Energy efficiency. How much will policy and technology cut energy demand?

On 9^th May I presented at the Flame Conference, Europe’s leading natural gas and LNG conference.  This was a different audience for me as I don’t often present to the massed ranks of the energy supply industry.  As I said during my introduction, my good news is usually their bad news.  Here is a version of my presentation.

We are at the beginning of the perfect storm for energy efficiency with six major drivers all coming together.  The drivers are:

• Policy
• Economics
• Finance
• Technology
• Business models
• Market infrastructure

My argument is that these drivers coming together will significantly accelerate the uptake of the energy efficiency potential and seriously dent future energy demand.

In Europe the EC released its winter package late last year which was entitled “Clean Energy for all Europeans”.  Amongst its thousands of pages there were some significant proposals for energy efficiency including adopting a 30% binding energy efficiency target for 2030, a revised Energy Efficiency Directive, and a revised Directive on the Energy Performance of Buildings.  We already have policies on Near Zero Energy buildings, Minimum Energy Efficiency Standards, and mandated energy audits for large organisations every four years.  On top of these policies we have significant public funding going into energy efficiency as Project Development Assistance, loans and guarantees.  Outside Europe, despite the best efforts of the current administration, many cities and states in the US are ramping up their energy efficiency programmes as a way of reducing environmental impacts and creating employment.

On economics, those of us who have been long-term advocates of energy efficiency have always argued that improving energy efficiency is the cheapest, (as well as quickest and cleanest) way of meeting demand for energy services.  Now we have the evidence on this.  The Derisking Energy Efficiency Platform (DEEP), created by the Energy Efficiency Financial Institutions Group Derisking project, has data on more than 7,500 projects across industry and buildings.  The mean cost of energy efficiency for buildings is 2.5 euro cent per kWh while for industry it is 1.2 euro cent per kWh.  On top of the financial benefits from energy cost savings, it is increasingly recognised that energy efficiency brings with it many non-energy benefits including amongst others; improved health and well-being, increased productivity, and increased asset value.  These non-energy benefits can be much more valuable and much more strategic to decision makers than simple energy cost savings, and therefore projects sold in this way are more likely to proceed.  Energy efficiency projects should and are increasingly sold on these strategic non-energy benefits.

Finance is the next driver of change.  For many years energy efficiency professionals said “there is no money for efficiency”.  This is no longer true.  There is a wall of capital looking to invest in energy efficiency because it is low risk and offers the most impactful way to influence emissions and climate change.  Groups like the Institutional Investors Group on Climate Change, which has 130 members with €18 trillion in assets, are pushing to increase the deployment of capital into energy efficiency.  More than 140 banks have signed commitments to increase their deployments into efficiency.  Finally the massive scale of the opportunity, perhaps the biggest money making opportunity on the planet, has been recognised.  There is more money available than there are well developed projects.  The issues now are all about practical ways to scale up the development and funding of energy efficiency investments.

Energy efficiency technology is moving rapidly and getting cheaper, and it is not all about LED lighting.  New smart control technologies, artificial intelligence and retrofit prefabrication technologies are all getting cheaper.  Innovations like Energiesprong offer rapid retrofits which can greatly improve living conditions, speed up retrofits to a week or less, and result in financed solutions that end up in a net zero energy house – something that will be deeply attractive to many consumers, particularly in markets like the UK where energy companies are deeply unpopular.  The number of efficiency start-ups has increased and at the other end of the scale large companies are adapting and developing new technologies.

Along with technology and finance another important driver is business models.  When people start talking about energy efficiency it does not take long for the conversation to shift to Energy Performance Contracts or EPCs.  EPCs have been around a long time but remain a small market, the reason why they remain small is they don’t work in most sectors.  They work in the US public sector and to a limited degree the EU public sector, but they don’t work in commercial real estate or in industry.  New contract and business models are emerging such as Efficiency Service Agreements and Managed Energy Efficiency Agreements.  In California and other US states there is real innovation in which energy efficiency is actually being metered just like any other energy supply.  This allows several things; for the first time we can actually pay for performance rather than just pay for stuff like insulation and new boilers and hope it works, secondly efficiency can become a metered commodity and a reliable energy source like any others – something it has never been before.

On top of all these drivers we have a number of what I call market infrastructure developments.  Chief amongst these is the Investor Confidence Project (ICP) which addresses one of the major barriers to scaling up investment into energy efficiency.  This lack of standardisation increases performance risk, increase due diligence costs, prevents aggregation of multiple small projects and prevents banks and investors building teams around standard processes.  The ICP through its Investor Ready Energy Efficiency™ provides a way of standardising through best practice, transparency and independent quality assurance.

So how far can we go in decoupling energy growth and economic growth?  When I first became a student of energy in the late 1970s it was accepted that energy use and GDP were firmly coupled.  All forecasts of demand were based on that idea.  Then we moved to “relative decoupling” in which energy use grew less rapidly than economic output. After that came “absolute decoupling” in which energy use declines while economic output continues to grow.  Since 2007/08 we seem to have entered absolute decoupling in Europe and the US.

We need to learn a lesson from history when thinking about future energy demand.  In the 1970s two significant low energy scenarios were published.  In 1976 Amory Lovins published “Energy strategy: the road not taken” in which he described “soft energy paths” and in 1979 Gerald Leach et.al. published “A low energy strategy for the UK”.  Both of these were considered wildly optimistic at the time and widely panned by analysts, the energy industry and government agencies.  History shows that they turned out to be more accurate than any official government or energy industry scenario.  As I said in the title of a blog a while back; “Surprise, you are living in a low energy future”.  What is more, we achieved that low energy future without really trying, except perhaps for a ten year period starting in the mid-to late 1970s.

So to answer an expanded version of the question in the title, “How much will technology / policy / economics / finance / business models and emerging market infrastructure reduce energy demand?”, a lot more than you think!