Liveable Cities Series: Boosting energy efficiency investments

Energy efficiency technology may not be the sexiest investment, but it is vital to reducing urban energy demand. Image: Grundfos.

The name ‘Grundfos’ will not likely ring a bell to the man in the street, but chances are the average person has stepped into a building that uses the company’s water pumps to save energy.

In fact, Grundfos provides pumps and motors for more than half - 60 per cent - of Singapore’s commercial buildings. These pumps and motors circulate water for air-chillers and other systems, and are also supplied to a wide range of industries from power generation to agriculture.

Its business may not sound sexy but its technology is key to global efforts to reduce carbon emissions and curtail growing energy demands in cities.

According to the Asian Development Bank (ADB), industries and buildings account for more than 70 per cent of commercial energy used in the region. Cities have two options for coping with this growing energy burden: they can reduce demand through energy efficiency, or they can add new power capacity at twice the cost.

Speaking at Grundfos’s new manufacturing facility, Singapore’s Economic Development Board (EDB) director of cleantech Goh Chee Kiong said:Energy efficiency is actually the cheapest form of energy, and cities should view it as low-hanging fruit.”

The firm recently joined the growing ranks of manufacturers operating green factories with the opening of its new S$40 million regional headquarters and assembly plant in Singapore’s Tukang Innovation Park.

Singapore has set a target of reducing its energy intensity – or the amount of energy used to produce goods and services  – by 35 per cent by 2030. To achieve that, the city-state has prioritised energy efficiency in its industrial, household, building, and transport sectors.

For industry, the Republic’s largest electricity consumer, Singapore has instituted a combination of incentives, grants and training programmes as well as mandatory energy management requirements that will take effect next year (see below).

Under its Energy Efficiency National Partnership programme, introduced in April 2010, Singapore is encouraging manufacturers like Grundfos to lower their share of energy demand.

To reduce its environmental footprint, Grundfos invested an extra 5 per cent of construction costs in its plant, which earned a platinum rating - the highest possible - under Singapore’s green building certification scheme.

The firm and its 200 local staff expect the green factory to achieve more than 40 per cent energy savings and save about 1.8 million litres of water each year through features such as natural lighting and ventilation on the production floor, solar water heaters, energy efficient air-conditioning and LED lighting.

Grundfos regional managing director Poul Due Jensen said that the extra investment in the facility’s green features would pay for itself in energy and water savings in less than five years, but that reduced costs were not the only incentive for the company.

“There’s no doubt having a platinum rated facility will benefit Grundfos because of the industry we are in. We can use this in marketing,” he added, acknowledging that businesses in other industries may need a different motivation.

To encourage investment in its own energy efficient products, Grundfos explains to customers that the purchase price is only five per cent of the life-cycle cost of the product - the rest is maintenance and electricity, he said.

Energy efficiency may seem like a no-brainer because of its cost-effectiveness, but there are still major hurdles.

Mr Jensen noted that even with clear returns on investment and performance guarantees for efficiency, financing is still a big barrier in the region. Ramping up energy efficiency in the region’s cities will require government help, particularly in countries with artificially low electricity rates, he added.

A recent ADB report - Energy Efficiency Interventions - echoed observations that governments needed to address energy pricing and building codes to attract significant investment in energy efficiency.

The development agency further noted that commercial lenders needed better knowledge of specific industries as well as stronger guarantees against risk.

Singapore-based Jihong He, a principal at global consulting firm Roland Berger, told Eco-Business that despite an estimated US$40 billion in potential energy savings in Southeast Asia, energy efficiency is only a good investment if the political framework is right.

“If energy continues to be subsidized, there’s no investment opportunity,” she said.

Industrial mismanagement

Southeast Asia’s manufacturers lackincentives to invest in energy efficiency because many do not know where their energy is being consumed, so the beneficial effects of the investments are often badly measured, noted Ms He.

The short investment cycle for manufacturers further aggravates the business case for energy-saving investments. Most of them look at investment returns over the next two to three years, whereas payback on investments in energy efficient industrial equipment can take five to 10 years, she said.

Those manufacturers that have taken the plunge have experienced mixed results, resulting in a lack of trust from companies regarding the effectiveness of new technology such as process automation or more efficient pumps and chillers.

Some have been burned in the past from false claims, and some are put off by products that do not perform because they are not tailored to the manufacturers’ operations, she added.

Energy service companies - or ESCOs - can provide expertise and, in some cases, guarantee energy savings to secure third party financing, but not every ESCO has been able to provide the technical know-how needed for installation and performance, said Ms He.

Moreover, once in place,the new technology can underperform due to external circumstances.

“In Singapore the problem is not so bad, but elsewhere in theregion, levels of output are unpredictable, standards of production of variable and electricity prices are unstable…and often too low. These are all risk elements that can eat into profits,” she noted as an example.

She further noted that energy efficiency is becoming integral in places such as Singapore that are not rich in natural resources because efficiency is tied to energy security and national sustainability.

But in those countries where natural resources are abundant, such as in Vietnam, Malaysia and Indonesia, energy efficiency is not a huge issue because the governments are more concerned with competitiveness, she said, adding that the companies there think of inefficiency as a long-term problem with no immediate impact on the bottom line.

“To really kick-start energy efficiency, you need government policies,” said Ms He, pointing out that in places such as the United States, it is always government incentives and policies that raise awareness.

Green building growth

Green buildings are becoming the focus for this efficiency trend, with green building certification schemes and incentives appearing in growing numbers throughout Asia Pacific. The sector consumes about a third of the world’s energy according to the International Energy Agency.

A recent report on global green building hotspots from independent research firm Lux Research singled out Australia, Singapore, Malaysia and South Korea for their investment-attracting green building policies.

Boston-based Lux analyst Aditya Ranade told Eco-Business that green building technology companies look for three things in an investment market: attractive government policies such as tax incentives and good building codes; large target markets; and electricity prices low enough to incentivise energy saving.

The biggest opportunities are for technologies with a return on investment shorter than three years, he noted, giving as examples smart lighting, building energy management systems and building facades that adapt to solar conditions.

However, most of the policies that underlie these opportunities emerged within the past five years and it remains to be seen whether or not they will be consistent, said Mr Ranade. “Writing building codes is a good start, but it’s the cities that follow up with audits that will successfully attract investment in the long run,” he added.

Clay Nesler, vice president of Global Energy and Sustainability for energy services firm Johnson Controls, points to another emerging incentive for green building investment: A recent study out of Australia indicated that not only does greening properties raise capital values, not greening them may be lowering their resale value.

This marks the beginning of an important trend for the maturing green building industry, said Mr Nesler: “It’s one thing to be an early adopter. It’s another to believe that your property value will be hurt if your building is inefficient.”

Such consequences for lagging behind in investment is the stick, and price premiums on the sale or rental of green properties are the carrot, he said, noting that it will take a combination of the two to really get energy efficiency investments to take off.

If that happens, it will have a substantial impact on reducing urban energy demand.

“Buildings are the number one opportunity for energy efficiency in cities,” said Mr Nesler.

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