The truth about energy efficiency

In a series of posts leading up to the World Economic Forum’s New Energy Architecture report launched on Monday 23rd April 2012,  Energy Industry Managing Director Arthur Hanna discusses the advantages of energy efficiency in a discouraged energy market. 

As highlighted by the World Economic Forum report Energy Efficiency: Accelerating the Agenda, improved energy efficiency can assist in sustaining economic growth without putting unsustainable burdens on the world’s energy supplies or the environment, thereby helping bring balance to the energy triangle. This can be seen in Europe, which the World Energy Council (WEC) highlights as an example of significant improvements in energy efficiency from 1990 to 2006, achieving a 40% average decrease in final energy consumption per unit of GDP. The WEC estimates that if all regions of the world have the same energy efficiency performance as the EU in 2006, a total 420 Mtoe of fuel could have been saved, avoiding 1.3 GT CO2 emissions.

Energy efficiency has now risen to be an important component of energy policies. Over 70% of countries have developed energy efficiency targets and implemented a wide range of policy measures from mandatory targets to incentives and subsidy schemes. China has set a goal of doubling energy efficiency; Russia has set a target of reducing the energy intensity of the Russian economy by 40% by 2020; and in the US the Obama administration has focused on energy efficiency investments as an engine of economic growth: “One of the fastest, easiest and cheapest ways to make our economy stronger and cleaner is to make our economy more efficient.”

Energy efficiency savings at the consumer level have a knock-on effect up the value chain. In a traditional coal plant, for example, only about 30-35% of the energy in the coal ends up as electrical output. Although integrated gasification combined cycle (IGCC) plants are capable of efficiency levels above 60%, as are the most efficient gas-fired generators, there is still a tremendous quantity of energy left behind. Meanwhile, transmission and distribution systems, which include everything between a generation plant and an end-use site, typically run at losses of between 6-8%. This means that a unit of electrical energy saved at the consumer level, can result in three units of energy saved upstream.

These energy savings mean more money in the pockets of consumers and an enhanced bottom line for commercial businesses. A study by the Lawrence Berkeley National Laboratory’s Environmental Energy Technologies Division into the realized and project impacts of energy efficiency standards for residential and commercial appliances in the US during the period 1988-2006 found that the efficiency gains would lead to US$ 241 billion in consumer savings by 2030. Meanwhile, the Global eSustainability Initiative, a consortium of leading high-tech companies, estimates that smart building technology has the potential to save US$ 20-26 billion in electricity cost savings.

Despite this promise, according to the IEA, improvement rates in overall energy efficiency have declined from a historical average of 2% per year to an average of 1% per year since 1990. Distortions and market failures discourage investment in efficiency. Often, consumers are poorly informed about the savings on offer. Transaction costs are also high: it is a time-consuming chore for someone to identify the best energy-saving equipment, buy it and get it installed. Indeed, energy efficiency is often the casualty of “principal-agent” failures, as in energy-efficient buildings, where developers may be reluctant to take action because the immediate benefit of lower electricity bills will go to tenants not them. Furthermore, consumers’ expectations with regard to pay-back periods are often unrealistic, with homeowners demanding exorbitant rates of return on investments in energy efficiency – of around 30%

Higher consumer demand will be the key growth driver and further work needs to be done on providing a convincing cost perspective to those making investment decisions. Policy-makers should play a role here, providing motivation for consumers to adopt energy efficiency based on a carrot and stick approach, incentivizing energy efficiency through measures such as the UK Renewable Heat Incentive while also mandating energy efficiency standards across the value chain, from vehicles to new buildings and consumer products. These efforts should also be underpinned by the provision of information on the potential benefits of energy efficiency. Policy-makers are not alone in this endeavour. Industry should look to develop new business models as part of an integrated approach to commercial and residential energy efficiency, such as through horizontal integration and the creation of Energy Service Companies (ESCOs).

Author: Arthur Hanna, Managing Director, Energy Industry, Accenture, United Kingdom.and member of the World Economic Forum’s Global Agenda Council on the New Energy Architecture.

Picture: The University of Maryland’s solar-powered house is seen in Washington, D.C. October 6, 2005. The University of Maryland, along with 17 other collegiate teams, is competing in the Solar Decathlon, a competition to design and build attractive and energy-efficient solar-powered homes. REUTERS/Stefano Paltera/Solar Decathlon/Handout