Chapter 1 Industrial energy conservation:

a broad overview

Handbook on energy audits and management 1–13

This chapter is intended to provide an overview on industrial

energy conservation. The broad issues that have been touched
upon include: (1) potential for energy conservation in the
Indian industrial sector; (2) policy recommendations;
(3) barriers restricting the implementation of energy conser-
vation measures; (4) incentive schemes; (5) the role of energy
audits in industrial energy conservation; and (6) the economic
analysis of investments for energy conservation.

The industrial sector is a major energy-consuming sector in

Potential India and uses about 50% of the total commercial energy
available in the country. The total industrial energy consump-
tion, including non-energy uses, grew from 45.7 MTOE
(million tonnes of oil equivalent) in 1984/85 to 74 MTOE in
1994/95. Of the commercial sources of energy, coal and lignite
account for about 56%, oil and natural gas around 40%,
hydro-electric power about 3%, and nuclear power accounting
for 1%. The level of energy consumption is very high, as can
be seen from Table 1, which gives the absolute energy con-
sumption values of some of the energy-intensive industries for
1995/96.

Table 1 Absolute energy consumption of some energy-intensive industries

Absolute energy consumption

Industry (million gigacalories)

Fertilizer 112.0
Textile 52.5
Sugar 100.0
Petrochemicals (PVC and polyester) 5.8
Chlor-alkali 20.0
Aluminum 30.1
Mini-steel 27.0
Food processing 15.0
Paper 26.0
Glass and ceramics 15.0
Iron and steel 17.0
Cement 67.0
Foundry 14.0
 2 Industrial energy conservation: a broad overview

In general, the Indian industry is highly energy-intensive

and energy efficiency is well below that of other industrialized
countries. Efforts to promote energy conservation by such
industries could lead to substantial reduction in cost of pro-
duction, making them more competitive globally. A compari-
son of energy use in some of the energy-intensive industries in
India and their counterparts in developed countries is shown
in Table 2.

Table 2 Comparison of specific energy use in select industries

(in million kcal/tonne)

Country Steel Cement Pulp and paper Fertilizer

India 9.50 2.00 11.13 11.25

UK 6.07 1.30 7.62 12.23
USA 6.06 0.95 9.70 11.32
Japan 4.18 1.20 — —
Sweden 5.02 1.40 7.56 —

There is substantial scope to improve the end-use energy

efficiency of the Indian industry. It has been estimated that
the total conservation potential of the Indian industry is
around 25% of the total energy used by this sector. It is also
estimated that over 5% to 10% saving is possible simply by
better housekeeping and another 10%–15% with small invest-
ments towards low-cost retrofitting, use of energy-efficient
devices and controls, etc. The quantum of saving is much
higher if high cost measures like major retrofitting, process
modifications, etc., are considered.

The Government of India has, from time to time, constituted

Policy expert groups to examine specific aspects of energy supply
recommenda- and demand and recommend appropriate policy measures. In
tions the work of the earlier government-appointed committees, the
emphasis, understandably, was more on aspects of energy
supply. However, in the more recently constituted expert
groups (Inter-Ministerial Working Group, Working Group on
Energy Policy, Committee on Power, and Advisory Board on
Energy), considerable attention has been given to the conser-
vation aspects as there is a growing realization that energy
conservation can be considered as an alternate source of
energy. As can be seen from Table 3, the cost of supplying
incremental energy is far less if it is made up by implementing
energy conservation measures as against the investment
required to create equivalent resources. The table shown

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 3 Industrial energy conservation: a broad overview

below is taken from the report prepared by the Inter-Ministerial

Working Group on Utilization and Conservation of Energy in
1983. Although the source is quite old, its reference value
persists because an assessment of this sort has not been
attempted in recent times.

Table 3 Industrial sector conservation potential

Investment required for

Annual Savings creating equivalent
Energy form consumption potential resources (Rs in million)

Coal (MT) 70 17.5 8750

Oil (MT) 4 1 1800
Electricity 60 billion kWh 5250 MW 47250
Total investment required
for creating equivalent
resources 57800
Investments required for
implementing energy
conservation measures 36000
Expenditure saving by
implementing
conservation measures 21800

Source MoP (1983)

Some of the important policy measures recommended by

the expert groups are given below.

Technical and 2 Detailed energy audits should be carried out in at least all
operational large- and medium-sized industries.
measures 2 Measures to improve the efficiency of energy utilization in
industries should be the most important element of energy
policy in the industrial sector. Standards for fuel efficiency
for each type of industry should be fixed with gradual
improvement in efficiency over time.
2 Cogeneration policies in existing industries should be
identified and pursued if necessary by providing financial
incentives.

Fiscal and 2 Investments and subsidies for energy conservation schemes

economic should be provided by creating an energy conservation fund
measures by levying energy conservation cess on industrial consump-
tion of petroleum products, coal, and electricity.
2 Customs duty relief on both components and equipment
related to energy conservation should be offered.

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 4 Industrial energy conservation: a broad overview

Energy pricing 2 Energy pricing policies must ensure that: (1) sufficient
surplus is generated to finance the energy sector invest-
ments; (2) economy in energy use is induced; and
(3) desirable interfuel substitution is encouraged.
2 Penal levies on industries that exceed the laid down norms
and fiscal incentives for those who improve on them should
be considered.

Industrial 2 Before licences are given to new units, the capacities of the
licensing, existing units and the capacity utilization factors for these
production, units should be taken into consideration.
and growth 2 In setting up new industries, the technologies used should
be the least energy-intensive option.
2 The possibility of utilizing waste heat from power plants,
especially the super thermal stations, by setting up appropri-
ate industries in the vicinity should be seriously considered.

Organizational 2 In large- and medium-sized industries, it must be made

measures mandatory to appoint energy managers. In small-scale
industries, a mechanism of energy auditing, reporting, and
improvement in energy use should be instituted.

Energy 2 Better standards must be set for energy-consuming equipment.

equipment 2 Restrictions must be placed on the production and sale of
low-efficiency equipment.
2 Manufacture of sophisticated instruments required for
monitoring energy flows must be encouraged. Import of
such instruments and spare parts should be free of customs
duty.

Research and 2 Every major industrial process should be reviewed to iden-

development tify the R&D efforts required to reduce energy consumption.
2 The government as a distinct component of the science and
technology plan should sponsor R&D programmes in
energy conservation technologies.

Other 2 Formal training courses for developing energy conservation

measures expertise should be introduced in various technical institu-
tions to maintain a steady flow of experts in the field.
2 A system of governmental recognition and awards should
be instituted for honouring individuals and organizations
for outstanding performance in energy conservation.
2 Pamphlets in local languages, suitable documentary films,
and programmes on radio and television should be intro-
duced to create energy conservation awareness. While some
of the measures recommended above have already been

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 5 Industrial energy conservation: a broad overview

implemented, there are many where no decisions have been

taken so far. One hopes that the recommended initiatives
get the attention of the policy makers and is taken note of
while formulating the Energy Conservation Bill that the
government is planning to introduce.

While the technical and economic viability of improving the

Barriers energy efficiency in India is quite substantial, there also exists
a set of barriers that restrict the actual realization of this
potential. The sector, in spite of being relatively organized, is
highly disparate and dispersed, consisting of a large number of
small manufacturing units. Although there has been a gradual
improvement in the specific energy use by the industrial
sector, the energy conservation move has not acquired the
desired momentum. Some key factors responsible for this are
listed below.
2 Conflict of investment priority between energy conservation
projects and capacity expansion.
2 Importance given by many towards initial cost minimiza-
tion, disregarding the more efficient options (which gener-
ally are more expensive).
2 Existence of limited competitive pressure to reduce cost
because of the growing economy.
2 Shortage of capital to fund energy conservation projects.
2 Shortage of skilled staff and lack of knowledge/information
on technological options.
2 No check on manufacture and marketing of cheaper ineffi-
cient products.

In order to motivate the industrial sector to take up energy

Fiscal conservation seriously, the government, from time to time,
incentives introduced fiscal incentives that ranged from offering 100%
depreciation allowance to cut on import duties for specific
items to offering energy audit subsidy schemes through vari-
ous agencies. Effective from April 1983, a 100% depreciation
allowance has been allowed on certain energy-saving devices
and systems. These can be categorized as:
2 specialized boilers and furnaces,
2 instrumentation and monitoring systems for monitoring
energy flows,
2 waste-heat recovery equipment and cogeneration systems, and
2 power factor correcting devices.

Specified imported equipment (both energy-efficient equip-

ment as well as instruments to monitor energy flows) are fully
exempt from the customs duty. The list of equipment eligible

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 6 Industrial energy conservation: a broad overview

for these incentives is being periodically reviewed by the

Energy Management Centre (a registered society under the
Ministry of Power, to coordinate and implement the energy
conservation activity), and can be obtained from there. A
number of schemes to promote energy audits by providing
subsidies towards the audit fee have also been introduced by
various institutions.

PCRA Energy audit subsidy

initiative The PCRA (Petroleum Conservation Research Association),
under the Ministry of Petroleum and Natural Gas, offers
subsidies up to 50% of the cost of conducting an audit at an
industrial premises limited to a maximum of Rs 50 000. The
subsidy is payable after the satisfactory conduct of the energy
audit and its acceptance by both the PCRA and the party.
There has to be a written commitment from the party for
implementing the recommendations of the audit amounting to
50% or more of the identified energy-saving potential. The
energy audit subsidy is available to those industries consum-
ing more than 1000 tonnes of oil equivalent per annum and
wherein the majority of fuel consumption is constituted by
petroleum products. The energy auditors must also be empan-
elled with the PCRA.

Schemes for setting up of energy audit centres / upgrading energy

auditing facilities
The PCRA provides financial assistance in terms of soft loans
to procure energy auditing equipment to start or upgrade
auditing capabilities. A beneficiary can take assistance in the
form of a part loan from the PCRA for the purchase of instru-
ments/equipment approved under the scheme. The assistance
varies from 50% of the cost or Rs 1 million, whichever is
lower, with the beneficiary contributing the balance. An
interest rate of eight per cent on a reduced principal basis per
year shall be charged on the loan amount. The repayment of
loan begins one year after it is disbursed in six equal annual
instalments.

The IDBI scheme

The IDBI (Industrial Development Bank of India) scheme,
launched in 1988, involves organizations such as the NPC
(National Productivity Council) and the PCRA. The assist-
ance under this scheme will be available for financing propos-
als for energy conservation in financially sound industrial
undertakings operating for at least five years. The extent of
conservation, saving, and reduction in unit energy consump-
tion will be assessed and verified by the IDBI / ICICI

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7 Industrial energy conservation: a broad overview

(Industrial Credit and Investment Corporation of India) Ltd /

IFCI (Industrial Financial Corporation of India) in consulta-
tion with the NPC and the PCRA. There are two schemes
under which assistance is available.

Energy audit subsidy scheme

This may be for a primary or a detailed energy audit. The
IDBI bears 50% of the charges of an approved consultancy
for carrying out the audit. For a preliminary audit, the subsidy
is Rs 10 000 or 0.1% of the gross value of fixed assets of the
company, whichever is less, and for a detailed energy audit it
is Rs 0.1 million or 0.05% of the gross value of fixed assets,
whichever is less. The scope of the energy audit and the con-
sultancy charges will be assessed by the IDBI, keeping in view
the quantum of work required to be carried out by the agency,
size of unit, etc.

Equipment finance
Assistance under this scheme will be available only for instal-
lation of equipment for effecting energy conservation in the
existing plants and not for diversification of product capaci-
ties. An energy audit (preliminary and detailed) would be a
prerequisite for assistance under this scheme. The assistance
would be in the form of term loans limited to 50% of the
gross value of fixed assets (excluding revaluation reserves) of
the undertaking/company or Rs 40 million, whichever is less.
The interest will be at the rate of 14% per annum. Interest
can be funded for a period of up to two years from the date of
first disbursement on simple interest basis.
Repayment will commence after two years from the date of
first disbursement to be repaid in full within three years
thereafter. The borrower is also entitled to a rebate in interest
linked to the extent of energy conservation actually achieved
on a sustained basis per unit, equal to the percentage of
savings/reductions in unit energy consumption actually
achieved vis-à-vis the standard. The processing of applications
under the schemes will be handled by the IDBI, jointly with
the IFCI and the ICICI. The proposal (memorandum of
interest) would set out salient details of the proposal and year-
wise targets of energy conservation expected to be achieved.
The actual achievement during operation will be monitored
and certified by an agency to be designated by the IDBI.

IREDA
Financial assistance is offered by IREDA (Indian Renewable
Energy Development Agency) offers on attractive terms for
energy-efficient equipment manufacturers as well as users.

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 8 Industrial energy conservation: a broad overview

Projects, which fall under industrial, commercial, domestic,

and agricultural sectors and have energy-saving potential can
avail IREDA’s loans and implement energy-saving measures.
It is, however, recommended that an energy audit by reputed
consultants should be conducted to identify the energy-saving
potential before applying for a loan. Energy-efficiency/conser-
vation projects proposed to be implemented through the
ESCOs (energy service companies) are financed by IREDA. It
also provides loans for installing facilities for manufacturing
of energy-efficient equipment. In addition to the proposed line
of credit from the World Bank, IREDA has also allocated its
own resources towards financing energy-efficiency/conserva-
tion projects.

Terms of Table 4 provide details of financing available in this regard.

financing
Table 4 Financing for energy conservation / efficiency projects (including
demand-side management) and energy service companies

Interest rate Repayment

(per annum) (years) Minimum
(exclusive of including Moratorium contribution
interest tax) moratorium (maximum) by promoters
Sector (%) (maximum) (Years) (%)

Project =
Commercial and industrial 13.50 10 2 25
Domestic 13.50 5 1 25
Agricultural 12.50 10 2 25
Manufacturing => 14.50 8 2 25
Equipment=
Commercial and industrial 14.00 10 2 20
Domestic 13.50 5 1 20
Agricultural 13.00 10 2 20

=
the term loan / lending norms of IREDA amount up to 75% of total project cost; > of equipment
/ facilities relating to energy conservation / efficiency systems

All the decisions concerning implementation of energy-

efficiency initiatives are based on the savings proposed. It is
very important to first assess the returns on investment and
then decide on the future course of action. For making an
effective and commercially viable decision, a basic under-
standing of investment criteria is essential.
It must be kept in mind that these incentives can help, but
only to a limited extent. Our experience shows that the man-
agement, which is really keen on improving the energy effi-
ciency, never waits for such incentives. It is also true that

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 9 Industrial energy conservation: a broad overview

invariably in all cases, the energy audit expenses are paid back
by implementing only the no-cost/ low-cost options identified
during the course of such audits.

Energy audits can be considered as the first step towards

What is an understanding how energy is being used in a given facility. It
energy audit? indicates the ways in which different forms of energy are being
used and quantifies energy use according to discrete func-
tions. Energy audits do not provide the final answer to the
problem. They identify where the potential for improvement
lies and, therefore, where energy management efforts must be
concentrated.

Methodology It is true that there is no clear cut methodology which can be

tailor-made for conducting an energy audit. What is presented
in the subsequent chapters are indicative of the ways to
attempt the audit of various energy-consuming equipment.
Historically, energy audits are broadly classified as: (1) pre-
liminary energy audits; and (2) detailed energy audits. Brief
explanatory notes are provided below.

Preliminary energy audit

In a preliminary energy audit, the entire audit exercise can be
divided into three steps. Step 1 identifies the quantity and
cost of the various energy forms used in the plant. Step 2
identifies energy consumption at the department/process level.
Step 3 relates energy input to production (output), thereby
highlighting energy wastage in major equipment/processes.
The typical output from a preliminary audit assignment are:
2 a set of recommendations for immediate low-cost action, and
2 identification of major areas/projects which require a more
in-depth analysis.

A preliminary energy audit study typically involves two or

three days of plant visit. In such studies, which are at times
also referred to as walk-through audits, one basically relies on
the data supplied by the unit or personal readings from meters
installed in the industry. Practical experience shows that, in
many instances, the meters installed in the industry do not
show accurate readings primarily because these instruments
are not calibrated regularly. Ideally, the energy auditor must
carry properly calibrated portable instruments and make
recommendations based on measurements taken at the site
during the time of the audit. Due to the drawbacks of this
method, more and more plants are getting interested in a
detailed or comprehensive energy audit.

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 10 Industrial energy conservation: a broad overview

Detailed energy audit

The detailed energy audit goes much beyond the quantitative
estimates of cost and savings. It is generally preceded by a
plant visit, which is also called a scoping study, wherein the
scope of the audit assignment is discussed in detail with the
plant personnel (the scoping study is, however, applicable to
only consultancy firms). The study involves detailed mass and
energy balance of major energy-consuming equipment. The
system efficiencies are evaluated and measures are identified
for improving the end-use energy-efficiency. The study pro-
poses specific projects / feasibility studies for major retrofit-
ting/replacement proposals, providing a cost-benefit analysis
of the recommended measure. The duration of the audit is a
function of the size and complexity of the plant, the areas to
be covered under the study, etc., and can vary from around
three months to a year.

When any conservation opportunities are to be implemented,

Economic most measures do not require investments. However, it is
analysis of possible that an investment, marginal or substantial, is some-
investments times incurred for specific energy saving opportunities. And,
transferring the implementation from paper to actual practice
involves making a decision-to invest or not to invest.
Usually, decisions are made regarding alternative solutions
for utilization of capital. At the outset, the decisions must not
conflict with the objectives of the enterprise, These objectives
can be constrained by social considerations or governmental
regulations. They can be influenced partially by the owner’s
tastes or time required for implementation, However, the
prime objective does not deviate from profit maximization.
In order to aid the decision makers, there are certain eco-
nomic methodologies, which are followed. These are briefly
discussed, although progressing beyond basic concepts would
be beyond the scope of this manual.
All these methods are more or less reliable, depending on
the accuracy of evaluation of the cash inflow and outflow,
estimation of the discount rate (cost of capital) and prediction
of the possible rate of increase of the energy price. Within
these limitations, the most precise method is the ‘present
value criterion’, which compares the present value of all-
future after-tax cash inflow and outflow over specified period
of time to the present value of the cost of investment for the
investment.
Although it may appear elementary, one has to recall here the
fundamental rule of sunk cost, which says that in taking deci-
sions about future investments, no role is played by past costs.

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 11 Industrial energy conservation: a broad overview

For example, when a new line of products is considered in a

factory, the original book value of the existing old machinery
already installed as irrelevant from the point of view of future
cost evaluation. What is relevant is the present book value of
the equipment, in case the old machinery can be sold or
partially used to substitute the purchase of the new machin-
ery. If the old machinery can not be sold or used in the new
production it is a ‘sunk cost’ and has no relevance to the
investment decision concerning the new machinery.

Present value The NPV (net present value) is defined as the difference
criterion between present worth of savings and cost of investment. The
investment should be made if the NPV is positive, and should
be discarded if the NPV is negative.
The present value method converts the money time series
corresponding to the savings to an equivalent single amount at
the date (year O) when the decision to invest is to be taken.
The present value criterion then compares this equivalent
amount to the capital to be invested.

1
NPV = p ×
(1 + r )n

where,
p = future payments and income,
r = predetermined discount rate, and
n = number of years for which the NPV is calculated

The NPV indicates the return that the management can

expect from the project at various discount rates. It can also be
used to compare various projects with similar discount rates and
risks, as well as compare them against a benchmark rate.
The IRR (Internal rate of return) is the threshold rate at
which the NPV is zero. It is the rate of return received for the
project considering payments and income at regular intervals.
This is commonly used for analysing investments in projects, A
project is considered viable, if its IRR is greater than the interest
rate offered by financial institutions for investing the capital with
them that would be otherwise invested in the project.

Average rate The average rate of return on investment criterion is not so

of return precise as the present value criterion but it can provide a
criterion preliminary guide to investment decisions provided that the
projected future annual cash savings can be assumed to
remain constant.

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 12 Industrial energy conservation: a broad overview

For example, suppose the installation of a heat recovery

device is considered. The heat recovery system installation
costs Rs 1 million and will last five years. The law permits a
20% annual linear depreciation factor. The new machine is
expected to save Rs 300 000 in fuel costs annually.

Return on The returns may be on the investment made or on a particular

investment project or of the organization as a whole.

ROI (return on investment) : profit/capital employed

The ROI is a combination of two ratios, i.e. the profitability

and the capital turnover ratios.
The profitability ratio indicates the profitability of the
organization / investment / project while capital turnover ratio
indicates the efficiency with which the assets/investment are
being employed. The greater the two ratios, the higher will be
the return on investment.
Generally the management analyses profitability ratios to
take decisions pertaining to pricing policies, costs, etc., while
the capital turnover ratio is analysed to take investment deci-
sions.
The expected return on investment is generally the bench-
mark for investment decisions.

Payback The payback period criterion evaluates the time required to

period recover an initial investment through an annual net cash flow.
criterion It is defined as the investment cost divided by the cash flow.
In the previous example of the heat recovery systems, the pay
back time in years is equal to 3.3 years.
Similar to the return on investment method, the payback
criterion does not take into consideration the discount rate,
the change in energy prices, or the lifetime of the investment
project. It has one advantage over ROI in that a precise indi-
cation of the annual benefit, namely the cash flow, is used
instead of profits. However, both suffer from the difficult in
justifying the threshold value beyond which no project should
be considered.
In practice, investment projects with a payback period of
three years of less almost always have a positive NPV. Thus
the payback period is often used as a ‘filter’, calculating the
NPV when the payback period is over three years and accept-
ing the project when it is less.

Break-even An important part of investment analysis, not to be confused

parameters of with the payback period, is the calculation of the threshold
NPV value of a critical parameter of the NPV.

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 13 Industrial energy conservation: a broad overview

The threshold, or break-even value, is the value of a NPV

parameter for the NPV equal to zero. Any value beyond the
break-even value will cause the NPV to become positive and
the investment acceptable.
Typical parameters studied in this manner include:
2 the price of the service;
2 the utilization of the capacity of the investment;
2 various items of the cost of the project;
2 the energy price increase, and
2 occasionally, the duration of the project.

When the latter is used as a parameter, the break-even time

(in years) is a ‘true’ payback period, where the discounted
benefits begin to exceed the discounted costs.

In general, the Indian industry is highly energy-intensive and

Conclusions its energy-efficiency is poor when compared to that of other
industrialized countries. There is considerable scope for
improving energy-efficiency in industries dealing with iron
and steel, chemicals, cement, pulp and paper, fertilizers,
textile, etc. Efforts to promote energy conservation by such
industries could lead to substantial reduction of their cost of
production, making them more competitive globally. As 1
kWh saved at the user- end could mean a relief of 2–4 kW of
the generation capacity depending on the plant load factor,
transmission and distribution losses, and end-use efficiency,
energy conservation offers the least-cost option for bridging
the ever-widening gap between demand and supply of energy.
Significant energy savings could be achieved through better
housekeeping, improved capacity utilization, development of
cogeneration facilities, industrial waste and heat management,
and arrangements for improving the quality of electricity
supply. For new plants, the goal should be to adopt energy-
efficient technologies at the inception stage.
In order to motivate entrepreneurs to take up the energy-
efficiency drive seriously, many state governments have made
energy audit mandatory for units above a certain size (gener-
ally relating it to the connected load). But the fact remains
that it will become a motivating force only when the entrepre-
neurs start realizing the actual benefits of energy use and
utilize it as a tool to increase profits and productivity, rather
than view it as a statutory requirement.

MoP. 1983
Reference Report by the Inter-Ministerial Working Group on Utilization
and Conservation of Energy
New Delhi: Ministry of Power, Government of India

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