ENERGY EFFICIENCY ON THE WORLD STAGE

Energy Vision Update 2010; Towards a More Energy Efficient World
March 2010 (World Economic Forum with IHSCambridge Energy Research Associates)

THE POINT
The place where all the concerns and possibilities of the coming New Energy economy meet is called Energy Efficiency. Energy Efficiency offers a faster and more accessible path to meeting rapidly rising energy demand, providing energy security in an ever more dangerous world and addressing global climate change. It also offers jobs the sluggish economy urgently needs and the energy-cost savings that can fund the buildout of New Energy.

Despite the highest hopes of New Energy advocates and developers, installed capacity growth on a big enough scale to meet unchecked rising world energy demand in the near term could only happen with a massive and sustained commitment. Such a commitment will not come in industrial societies where Old Energy's vested interests refuse to give way.

In the absence of such a massive commitment, Energy Efficiency is the necessary and best alternative. Energy Vision Update 2010; Towards a More Energy Efficient World describes the world’s renewed commitment to Energy Efficiency, the most redeeming feature of an otherwise disappointing December international climate change summit in Copenhagen.

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The fastest, cheapest way to make the biggest impact on the available domestic energy supply is with negawatts, the label energy visionary Amory Lovins gave to getting more output with less energy. Closing the efficiency gap between available and cost-effective options and the wasteful way energy is presently used will not only reduce the pressure on world resources; it will also save money, an estimated $2-to-$4 for every dollar spent. Those are dollars that can be invested in New Energy infrastructure. (Such a deal!)

Even the most pessimistic scenarios about recovery and growth in Western industrial economies nevertheless foresee rising energy consumption around the world. Demand will be driven by, if nothing else, the continuing march out of poverty and into the middle class of billions of people in India, China, Brazil, Indonesia, Korea and Southeast Asia.

But even if the world had not already had enough of oil tanker spills and deadly coal mine disasters, it is becoming clear the Old Energy infrastructure - even augmented by the rapidly expanding capacities of the New Energies - cannot fully meet predicted levels of near-term demand without a complimentary expansion of Energy Efficiency tools and capabilities.

Happily, the advance of Energy Efficiency is happening around the world without the need for international agreements or leadership from the U.S. Senate (neither of which, it would seem, is within reach on this or any important topic). China is building new, high voltage transmission. South Korea is pioneering Smart Grid technology. And the entrepreneuers of silicon vallies from Massachusetts and California to Bangalore, their high tech toy sales dwindling and the realization rising that a world without adequate electricity is not one in which they can prosper, are turning with all their desperate passion to Energy Efficiency.

Hope, with springtime, is in the air.

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THE DETAILS
Definition: Energy Efficiency (EE) is getting more benefit from the same energy expenditure or the same benefit from less energy expenditure. From the consumer’s point of view, efficiency means sustaining or stepping into the U.S. way of life without exhausting the world’s energy supply or overburdening the earth’s ability to cope.

Obstacle: EE is calculated in negawatts. It is something that does not happen. Investment in EE requires spending for something conceptual, something that can be calculated but not easily seen or touched. It is exactly the opposite of investing in a wind turbine, a solar power plant, a geothermal project or even solar panels for the roof.

That is perhaps why much of the private investment in EE comes from Silicon Valley high tech entrepreneurs. Government spending for EE has largely stopped at programs to train and employ blue collar workers for home and building retrofits. The challenge for EE advocates is to present it as something with concrete benefits. That is why it must be coupled with the New Energy its savings can build.

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The 4 keys to EE growth: (1) Consumer behavior, (2) the cost and availability of capital, (3) the price and price volatility of energy, and (4) innovation.

(1) Consumer behavior comes at the top of the list for a very simple reason. If consumers don’t use the innovations, they will do no good. Getting consumers to shift on a large scale requires complete user-friendliness. Consumers are known to prefer the status quo and the familiar - until they understand the value of making the change. This is especially challenging with high tech, conceptual EE hardware .

(2) The cost and availability of capital comes next. EE can make sense to investors but not meet the level of competition from other potential uses of the same money. Either a lower cost or a more obvious potential for return would make EE more likely to get funded but in the absence of either, it may not. For this reason, investors must be helped to see the huge upside.

(3) The price and price volatility of energy makes EE investment problematic. All markets vary but few are so subject to other governments’ policies (especially oil producing nations’ policies). On the other hand, few markets could more readily be controlled by U.S. policy decisions than energy markets. The right policies would give stability to returns on EE investments. Investment and all its attendant benefits will accrue to EE if U.S. policymakers institute a national Renewable Electricity Standard (RES), a national Energy Efficiency Resource Standard (EERS) and stable, long term financial subsidies that assure investors of a level playing field against the long-supported and long-subsidized Old Energies.

(4) Innovation is the constant. EE just keeps getting better, meaning that technology keeps finding ways to get more with less. Lighting was incandescent, is now compact fluorescent will become LED. Refrigerators use 25% of the energy they used in 1975 and are 20% bigger. The return on investment keeps getting better, which is why contemporarily emerging economies like China and India commit to cutting energy intensity before they commit to cutting emissions.

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The 3 intertwined barriers to more EE investment are (1) asset life and capital turnover, (2) split incentives and (3) disaggregated investments.

(1) Asset life/capital turnover: EE pays off but only over time. New building EE is a better bet than retrofitting but retrofitting is where the biggest need is.

(2) Split incentives: Because of the delayed return on asset investment, the EE investor is often not the beneficiary of the investment. Home builders do cosmetics, homeowners need EE (better windows, better heating and cooling systems, better insulation). The builder would have to charge more to install EE and buyers shop for lower prices. Homeowners pay all they can for houses and therefore lack resources to do after-purchase EE upgrades.

(3) Disaggregated investments: EE is not one buy, like solar panels or a wind project. It is a series of investments, each with a separate capital demand and differing rate of return. Every leak is vital to plug but a systematic plugging of them all is the only way to get the big payoff.

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Sectoral Opportunities: (1) Industrial, (2) Building, (3) Household, (4) Transportation.

(1) Industrial. EE is a way to increase profits, especially for energy-intensive companies. The barriers of asset life and disaggregated expenses are especially relevant. The most common solution, used effectively in China, is to set EE goals and leave type and implementation to managers.

(2) Building. 40% of energy use comes from buildings that can last 50 or even 100 years and change hands frequently, making split incentives and capital turnover key barriers. Higher standards and stricter codes can drive more EE. Certification programs can also help drive new EE and retrofits.

(3) Household. EE may not be a major household cost, a cost that gets homeowners' attention and motivates action. More than 50 countries have EE labelling programs that require compliance and increase home value. Smart technologies that automate EE bypass consumer indifference. Subsidies for low-income consumers supply the otherwise unavailable capital to get savings for the homeowner, the utility and society.

(4) Transportation. This sector offers a major opportunity. Higher vehicle efficiency standards make better forms of personal transport available. Heavy transport saves money if more efficient fuels are provided by setting national production standards and subsidizing production. Only governments can do public transport and city planning but society as a whole profits from the investment.

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The World Economic Forum (WEF) paper emphatically puts forward the idea that developing EE is not the same as building infrastructure, though it provides a way to meet demand, secure energy supplies and fight climate change. It is a process, a way of approaching the energy demand and supply issue that needs to inform the decisions made in the 4 economic sectors.

Improved energy intensity results from thinking both about EE technologies and about economic strategy. But it is achievable. The U.S. and Japan have cut their energy intensities in half since the early 1970s.

The fundamental question the WEF paper raises: (1) Is the efficiency gap a result primarily of market failures and barriers or of markets working and people making investment choices? The answer: Both. Insights from the 4 sectors elucidate.

Industry certainly makes EE decisions in economic terms. The elimination of market failures and barriers would and has opened up new vistas of EE in that sector. Capital must pay off. Best practices must be identified.

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In the building sector, EE incentives are defeated by disaggregation. Spending on small changes seems to obtain little impact. They are also defeated by split incentives. Builders get little benefit from EE and owners don’t have the option or the capital or, if they do, they are relegated to less economically beneficial retrofits. Higher standards, stricter codes and certification programs are needed.

Households need to know and understand their costs. Smart tools that communicate EE’s value are needed. This may require government funding and/or requirements. Labeling has been shown to help.

The heavy transport sector makes economic choices. It requires better technologies. Personal transport is a combination of personal choices and reducing barriers to more efficient options. Automakers can provide better options. Public transport is almost entirely in the hands of governments.

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Policy makes a difference. National policies can eliminate the inefficiencies that come from information deficits and can create “soft infrastructure” to advance EE.

Governments routinely manipulate the price of energy with incentives. The U.S. oil industry has long benefited from big tax breaks. Coal and nuclear energy are protected from liability for the harms or potential harms they create.

Similarly, governments can expand the incentives they provide to New Energy (NE) and EE. This would begin by putting a price on greenhouse gas emissions (GhGs).

Governments could also withdraw subsidies now available to Old Energies. They can overcome barriers by expanding funding for EE available to low-income citizens. More R&D spending to drive technology breakthroughs is another policy option.

Perhaps most importantly, governments can set long-term, demanding national requirements for increased levels of NE and EE that guarantee markets for entrepreneurs willing to dare to compete.

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The Private Sector is already at work. Industry has a big opportunity in EE. The extremely energy-intense cement industry is working with the World Business Council for Sustainable Development (WBCSD) and the International Energy Agency (IEA) on a roadmap to increase EE and cut GhGs. The information technology and communication (ICT) sector is working to streamline its own electricity use and advance smart technologies.

No public policy or market mechanism, however, can replace the aggregated impact of responsible individuals. Turning out lights, turning off switches and reducing waste consumption can coalesce into a changed world. Choosing new, more efficient technologies like better light bulbs and smaller cars is also a matter of taking responsibility.

Businesses can bring EE practices into their operations and bring EE products to the marketplace and in both ways profit their bottom lines and their societies.

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Future Questions
(1) What is EE’s best mix of prices, market forces, mandates and regulation, and information and education?

(2) How can businesses and governments find and use EE’s best practices?

(3) How can businesses and individuals identify and use EE investment strategies that will pay off?

(4) What EE strategies work best for businesses?

(5) What strategies drive households to EE and how can costs and barriers be minimized?

(6) How does EE implementation differ in developed and emerging economies and how can EE get into emerging economies?

(7) How can the best EE programs be implemented globally and locally?

(8) How can consumers and policy-makers drive EE in the building industry?

(9) What are the best new EE technologies and business models and how can they be propagated?

(10) How can industry and governments partner on EE RD&D?

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QUOTES
- Jose Sergio Gabrielli de Azevedo, 2009 World Economic Forum Energy Community Leader and CEO, Petrobras Brazil: “The long-term prospect of increasing energy demand is very challenging…On the other hand, rising demand creates incentives for the development of new and promising alternative technologies…Demand for alternative energy is growing at a fast pace, although from a small base, and the pursuit of a low carbon economy is likely to escalate further as a result of increasing social pressure…A lasting lesson from the recent economic crisis is that business as usual is not sustainable. It is time to change paradigms. Energy efficiency is central to the new paradigm…”

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- Jose Sergio Gabrielli de Azevedo, 2009 World Economic Forum Energy Community Leader and CEO, Petrobras Brazil: “The potential of energy conservation is unquestionable. The wise use of resources is among the most valuable initiatives we can take to face our challenges. Within this context, public policies and regulation are crucial…Price incentives and business opportunities, together with suitable and transparent rules, are required for successful public policies. Public policy is also essential to accelerate the adoption of advanced efficiency standards for household and industrial appliances and equipment, and to promote innovative financing schemes for energy efficiency…”

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- Jose Sergio Gabrielli de Azevedo, 2009 World Economic Forum Energy Community Leader and CEO, Petrobras Brazil: “Technology plays a critical role in enabling energy efficiency. On the energy supply side, the use of increasingly efficient procedures, technology and equipment is evident. On the demand side, the search for higher efficiency is particularly evident in the automotive industry, through incentives to incorporate hybrid and electric vehicles in the market. New engines, new vehicles, new modes of transportation, new structures of urban planning and better utilization of logistical networks – and new attitudes – all these will further increase transportation efficiency…The energy landscape of the world will change with renewables in response to environmental challenges. However, alternative sources of energy will be marginal additions to primary energy supply in the medium run…Challenges associated with energy production and consumption prompt the human mind to be creative. At the core of current international negotiations to fight climate change, the world energy system stands out, as it is responsible for 75% of the total greenhouse gas emissions. Its effective contribution to a sustainable future implies substantial conservation policies and efficiency gains in concert with development and use of new energy technologies…”