Why Does Energy Efficiency’s Promise Remain Unfulfilled?

Among the many measures the world can take to wean itself off fossil fuels, few match the benefits of making homes, business, and cars more energy-efficient. But financial and psychological barriers have kept individuals, businesses, and governments from realizing efficiency’s great potential.

In 2006, Paul Rak, president of VeriForm Inc, a Canadian steel fabricator, set his company on the kind of do-gooder mission that could have given his corporate accountant fits. Rak had just seen Al Gore’s climate change film, An Inconvenient Truth, his first child had recently been born, and Rak decided he was obliged to find ways to deeply cut his company’s greenhouse gas emissions, even though he knew it was going to cost plenty.

It turned out the company accountant had every reason to relax, even smile. Doing good quickly turned into doing well.

Over the next two years, VeriForm installed more efficient lighting, automated its heating system, and found ways to run its saws and other tools more efficiently. Rak says he was floored by how quickly the resulting energy savings dropped right to the company’s bottom line. Between 2006 and 2008, he told the trade magazine Green Manufacturer, he spent about $46,000 on energy efficiency, an investment that immediately began returning about $90,000 in reduced energy bills annually, a nearly 200 percent return on the investment. Meanwhile, VeriForm had cut its energy costs by 58 percent and its greenhouse gas emissions by 233 metric tons per year. Today, Rak continues to avidly pursue energy efficiency at his company, an effort that this month earned him a $100,000 award from the Canadian government.

An investment of $500 billion in efficiency would end up saving $1.2 trillion in energy costs.

That a company, or a household, can make such an energy leap shouldn’t come as a surprise. What is surprising, though, is that more businesses and individuals aren’t embracing energy efficiency measures, given the significant savings that come from steps as simple as changing light bulbs, adding insulation, or installing smart electric meters.

That efficiency programs offer a huge opportunity to slash energy use is no longer in doubt. In the U.S., a pair of high-powered analyses, one by the prestigious National Research Council (NRC) of the National Academy of Sciences, another by McKinsey & Co., a global consulting firm, came to a remarkably similar conclusion: opportunities abound to save energy and reduce carbon dioxide emissions though improved efficiencies.

Wind and solar might get more attention as energy alternatives. But the National Academy and McKinsey reports, both published in 2009, suggested that plain old efficiency had at least as much potential to deliver a rapid carbon-cutting wallop. Both analyses said that within a mere 10 years, the U.S. could cut total energy use by 20 percent or more. As an added benefit, the energy savings could be served up with a side of fiscal dessert: An investment of $500 billion in efficiency would end up saving $1.2 trillion in energy costs, said the McKinsey analysis.

Even more recently, a team of researchers at Cambridge University estimated that the world could save 73 percent of its energy through efficiency measures. Much of that gain could come from deploying basic, already-available technologies such as thicker building insulation and triple glazed windows. (At least one idea seems more far-fetched: limiting automobile weight to 300 kilograms, or about 660 pounds.)

During his presidential campaign, Barack Obama touted efficiency as “the cheapest, cleanest, fastest energy source.” Last week, President Obama set a goal of improving U.S. energy efficiency by 20 percent over the next 10 years through a series of tax incentives and grants. Still, efficiency seems to get far less attention than it deserves. If companies like Paul Rak’s can so easily prove efficiency’s merits, why isn’t everyone on the bandwagon?

‘It’s a myth that the wealth of a country is proportional to its energy use,’ says U.S. Energy Secretary Steven Chu.

To be sure, there has been progress. Since the oil shocks of the 1970s, the developed world’s heavily energy-dependent industrial sector, in particular, has figured out that using energy more efficiently makes financial sense. According to the American Council for an Energy Efficient Economy (ACEEE), a Washington D.C. based advocacy group, the U.S. would be consuming 80 percent more energy than it does now if it was using as much energy per dollar of GDP generated in 1975.

U.S. Department of Energy Secretary Steven Chu points to data like that as proof that “it’s a myth that the wealth of a country is proportional to its energy use.”

Some major corporations have announced large efficiency gains recently. Skeptics raised eyebrows when retail giant Wal-Mart announced in 2005 that it would turn heavily to efficiency to help reduce greenhouse gas emissions, but the company quickly began investing as promised. One early program to install cooler, high-efficiency LED lights in its miles of frozen food displays has bloomed into initiatives to replace ceiling and parking lot lights at 650 stores, at energy savings of up to 70 percent. (The company says lighting is its second-biggest operating expense.) New stores are being built with features that include day-lighting and heat-reflective white roofs, and the company has deployed a scattering of hybrid diesel trucks.

General Motors announced last month that it had found ways to derive huge savings simply by coordinating the on-off cycles of conveyor belts with lighting and energy-hogging features like compressors and heaters in its manufacturing plants, using software developed by General Electric; the annual energy savings will be up to five times more than the cost of implementation, GM said. (The idea: lights and energy-sucking equipment switch on only minutes before employees arrive at work stations.)

Tech giant Google claims that its push for efficiency means that its own giant data centers use only half the energy of a typical data center, and other large corporations from DuPont in the U.S. to Germany’s Siemens claim to have made giant and highly profitable efficiency strides.

‘People do not always make decisions based on what makes economic sense,’ says one expert.

Still, the 2009 studies and other research make it clear that consumers, and even many bottom-line driven businesses, are continuing to miss what should be clear opportunities, even when they could nicely fatten corporate or personal wallets. Consider, for example, that home and business owners continue to resist taking actions as cheap and simple as caulking leaks, switching to compact fluorescent light bulbs, or making wise appliance choices, despite the fact that government programs like “Energy Star” labeling help take some of the guesswork out of decisions.

R. Neal Elliott, director of research at ACEEE, says that one clear message that has emerged from his group’s 30 years of efforts to promote efficiency is that “people do not always make decisions based on what makes economic sense. The myth of the rational consumer is clearly that: a myth.”

As Elliott himself acknowledged, there are ways to explain at least some of what looks like economic irrationality. The McKinsey report highlighted several of these.

Start with sheer consumer ignorance about what savings efficiencies can achieve, or skepticism that projected savings will materialize, or simply that people have other things on their minds. Sometimes it’s a sort of false miserliness, a reluctance to invest money up front, even if the money is an investment that will quickly be paid back. Of course, even a consumer or business well aware of cost savings might simply not have enough cash or credit to make an up-front investment.

Other factors are more complex. In some cases, it’s a matter of “split incentives”: a landlord who sees no benefit in investing in, say, insulation, or a more efficient furnace that will benefit to tenants economically. Tenants, likewise, have little incentive to make improvements to a structure they don’t own. A homeowner who plans to move on might have little incentive to invest for the benefit of a future buyer, at least not unless that future buyer can be counted on to shell out extra cash, knowing that rewards will come in the form of reduced future operating costs.

Since the energy crisis, California’s use of electricity has remained flat, even while its economy doubled.

Writing in the journal Science in March 2010, economists Hunt Allcott of the Massachusetts Institute of Technology and Sendhil Mullainathan of Harvard University summarized behavioral research about how and why people often don’t seem to respond to clear price signals, even when they have plenty of information about costs and benefits. They suggested that these sorts of anomalies have implications for energy policy, including whether carbon taxes or carbon trading programs will have has much effect on behavior as advocates hope. It turns out that much of the problem is simple procrastination — of busy people intending to take action, but putting off until endless tomorrows what isn’t an urgent need that day, or the next, or next. Another is a persistent “endowment effect,” an apparently deeply embedded human urge to simply stick with the current status quo.

An approach that does tend to counter these all-too-human quirks is a “soft paternalism” that preserves individual choice, but defaults to the most beneficial one. For example, automatically placing all new employees in defined contribution retirement plans, with the choice of opting out, is a proven way to boost participation. In terms of energy efficiency, it could mean tactics as simple as requiring that new computers, mobile phones, or video game consoles default to their energy-saving modes. (Some game consoles, in a default always-on mode, become energy hogs that use more electricity than the family refrigerator.)

A blunter instrument, the outright regulatory mandate, also has its admirers. Chu likes to point out that simply as a result of years of repeated tweaking of refrigerator energy-efficiency standards, the U.S. is now saving more energy than all of the nation’s wind and solar power is producing, even though the cost of refrigerators has dropped on an inflation-adjusted basis.

That some utilities are now motivated at all to discourage energy consumption has itself been a sea-change. Under traditional business models, it made no more economic sense for utilities to reduce the volume of product sold — kilowatt hours, or units of natural gas — than it made for makers of soft drinks or shampoo to sell less of their products.

California became the first state to confront that issue in 1982, when, in the throes of the energy crises of that era, it found a way to decouple profits from the amount of energy used, allowing the utilities to encourage efficiency while guaranteeing a profitable return. Utilities, essentially, were allowed to charge more for each unit of energy, as long as efficiencies improved.

Recent data suggests European Union nations are on track to reach only half their energy efficiency goal.

The state seems to be a model for what’s possible, at least in the view of Chu, who points out that since the energy crisis, the state’s use of electricity has, remarkably, remained flat on a per capita basis, even while its economy doubled. Electricity consumption in the rest of the U.S. meanwhile went up 40 percent on the same per capita basis. Some version of decoupling is now in place, although sometimes only on a limited pilot basis, in at least 18 other states.

Internationally, China’s official Xinhua News Agency claimed last month that the nation had achieved a five-year target of reducing energy consumption per unit of gross domestic product by 20 percent. Impressive perhaps, but it also turns out that in a final sprint to reach that goal in the last half of 2010, the government ordered a shut-down of about 2,000 heavy industrial facilities, including steel and cement plants, imposed rolling blackouts, and even ordered some street lights turned off: not exactly the sort of tactic that would win elections in Western democracies.

Meanwhile, an efficiency push by the European Union has hit some snags. Four years ago, member states agreed, in a non-binding resolution, to deploy efficiencies to reduce energy consumption by 20 percent by 2020. Even though the member nations appear to be on track to hit a similar, binding goal of producing 20 percent of their electricity from wind and solar power, recent data suggests they’re on track to reach only half their efficiency goal.

What’s on the energy efficiency horizon? ACEEE’s Neal Elliott says “smart” will be a linchpin in future efficiency progress. That starts with a move, now underway, to smarter regional and national electric power grids, including robust power systems that can interact, via Internet-like digital communication, with end users.

At a basic level, a smarter grid means that a meter can offer consumers real-time information about electricity costs, which tend to soar at times of peak summer demand. But, says Elliott, “We’ll start seeing the real benefits when we start putting smart meters on smart homes filled with smart appliances.”

That might mean a refrigerator that “knows” that the dark of night is a far better time to make ice than the middle of a hot summer day. Similarly, the charging system for an electric or plug-in hybrid automobile could turn itself on in the morning’s wee hours when demand and rates are low.

On a more nuanced level, says Elliott, it means that appliances will even be able to predict patterns of household or business energy demand. “If it’s the middle of a weekday, and your refrigerator has learned the door isn’t likely to be opened because no one’s at home, maybe it can just cut back on the compression cycle,” says Elliott.

A smarter grid will also mean valuable information can be fed back to power generators. To prevent outages or brownouts, especially during times of peak demand, utilities today are left guessing just how much they have to crank up older and more-polluting power plants. More robust, real-time feedback from electricity consumers will mean utilities can more accurately fine-tune supply to demand, trimming generation now wasted on maintaining a margin of safety. The two-way interaction would mean that a utility can offer customers incentives to agree to participate in trimming peak demand by, say, allowing the utility to remotely cycle down a household’s central air conditioning for a short time.

The stakes are hardly small. According to the U.S. Department of Energy, making the grid a mere 5 percent more efficient would equal permanently eliminating the greenhouse gas emissions from 53 million cars.