Regulation needed to boost energy efficiency

San Francisco, USA (GLOBE-Net) – Future energy demands and greenhouse gas emissions can be reduced in economically beneficial ways, but government intervention will be required to spur needed investments, says a new report from the McKinsey Global Institute.

In the study’s base case scenario, world energy demand will grow by 2.2 percent annually to 2020, much faster than the 1.7 percent annual rate recorded since 1986. However, capturing available economic opportunities could cut demand growth to less than one percent without compromising economic growth, concludes McKinsey.

“A concerted global effort to boost energy productivity (economic output from the energy we use) would have “spectacular results”. By capturing the potential available from existing technologies with an internal rate of return (IRR) of ten percent or more, we could cut global energy demand growth by half or more over the next fifteen years,” says the report.

McKinsey identifies consumers as the “driving force of energy consumption”, with residential and consumer buildings and road transportation driving 57 percent of projected energy growth to 2020 in the base case. While efficiency improvements are feasible, government intervention is necessary to resolve market inefficiencies and distortions that prevent consumers and companies from capturing the savings from higher energy productivity, concludes the report. Even a sustained oil price above $70 per barrel would not significantly curb energy demand, it adds.

This is because world prices are not always reflected in consumer prices, and end-users lack information and incentives to help them capture efficiency opportunities, says the report. Further, a range of policies dampen price signals and reduce incentives for end users to adopt energy productivity improvements, including subsidies for fossil fuels and to state-owned energy utilities.

The residential sector is identified as the largest single energy end-use sector, accounting for one-quarter of global demand; it is also where the largest energy productivity opportunities are waiting to be seized, says McKinsey. Already planned policies will help moderate the sector’s energy demand growth by an amount equal to 15 percent of consumption in 2020. But additional measures, strictly enforced, could boost energy productivity and cut 2020 demand by a further 21 percent, concludes the study.

The commercial sector - including office and retail buildings, hotels and restaurants, and buildings used for schools and hospitals - could cut its 2020 demand for energy by 20 percent compared with the base case if available energy productivity opportunities are captured.

The road-transportation sector’s energy demand is noted as the most sensitive to oil prices. A large proportion of consumers worldwide are shielded from changes in the oil price by subsidies, leaving room for substantial energy productivity improvement opportunities, says the study.

The global air-transport industry accounts for only 2.2 percent of worldwide energy demand and 6.6 percent of the global call on petroleum products. Nevertheless, it will post the strongest demand growth of any energy end-use sector. According to McKinsey, options for reducing air-transport energy demand are limited as they require reducing air travel or consumer comfort by increasing the number of seats on planes.

Certain targeted policies identified by McKinsey include:

  • Ending fuel subsidies could cut transportation fuel demand by 3 million barrels per day

  • Tightening fuel economy standards, if U.S. matched EU and Japan plans

  • Mandate efficient lighting and reductions in standby power

  • Standards for commercial buildings, and enforcement in China, where compliance is less than 5 percent

  • Disaggregated utility bills to show consumers where costs are incurred

  • Demonstration projects, energy audits, subsidies, tax credits, or low rate financing to accelerate energy efficiency investment.

Read Curbing Global Energy Demand Growth: The Energy Productivity Opportunity here (free registration required).

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