Energy Efficiency

Framing the Problem

The stark reality of the energy transition is that, arguably, it hasn't started yet. Global fossil carbon demand and greenhouse gas emissions have continued to rise even as $6 trillion was invested in renewables and $3 trillion in grids over the past two decades. Some decarbonisation in some Western economies has been vastly outweighed by higher carbon consumption elsewhere. Yes, clean energies are now growing fast and starting to displace some fossil demand, but not yet enough to actually reduce it overall. That may finally change sometime later this decade, but for now we still live in the world of energy additions - a world that consumed a record 8.5 billion tonnes of coal in 2023.

The quest for a sustainable energy future typically frames the challenge on the supply side of the equation: how to deliver supply as cleanly and cost-effectively as possible. That implies demand will just keep rising as a function of population and economic growth. Clean energies then take the blame for lacking the necessary impact.

It is true that renewables alone cannot deliver a net zero economy. But they won't need to. Besides renewables, the energy system of the future will be delivered by five other synergistic mega-trends: electrification, storage, infrastructure, carbon removal and energy efficiency.

Some of these trends are clearly moving faster than others. The single biggest challenge - arguably then the single biggest opportunity - is the profound inefficiency of the existing fossil carbon based energy system. It is the proverbial bucket with gaping holes in it: more than two thirds of primary energy is wasted before the point of use. Since around three quarters of total global emissions (~50 GT/year CO2e) relates to energy, that implies up to half of these emissions, ~25 GT/year, provide zero economic benefit.

Changing the Focus 

So, while we keep on pouring more water into the bucket, shouldn't we be investing at least as much to reduce the size of the holes? Since energy is the essential input for all human activity in a world heading for 10 billion people by 2050, a more efficient system is an urgent necessity. A less leaky bucket is not just about reducing emissions, pollution and resource competition - it is about building a more productive and secure economy with higher returns on all future energy investments.

Focusing on the useful energy actually consumed - energy output, or exergy - is more productive than continued focus on primary energy, the water that's poured into the leaky bucket. We use fossil fuels because of their high energy density, but most of that energy is lost in extraction, transportation, refining, distribution and combustion, before it does anything useful. 

That's why energy efficiency - doing more with less - is a critical pillar of the new energy ecosystem being built today. In fact, it is as vital to our shared future as any supply side technology because it reduces the scale of the challenge they face. It will help those other five mega-trends above to be delivered successfully.

In today's energy system, each unit reduction in final demand saves on average 2.3 units of supply. But lower demand can also come from reducing the proportion of fossil-derived exergy. Electrification - not just of power but also of transport and heat - is one particularly powerful efficiency vector. For example, electric vehicles have 75-80% energy conversion efficiency versus 15-30% for internal combustion engines.

Systematically tackling the demand side can improve energy security, sustainability and affordability alike - all of the famous trilemma. It could improving the lives of energy consumers multiple ways: less reliance on expensive and unreliable imports, less waste, pollution and emissions, and lower energy bills. 

The Impact of Efficiency

This is the rationale behind the goal agreed at COP28 to double the rate of energy intensity progress to 4%/pa by 2030. The target is rightly ambitious, but achievable. The good news is the technologies to deliver it already exist. That is crucial as time is not on our side: immediate impact trumps waiting for future magic bullets.

The impact of meeting this target could be far-reaching:

1. Avoid energy demand equivalent to total US primary energy today (95 EJ)

2. Reduce energy bills in advanced economies by one third

3. Save >7 GT of CO2 (nearly 20% of today's energy-related emissions and half the reductions required in the IEA's Net Zero 2050 scenario)

4. Create up to 4.5m extra jobs

5. Be on track to halve pollution by 2050

The IEA's Net Zero 2050 scenario is just that, a scenario, not a forecast. It looks exceptionally challenging to achieve in such a short timescale, just a single generation. But if it were, efficiency would be the key driver, delivering around 40% of emissions abatement.

The Invisible Solution

Why then, does it remain largely overlooked compared to, say, the supersonic growth in solar PV - exciting and essential as it is - or debates about fossil fuel investment? Partly because it's relatively invisible. It's harder to attract investor or public attention to negative, unused energy (or "negawatts") that you don't even see or touch. Returns in the form of future savings are less tangible than equivalent returns on building new things. Saving is less exciting than spending. It's also partly because the solutions can be quite dull. It's hard to argue that switching light bulbs to LEDs is going to get anyone's pulse racing.

Efficiency measures have applications across all major demand centres including buildings, industrial processes, transport and heating. The spectrum of technical and resource improvements ranges from decentralisation, digitalisation and demand management to recycling of energy sources including gas recovery and reuse of waste heat to the use of electric arc furnaces in industry, cleaner fuels in cooking, upgrading to higher-spec appliances and infrastructure, improved design, insulation and retrofitting of advanced controls in buildings, all the way down to simple equipment upgrades.

Decentralisation involves generating energy closer to or at the point of consumption, thereby saving costs versus a centralised system which incurs significant transmission and distribution costs. That can involve onsite co-generation, use of rooftop solar, heat pumps and district energy solutions. Digitalisation involves smart applications that enable real-time adjustments in demand and better matching with supply.

Then we have the second-order impacts: all these elements will cross-fertilise in unpredictable ways, generating positive feedback loops and multiplier effects, accelerating the inflection towards a new energy system. And finally, there is the question of how rapidly evolving AI can be applied to finding further productivity gains (notwithstanding its very high power usage today).

Making it happen

Agreeing the 4%/pa target is the easy part. Delivering it, of course, is harder. Rolling out all the applications above effectively requires clear policies, standards and incentives. At a national or regional level the task has been channelled into a variety of new measures and laws, including the EU's Energy Efficiency Directive, the Inflation Reduction Act in the US, Germany's Energy Efficiency Act, Spain's Energy Savings Certificate, Japan's Act on Rationalizing Energy Use and France's 2030 plan. However, there still seems a long way to go in terms of replicating such measures in other countries and across all industries, and ensuring broad and effective implementation. For example, despite rapidly expanding solar PV capacity in recent years (216 GW in 2023 alone) and putting clean energy technologies at the heart of its growth plans, China currently remains well off track to meet its target to reduce energy intensity by 13.5% over 2021-25.

The Challenge of Jevons

Beyond that, how can we know that achieving 4%/pa by 2030 will make a real difference? The perennial fly in the energy efficiency ointment is the "Jevons Paradox". A Victorian era economist called William Stanley Jevons noted that as steam engines got more efficient, coal demand went up, not down. Overall system growth outpaced efficiency gains. This reflects a deeper human tendency: as things get cheaper and more available, we consume more of them, nullifying the benefits.

Mr Jevons has a habit of popping up across the energy spectrum. Lighting demand rose dramatically despite enormous efficiency improvements like the invention of LEDs. Bigger cars and more traffic offset improving fuel efficiency. The array of technological gains at our fingertips today reflect an "energy-on-tap" complacency, fuelled perhaps by pre-Ukraine war energy abundance. In this era of rapidly rising electricity-intensive demand sectors - data centres, crypto-mining, AI, video-communications, streaming - will Jevons have the last laugh?

It's a natural cycle: we rely on a variety of basic resources to fuel our lives, then when they become scarce or expensive, we respond with technological advances to improve efficiency. These gains tend to come incrementally, and then suddenly, as innovations break through and reach scale. But then, fuelled by these advances, our consumption catches up again, and the cycle repeats.

On one level, Jevons reminds us that we humans simply need to learn to be satisfied with enough. A valid lesson for the world's 1 billion most affluent people, but try telling that to other 7 billion. We need a better answer. And if changing human behaviours is hard enough, changing human nature is more or less impossible.

So how do we tackle Jevons? Will demand always pocket the gains and rebound, or will there be a natural limit to human consumption? As so often, data can be picked to support either argument. Ultimately, though, it seems our best bet will be to harness the synergies and multiplier effects between energy efficiency measures and supply side technologies, to outpace the human desire for more. It's a treadmill, but one that clearly calls for much more efficiency, not less. And as resource intensity and emissions continue to decouple from energy consumption, the marginal impact of extra demand should decline further.

Sustainable means Commercial

To play a meaningful role in energy transition, solutions must be worth reinvesting in to build scale. Ultimately, energy efficiency's most compelling characteristic is that it is fundamentally economic. The IEA's efficiency expert Nicholas Howarth (no relation) notes that 80% of additional efficiency gains result in cost savings. According to the Copenhagen Consensus think tank, every dollar invested in doubling efficiency generate three dollars in return.

The investor Jonathan Maxwell, who had the foresight to establish an efficiency focused fund, Sustainable Development Capital LLP, over 15 years ago, summarises this well in his recent book, The Edge:

"Energy efficiency is the largest, cheapest, and fastest source of emissions reductions - and remains largely untapped. One of the most important and extraordinary features of energy efficiency is that it does not cost money but saves it... Solutions are widely available today, based on existing technologies that are commercially proven and cost effective. Energy efficiency is sustainable because it is commercial. [It] should not come at the expense, or instead, of other actions to improve productivity and energy security, such as new, large-scale and innovative renewable energy capacity. But [it] should come first because it reduces the size of the problem and because it can be delivered in the meantime."

Looking Ahead

Could we reach a world where absolute energy demand is falling even as population and economic growth continue to rise? Global average energy intensity has already reduced from over 2.5 kWh/$GDP in 1965 to below 1.5 kWh/$GDP by the mid-2010s and it has also peaked in China and India. However, per capita energy consumption continues to rise, with the US and Europe past their peaks but still around four and two times the global average respectively, while China is catching Europe fast and India is steadily increasing too.

The answer will depend much on whether Asia and Africa will industrialise along traditional lines or can leapfrog to far more efficient energy systems and industrial infrastructure. Renewable energies, expanding grids, carbon removal technologies and the battery revolution are all indispensable aspects of this process, but overlaying them all is the need for renewed focus on the multitude of energy efficiency gains available today.