Energy efficiency: not quite a free lunch

Is “peak demand” possible for rich countries’ energy use? CERA is publishing a very interesting report today on the potential for energy efficiency gains in Europe, which concludes that the EU has the potential for an “unpredecented” reversal in its energy use, with power consumption levelling off and gas consumption falling quite sharply. This could all be done using existing technology, CERA believes, and would still take Europe only about half-way to meeting the EU’s ambitious target of a 20 per cent improvement in energy efficiency by 2020.

The question is: how much will it cost?

A standard argument used by the cheerleaders for energy efficiency programmes is that they can be delivered for zero or even negative cost. The savings in energy costs that can be achieved will outweigh the costs of investing in the energy-saving equipment.

The chart below is often used to make that point. It focuses on CO2 emissions redcutions, but the message is the same. Look over to the far left-hand end, where the costs of measures such as insulation improvements and more fuel-efficient vehicles are strongly negative.

There is, however, a fundamental problem with this type of analysis. It implies that people are stupid, and there is a free lunch waiting to be eaten. Dollar bills are lying on the ground, and no-one is picking them up. Another CERA analysis, looking at the US, points out:

The “negative cost” logic does not hold in the context of a productive capital market. An efficiency investment with a positive return that does not make the cut in a marketplace has a net positive cost, not negative, because doing it requires giving up something that consumers reveal has greater value.

In the European study, CERA makes a similar argument:

Large reductions in consumption are possible, but they will not be free. The mandates that the Eco-design Directive envisages will increase capital spending as appliances are replaced by as much as €20 billion per year for new space- and water-heating systems alone. But as a result of declining per-customer energy consumption, energy bills will decline, and for the
period to 2030 CERA estimates that the value of lower fuel bills is broadly equivalent to the upfront capital costs. The main cost to society therefore is from the mandated allocation of capital toward energy efficiency and away from other sectors of the economy.

In other words, even if the net resource costs is essentially zero, there is still a cost in all the foregone benefits that the necessary capital investment – estimated at €500bn-€700bn – could have provided.

On the other hand, greater energy efficiency will also have benefits for security of supply and the fight against climate change that are hard to quanify, but could be very large indeed; priceless, you might say. Looked at that way, the cost – especially when compared against even more expensive technologies such as nuclear, offshore wind, or carbon capture – still seems pretty good value.

Related links:

EU curbs on energy use bear fruit (FT)

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