Industrial Sectors Market Characterization Chemicals Industry Prepared for Pacific Gas & Electric Company and Southern California Edison Company Oakland, California, February 2012 Table of Contents Acronyms and Abbreviations ........................................................................................................ 1  Summary of Key Research Findings ............................................................................................ 1  Industry Description ............................................................................................................... 1  Business Models and Cost Structure ..................................................................................... 1  Technology and Energy Consumption ................................................................................... 2  Market Barriers and Opportunities for Energy Efficiency ....................................................... 3  Overall Findings ..................................................................................................................... 4  1.  Introduction and Summary ..................................................................................................... 6  2.  Trends in Industrial Energy Efficiency .................................................................................... 8  2.1  Energy Consumption Trends ........................................................................................ 8  2.2  Economic Downturn Effects on Industrial Production ................................................. 10  2.3  Climate Change and Energy Legislation .................................................................... 11  2.4  National Programs ...................................................................................................... 12  2.5  Rise of Continual Energy Improvement ...................................................................... 14  2.6  Additional States Adopt Industrial Energy Efficiency .................................................. 17  3.  Industry Characterization ..................................................................................................... 21  3.1  Industry Definition ....................................................................................................... 21  3.2  Industry Leaders ......................................................................................................... 26  3.2.1  Global Titans ................................................................................................... 27  3.2.2  Domestic Leaders ........................................................................................... 28  3.2.3  Important Local Players .................................................................................. 29  3.3  Competitive Issues ..................................................................................................... 30  3.3.1  Business Models ............................................................................................. 31  3.3.2  Cost Structure ................................................................................................. 33  3.3.3  Technology Development ............................................................................... 34  3.3.4  Supply Chain Management ............................................................................ 36  3.3.5  Product Development and Roll-out ................................................................. 37  3.3.6  Pricing ............................................................................................................. 39  3.4  Economic Factors ....................................................................................................... 40  3.4.1  Business Cycles ............................................................................................. 40  3.4.2  Availability of Capital and Credit ..................................................................... 41  3.5  Regulatory Issues ....................................................................................................... 42  3.5.1  Environmental ................................................................................................. 42  KEMA, Inc. i January 2012 Table of Contents 3.5.2  Climate ............................................................................................................ 44  3.5.3  Federal Food, Drug and Cosmetic Act ........................................................... 46  3.6  Industry Network ......................................................................................................... 47  4.  Target Technologies / Processes and Energy Efficiency ..................................................... 49  4.1  Energy Use ................................................................................................................. 50  4.2  Energy Consumption by End Use and Energy Efficiency Potential ............................ 55  4.3  Production Processes ................................................................................................. 59  4.3.1  Separations ..................................................................................................... 61  4.3.2  Chemical Synthesis ........................................................................................ 62  4.3.3  Process Heaters ............................................................................................. 63  4.4  Current Practices ........................................................................................................ 64  4.4.1  Efficiency Improvements ................................................................................. 67  4.4.2  Capital Expenditures for Energy Efficiency ..................................................... 72  5.  Market Intervention .............................................................................................................. 74  5.1  Effective Utility Programming ..................................................................................... 74  5.2  Drivers of Energy Decision-Making ............................................................................ 74  5.2.1  Energy Efficiency Planning ............................................................................. 75  5.2.2  Investment Priorities ....................................................................................... 77  5.2.3  Project Financing ............................................................................................ 77  5.2.4  Barriers to Energy Efficiency Investment ........................................................ 77  5.3  Cycles of Innovation ................................................................................................... 79  5.4  Customer Assessment ............................................................................................... 80  5.4.1  Utility Program Awareness ............................................................................. 80  5.4.2  Customers’ Experience ................................................................................... 80  6.  Next Steps and Recommendations ..................................................................................... 82  6.1  Next Steps—Pharmaceuticals .................................................................................... 83  6.2  Next Steps—Other Chemicals .................................................................................... 84  7.  References ........................................................................................................................... 86  A.  ATTACHMENTS ................................................................................................................ A-1  KEMA, Inc. ii January 2012 Table of Contents List of Figures Figure 1: Graphic Overview of the Report .................................................................................... 7  Figure 2: U.S. Trends in Industrial Energy Intensity Delivered Energy, 1985-2004 ...................... 9  Figure 3: U.S. Energy-Related CO Emissions by End-Use Sector, 1990-2007 ........................ 12  2 Figure 4: Industrial Technologies Program Funding, 1998-2010 ................................................ 14  Figure 5: Examples of National and Regional Continual Energy Improvement Programs .......... 15  Figure 6: Utility Energy Efficiency Policies and Programs, 2006 vs. 2007+ ................................ 18  Figure 7: CHP as a Percentage of U.S. Annual Electricity Generation ....................................... 20  Figure 8: Chemical Manufacturing Subsector Electricity Purchases from PG&E in 2006 ........... 24  Figure 9: Chemical Manufacturing Subsector Electricity Purchases from SCE in 2008 ............. 25  Figure 10: Chemical Manufacturing Subsector Gas Purchases from PG&E in 2006 ................. 26  Figure 11: Chemical Industry Energy Footprint .......................................................................... 51  Figure 12: Chemical Industry Energy Footprint—Usage in Specific Equipment ......................... 53  Figure 13: Electric Consumption, Chemicals Industry ................................................................ 55  Figure 14: Electric Consumption by End Use, Chemicals Industry ............................................. 56  Figure 15: Electric Energy Efficiency Potential by End-Use ....................................................... 57  Figure 16: Gas Consumption by End-Use .................................................................................. 58  Figure 17: Gas Energy Efficiency Potential ................................................................................ 59  Figure 18: Simplified Chemical Synthesis Diagram .................................................................... 63  Figure 19: Energy Intensity Trends Related to Heat and Power in the U.S. Chemical Industry, 1974–1997 ........................................................................................................................... 65  Figure 20: U.S. Pharmaceutical Industry Electricity Consumption 1987-2002 ........................... 66  Figure 21: U.S. Pharmaceutical Industry Energy Intensity 1987-2002 ....................................... 67  KEMA, Inc. iii January 2012 Table of Contents List of Tables Table 1: Industrial Energy Consumption, California ...................................................................... 9  Table 2: Percent Change in CO Emissions among Largest Calif. Industrial Sectors, 2008-2010 2 ............................................................................................................................................. 10  Table 3: 2020 Cumulative Electricity Savings Targets, by State ................................................ 19  Table 4: California Chemical Manufacturing Industry Value and Growth ................................... 22  Table 5: Pharmaceutical Industry Energy Use ............................................................................ 54  Table 6: Chemical Industry Specific Technologies ..................................................................... 60  Table 7: Self-Reported Manufacturer's Ability to Undertake Energy Efficiency Investments, Using Scale 1–5 ................................................................................................................... 76  KEMA, Inc. iv January 2012 Acronyms and Abbreviations °C Celsius °F Fahrenheit AB 32 Assembly Bill 32 the Global Warming Solutions Act ACEEE American Council for an Energy Efficient Economy AMO Advanced Manufacturing Office ANSI American National Standards Institute ARB California Air Resources Board Btu British thermal unit CAA Clean Air Act CAV constant air volume CDER Center for Drug Evaluation and Research CEI continual energy improvement CERCLA Comprehensive Environmental Response, Compensation and Liability Act CHP combined heat and power CO carbon dioxide 2 CO e carbon-dioxide equivalent 2 CWA Clean Water Act DNA deoxyribonucleic acid EEPS Energy Efficiency Portfolio Standard ESA Endangered Species Act FDA Food and Drug Administration GHG greenhouse gas GMP good manufacturing practice GWh gigawatt-hour(s) HEPA high-efficiency particulate air HMO health maintenance organization HVAC heating, ventilation and air conditioning IAC Industrial Assessment Center IOU investor-owned utility KEMA, Inc. 1 January 2012 ISO International Standards Organization kWh kilowatt-hour LBNL Lawrence Berkeley National Laboratory MBtu million British thermal unit MECS Manufacturing Energy Consumption Survey MW megawatt NAICS North American Industry Classification System O&M operations and maintenance PCB polychlorinated biphenyl PG&E Pacific Gas and Electric Company R&D research and development RCRA Resource Conservation and Recovery Act RPS renewable portfolio standard SCE Southern California Edison Company SEP superior energy performance TBtu trillion British thermal unit tpy tons per year TSCA Toxic Substances Control Act U.S. United States U.S. DOE U.S. Department of Energy U.S. EPA U.S. Environmental Protection Agency U.S. FDA U.S. Food and Drug Administration USGS U.S. Geological Survey VSD Variable-speed drive KEMA, Inc. 2 January 2012 Summary of Key Research Findings Industry Description The chemical industry is based on the transformation of organic and inorganic raw materials by chemical processes to formulate products with wide-ranging uses. In 2008, the industry totaled $46 billion in sales in California alone, for diverse intermediary and final products such as medicines, cleaning agents, perfumes, paints, industrial gases, and fertilizers. The chemical industry in California, with the dominance of pharmaceuticals and industrial gases is very different from the industry in the southeastern United States (U.S.), which focuses on organic chemicals. While each of the subsectors within the North American Industry Classification System (NAICS) code 325, chemical manufacturing industry is unique, the businesses can be broadly categorized into the following three categories: 1. Basic chemicals (or commodity chemicals), which involve the transformation of raw materials, such as minerals, air and/or methane, for further industrial use. Industrial gas companies are among the most significant customers in this category. Some common industrial gases include air, nitrogen, oxygen, hydrogen, and compound gases such as ammonia, hydrogen chloride, and sulfur hexafluoride. 2. Specialty chemicals, which encompass high-value and niche products that are mostly associated with chemical subsectors such as pharmaceuticals, pesticides and fertilizers. Pharmaceuticals is the largest energy consuming industrial subsector in northern California. These products are generally categorized by high research and development (R&D) expenses, as well as use of biotechnology and other types of patented technologies. 3. Consumer products, which include direct product sales of chemicals such as soaps, detergents, paints and coatings. Products are manufactured using a wide range of feedstock, including intermediary chemicals such as chlorine, phosphoric acid, sulfuric acid, nitric acid and epoxy resin. Business Models and Cost Structure The business model for the large industry leaders relies on keeping products and production processes simple and focusing on economies-of-scale production, while small specialty producers tend to focus on niche products requiring more complex custom products. The more basic the product, the more sales depend purely on pricing. For instance, commodity products KEMA, Inc. 1 January 2012 compete almost purely on price, with the profitability of individual companies closely tied to efficient operations. For many products, the cost of energy can be 30 percent or more of the total manufacturing cost. For chemical products which are not commodity products, companies compete to be first in the market and to benefit from patent protection. Patent protection is especially important for the pharmaceutical, pesticide and fertilizer industries. These types of specialty chemicals focus on niche products that rely heavily on large investments in R&D to capture market share through patented products. Not surprisingly, the highest expense for these companies is in product innovation, which includes long lead times and a high degree of risk. Energy costs typically only factor in at about 3 percent of total product cost. The pharmaceutical and pesticide/fertilizer industries are also highly regulated to protect public health and safety. Consumer products compete on price for general consumables, such as laundry soap and bleach, but also on product differentiation where possible. The type and extent of competition also varies depending on whether the product serves the household or commercial market. Product differentiation and brand loyalty is more important in the household market, whereas competition in the commercial market is based on performance and price. In general, demand for industrial chemicals is more volatile than for many other manufactured products. Within the chemical industry, however, pharmaceuticals tend to have relatively stable demand and supply patterns due to the nature of products supplied. Overall, the chemicals industry has seen a gradual move towards greater globalization within the industry, with efforts to unify operations globally as free trade expands. Technology and Energy Consumption With thousands of processes used to produce the more than 70,000 products of the chemical industry, it is not surprising that manufacturing energy use varies significantly among different segments of the industry. The chemical industry is also increasingly adopting industrial biotechnology because of its many potential technical, economic and environmental advantages. These benefits include the simplification of processes, cost savings, reduced consumption of fossil fuel and energy, potential reduction in the United States import of crude petroleum, development of rural economies, and beneficial environmental effects. Technology development related to innovation of new processes and materials has been most significant for specialty chemical companies. KEMA, Inc. 2 January 2012