Harnessing the invisible fuel

We don’t demand energy for its own sake, but for what it enables us to do.

If energy is life, then we should be careful how we use it. Energy efficiency simply means using less energy to perform the same activity, eliminating waste.

The “invisible fuel” as energy efficiency is sometimes known as, provides some of the quickest and most cost-effective options to reduce energy consumption and cut carbon emissions. Done right, improving energy efficiency can help the environment while also reducing energy poverty.

Global energy efficiency progress, as measured by improvements in ‘energy intensity’, compares energy use to the overall output of the economy. Over the past decade, energy intensity has improved by 1.6% per year on average, an acceleration from the 1% per year improvement during the previous decade.

Over the course of the 21st Century energy efficiency measures appear to have had a significant impact in curtailing carbon emissions that would have otherwise occurred. The International Energy Agency (IEA) estimates that energy efficiency has cut in half the CO2 emissions arising from fuel combustion resulting from population growth and rising incomes.¹

The acceleration in the electrification of the economy, especially from renewables, has been one of the main drivers of recent energy intensity improvements. As the share of renewables increases, energy intensity benefits from smaller heat losses during power generation. For example, the typical thermal efficiency for utility-scale electrical generators is 30- 40% for coal and oil-fired plants, and up to 60% for combined cycle gas-fired plants. In comparison, solar PV and wind generation are 100% efficient.

However, to be on track to reach the IEA’s Net Zero 2050 Scenario, global energy efficiency will need to roughly double to 4.3% per year by 2030. In this scenario, the IEA project that energy efficiency will more than offset the upward pressure on emissions resulting from population growth and the expected increase in incomes.

During the energy crisis of 2022, global energy efficiency jumped to 2.2%. Given the speed at which wholesale energy prices escalated during 2022, you would be forgiven for thinking there would be a bigger improvement. Afterall, a sudden increase in energy prices to very high levels should prompt a big response from consumers.

However, by seeking to protect consumers and businesses from the impact of the energy crisis, governments have blunted the signal that high energy prices provides. The IEA estimates that governments spent $1.1 trillion in 2022 seeking to protect citizens and industry from the impact of the energy crisis - between two and three times normal annual subsidy levels (see Fuelling controversy: Fossil fuel subsidies act like a negative carbon price).

Even if governments had done nothing to soften the blow, it’s doubtful as to whether it would have made a big difference to energy efficiency, at least in the short term. Remember that demand for energy is highly price inelastic. You might be more strict on your kids to turn the lights off, but you still need to cook food, and heat your home. Being more efficient with energy consumption takes investment, and that takes time.