'), how the following 10 reasons rated in theirdecision not to implement recommendation x. Thereasons were grouped under the three sub-headings&costs/pro"tability' (reasons 1}5); &expertise' (reasons6 and 7) and &other' (reasons 8}10).

Costs/proxtability1. The investment was too risky.2. The auditors assessment of costs and /or savings

was inaccurate.3. The rate of return on the investment was too low.4. Finance was unavailable.5. The payback period was too long.

Expertise6. There was a lack of sta! with expertise in this.7. From the audit report, it was not clear how to

actually implement the changes.Other reasons8. The decision to invest in the recommendation is

beyond our control (e.g. the premises are rentedand some decisions are up to the landlord).

9. &Investments in energy e$ciency are largely irre-versible' (meaning that once the money has beeninvested it cannot be fully recovered).

10. Energy e$ciency issues are often overlooked bymanagers.

Firms were also asked what rate of return they wouldhave considered necessary to have undertaken this in-vestment (to overcome the stated reasons for non-imple-mentation). The aim was to obtain an indication of whathas been termed a hurdle rate for di!erent types ofinvestments.

3. Results

Eighty-six per cent of "rms owned their premises, andmost of these occupied the entire building. Only 12 percent of "rms owned and occupied only a section of

J. Harris et al. / Energy Policy 28 (2000) 867}876 869

Fig. 1. Environmental considerations are important in the decision making process* Figures represent the percentage of "rms within each category

a building. For "rms that leased premises, the averagelength of lease was about "ve years.

Regarding the size of "rms which took part in EEAP,the average number of employees was 297, and the aver-age energy bill was A$434 000, representing 4.3 per centof a "rm's total capital expenditure. The average amountspent by "rms on an EEAP audit was A$7248.

Around 40 per cent of the sample of EEAP "rmsemployed less than 100 people. In contrast, 99 per cent ofAustralian enterprises employ a workforce of under 100people, and companies of under 100 people are respon-sible for 60 per cent of all employment in Australia(Industry Commission & Department of Industry,Science and Tourism, 1997). These "gures suggest thatEEAP participation is biased towards larger "rms. How-ever, a study of small "rms in Australia that were notreached by EEAP revealed high rates of energy ine$c-iency amongst these "rms (Productivity Commission,1996, p. 18), indicating that energy audits may still be ofbene"t to these "rms. Conclusions drawn in this study,therefore, are likely to be relevant for a broad range of"rms.

Furthermore, expenditure on energy, which averages4.3 per cent of a "rm's total capital expenditure in theEEAP sample, is comparable with average energy expen-diture in a number of industries in Australia. For in-stance, energy expenditure represents more than 3 percent of total capital expenditure in the wood and paper,the non-metallic mineral and metal products sector, andaround 10 per cent in the mining sector (ABS, 1998,unpublished data).

3.1. Attitudes to the environment and risk

Most "rms were supportive of the statement &Environ-mental considerations play an important role in ourdecision-making process'. In fact 47 per cent of "rms

agreed with this, and a further 27 per cent strongly agreed(Fig. 1). Overall, only 9 per cent of "rms disagreed withthe statement and 17 per cent neither agreed nor dis-agreed. These results agree with those from a survey on&environmental management in New South Wales indus-try' of 500 randomly selected "rms in New South Walesby that state's Environment Protection Authority (NewSouth Wales Environment Protection Authority, 1997).For example, almost 60 per cent of these "rms said that`management of this company gives high priority toimproving its environmental performancea, and 86 percent agreed that `our sta! are generally supportive ofpractices that will improve our environmental perfor-mancea (p. 44).

Firms were then asked `How would you rate your"rm's general attitude to risk when it comes to investingin energy e$ciency?a. The majority of "rms (58 per cent)stated they were either conservative or very conservative(Fig. 2). About a quarter were risk neutral, and only 17per cent regarded themselves as risk takers (4 per centwere &high risk takers'). To give a guide to the reliabilityof the survey estimates, relative standard errors (RSE)have been calculated and are also presented. In general,the smaller the relative standard error, the more reliablethe estimate. Note however, that numerically smallestimates tend to have large relative standard errors(Table 1).

3.2. Decision-making rules used by xrms

By far the most widely used decision-making rule is thepayback period. Eighty per cent of "rms reported thatthey use this rule for evaluating investments (Fig. 3). Theaverage length of time during which investments mustrecoup their costs (the average payback period) was 42months. Just under one-third (30 per cent) of "rms usepositive NPV as a decision rule when evaluating invest-ments. The average discount rate used to calculate NPVwas 13 per cent. Over half (53 per cent) require a particular


Fig. 2. Firms general attitude to risk when it comes to investing in energy ef"ciency.

Table 1Relationship between environment considerations and risk aversion (percentage of "rms within each classi"cation)

Are environmental considerations important?

Stronglydisagree

RSE Disagree RSE Neither agreenor disagree

RSE Agree RSE Stronglyagree

RSE

Risk attitudeVery conservative 1 95 1 95 4 53 9 26 5 42Conservative 1 97 2 70 6 38 20 16 9 27Risk neutral 0 na! 1 93 3 61 12 23 10 24Risk takers 2 73 1 72 3 67 5 34 2 73

High risk takers 0 na 0 na 1 92 1 91 1 78

All classes 4 50 5 41 17 25 47 11 28 16

!na: not applicable.

Fig. 3. Rules used in evaluating possible investments * Figures represent the percentage of "rms that use each of the rules.

rate of return on capital, and the average rate requiredwas 26 per cent. Only 15 per cent of "rms stated that theytake debt/equity ratios into consideration before decid-ing whether to go ahead with an investment.

3.3. Implementation of recommendations

Each "rm participating in EEAP received an averageof just under six recommendations and implemented just


Fig. 4. Percentage of "rms receiving speci"c recommendations.

Table 2Attributes of recommendations and implementations (average per "rm)

RSE

Number of recommendations* all 5.8 4Number of recommendations* implemented 4.7 5Implementation rate 81% 3Recommendation costs * all A$120971 19Recommendation costs * implemented A$87749 22Recommendation NPV * all A$428943 14Recommendation NPV * implemented A$364361 15Recommendation bene"t * all A$81953 14Recommendation bene"t * implemented A$67378 15

under "ve of them, giving an implementation rate of 81per cent (Table 2). The types of recommendations mostcommonly received by "rms are shown in Fig. 4.

Fig. 5 shows the implementation rates for the di!erenttypes of recommendations. For example, of the estimated1484 lighting recommendations, 1224, or about 82 percent were implemented. The ratio of the number of rec-ommendations made to the number implemented ap-pears to be quite consistent across di!erent types ofrecommendations. However, there does appear to bea relationship between the average cost of a particulartype of recommendation and the implementation rate.

Generally speaking, the higher the average cost the lesslikely it is that a recommendation will be implemented.The average cost to implement all recommendations wasabout A$121 000 per "rm, compared with only A$88 000for those actually implemented, giving a ratio of about 73per cent (Table 2). This result is intuitively appealingbecause higher cost recommendations might be expectedto receive more rigorous scrutiny and be postponed "rstif "nancial constraints tighten. The average bene"t, orpotential savings, from implementing all recommenda-tions was about A$82 000 and about A$67000 for thosewhich were implemented.

Using both the (one o! total) cost and savings (peryear) reported by the auditor, NPV of each investmentwas calculated assuming a 10 yr investment life, anda discount rate of 8 per cent. The average NPV per "rmfrom implementing all recommendations was calculatedto be A$429 000, and the NPV of the recommendationsactually implemented was A$364 000 per "rm.

3.4. Important sources of risk

Questions regarding the importance of four sources ofrisk were asked for recommendations that were not im-plemented (Table 3) but also in general terms for "rmsthat had implemented all of their recommendations(Table 4). For individual recommendations (Table 3), themost signi"cant source of risk is &adjustment costs duringinstallation' which was quoted as important or veryimportant by 43 per cent of respondents. This probablyindicates that there are costs associated with disruptionto the running of the "rm that involves risks greatenough to prevent particular investments from goingahead. These are a source of &hidden costs' not includedin traditional NPV calculations. Such calculations wouldalso ignore risks associated with &constantly changinginformation' which is regarded as important by 38 percent of "rms. A further 28 per cent regard adjustmentcosts after installation and breakdown costs as importantor very important in their decision not to implementa speci"c recommendation.

For "rms that had implemented all recommendations(Table 4), a high percentage believe that all of thenominated sources of risk are important when it comesto investing in energy e$ciency. These respondents wereexpressing their opinions about the importance of thevarious risk categories for investments in energy e$cien-cy generally. Three quarters of those surveyed regarded&information is constantly changing' as important. Thissupports the view that more e!ort should be made to


Fig. 5. Recommendations and implementations.

Table 3Rating of risk by "rms deciding not to implement a speci"c recommen-dation (proportion rating sources as important or very important)

% RSE

Information is constantly changing 38 15Adjustment costs during installation 43 16Adjustment costs after installation 28 21Potential costs associated with breakdown 28 21

Table 4Rating of risk by "rms implementing all recommendations (proportionrating sources as important or very important)

% RSE

Information is constantly changing 75 10Adjustment costs during installation 70 11Adjustment costs after installation 71 11Potential costs associated with breakdown 74 10

Table 5Percentage of "rms agreeing or strongly agreeing to reasons given fornot implementing a speci"c recommendation

% RSE

Investment too risky 20 26Auditors assessment inaccurate 38 18Rate of return too low 53 12Finance unavailable 20 28Payback period too long 45 14Lack of sta! with expertise 17 31Unclear how to implement 28 20Not our decision 13 35Investments irreversible 28 22Energy e$ciency often overlooked 35 20

incorporate this category of risk into investment evalu-ation procedures. The same can also be said for the otherthree risk categories which were also regarded as impor-tant or very important by at least 70 per cent of respon-dents.

This result could also imply that the so-called &noregrets' opportunities to improve energy e$ciency areexaggerated. They would be exaggerated if an opportun-ity was labelled &no regrets' without adequate accounttaken of the riskiness of the investment when the invest-ment was evaluated. In other words, where a measuresuch as NPV that takes inadequate account of risk istaken as the sole indicator of economic viability then theextent of &no regrets' options will be in#ated. Even ifstandard NPV measures are socially optimal (there isa view that risk averse individual should not deprivesociety of the full expected value of investments) despitebeing individually risky, there will be a practical di!er-ence between what is achievable hypothetically and whatwill be achieved in practice. In this context, talking interms of &no regrets' from the "rm's perspective is notvery helpful.

3.5. Reasons for not implementing specixcrecommendations

The incidence of reasons "rms give for not imple-menting recommendations is shown in Table 5. Thethree most important reasons for not implementing


Table 6Division of "rms among attribute classes and scale of implementation

Implementation categories

Attribute class All "rms RSE (70%implemented

RSE 70}90%implemented

RSE '90%implemented

RSE

Own all or part of building 88 4 90 7 83 9 89 6Lease all or part of building 12 28 10 64 17 43 11 46

Sta! no. (50 34 15 28 33 37 27 37 20Sta! no. 50}200 32 14 27 34 34 25 34 20Sta! no. '200 34 14 45 26 30 21 30 21

Energy costs (100 K 30 15 25 27 25 28 36 22Energy costs 100}400 K 40 14 23 40 44 22 48 18Energy costs '400 K 31 13 52 18 31 24 16 33

Operating costs (1700 K 41 12 48 19 39 25 37 17Operating costs 1700}6000 K 29 15 14 27 22 41 43 17Operating costs '6000 K 31 15 38 25 39 23 20 33

Audit costs (5 K 37 11 31 25 36 14 41 16Audit costs 5}8 K 29 15 25 30 30 29 31 22Audit costs '8 K 34 14 44 19 33 25 28 26

Firms using &NPV' rule 30 15 38 28 32 23 24 29Firms using &RR on Capital' rule 53 10 51 19 50 18 57 15Firms using &payback period' rule 80 5 78 9 82 9 80 7

Environment important * agree 74 7 59 19 79 11 80 8Environment important * disagree 9 32 13 54 7 69 8 49

Firm is risk taker * agree 16 25 27 39 18 42 9 51Firm is risk taker * disagree 58 9 60 19 55 19 58 13

Thought audit worthwhile 93 2 84 6 95 5 98 2

recommendations come under the heading of &costs/prof-itability'. Fifty-three per cent of "rms cited low rates ofreturn, 45 per cent cited long payback periods and 38 percent did not agree with the auditor's economic assess-ment of a particular investment. The relative importanceof these economic criteria as distinct from other criteriawhich are commonly cited as reasons for non-implemen-tation is interesting. One interpretation is that "rms maybe acting rationally in rejecting energy e$ciency invest-ments purely on economic grounds, and the extent of noregrets opportunities in the Australian economy is exag-gerated. This is consistent with the observation that therecommendations adopted had a higher bene"t}cost ra-tio than those not adopted. In addition, it supports theview that current techniques for evaluating investmentsare not capturing all of the factors which are importantto "rms. The common view that energy e$ciency is oftenoverlooked by management, perhaps because it is not&core business' (see for example Productivity Commis-sion, 1996), received support by 35 per cent of respon-dents, making it the fourth most important reason fornon-implementation of recommendations. Other reasons

receiving support by more than 20 per cent of thosesurveyed were the irreversible nature of investments andthe fact that it was unclear how to implement invest-ments.

3.6. Relationship between scale of implementationand xrm characteristics

In Table 6 the scale of implementation of EEAP rec-ommendations is broken down into the categories of lessthan 70 per cent, 70}90 per cent and more than 90 percent of recommendations implemented. These are thentabulated against various attribute classes. In this waya relationship may be discovered between behaviour as itrelates to implementation, "rm size and other traits.

As an illustration, in the population as a whole (the &allunits' column) 88 per cent of "rms own all or part of theirbuilding. Looking only at the group of "rms whichimplemented less than 70 per cent of their recommenda-tions, 90 per cent of these own all or part of theirbuilding. Generally, rates of implementation do not di!ernoticeably between "rms that leased and "rms that


Table 7Mean total NPV for audited "rms by di!erent interest rates and timeperiods (A$000)

Number Discount rate (%)of years

6 8 10 12 15 20

1 !31.4 !32.6 !33.7 !34.8 !36.4 !38.82 28.6 25.2 22.0 18.9 14.6 8.03 85.1 78.7 72.6 66.9 58.9 47.04 138.5 128.2 118.6 109.7 97.4 79.45 188.8 174.0 160.4 147.9 130.9 106.56 236.3 216.5 198.5 182.0 160.0 129.17 281.2 255.8 233.0 212.5 185.3 147.98 323.4 292.2 264.5 239.7 207.4 163.69 363.3 325.9 293.1 264.0 226.5 176.6

10 400.9 357.1 319.0 285.7 243.2 187.5

owned their own premises: the distribution across the&scale of implementation' classes is roughly the same as inthe population as a whole. Indeed, this appears to bethe situation across all attributes except for the sizeindicators.

Four size indicators are presented: sta! numbers, en-ergy costs, operating costs and audit costs. From Table 6there is evidence that larger "rms have lower rates ofimplementation. To see this, the distribution of the popu-lation within attribute groups, is compared with the &allunits' column' for each size indicator group. Generally,for all indicators, the larger units are over-represented inthe less than 70 per cent group and under-represented inthe greater than 90 per cent group.

Taking energy costs as an example and looking at thepopulation as a whole, 31 per cent of "rms have energycosts greater than A$400 000. But looking only at thegroup of "rms that implemented less than 70 per cent oftheir recommendations, 52 per cent of these have energycosts greater than A$400 000. Of the group that imple-mented more than 90 per cent, only 16 per cent haveenergy costs greater than A$400 000.

3.7. Implementation and &hurdle rates'

For speci"c recommendations that were not imple-mented, we asked the question `What rate of returnwould your "rm consider necessary to have undertakenthis investment (given the uncertainties mentioned)?a.This was the way "rms were asked for the &hurdle rate' fora speci"c investment without using the term itself whichmight have been unfamiliar.

There were 27 responses to this question, and theseranged from 4 to 75 per cent per annum. On average, therate of return that "rms reported as the minimum neces-sary for investment was 26 per cent, and the median ratewas 20 per cent. These results suggest that "rms doexpect high rates of return for energy e$ciency invest-ments. The key &hurdles' to be overcome are constantlychanging information and irreversibility. These werefound to be relatively important reasons for non-imple-mentation.

The hurdle rate concept is supported by the results asfar as they go but further analysis of this type would beuseful before strong conclusions could be drawn.

3.8. Evaluation of the cost ewectiveness of EEAP

To evaluate the cost e!ectiveness of EEAP, the averagevalue of EEAP to an individual "rm is calculated (seeTable 7), assuming di!erent interest (or discount) ratesand di!erent investment lives (number of years for whichbene"ts accrue). Each NPV is calculated using the costsand bene"ts provided by the auditors of those invest-ments actually implemented by "rms. The cost of the

audit is subtracted from the calculation with there beingno distinction between the government and "rm-fundedcomponents of the audit cost. Government costs in ad-ministering the EEAP policy, however, have not beentaken into account.

EEAP was unambiguously bene"cial to an individual"rm in every case except where investment life is assumedto be one year, probably an unrealistic situation. Takingone "gure as an example, say an investment life of 5 yearsand an interest rate of 8 per cent, the NPV is A$174 000.To put this "gure into context, the average amount spenton energy per year by a "rm is A$434 000. So each "rmon average saves 40 per cent of their energy costs over5 years, or 8 per cent of the original bill per year for5 years. This is about 4 per cent of a "rm's total operatingcosts. A saving of 40 per cent of the original energy billover "ve years might be considered worthwhile by the"rm but perhaps not huge, given the opportunity cost ofcapital, and other priorities the "rm obviously has. Thelevels of savings from the energy bill are similar in magni-tude to those observed from the operation of a largeaudit program in the United States, which found that onaverage a manufacturing plant reduces its energy costs byabout 10 per cent a year as a result of implementingenergy saving recommendations (US Department ofEnergy, 1996).

The net present values given do not include &hiddencosts' which are excluded from standard evaluation tech-niques. Risk can represent a substantial &hidden cost'which is not accounted for in deterministic NPV analysis.Risk is seen as an important factor in energy e$ciencyinvestment decision by a signi"cant proportion of thepopulation. For example, 75 per cent believe the rate atwhich information is changing, or the pace of technolo-gical change, is important or very important. Un-doubtedly the "rms made some sort of assessment orjudgement about the pace of technological changeand other risk factors before making their investment


decisions. To the extent that this is true the NPV valueswill tend to overstate the cost-e!ectiveness to "rms of theaudit process.

Despite the above provisos it can probably be con-cluded that the EEAP audit process was cost e!ective to"rms. This is backed up by the 93 per cent or so of EEAPparticipants who said that it was worthwhile (Table 6). Inaddition it is probably safe to say that, given the magni-tudes of the results, audits are worthwhile for many "rmseven without government subsidies.

4. Concluding comments

The rate of implementation of EEAP recommenda-tions turned out to be much higher than was perhapsexpected, at around 80 per cent for the more than 1000"rms that took part in EEAP. A simplistic interpretationof this result, which could be appealing at "rst glance, isthat it shows that there are many undiscovered &no re-grets' opportunities: each auditor found an average of sixrecommendations per "rm of which "ve were imple-mented. However, investment in energy e$ciency isa complex issue. There are a large number of factorswhich determine a "rm's decision to invest or not. Oneimportant possible explanation is the costs and risksinvolved in acquiring information and investing in newtechnologies. These issues are discussed in detail ina study currently being undertaken by ABARE.

EEAP worked because it addressed the complexity ofinvesting in energy e$ciency. However, this does notnecessarily mean that EEAP should be re-instated.Although the government subsidy served to initiatea "rms involvement in EEAP, the end result was usuallyworthwhile for the "rm. Results of the analysis indicatethat this would have been the case even without thesubsidy.

The main policy implication is that promotion of thetype of process which occurred under EEAP might bea useful direction to pursue (assuming that energy e$-ciency policies will be pursued in future and that publicprovision of information is the most cost-e!ective generalmethod). Promotion should concentrate on the desirabil-ity of a "rm taking what we call an enterprise-wide viewof their energy e$ciency, perhaps suggesting that anexpert be consulted.

References

Australian Bureau of Statistics (ABS), 1998. Australian Mining Indus-try 1995}96, Cat. No. 8414.0. ABS, Canberra.

Commonwealth of Australia, 1991. Enterprise Energy Audit Program.AGPS, Canberra.

Eyre, N., 1997. Barriers to energy e$ciency: more than just marketfailure. Energy and Environment 8(1), 25}43.

Harris, J., Weston, L., Warr, S., Peat, A., 1996. An analysis of data fromthe enterprise energy audit program. ABARE Consultancy ReportPrepared for the Department of Primary Industries and Energy,Canberra, November.

Industry Commission & Department of Industry, Science and Tourism,1997. A Portrait of Australian Business. Results of the 1995 BusinessLongitudinal Study. Department of Industry, Science and Tourism,Canberra.

Ja!e, A., Stavins, R., 1993. The energy paradox and the di!usion ofconservation technology. Faculty Research Working Paper Series,R93-23 Harvard University.

Johnson, B. E., 1994. Modeling energy technology choices. Whichinvestment analysis tools are appropriate? Energy Policy 22 (10),877}883.

New South Wales Environment Protection Authority, 1997. Industryand the environment* A benchmark survey of environmental mana-gement in NSW industry. EPA Social Research Series, November.

Productivity Commission, 1996. Energy e$ciency for SMEs. Report96/14, AGPS, Canberra.

United States Department of Energy, 1996. Analysis of energy-e$cien-cy investment decisions by small and medium manufacturers. Tech-nical Report 4, United States Department of Energy, Washington,DC.


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