Energy efficiency is undervalued and misunderstood

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Estimated reading time ~ 9 mins

Conventional thinking says that energy efficiency is pointless.

Critics suggest that it will always lead to a rebound effect. This is where lower energy prices lead to a rebound in consumption, overwhelming the initial decline brought about by the efficiency improvement.

It was William Stanley Jevons who first drew attention to this. The English economist observed that Britain’s consumption of coal soared after James Watt introduced the steam engine in 1712. In his essay, “The Coal Question”, Jevons concluded, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”

Another criticism is that opportunities for energy efficiency inevitably suffer from diminishing marginal returns. For example, it might be relatively straightforward and cost-effective to cut energy consumption by 20% say, but over and above that, every additional 1% decline in consumption becomes progressively more expensive and difficult to do.

Either way, the conclusion based on conventional thinking is that any impact on emissions from improving energy efficiency are likely to be meagre, and will inevitably and rapidly be swallowed up by increased energy demand. Some argue that rather than wasting precious resources trying to be more efficient it is far better to invest in additional sources of energy supply.

Even worse than being pointless, energy efficiency is also linked with exaggerated ideas of thrift (such as President Jimmy Carter’s call to beat the oil crisis by wearing a jumper), and de-growth (cutting energy consumption in a “Cutting off one's nose to spite one's face" reaction to concerns about climate change).

Conventional thinking misses several important factors. In short, energy efficiency is misunderstood.

First off, people often fall prey to the primary energy fallacy. This is the assumption that all of the energy embedded in the fossil fuels we burn today needs to be replaced by an equivalent amount of clean energy (i.e., renewables and nuclear). Those who fall for this line of reasoning point to primary energy trends since the Industrial Revolution. History shows that every previous energy transition has tended to be additive, i.e., each new source of energy (fossil fuels, nuclear, renewables etc.) has added to overall primary energy demand, rather than substituted for the incumbent. For example, despite the surge in renewable generation capacity over the past two decades, the share of fossil fuels in primary energy demand has been stuck at around 80-85%, yet overall primary energy demand has continued to rise. In the face of these primary energy trends, advocates argue that energy efficiency - and the clean energy transition more broadly - is a futile endeavour.

The focus on primary energy fails to take adequate account of the energy losses involved with fossil fuels. Every year the Lawrence Livermore National Laboratory in California produces a Sankey diagram illustrating primary energy flows through the US. It’s latest report shows that over two-thirds of primary energy ends up as ‘Rejected Energy’. The majority of these losses arise in the the form of waste heat as primary energy is first extracted, converted, and used for power generation, and then transmitted and distributed to the final energy consumer. Overall, it means that only one-third of primary energy in the US is actually used by consumers as ‘Energy Services’. A relentless focus on expanding supply promises to lock in high levels of energy inefficiency.¹

It’s important to note that we don’t demand energy for its own sake, but for what it enables us to do. Energy comes in many different forms, each with a different inherent quality (energy density, ease of transport, environmental impact, etc.). It’s no good to simply compare oil with renewables, or nuclear with coal. At its most basic level we use energy to perform work. Exergy is the term that scientists use to define the maximum amount of work that can be produced from a flow of energy. Electricity enables consumers to make better use of exergy. For example, one joule of electricity can be used to power a wider range of activities than an equivalent amount of heat.

In the past energy efficiency has tended to focus on the actions of individual industries or countries, and importantly in isolation. This includes businesses adopting more efficient means of production, or governments introducing regulations that ban energy inefficient appliances. Energy efficiency is also misconstrued as individuals deliberately cutting their living standards in order to save energy. What all of these actions have in common is that they represent only an iterative change to the energy system. In contrast, electrification and decentralised energy generation - two of the most powerful forms of energy efficiency - go beyond the isolated actions of individuals and change the entire system.

The largest source of inefficiency in absolute terms is power generation. Two-thirds of primary energy is lost from extraction, heat loss in power generation, through to electricity transmission and distribution. The conventional electricity grid comprises centralised power generation and an elaborate web of transmission infrastructure in order to deliver power to where it is needed. It doesn’t need to be this way. According to

Jonathan Maxwell

decentralised energy delivers higher levels of electrical and thermal efficiency, relieving pressure on the grid, while also being lower cost and more reliable. Decentralised generation refers to energy that is generated off the main grid and includes micro-renewables, heating and cooling.²

The second biggest source of energy loss is transportation. The internal combustion engine is eye-wateringly inefficient, losing around 80% of primary energy, mostly in the form of heat from the engine. In comparison, electric vehicles achieve almost 90% efficiency; electric motors deliver around 67%, plus an additional 22% from regenerative braking.

Hannah Ritchie

makes the point that decarbonising transportation seems almost impossible when you only think about primary energy demand. However, once you consider the efficiency gains from electrification it begins to become clear that you only need to displace a fraction of the fossil fuels currently consumed.³

The third largest source of energy losses is industry, with more than half of primary energy being lost. The same is true here, electrification can also make a big dent to industrial demand for primary energy. For example, industrial heat accounts for ~20% of global energy demand. Around three-quarters of that heat is supplied using fossil fuels, primarily natural gas and coal and contributes around 10% of global greenhouse gas (GHG) emissions.

Electrification via heat pumps has the potential to account for about 30% of total industrial heat demand by 2050, according to the IEA’s Net Zero Emissions by 2050 Scenario. Unlike conventional electrical space heating systems that convert one form of energy (electricity) to another (heat), heat pumps work by transferring heat from one place to another. As heat pumps only use electricity for heat transfer they use far less energy than conventional heating. Overall, heat pumps tend to be 3-4 times as efficient, depending on the external temperature (see Heat pumps on the factory floor).

Whole energy system change dramatically alters the equation. Rather than being limited to diminishing marginal returns, an energy efficient world akin to the one I’ve outlined could have increasing returns to scale. Decentralisation coupled with lower energy and resource demands should reduce geopolitical pressures. Fixing the current broken energy system means that instead of upgrading and expanding the grid, capital can be deployed for more productive uses. Last but not least, an energy efficient global economy will increase competitiveness and productivity. Rather than being a drag on living standards, system-wide energy efficiency promises to accelerate economic development.

How are we doing so far? Well, the annual improvement in global energy intensity - the amount of primary energy used to produce a given amount of GDP - slowed from 2% in 2022 to 1.3% in 2023, according to estimates from the International Energy Agency (IEA). However, to be consistent with the IEA’s Net Zero Emissions by 2050 Scenario, the annual improvement in energy intensity will need to double to 4% across the period 2022-30. The IEA predict that the improvement in energy intensity would result in 7 Gt CO2 lower emissions – 20% of current emissions. Importantly, the IEA indicates that energy efficiency and related measures could account for half of all emission reductions achieved this decade.⁴

History shows that it can be done. The annual improvement in global energy intensity more than doubled from 0.8% in 2001-10 to 1.7% in 2011-20. Fourteen of the G20 economies accelerated their energy intensity improvements in 2011-20 versus the previous decade. Nine out of every ten countries have achieved the 4% rate at least once over the past decade, and half have done so at least three times. Nevertheless, in an illustration of how challenging it is to do on a consistent basis, only four G20 countries – France, China, Indonesia, and the UK – have done so over a continuous 5-year period.

A doubling in energy intensity is going to require a lot more investment. The IEA calculates that global annual investment in energy efficiency will need to triple to $1.8 trillion by 2030. As always though the burden is unlikely to be shared equally. The IEA estimates that investment in energy efficiency in advanced economies needs to more than double by 2030 to almost $900 billion, but the challenge is even greater in less developed economies. The IEA think that investment needs to scale by a factor of 3.5 to be on course for net zero.

Energy efficiency is the cleanest and cheapest way to decarbonise our economy while also meeting our energy needs. It is also the most misunderstood. That will need to change if the energy transition is to succeed.

1. https://flowcharts.llnl.gov/

2. Broken Promises?

3. Most of the energy you put into a gasoline car is wasted; this is not the case for electric cars

4. https://iea.blob.core.windows.net/assets/dfd9134f-12eb-4045-9789-9d6ab8d9fbf4/EnergyEfficiency2023.pdf