Bright Green Efficiency

	Joel Makower December 08, 2006
	Joel Makower is founder of GreenBiz.com. A version of this article originally appeared on his blog, Two Steps Forward. It's long been axiomatic that energy efficiency is the awkward stepchild of renewables—that is, that it's sexier to install cutting-edge renewable-energy technologies like solar panels than to engage in more prosaic (and less visible) measures to get more value out of each BTU or barrel. That mindset has bedeviled proponents of efficiency—people like Amory Lovins, who for some thirty years has promulgated the notion that we can solve our energy and climate challenges by harnessing existing technologies that allow us to garner ever-greater economic productivity out of fewer barrels of oil, tons of coal, cubic feet of natural gas and pounds of uranium. (Lovins' 1997 white paper , Climate: Making Money and Making Sense, remains one of the best articulations of how companies and economies can profitably harness efficiency.) The world is ripe with efficiency opportunities. ("The low-hanging fruit," as Lovins puts it, "is mushing up around our ankles.") His Rocky Mountain Institute points out that in industrial settings, "there are abundant opportunities to save 70 percent to 90 percent of the energy and cost for lighting, fan and pump systems; 50 percent for electric motors; and 60 percent in areas such as heating, cooling, office equipment and appliances." In general, up to 75 percent of the electricity used in the U.S. today could be saved with efficiency measures that cost less than the electricity itself. A report just published by the McKinsey Global Institute, a think tank within the venerable McKinsey & Co. consulting empire, brings new life to Lovins' and others' assertions, making the case that "there are sufficient economically viable opportunities for energy-productivity improvements that could keep global energy-demand growth at less than 1 percent per annum"—less than half of the 2.2 percent average growth anticipated through 2020 in a business-as-usual scenario. Energy productivity—which measures the output and quality of goods and services per unit of energy input—can come from either reducing the amount of energy required to produce something, or from increasing the quantity or quality of goods and services from the same amount of energy. The report is the result of a year-long effort "to understand the microeconomic underpinnings of global energy demand" with a focus on "how the growing demand for energy can be met most productively." Energy productivity, McKinsey points out, is critical to economic growth and well-being, "and should therefore be a much higher priority in national policy agendas." The reason it's not, says the report, is largely "market-distorting subsidies, information gaps, agency issues and other market inefficiencies" that work against energy productivity. Moreover, the impact of rising energy prices is dampened due to the fact that energy represents a small share of most companies' costs. As a result, high energy prices aren't enough to curb demand, says McKinsey. Even sustained oil prices of $70 a barrel will reduce demand by less than one-half of one percent compared to $30-a-barrel oil. Consumers—in both developed and developing countries—aren't the answer, either. They "lack the information and capital needed to improve energy productivity, and their price response is further muted by the priority given to convenience, comfort, style or safety." Indeed, says McKinsey: In reality, consumers are far more interested in using more energy for comfort (e.g., larger houses and apartments), convenience (e.g., more and larger appliances), style (e.g., more and larger vehicles), and health/safety (e.g., gas and electricity rather than coal for heating or dung and straw for cooking). And businesses typically forego viable energy-productivity investments because of small and fragmented energy costs, says McKinsey. On new-capital purchases (e.g., automated manufacturing or information-technology hardware), energy efficiency is typically a minor factor at best. Many high-return investments to improve the energy productivity of existing operations are left on the table, as users often require three-year or less payback times—or less than a 30 percent [internal rate of return]—for capital expenditures that reduce energy consumption. In addition, energy-transforming and energy-intensive industrial sectors continue to be publicy owned in many developing economies, reducing the competitive pressure on managers to improve their performance. So, if policy makers, businesses and consumers aren't willing or able to grab hold of the low-hanging efficiency opportunities, who will? McKinsey doesn't explicitly say, though it proffers a complex "bottom-up energy demand model" that allows users to test the impact of different price, policy, global growth and other variables on energy demand. (You'll no doubt have to pay the big bucks for access to such a tool.) But Lovins, among others, has shown what can be done within today's existing frameworks, using current technologies and best practices. (Last year, I posted a raft of resources here.) And what the McKinsey report lacks in specific solutions, it could make up for by re-energizing the discussion about the vast potential for efficiency to address our energy, security and climate challenges.