Energy efficiency — the ugly ducking in an industry full of shiny solar panels and soaring wind turbines — may be the smart, business friendly path to mitigating climate shifts, regardless of political detours. 

The Paris Agreement, the most drastic global climate action plan, officially entered into force in early November, confirming 94 countries’ pledges to reduce emissions and dedicate resources to ramping up effective resource use. Although limiting the world’s temperature to a 2°C increase is now a recognized goal and standardizing reporting requirements are now in place, this may not be enough to actualize the overarching goal of Paris: to avoid the most severe effects of a shifting climate.

Since May 2016[1], international scientists have been trying to spread the word that the agreement as it stands now is not going to be enough to mitigate — let alone eliminate — climate effects or keep the global temperature shift below 2°C.

This general warning was followed by a timely report from the United Nations Environment Programme (UNEP) on Nov. 3, revealing that the world remains on a path toward a temperature rise between 2.9-3.4 degrees in this century — even if every current pledge at Paris were to be fully fulfilled.

“We are moving in the right direction: the Paris Agreement will slow climate change, as will the recent Kigali Amendment to reduce HFCs,” said Erik Solheim, head of UN Environment, in a press release[2]. “They both show strong commitment, but it’s still not good enough if we are to stand a chance of avoiding serious climate change.

The International Energy Agency has already outlined five key measures in a “Bridge Scenario”[3] that could act in addition to the pledges to achieve a peak in emissions around 2020 and, ultimately, mitigate temperature rise to meet the 2°C level (or the scientifically preferred but government-dreaded 1.5°C level). These are: energy efficiency, reducing inefficient coal, renewables investment, methane reductions, and fossil-fuel subsidy reform. Of these, energy efficiency is estimated to create the largest amount of emissions savings by far, causing 49 percent of the projected decrease. The next largest impact could come from renewables investment, at 17 percent.

At a regional level, energy efficiency is also projected to have the largest or equivalent impact in seven of the nine key regions, from the developed European Union to the developing Latin America region. What makes energy efficiency such an expansive solution, and why is it considered more effective than other possible routes to emissions reduction?

The key lies in the private sector’s growing interest in energy efficiency as a strategy to quickly save money rather than spend it, take control of energy use, and — perhaps most importantly — to address the risks inherent in the rapidly changing energy sector.

An Economic Starter

At a macro level, the economic benefits of energy efficiency have already begun: A 2015 report by the International Energy Agency[4] found that global energy efficiency investments since 1990 (totaling over $300 billion) have saved consumers $550 billion in reduced fuel costs — leading to the IEA naming efficiency the “first fuel” for a decarbonization strategy. Furthermore, an analysis from the Fraunhofer Institute[5] compared the total societal costs of an energy-efficient pathway and an energy-intensive pathway, concluding that an energy-efficient path saves businesses and consumers between $2.5-2.8 trillion USD by 2030.

While these savings are often attributed to energy-intensive sectors, commercial businesses can reap wide economic benefits through relatively simple updates. A 2014 McKinsey analysis[6] found that the entire UK commercial sector could reduce its electricity demand by 40 percent by 2030 through efficiency updates alone, and 80 percent of that decrease could come from just three changes: updating insulation, installing lighting controls, and updating HVAC systems — all measures that McKinsey estimated could easily produce net present value for individual businesses within five years.

Energy Star agrees; according to the company’s business resources[7], a 500,000-square-foot office building that benchmarks its energy performance could earn a cumulative cost savings of $120,000 over three years and increase in asset value of over $1 million.

In the UK manufacturing sector, McKinsey estimated that these changes would result in a demand reduction of up to 25 percent, and it is worth noting that these numbers do not begin to consider the impact of more expansive, system-wide changes such as how a manufacturer returns heat energy back to the system (heat integration).

While climate advocates may see energy as just a vehicle for emissions reduction, a business should see energy as the latest opportunity to create a cost advantage, as the savings from efficiency upgrades can be re-invested in new technology or back into the company.

Energy Control Has a Wide Scope of Benefits

Many businesses are hesitant to adopt energy efficiency because of the cost of investment, which varies by industry and when infrastructure was built, but the IEA encourages business leaders to look beyond the immediate investment and measure the direct benefits of energy efficiency.

According to a paper developed following an IEA roundtable on industrial productivity[8], additional benefits of energy efficiency include reduced environmental compliance costs, decreased maintenance costs, extended equipment lifetime, reduced waste disposal costs, and improved process and product quality. For employees, work conditions are improved and pollution is decreased. More broadly, the IEA reported, there are socio-economic benefits such as employment creation and stimulation of new business sectors.

Additionally, the control of energy use that accompanies energy efficient updates — Nest thermostats or water monitoring systems — provides increased understanding of how resources affect a business. Not sure how that can help? Think about the effective decision-making that comes with a complete readout of day-to-day resource use and the ability to plan future business around exact needs and costs.

The U.S. Small Business Administration agrees, explaining that energy-efficient technologies increase long-term asset value while decreasing operations and maintenance requirements, which save money as well as staff time. On the demand side, SBA reports that customers respond to businesses that cultivate public images of consciousness. Overall, businesses that consider the long-term have a long list of small but significant benefits that accompany efficiency investments.

The Shifting Sector is Exciting, But Risky

As energy continues to be a race between politics and physics[9], what remains certain in corporate energy is that practically everything — where our energy comes from, how much we use, and what (and who) we pay to use it — is volatile, especially as politicians toy with how best to regulate new energy sources and distributions.

This is demonstrated by the significant change in energy subsidies and support funding in the United States, which declined from $38 billion in 2010 to $29.3 billion in 2013[10] due to legislative priorities shifting away from transportation fuels, conservation, and support for low-income housing. Funding support for R&D or commercialization of diverse energy sources is often pushed toward the end of the legislative year in the U.S., creating additional uncertainty for companies considering investment. Unexpectedly extending energy tax credits, as Congress did in December 2015, can also affect energy markets by skewing prices and discouraging fair power purchase agreements.

State governments provide an additional level of instability, as seen in Nevada in late 2015. When the state’s Public Utilities Commission ignored the private sector’s protests and established new net metering rules and rates, the two top U.S. solar panel installers left the state[11]. Infighting about how best to run Nevada’s energy sector continues, ultimately hurting both residents and businesses that just want reliable, cost-effective energy to keep their lights on.

The safest defense against a volatile market is to reduce participation, and in this case, that can only be accomplished by decreasing energy consumption, the McKinsey report concluded[12]. Fortunately, through simple technical updates, decreased consumption is not a matter of cutting production but rather a smart choice to do more with less. Energy efficiency is key to competitive, risk-averse businesses, and thus it must be given center stage if the world is to meet its Paris goals.

 

[1] “IEA: Governments Not on Track for Paris Goals Key Actions to Peak Emissions Around 2020” published in May 2016 by the IEA. Found at http://newsroom.unfccc.int/unfccc-newsroom/iea-governments-not-on-track-to-achieve-paris-agreement-goals/.

[2] “World must urgently up action to cut a further 25% from predicted 2030 emissions, says UN Environment report” published in Nov. 2016 by the UNEP. Found at http://www.unep.org/newscentre/Default.aspx?DocumentID=27088&ArticleID=36295&l=en.

[3] “IEA: Governments Not on Track for Paris Goals Key Actions to Peak Emissions Around 2020” published in May 2016 by the IEA. Found at http://newsroom.unfccc.int/unfccc-newsroom/iea-governments-not-on-track-to-achieve-paris-agreement-goals/.

[4] “Energy Efficiency Today: The 2015 Market Report.” Found at http://www.ieadsm.org/wp/files/Tyler_Bryant.pdf.

[5] “How Energy Efficiency Cuts Costs for a 2-Degree Future” published in 2015 by the Fraunhofer Institute. Found at http://www.climateworks.org/wp-content/uploads/2015/11/ExecSummary_How-Energy-Efficiency-Cuts-Costs-For-A-2-Degree-Future.pdf.

[6] “How Businesses Can Reduce the Risks Related to Energy Consumption” by A. Volpin in Energy World in Jan. 2014. Found at https://www.energyinst.org/information-centre/ei-publications/energy-world/energy-world-january-2014.

[7] “The Business Case for Energy Efficiency.” Found at https://www.energystar.gov/buildings/about-us/how-can-we-help-you/build-energy-program/business-case.

[8] “Capturing the Multiple Benefits of Energy Efficiency: Roundtable on Industrial Productivity and Competitiveness Discussion Paper,” published by the IEA on January 27, 2014. Found at https://www.iea.org/media/workshops/2014/eeu/industry/IEA_Industrialnonenergybenefitsbackgroundpaper_FINAL.pdf.

[9] Coined by C. Mooney and B. Dennis in “Climate Change is Turning Into A Race Between Politics and Physics” as published in The Washington Post on Nov. 4, 2016. Found at https://www.washingtonpost.com/news/energy-environment/wp/2016/11/04/climate-change-is-turning-into-a-race-between-politics-and-physics/.

[10] Data from “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013” published by the EIA on March 12, 2015. Found at https://www.eia.gov/analysis/requests/subsidy/.

[11] “Get Ready for the Rooftop Solar Stall” by B. Eckhouse in Bloomberg Businessweek in October 2016. Found at http://www.bloomberg.com/news/articles/2016-10-20/get-ready-for-the-rooftop-solar-stall.

[12] “How Businesses Can Reduce the Risks Related to Energy Consumption” by A. Volpin in Energy World in Jan. 2014. Found at https://www.energyinst.org/information-centre/ei-publications/energy-world/energy-world-january-2014.

 

Photo courtesy of Coign Studio.