Introducing a new perspective for the economic evaluation of industrial energy efficiency technologies: An empirical analysis in Italy

An empirical analysis involving 130 Italian industrial firms showed that the economic viability of investments in energy efficiency technologies is mostly evaluated through indicators such as 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 the firm’s financial health.Our analysis suggests that these evaluation approaches hinder the adoption of several energy efficiency technologies, such as combined heat and power (CHP) plants, electric motors, variable speed drives (VSD), uninterruptible power supply (UPS), which are in fact economically viable if analyzed from a life cycle cost perspective, but appear to be unsustainable if analyzed through PBT or IRR indicators.This paper addresses this issue by introducing a new evaluation perspective for investments in industrial energy efficiency technologies. Inspired by the life cycle economic assessment methodology for energy production plants – the so-called Levelized Cost Of Electricity (LCOE) – 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 life cycle of the technology, e.g., initial investments, Operation & Maintenance (O&M), disposal costs. Accordingly, a technology can be considered as economically viable if the LEEC is lower than the energy price incurred by the firm, because in this case the economic benefits resulting from the energy saving due to the adoption of the technology is higher than the cost paid to obtain and operate it during its entire life cycle.The application of such methodology in different Italian energy-intensive industrial sectors (e.g., automotive, cement, iron & steel and pulp & paper) shows that most of the considered technologies are economically viable, from the life cycle perspective on which this methodology is grounded. Therefore we suggest that the LEEC is a clear and simple tool for companies’ decision makers to evaluate energy efficiency projects, to be used in combination with more traditional PBT or IRR indicators to gain a better understanding of the real economic viability of energy efficiency technologies.