The case for investing in energy productivity

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Containing energy demand is as important as developing new sources of supply, despite fears that this will require “large costs and economic sacrifices”, according to a new study from management consultants McKinsey. Indeed, additional annual investments of $170 billion between now and 2020, shared between the industrial, commercial, residential and transport sectors, would be enough to “capture the energy productivity opportunity”, the study argues.

The study – entitled ‘The Case for Investing in Energy Productivity’ – predicts that global energy demand growth will accelerate to an average of 2.2 percent a year to 2020, while global CO2 emissions will grow by 2.4 percent annually until the same year due to a shift to a more CO2-intensive fuel mix.  

McKinsey argue that “a concerted global effort to boost energy productivity” – defined as “the level of output we achieve from our energy use” – involving annual investment of $20 billion between now and 2020 – could “cut energy demand by the equivalent of the annual energy consumption of 5.3 million US households or 20 million cars”. 

Moreover, raising energy productivity will not require “enormous costs” as “we already have in our hands the potential to abate accelerating energy demand in a practical, cost-effective way,” the report finds. 

McKinsey highlight key areas for action if the barriers to raising the level of energy productivity are to be raised, including setting energy efficiency standards for appliances and equipment, upgrading the energy efficiency of new buildings, raising corporate energy-efficiency standards and strengthening energy intermediaries. They go on to suggest policies that should be followed to address each in turn. 

The report warns that market forces alone will not bring about a positive outcome, calling for “targeted policies” to overcome the price distortions and market failures acting against higher energy productivity. 

To this end, the authors suggest scrapping subsidised energy pricing, as “the economic benefits from subsidised production seldom justify the investment” and shield specific companies from competition, leading to economic inefficiencies. 

However, this will be politically difficult as subsidies are used to alleviate hardship in low-income households, McKinsey warn. Policies to mitigate the difficulties of the transition to a market-based economy will thus be required, and consumers and businesses should be provided with more information about the energy productivity choices available to them, says the report. 

McKinsey conclude that boosting energy productivity can make “a spectacular dent in the rate at which demand for energy is increasing”, and that this can be done primarily by using existing technology rather than relying on “costly research” into new methods. 

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