The urgent need for energy productivity

I heard the Chancellor of the Exchequer Philip Hammond yesterday morning talking about the Autumn statement and the need to build resilience in the UK economy. At the same time there has been a lot talk about productivity since the change of government.  The Chancellor himself said at the Conservative conference: “to deliver that strong, prosperous, economy……requires long-term, sustainable growth. And long-term sustainable growth requires us to raise our national productivity.”

Given these kinds of statements, and the energy situation we have, it is time to prioritise a policy and a target that would both improve resilience (to economic shocks) and improve productivity – specifically energy productivity, and put in place policies and programmes that drive energy productivity.  In the old world energy was an input to the economy and the demand for energy was driven by growth in the economy.  Now improving energy productivity itself has been shown to be a driver of economic growth.

Energy productivity is defined as GDP per unit of energy, how much value we create from every unit of energy.  At the end of the day we all want increased GDP. I know it is an imperfect measure of welfare but making people richer is what drives improvement in the human condition, here in the U.K. and everywhere else.  (Yes – I know that wealth also creates problems but we are not going to get out of those problems by becoming poorer – we will only get into other deeper problems). Given the energy issues that the UK is facing – including declining domestic energy production, increase reliance on imports, very tight electricity supply margin, environmental impacts that lead to health problems (a global impact through CO₂ emissions and local impacts through air pollution), and poor energy efficiency in housing that leads to fuel poverty – adopting an energy productivity target and strategy should be a priority.

Energy productivity goes beyond the traditional perspective of energy efficiency and is more than a simple reframing of the energy efficiency agenda. Ultimately the trajectory of energy productivity in an economy is driven by three factors; the energy productivity of existing capital stock, the energy productivity of new capital stock, and the structure of the economy.

Increasing energy productivity of the existing stock, (which is normally the province of energy efficiency and energy management), all other things being held equal will increase the energy productivity of the economy.  The methods to do this at the macro level are the subject of energy efficiency policy – which we know how to do and is well documented.

Increasing energy productivity of new stock entails ensuring that new stock, across all sectors, is as efficient as possible within the definition of economic.  Although new stock, new buildings for example, will tend to be more efficient than old stock due to advances in technology and tightening regulations, many cost-effective energy efficiency opportunities are missed due to many factors.  This lever of energy productivity can be effected by regulations that are normally considered part of energy efficiency policy e.g. building codes, but importantly, and largely neglected to date, it can also be changed by finance and investment policies – areas outside conventional energy efficiency policy.  For example public infrastructure funds could have a policy of only investing in high energy productivity stock, (for instance top quartile performance) and working with project sponsors to identify cost-effective energy efficiency opportunities – as has been practiced by the EBRD for many years.  Investing in new stock that has an energy productivity higher than the average (for the economy or the sector) will increase overall energy productivity.  Other finance and investment policies that would drive improvements in energy productivity include requiring banks to assess the energy productivity of their loan portfolio, facilitating the growth of the green bond market for high energy productivity assets, and reducing capital reserve requirements for high energy productivity assets.

The third driver of energy productivity is diversification within the economy e.g. a move towards higher energy productivity activities. This is the province of economic development and industrial strategy policies.  Energy productivity can be applied to all sectors of the economy and it is an integrating policy.

At a corporate level adopting an energy productivity target also drives activity in the three areas; retro-fit, refurbishment and new build – and helps to balance them within a coherent, and strategic policy.  Strategic issues always get more attention than non-strategic things and are not subject to the same short payback criteria normally applied to retrofit.  Energy management is usually only concerned with retrofit and is consigned to the boiler room rather than the board room – making it part of a strategic policy keeps it in the board room.

Adopting an energy productivity target would put the UK at the forefront of energy policy. It would drive growth in the economy and innovation in policy and programmes, it would really start to address our mounting energy problems, and it would greatly contribute to the Chancellor’s goals of increasing resilence and creating sustainable growth.