The Economic Evaluation of Energy Efficiency in Industry: an Innovative Methodology

An empirical research involving 130 Italian industrial firms showed that the economic viability of energy efficiency projects is mostly evaluated through indicators like Pay-Back Time (PBT) and Internal Rate of Return (IRR), whose acceptability thresholds are affected by decision makers’ risk propensity and other contingencies (such as competing priorities). However, this approach hinders the adoption of several energy efficiency technologies - such as CHP, electric motors, inverters -, which provide economically viable results from a lifecycle cost perspective. This paper addresses this issue by identifying an innovative evaluation method for energy efficiency investments. Inspired by the lifecycle economic assessment methodology for energy production plants – the so-called Levelized Cost Of Electricity (LCOE) or Levelized Energy Cost (LEC) - our indicator, called Levelized Energy Efficiency Cost (LEEC), correlates the energy savings that can be achieved through the implementation of an energy efficiency technology and the total costs incurred throughout the entire technology lifecycle (e.g. initial investments, O&M, disposal). A technology can be considered as economically viable if the LEEC is lower than the energy price incurred by the firms, because in that case the economic benefit of the saved energy is higher than the sustained cost to obtain it. The application of such methodology in different Italian energy-intensive industrial sectors (e.g. automotive, cement, iron&steel and pulp&paper) demonstrates that most of the considered technologies are economically viable. Therefore the LEEC is a clear and simple tool for companies’ decision makers to evaluate energy efficiency projects.