The Buyer's Role in Improving Supply Chain Energy Efficiency

This paper analyzes the Energy Efficiency (EE) investment decisions of a capital-constrained manufacturer that services a large industrial buyer. Through a series of game theoretic models, we provide insight into the supplier’s optimal investment decisions and how they are impacted by the buyer’s knowledge of the supplier’s EE opportunities, as well as characteristics of the energy market. We find that buyer knowledge can either help or hinder the supplier’s EE investment level, depending on the cost of the buyer’s alternative supply source and the supplier’s exposure to bankruptcy risk. Utilizing data from Industrial Assessment Centers and the Department of Energy, we run a series of numerical experiments to further isolate the energy market conditions where buyer knowledge is most beneficial and to quantify these associated benefits. Our findings provide insights for policy makers interested in increasing EE investment and reducing the energy efficiency gap that plagues many supply chains.