The Top Ten Reasons Why We Need a Renewed Commitment to Energy Efficiency  2.16.04
Bill Prindle Deputy Director
American Council for an Energy-Efficient Economy

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Looking back on the energy events of 2003 and recent years, with an eye toward the future, the energy policy experts at ACEEE offer their top ten reasons for renewing America’s commitment to energy efficiency.

10. Efficiency is much more than a personal virtue. In the spring of 2001 senior Administration officials opined that energy efficiency, while a “personal virtue”, is not a serious energy policy solution. That same year, the state of California, faced with an electricity crisis, mounted a multi-pronged energy efficiency program that achieved an unprecedented 7% reduction in electricity demand, corrected for weather and economic factors [http://aceee.org/pubs/u021full.pdf]. This reduction in demand succeeded in preventing any further blackouts in the state and was the major factor responsible for reducing excessive wholesale prices in the California power market, saving customers billions of dollars.

State officials close to the situation said it was this demand-side response, led by energy efficiency, that contained the crisis. This experience has cemented the role of energy efficiency as a “public good” that has enormous benefits for our economy and the environment.

9. Efficiency is the key to a sustainable economy. Over the last 30 years, the energy intensity of the U.S. economy has fallen by more than 40%. That means that without energy efficiency, we would be using 70% more energy to support our economic growth. It’s not likely that we could have found the land, the capital, the infrastructure, or the fuel to sustain that much demand growth. In faster-growing economies, this is even more critical. In China, for example, the electricity system is currently overstrained, threatening several planned factory openings and thus crimping China’s economic growth. That’s why China is developing some of the world’s toughest efficiency standards for vehicles and other equipment, and sees efficiency as a central principle for sustaining a strong economy.

8. Efficiency is no-regrets insurance against global warming. Most of our greenhouse gas emissions come from energy consumption in powerplants, factories, buildings, and vehicles. ACEEE research shows that without efficiency, carbon emissions would be 30% higher today. A 2001 ACEEE study calculated that the U.S. can reduce its carbon emissions back to 1990 levels by 2020, through cost-effective policies such as appliance standards, building codes, public benefits funds, fuel economy standards, accelerated use of combined heat and power, and tax incentives [http://www.aceee.org/pubs/e012full.pdf]. These measures will help, not hurt, the economy; so regardless of the ultimate relationship between energy use and climate, energy efficiency investments are a “no-regrets” insurance policy that will provide net benefits in any case.

7. Efficiency can cut powerplant waste in half. Our aging powerplant fleet (average age approaching 50 years), with a typical thermal efficiency of less than 35%, wastes more than one-quarter of all the energy consumed in the United States. Modern combined heat and power (CHP) systems offer a form of distributed generation that attains net thermal efficiencies up to 80%. ACEEE research estimates that over 150 GW of power generation capacity could be developed as CHP between now and 2020 [http://www.aceee.org/pubs/ie983.htm], which is almost half of forecast demand (and would be over half of forecast demand if rigorous end-use efficiency were pursued in the electricity sector). To get CHP’s benefits, however, we need fair and consistent national interconnection standards, and we need state utility tariff policies that eliminate predatory pricing for standby and supplemental power. We also need air quality policies that allocate emissions based on useful output, not on fuel input, and that streamline permitting for smaller facilities.

6. Efficiency policies are needed to overcome barriers and market failures. Academic economists often theorize that market forces spur the optimal level of investment in energy efficiency, and that public policies to increase efficiency are not needed. These theorists ignore the realities of the marketplace, which throw up numerous market barriers and cause markets to fail to make optimum efficiency investments. For example:

  • Builder-Buyer. Homebuilders, appliance manufacturers, automakers, and other producers of energy-using equipment are more concerned about up-front cost that operating cost. They compete based on reducing the first cost of their product, not the operating cost to the user. They thus often fail to offer more energy-efficient models that may cost a little more initially but would minimize consumers’ life-cycle costs. This “builder-buyer” barrier is why appliance standards, building codes, and fuel economy standards are needed to keep efficiency levels improving.

  • Information Gap. Energy-using technology is sold to millions of homeowners, car buyers, and other consumers, many of whom don’t understand the science or economics of efficiency, and thus don’t know what to look for in a product. This lack of information and awareness makes efficiency invisible in many markets, making it hard to sell the benefits of efficiency compared to the more obvious attributes of the product. To bridge this “information barrier”, we need labeling and branding programs like Energy Star to make efficiency more visible to consumers.

  • Split Incentives. More than a quarter of American homes, and more than half of American offices, are rented. That means the landlord typically pays for energy-using equipment, but the tenant typically pays the energy bill. And in larger organizations, procurement people buy equipment on low-bid principles, accounting people pay energy bills, and engineering people keep facilities running, splitting the responsibility for energy efficiency. These “split-incentive” barriers increase the need for building codes, appliance standards, and public benefits funds to reach these sectors.

  • Utility Dependence on Energy Sales. For most utilities and energy suppliers, shareholder return is tied to the amount of energy sold through the utility system. Under the typical state rate regulation system, reductions in energy sales mean lost revenues and lost returns to shareholders. This makes most utilities natural opponents to energy efficiency investments. Some states, such as California and Oregon, have “de-coupled” revenues from energy sales or pursued other regulatory mechanisms to overcome this predisposition to increase unit sales. Such approaches can allow utility companies to operate efficiency programs without sacrificing profitability.

 

5. Energy efficiency means economic prosperity. Efficiency is an engine of sustainable economic growth. If we had not become 40% more efficient in recent decades, we would be spending an extra $400 billion a year on energy, above the current $600 billion we now spend. This would divert an extra 4% of our GDP to energy costs, costing us over $1000 per person in direct energy bills plus increased costs for the products and services we buy. Energy efficient products and services already account for tens of billions of dollars of direct sales, and drive a growing number of jobs, investments, and profit margins. So there is no conflict between energy efficiency and a thriving economy. In fact, efficiency is a foundation of economic strength.

4. Energy efficiency clears the air. Since the majority of regulated air pollutants come from powerplant smokestacks or vehicle tailpipes, energy efficiency policies that reduce electricity use or vehicle energy use also reduce air pollution. The Clean Air Act Amendments of 1990 made specific provisions for utilities to use energy efficiency as an emission reduction option http://aceee.org/pubs/u034full.pdf. EPA’s nitrogen oxides emission reduction regulations have recognized the value of energy efficiency in reducing those emissions. The State of Texas, in seeking to meet its NOx deadlines, implemented a statewide building energy code in 2001 because of its emission reduction benefits. States in the Northeast are banding together to use energy efficiency as part of a comprehensive strategy to cut air pollution across the region. Yet federal legislative initiatives such as the Administration’s Clear Skies bill fail to recognize these benefits, and don’t allow end-use efficiency and other indirect emission reduction strategies as part of their compliance regimes. This omission should be corrected so that energy efficiency is a recognized source of emission reductions.

3. Energy efficiency is vital to national security. Defense and foreign policy professionals agree that our oil dependence on volatile regions such as the Middle East is a key threat to U.S national security. The fact is that without the fuel economy improvements we’ve achieved since the 1970s, we would be importing another 4 million barrels of oil a day, putting Middle East oil producers more firmly in the driver’s seat.

Because Gulf producers continue to control the world’s low-cost marginal or “swing” production capacity, modest changes in world oil demand have an enormous effect on their economic and political power. And since the U. S. consumes over one-quarter of world oil supply, we are a critical “swing” consumer. It was the fall in U.S. oil demand in the 1980s that initially weakened the OPEC cartel, but surging sales of lower-mileage SUVs have accordingly driven U.S. demand back up in the last decade. ACEEE research shows that, using today’s technology, we can improve our fuel economy by 50% over a 10-15 year period, with a 5% increase in vehicle cost and net lifetime savings to the buyer http://www.aceee.org/energy/cafe.pdf. But since automakers have strong negative incentives to build higher-mileage vehicles, we need strong new fuel economy standards, tax incentives, and other means to reduce our transportation oil demand.

2. Energy efficiency keeps the lights on. On August 14, 2003, up to 50 million people in the U.S and Canada lost power in the largest blackout in North American history. While the immediate cause has been linked to power system operating practices and outmoded transmission technologies in parts of the U.S. grid, the fact remains that this emergency happened on a hot weekday afternoon, when air conditioning demand pushed the system to the breaking point. Excess customer demand overheats transformers, overloads transmission lines, and strains any of the other weak points in the power system. So while we need clearer operating standards and a rationalized regulatory system for U.S transmission systems, we also need to invest in energy efficiency and other forms of demand response to keep both the physical infrastructure and the financial markets of our electricity system in balance. Efficiency investments have already avoided the need for more than 30,000 MW of peak capacity; ACEEE research shows that by targeting investment in efficiency programs that have maximum peak impact, we could avoid another 64,000 MW of peak demand http://www.aceee.org/utility/index.htm. These savings would not only reduce strain on the grid during peak hours, thereby reducing the risk of blackout, they would also exert strong leverage on peak power prices, saving money for all customers on the system.

1. Efficiency is our first line of defense against soaring natural gas prices. The biggest energy story of 2003 has been the realization, right up to the desk of the Chairman of the Federal Reserve, that North America’s natural gas markets are changing dramatically, and that this is not a short-term blip but a long-term structural shift. Demand has outstripped, and is expected to continue to outpace, our continental production capacity. A new floor is appearing under gas prices: from the soft $2/MCF wellhead prices of the 1990s, market forecasters are projecting wholesale prices at $4.50/MCF and up for the foreseeable future. New supply investments, such as the Alaskan pipeline and LNG imports, will take years to come on line, and depend on higher gas prices to be financially viable.

Energy efficiency is one of the few realistic policy strategies that can bring balance to natural gas markets, both for the next few years and for the longer term. A 2003 ACEEE study shows that modest efficiency gains of 2% or less can have major price impacts in tight gas markets, driving down wholesale prices by about 20% or $1/MCF over the next five years. Pursuing this strategy would save consumers over $100 billion on a total investment of just over $30 billion, including a $7 billion public policy cost. http://www.aceee.org/energy/efnatgas-study.htm. In this brave new world of pricey and volatile natural gas markets, energy efficiency is a key hedging strategy that can help get us through what could otherwise be an economically devastating problem.