US energy efficiency needs ‘holistic approach’
US energy efficiency needs ‘holistic approach’
Huge potential for energy savings could be unlocked in the US by 2020, concludes a report from McKinsey. But this will only happen if a ‘holistic approach’ is adopted – and investments of some $500 billion are made. The investment would quickly pay for itself.
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| Article Highlights: |
| - Unlocking the potential of energy efficiency in the US would lead to enormous financial, environmental and societal gains, a study from McKinsey shows. |
| - The institutional barriers to accomplish this are, however, formidable. |
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- Hence, says McKinsey, energy efficiency should be elevated to a national priority. |
Or, as the report puts it, the US needs ‘a comprehensive and innovative approach’ to unlock its energy efficiency potential. This is because there are persisent barriers that need to be addressed at multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million buildings and billions of devices. ‘If executed at scale,’ the consultants write, ‘a holistic approach would yield gross energy savings worth more than $1.2 trillion, well above the $520 billion needed through 2020 for upfront investment in efficiency measures.’
National commitment
McKinsey was able to analyse in detail 80% of “stationary” end-use energy consumption in the US (i.e. excluding transport), which amounted to 37 quadrillion British Thermal Units (BTUs) or 39,000 petajoules in 2008. The researchers claim that this can be reduced by 23%. This reduction potential corresponds to the entire end-use energy consumption of Germany. If the potential can be exploited, it would lead to a reduction of carbon dioxide emissions of 26% or 1.1 gigatons compared to a business as usual scenario. Compared to total US emissions (5.9 gigatons) it would be a reduction of 18%.
As the title of the study (‘Unlocking Energy Efficiency in the U.S. Economy’) suggests, this vast, low-cost energy resource cannot be unlocked by conventional means. In order to harness its full potential, an additional $50 billion would need to be invested each year for a decade. This would be four to five times the corresponding investment in 2008. The efficiency sector could hardly be expected to achieve this on its own: McKinsey points out that even the fastest growing technologies of last century, such as cellular phones, microwaves or radio, took 10 to 15 years to achieve similar rates of scale-up. ‘Without an increase in national commitment, it will remain challenging to unlock the full potential of energy efficiency,’ the- authors write.
Residential sector
In the residential sector in a BAU (business as usual) scenario, McKinsey expects that end-use energy consumption will increase to 11.4 quadrillion BTUs by 2020 as a result of a growing population, larger houses and more electronic appliances. This would then amount to 29 percent of end-use energy consumption in the US.
If all energy efficiency improvements with a positive net present value were implemented by 2020, end-use energy consumption in the residential sector could be reduced by 28 percent and associated CO2 emissions by 27 percent. Measures that the authors describe as being “net present value positive” (NPV positive) are those in which the discounted future cash flows from future energy savings outweigh the initial upfront capital investment needed to implement the measure. In the residential sector, investment in homes, appliances and electronic devices totalling $229 billion would be necessary by 2020. Such investment would be a profitable move, as it would allow present value savings totalling $395 billion by 2020 alone. It is particularly worth noting in this respect that 71 percent of the end-use potential resides in improving the building shell and heating and cooling equipment, mostly in existing homes. The remaining 29 percent is split between electrical devices and small appliances, and lighting and major appliances.
Heating and cooling plays a particularly important role for 70 million existing non low-income homes, consuming 3.3 quadrillion end-use BTUs in the 2020 reference case. This cluster offers the largest savings potential in the residential sector, accounting for 41 percent or 1,300 BTUs of total residential end-use potential in 2020.
Rapid payback
Perhaps the biggest barrier to more energy efficiency in the residential sector is lack of awareness. American homeowners typically do not understand their home’s energy consumption and are unaware of energy-saving measures, according to the study. Half of homeowners consider recycling and energy efficient appliances as ways to reduce greenhouse gas emissions, though only 15 percent indicated that improving insulation would be a preferred means. In addition, many homeowners are reluctant to implement energy-saving measures as they are unsure whether they will have to sell their house. Whether an energy-saving measure implemented in the house will have paid for itself by then or will be perceived by the purchaser as increasing the value of the property is uncertain.
This reluctance to implement measures is compounded by financing issues and the expectation of rapid payback, typically of 2.5 years. Assuming homeowners decide to pursue the savings, high transaction barriers arise as consumers incur significant time “costs” in researching, identifying and procuring efficiency upgrades, and enduring lifestyle disruption during the improvement process. In addition, the availability of credible, whole house contractors remains limited. Most contractors are not trained in holistic building science, rather they specialize in a single construction procedure. Even if the energy saving technology is installed, problems can still arise, as inconsistent quality of installation and infrequent retro-commissioning of equipment can increase space conditioning costs by 20 to 30 percent.
In order to overcome these barriers, McKinsey puts forward several solution strategies. At the same time, the authors concede that most solutions in this cluster remain unproven. They cite public awareness, home labelling and voluntary standards as piloted strategies. In this respect they recommend combining rating systems and labelling schemes such as the Home Energy Rating System (HERS), the internationally recognised Energy Star and the building rating system Leadership in Energy and Environmental Design (LEED) with broad public awareness campaigns or campaigns targeted at realtors. This could increase transparency of home energy use and catalyze action to capture efficiency opportunities. Currently, fewer than two percent of existing US homes have ratings. But on the new homes market, for example, Energy Star has captured 17 percent of new construction in 2008 and is expected to grow to 25 percent in 2009. This could help to address the ownership-transfer barrier, because green home owners expect a higher resale value.
Innovative financing
Another piloted solution strategy is innovative financing. New forms of financing could mean that cash flow from the investment is always positive to the homeowner: monthly energy savings are greater than the loan payment. There are promising local pilots, such as Long Island Green Homes in Babylon, New York or Berkeley FIRST in Berkeley, California. Rebates and incentives are one strategy that has already been proven. Under the American Recovery and Reinvestment Act, homeowners can access up to $1,500 in tax credits for energy efficient home improvements.
Building mandates are another emerging strategy. Authorities can require prescriptive or performance-based improvements at the point of sale, during a major renovation, or over a specified interval. In the city of Berkeley, California’s Residential Energy Conservation Ordinance mandates minimum energy efficiency upgrades at the point of sale and major renovation. Another emerging solution is a larger market of home performance contractors. Given the current pace of roughly 200,000 retrofits annually, capturing the full efficiency potential of 70 million homes within ten years would require a 30- to 40-fold increase in certified contractors, from approximately 40,000 to 1.5 million.
Less potential
With regard to the commercial sector, McKinsey anticipates that, in a BAU scenario, end-use energy consumption will increase to 8 quadrillion BTUs by 2020, accounting for 20 percent of national consumption. Relative to the business-as-usual baseline for 2020, deploying all NPV-positive efficiency improvements in the commercial sector would reduce energy consumption in 2020 by 29 percent, require $125 billion in upfront investment, and provide present-value savings of 290 billion in energy costs while avoiding some 360 million tons of GHG emissions that year.
The largest consumer of energy in the US is the industrial sector. In the BAU scenario, the study predicts end-use energy consumption of 20 quadrillion BTUs in 2020 for the sector. This would be equivalent to 51 percent of the energy consumed by the US. However, McKinsey sees considerably less potential for energy savings in this sector in percentage terms compared to the residential and commercial sectors. ‘The industrial sector offers 3,650 trillion end-use BTUs of NPV-positive energy efficiency potential, equivalent to 18 percent of its forecast consumption in 2020. Capturing this potential would save $47 billion per year in energy costs.’ However, the study also shows that investment in energy-saving measures in industry will pay off particularly well. ‘Between 2009 and 2020 it would require present value investment of $113 billion yielding total present-value savings of $442 billion.’
