Creating a better future
Understanding Energy Efficiency
Energy efficiency is at the top of the global political and business agenda as governments and industry turn to it as a critically important "energy source" to address climate change and energy security, says the Energy Vision Update 2010: Towards a More Energy Efficient World.
The report, from the World Economic Forum and IHS Cambridge Energy Research Associates, aims to help harness this energy source by providing an intellectual framework to understand it..
Four key factors influence efficiency decisions, it says: consumer behaviour, competition for and availability of capital, energy price and price volatility, and technological innovation.
"Consumer behaviour is central to understanding the efficiency gap. To implement efficiency opportunities, energy consumers require knowledge about those opportunities as well as the motivation and ability to implement them. However, consumers do not always have the information they need," says the report.
The availability of capital is a key factor in energy efficiency decisions. For example, a household may not have the capital available to purchase a more energy efficient product, even though it would save on operating costs in the future.
For corporations, efficiency investments must have a high enough rate of return to compete with other potential uses for capital - they must be "investment grade". "This question of choice and trade-offs in efficiency investments compared to other allocations of capital is often overlooked."
Variation in energy prices and the unpredictability of future prices make the returns from energy efficiency investments uncertain. Although government policies can reduce the uncertainty, they risk unintended consequences.
"Market pricing or higher taxes on energy, for example, can help promote energy efficiency. Subsidies that shield consumers from energy prices may meet some social objectives and protect consumers from volatility. But they discourage energy efficiency investments and reduce or remove the incentive for consumers to be "energy thoughtful" in their daily decisions."
Technological innovation is crucial to improving energy efficiency, both break-through technologies and continuous improvements. Examples are the progress from incandescent lights to compact fluorescent bulbs to LEDs, and the average refrigerator in the US which today uses three-quarters less energy than in 1975 despite being 20 per cent larger.
However, barriers to efficiency investment exist. Three of the most common are asset life and capital turnover, split incentives, and disaggregated investments.
Asset life is where investments are "locked-in" for the life of the product. For example, many power plants operating today are more than 50 years old.
Split incentives, also known as principal-agent problems, are where a second party makes efficiency decisions on a consumer's behalf. An example is a home builder who focuses on cosmetic touches to sell a home while skimping on efficiency investments that are hard for the buyer to evaluate or invisible to the buyer such as windows, heating and cooling systems and insulation.
The problem of disaggregated investment, which occurs in industry and households, is where efficiency opportunities do not involve one large investment with a substantial return but consist of a large number of small actions that add up to significant energy savings.
Victor Bivell is editor of Eco Investor Magazine. See www.ecoinvestor.com.au
The report, from the World Economic Forum and IHS Cambridge Energy Research Associates, aims to help harness this energy source by providing an intellectual framework to understand it..
Four key factors influence efficiency decisions, it says: consumer behaviour, competition for and availability of capital, energy price and price volatility, and technological innovation.
"Consumer behaviour is central to understanding the efficiency gap. To implement efficiency opportunities, energy consumers require knowledge about those opportunities as well as the motivation and ability to implement them. However, consumers do not always have the information they need," says the report.
The availability of capital is a key factor in energy efficiency decisions. For example, a household may not have the capital available to purchase a more energy efficient product, even though it would save on operating costs in the future.
For corporations, efficiency investments must have a high enough rate of return to compete with other potential uses for capital - they must be "investment grade". "This question of choice and trade-offs in efficiency investments compared to other allocations of capital is often overlooked."
Variation in energy prices and the unpredictability of future prices make the returns from energy efficiency investments uncertain. Although government policies can reduce the uncertainty, they risk unintended consequences.
"Market pricing or higher taxes on energy, for example, can help promote energy efficiency. Subsidies that shield consumers from energy prices may meet some social objectives and protect consumers from volatility. But they discourage energy efficiency investments and reduce or remove the incentive for consumers to be "energy thoughtful" in their daily decisions."
Technological innovation is crucial to improving energy efficiency, both break-through technologies and continuous improvements. Examples are the progress from incandescent lights to compact fluorescent bulbs to LEDs, and the average refrigerator in the US which today uses three-quarters less energy than in 1975 despite being 20 per cent larger.
However, barriers to efficiency investment exist. Three of the most common are asset life and capital turnover, split incentives, and disaggregated investments.
Asset life is where investments are "locked-in" for the life of the product. For example, many power plants operating today are more than 50 years old.
Split incentives, also known as principal-agent problems, are where a second party makes efficiency decisions on a consumer's behalf. An example is a home builder who focuses on cosmetic touches to sell a home while skimping on efficiency investments that are hard for the buyer to evaluate or invisible to the buyer such as windows, heating and cooling systems and insulation.
The problem of disaggregated investment, which occurs in industry and households, is where efficiency opportunities do not involve one large investment with a substantial return but consist of a large number of small actions that add up to significant energy savings.
Victor Bivell is editor of Eco Investor Magazine. See www.ecoinvestor.com.au
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Tags: 'climate, 'energy, 'energy', 'sustainable, 'understanding, change', efficiency', energy, energy', source', More…
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Comment by Tim Pearce on May 14, 2010 at 9:08pm -
The example of 'split incentives' - selling a house - got me thinking that what is needed is an energy star rating for houses like we currently have for appliances. (I think they exist but are not widely used.). Thus the energy efficiency will have more visibility. For that matter why stop at houses? What about all buildings, cars, anything that uses energy? One problem is that energy rating is not the only important aspect for climate change. Natural gas heating produces only about a fifth the Carbon Dioxide of heating from electricity generated by coal fired power stations but still provides the same energy.
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