Can we deliver on the promise of energy efficiency?

In a series of blog posts curated by the World Economic Forum’s Climate Change Initiatives, a number of leading voices will present their perspectives on climate change. Contributions are linked to the Forum’s Green Growth Action Alliance project and the Forum’s Global Agenda Council on Climate Change. In the following post, Bruno Berthon, Global Managing Director of Strategy & Sustainability at Accenture, looks at global preparedness for climate change.

While it might lack the glamour of clean-tech, energy efficiency presents a major and immediate opportunity to reduce emissions, power economic competitiveness and deliver green growth. It’s a must on the energy transition agenda of many countries, whether developed economies such as Germany and Japan or emerging ones such as China or India.

The challenge facing policy-makers and business is how to both unlock the significant volumes of private finance that are needed, and find models that can effectively industrialize delivery and get to outcomes at scale. But to create a step-change in the scale and speed of execution, we need to find a way to systematically drive collaboration between policy-makers and the ecosystem of companies along the energy efficiency value chain. The Green Growth Action Alliance, a new partnership initiative between businesses, banks and development finance institutions, intends to provide a platform to advocate for, and incubate, new models to deliver energy efficiency.

The global economic benefits from investing aggressively in energy efficiency are compelling. In its 2012 World Energy Outlook the International Energy Agency (IEA) identifies that US$ 12 trillion in investment is needed between 2010 and 2035 – to deliver its ambitious Efficient World Scenario – but it would deliver a payback of as much as US$ 18 trillion over the same period in terms of additional cumulative economic output.

And this is not just speculation: experience already shows us that a consistent focus on energy efficiency delivers results. Between 1980 and 2000, global energy intensity (expressed as the amount of energy used to produce a unit of GDP) fell by 1.2% a year, a result of policy programmes across the OECD. The challenge today is how to accelerate this progress and replicate it as global production shifts to relatively energy-intensive, and often coal-based, economies. China and India have made clear commitments to improving energy efficiency under their respective 12th and 11th five-year plans, which is encouraging, but they start from an inefficient baseline. So, to deliver on the promise of energy efficiency, the international community needs to do much more, and to do it everywhere.

While policy is important, the business community recognizes that other barriers exist and that it has a central role to play, alongside governments, in identifying and overcoming them. Now, more than ever, businesses face restrictions on their access to affordable capital, which often dictates that positive net present value projects may be discarded in favour of revenue-generating investments. Simultaneously, risk aversion, combining technological and geographic uncertainty, increases the corporate cost of capital, or hurdle rates, and energy efficiency can be (wrongly) pigeonholed as relatively high risk.

To overcome this, we need new models that utilize innovative financing and performance contracting structures, reduce upfront capital requirements and balance them with operating expenses savings. Progress is being made to deliver these through the development of on-bill financing schemes, property-linked payment approaches such as PACE and/or Energy Service Agreements. All of these approaches can play an important role in catalysing a vibrant market that delivers business and environmental value.

To launch and scale these models, systematic collaboration is needed between public and private sector actors to reconfigure incentive structures and expand the scale of the market for energy efficiency. The Green Growth Action Alliance is, through its dedicated energy efficiency working group advocating for, and supporting the design of, new financing models for energy efficiency. Drawing on the experience of member companies, development and commercial banks as well as international experts, this group aims to collaborate with national governments and prominent international platforms, such as the UN Sustainable Energy for All initiative to drive actions and outcomes on the energy efficiency agenda.

Author: Bruno Berthon is the Global Managing Director of Strategy and Sustainability at Accenture. Accenture is a member of the Green Growth Action Alliance.

Image: A coal power plantis seen in Walsum REUTERS/Ina Fassbender