Capturing the Energy Efficiency Opportunity

Energy efficiency is not a new idea.  In a way, it is a fundamental characteristic of capitalist economies, since companies are constantly hunting for opportunities to produce more economic value at a lower cost, so finding ways of reducing the amount of energy used per unit of output is built in to the logic of every successful business.

Yet, we have known for a long time that the current economic system is enormously wasteful.  Especially in the U.S., efficiency has often taken a back seat to other priorities like producing new products and opening new markets.  Over 30 years ago, President Jimmy Carter challenged Americans to rethink how they used energy and resources, noting that “ours is the most wasteful nation on Earth. We waste more energy than we import.  With about the same standard of living, we use twice as much energy per person as do other countries like Germany, Japan, and Sweden.”[1]

While many people consider energy efficiency to be decidedly unsexy, its potential impact in reducing energy use and carbon emissions is compelling.  As Michael Grunwald notes[2] in Time magazine,

This may sound too good to be true, but the U.S. has a renewable-energy resource that is perfectly clean, remarkably cheap, surprisingly abundant and immediately available. It has astounding potential to reduce the carbon emissions that threaten our planet, the dependence on foreign oil that threatens our security and the energy costs that threaten our wallets. Unlike coal and petroleum, it doesn’t pollute; unlike solar and wind, it doesn’t depend on the weather; unlike ethanol, it doesn’t accelerate deforestation or inflate food prices; unlike nuclear plants, it doesn’t raise uncomfortable questions about meltdowns or terrorist attacks or radioactive-waste storage, and it doesn’t take a decade to build. It isn’t what-if like hydrogen, clean coal and tidal power; it’s already proven to be workable, scalable and cost-effective. And we don’t need to import it.  This miracle juice goes by the distinctly boring name of energy efficiency, and it’s often ignored in the hubbub over alternative fuels, the nuclear renaissance, T. Boone Pickens and the green-tech economy. Clearly, it needs an agent. But it’s a simple concept: wasting less energy.

The potential of energy efficiency is no joke.  As a recent IEA 2010 study concluded, energy efficiency can deliver 65% of worldwide carbon cuts in the energy sector by 2020, and 54 per cent by 2030. This means that in 2020, energy efficiency could have almost twice the impact of renewable energy, nuclear power and clean coal combined.  And as McKinsey’s ubiquitous cost curve analysis demonstrated, the majority of these opportunities are economically viable, even in the absence of a price on carbon.

Yet companies are stuck between the rhetoric and the reality; industrial efficiency should be a “no-brainer,” but year after year, the opportunity is deferred.  .  What are the barriers?  First, efficiency investments are often blocked by:

  • High upfront costs of capital
  • Long payback periods
  • Split incentives between different actors,
  • Reward systems that reward growth over efficiency
  • Investments are often ad hoc and project-based, so the disaggregated opportunities are not managed strategically

Second, there are also a host of psychological factors that inhibit investment.  Recent psychological research has shown how poor are at evaluating efficiency decisions.  For example, Larrick and Soll’s[3] research at Duke found that people don’t think clearly about how to optimize their gas savings.

A recent study published by Attari, et. al.[4] also discovered that 2-3% Americans cite major energy-saving steps such as purchasing energy-efficient cars and appliances and weatherizing homes, as being important in cutting energy consumption. Yet nearly 20% cited turning off lights as the best approach to conserving energy.

Another fascinating insight emerges in Bloom and Martin’s work[5], noting that relative to their European peers, US businesses seem to have a systematic blind spot when it comes to managing energy use.  In studies that correlated good firm management with various outcome variables, the well-managed European firms unsurprisingly had high ratings on measures of labor productivity and resource use.  While similar in most respects, American companies diverged from their European peers in one area:  energy efficiency.   These findings suggest that there is something about the way the US firms are managed that systematically neglect energy use.  It may also suggest that business education in the US lacks this focus.  In an era of cheap energy, this blind spot may not be fatal, but the costs of neglect are bound to go up.

Over the last month, EDGE has hosted a couple of events to better understand the barriers to energy efficiency and how they might be overcome.  On September 17, EDGE partnered with Duke’s Center for Globalization, Governance, and Competitiveness (CGGC) and the Environmental Defense Fund (EDF) to host a conference “Capturing the Energy Efficiency Opportunity:  Lessons from Climate Corps.”

Over the last 3 years, EDF’s Climate Corps program has placed over 80 MBA students from top universities into over 50 leading companies to do summer internships focused on energy and carbon savings projects.   The purpose of the conference was to bring together the past graduates of the Climate Corps along with their corporate sponsors to glean the learnings from their collective experience.

The day opened with provocative conversations with Mike Lamach, the CEO of Ingersoll Rand and Peter Senge, a leading thought leader and author on the topic of sustainability [photo at right: Dan Vermeer (left) speaks with Mike Lamach].  After the opening session, the balance of the day was spent in panels and working sessions focused on identifying, financing, and implementing energy efficiency opportunities.

On October 6, EDGE conducted the first Leading EDGE seminar focused on “Energy Efficiency in Action.”  This first seminar is part of a 5-part series on “levers of transformation” toward a sustainable energy system, economy, and society.  Each seminar is designed to provide a high-level keynote overview of the topic, followed by an interactive session, where participants work with external experts and use provided tools and frameworks to address case-based challenges.   In the first seminar, we invited Brian Castelli, the Executive Vice President of the Alliance to Save Energy to provide an overview of energy efficiency efforts both in policy and the private sector.

In the interactive session, Ingersoll Rand’s Pat Garibay and Susan Burek described the complex process of selling energy efficiency solutions to distracted, capital-constrained customers, and how to make a compelling business case.  Based on a provided case, seminar participants worked in small groups to identify effective strategies for overcoming the rhetoric/reality gap that inhibits energy efficiency investment.

While federal and international climate policy is lagging, efficiency efforts in the policy arena are actually accelerating globally, as governments create both “carrots and sticks” for private sector players to get more efficient.  As just one data point, China issued an order this part summer to shut down 2,087 of its most inefficient plants, in an effort to improve industrial efficiency across the rapidly-growing economy.

For the first time in 35 years, the United States Department of Energy (DOE) is enforcing decades-old energy efficiency and water conservation standards for resource-intensive products, filing enforcement actions against 27 companies for failing to certify that their products comply with regulations.   And on the incentive side, the US federal government has raised the stakes by offering $25 billion in energy efficiency programs through federal stimulus funds.

Capturing energy efficiency gains is harder than it looks.  Can we find effective ways to overcome all the psychological, organizational, and political barriers that stand in our way? Stay tuned in later EDGE Notes for some suggestions to unleash this opportunity.


[1] Source:  Jimmy Carter, Address to the Nation, April 18 1977.

[2] Source:  Michael Grunwald,  “America’s Untapped Energy Resource: Boosting Efficiency,”  Time Magazine,  December 31, 2008.

[3] Larrick RP, Soll JB (2008)  ‘The MPG illusion.’  Science 320: pp. 1593–1594.

[4] Attari, S., et. al. (2010) ‘Public perceptions of energy consumption and savings.’  Proceedings of the national Academy of Science.  Published online at: http://www.pnas.org/content/early/2010/08/06/1001509107.full.pdf

[5] Bloom, N., et. al. (2010) ‘Modern Management:  Good for the Environment or Just Hot Air?’  The Economic Journal, 120 (May), pp. 551–572.

Martin, R. (2010)  ‘Why is the US so Energy Intensive? Evidence from US Multinationals in the UK.’  CEP Discussion Paper No 965, pp. 1-39.  Found at:http://cep.lse.ac.uk/pubs/download/dp0965.pdf

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