Energy demand is expected to be much lower across all industrial sectors in 2020, as lockdowns have reduced production and consumer demand. The difference in the scale of drops in energy use between energy-intensive and less energy-intensive sub-sectors (the “structural effect”) will be a big determinant of changes in overall industry sector energy intensity. The last major financial crisis in 2008-09 showed that government stimulus spending can favour more energy-intensive industrial output. This crisis could have a similar outcome, depending on the design of stimulus packages.

Technical efficiency progress faces several challenges in the absence of targeted policy interventions, as shown by the example of high‑efficiency industrial motors, where the crisis could sideline efficiency investments, especially from light industries where significant energy savings potential exists.

Industrial energy consumption is expected to be significantly lower in 2020 due to lower production. Across most industries, production was lower in the first half of 2020 than in the first half of 2019. Lockdowns reducing workers’ movements curtailed production, while demand for upstream products fell from other sectors of the economy.

In India, the world’s second largest producer of cement, cement production was about 85% lower than in the same period in 2019, due to a combination of cement facility closures and weaker construction activity, both in India and in countries to which it exports cement. Investment in new building construction and retrofits, a major end-use for cement, is expected to decline by around 10% globally in 2020. 

Certain sectors have already rebounded, particularly in China. After lockdowns were lifted in March-April, China’s steel sector increased production beyond 2019 levels for the first half of 2020, while reports suggest cement production also rebounded strongly in May. However, the net yearly result for 2020 is still expected to show lower industrial production and energy demand than would have occurred without the Covid-19 crisis. 

The impacts of lower industrial production have flowed through to energy use. In the United States, electricity use by industry was 9% lower year-on-year in April, while natural gas use by industry fell 8% in May 2020, the largest year-on-year decline since the last global recession in 2009. Although industrial gas use had been flat before the pandemic (growing by only 0.1% in 2019) the pandemic has cut demand significantly, with the US Energy Information Administration projecting that industrial gas use will fall by 4.4% in 2020.

Stimulus spending has already helped revive upstream industries such as iron and steel

In some countries, government economic stimulus measures targeting industry are already reviving industrial production. In China, 4 638 km of railway and urban rail infrastructure, worth USD 14.7 billion, was approved between January to June 2020 to help stimulate demand. These projects alone are expected to consume 23.8 million tonnes of steel, around 5% of China’s steel production, in the first half of 2020.

Likewise, a growing preference for private travel because of the health crisis, steady demand, as well as new stimulus measures for electric vehicles, are also likely to boost demand for iron and steel used in automobile manufacturing, in addition to reviving the automobile sector.

From an energy perspective, if the output of less energy-intensive industrial1 sub-sectors (such as textiles, machinery and equipment) declines more than the output of more energy-intensive sub-sectors (such as iron and steel, and cement), the overall energy intensity of industry would increase in the next few years. This is referred to as the “structural effect” on industrial energy intensity.

In the United States and Europe, lower consumer spending because of the current crisis has hurt manufacturing of less energy-intensive durable goods, such as motor vehicles, to a greater degree than more energy-intensive chemicals manufacturing, for example. It is currently too early to discern if global industrial output has shifted towards more energy-intensive manufacturing as a share of industrial output in 2020. However, in the United States, if data from the second half of 2020 are similar to the first half of the year, industry is likely to become more energy intensive, primarily due to a relatively larger share of output from the energy-intensive chemicals sector.

As economies rebuild from the recession, experience after previous economic crises shows that the design of government stimulus, in combination with the level of countries’ economic development, could play a significant role in shaping industrial energy intensity. A growing economy is more likely to pursue stimulus by increasing construction of buildings and public infrastructure, which would lead to higher output from energy-intensive basic metals and cement production. In contrast, a developed economy would not require essential physical infrastructure to the same extent, so opportunities to stimulate manufacturing are present more in higher value sub-sectors like specialty chemicals or automotive production, which are less energy intensive.

For example, during the 2008-09 global recession, China (a fast-growing economy) implemented a large stimulus package that shifted its manufacturing sector to more energy-intensive manufacturing. This pushed up energy intensity in the industry sector globally because of the size of China’s industrial output and energy demand relative to other countries.

By tying industry financial assistance to energy efficiency upgrades, governments could help to reduce possible rebounds in industry energy intensity as stimulus packages are rolled out in response to the current crisis.

As investment is weak and attention is focused on reviving production levels, investments in energy efficiency are at risk of being deprioritised because they take a long time to pay for themselves – even longer under current conditions, with energy prices remaining low. Measuring the benefits from energy efficiency will be essential, as efficiency will be competing for investment with core business activities such as marketing or production optimisation. Without policy action to tie stimulus packages to energy efficiency investments, there is a risk that energy efficiency upgrades will be delayed.

As the table at the beginning of this section shows, several factors may either increase or decrease the technical efficiency of industry. Under current economic circumstances, the strongest factors are likely to be those that lower efficiency.

Given the predominance of motors in industrial processes, improving the energy efficiency of installed motor systems is a key way of increasing industrial technical efficiency. New regulations will increase the energy performance of new industrial motors. At the same time, industrial motors have continued to enjoy short payback periods during the crisis, which are estimated to have been extended by only 10% from a typical period of three to four years, owing to their longer hours of usage and the relatively stable industrial electricity prices. 

Despite this modest impact on payback period, the current crisis makes motor upgrades less likely because industries are tending to focus instead on their core business, on reducing costs and on maintaining liquidity. This is especially true for less energy-intensive industries where overall energy use is a less significant contributor to operating costs. Nonetheless, it is in these less energy-intensive industries – where electric motor-driven systems are a significant use of electricity and of energy overall – that the largest share (70%) of industry sector energy savings potential exists.

Moreover, despite new regulations increasing the efficiency of motors, motor‑driven units such as pumps, fans and compressors still have limited coverage by minimum energy performance standards and rely on original equipment manufacturers to increase the energy efficiency of their products, depending on their perception of market needs.

So far, few stimulus packages for industry contain energy efficiency measures, with notable exceptions in Denmark and France, which have earmarked funds industrial efficiency projects starting in 2021.