Columnists: Hans Nilsson, Fourfact

Published on: 11 Oct 2016

Tired of peeling onions?

It is time to take back control of the debate on the advantages of energy efficiency in our energy systems and in the economy. For decades we have been “educated” by economists to analyse the potential for energy efficiency improvements in what I call an “onion-peeling” fashion.

We have been told that there is a limit to how efficiently energy can be used. This limit – what is technically possible – is the onion’s outer skin, that cannot be surpassed and therefore this limit is the technical potential . Then we are told to deduct the part of the technical potential which is “not cost effective” to reach the economic potential.  This is sometimes also called the “engineering potential” since engineers are assumed to be optimistic and think about saved money as proof of rationality.  But, what is cost effective today depends on many factors of which energy prices is only one.

The more sophisticated peelers find yet another skin to take away in order to get to a true societal economic potential when they have also deducted any external effects that would impose costs on the project.

Finally we have to peel away market and adoption barriers that prevent people from voluntarily realising their opportunities to be more efficient. We have now reached the inner core called “achievable potential”, which of course is much smaller than we would have assumed from the beginning. It is thus unlikely to achieve our energy and climate objectives.

This narrative has kept us busy for decades fighting over how big the inner core is, and we fall in despair that more cannot be achieved. Some of our hard-core opponents even say that all reasonable potential is already realised. Sometimes they may admit that more could be in fact done, but the reason we do not get further is that people and companies prefer to do something else that is more profitable for them.

Nevertheless, we have been left with a nagging feeling that the “hard-core” economists’ explanation is not the end of the story. What if people increased their investments in efficiency?  Perhaps they could even generate more resources (i.e. profit) and use these new resources to do more of the things they want to do. Could we do more with less?

But then our opponents say that this would cause a rebound effect and at the end of the day, we would get less for more! Ah, just think that we would use those energy savings to use more energy!

In short, we have been trapped!

It is time to change the narrative and stop peeling these onions. Maybe we should instead plant the onions and harvest them when they have grown bigger!

  1. Consider the outer skin and recall what we have seen happen with renewables (as indeed with some end-use technologies!). The price is falling and performance is improving due to market learning. We can see it in learning curves for various technologies with dramatic changes in price/performance.

Furthermore, consider what is happening with buildings – existing and new. Not that long ago the limit was defined by the thickness of insulation but today most countries have advanced programmes for “zero-energy” buildings, taking a holistic approach

Think about what might happen when we start to make full use of recycling of material and maybe of what sharing economy could do in the area of transportation.

The outer skin of our onion – the technical potential – is moving away and it does so at a growing speed.

  1. The next level – the calculation of what is economically feasible – could be moving even faster when we start to include the multiple benefits of energy efficiency. We already have good data showing that industrial productivity improves with energy efficiency. Similar things happen with the health and happiness of occupants when buildings are improved. And here we could also include the benefits to our environment!

The IEA has mapped not less than 15 types of multiple benefits that should be considered when energy efficiency is calculated. If included into energy efficiency investment calculations and if we find ways to properly account for these benefits, the economic potential grows.

  1. Finally, the inner core, what is “achievable,” can be affected in substantial ways if we start to recognise what behavioural economics tells us about how people actually react to various kind of incentives.

The World Bank showed how such effects can be detected and influenced when the published its 2015 study “Mind, Society, and Behavior”.

Presently we often limit ourselves to producing information assuming that some will find it interesting and take action .

However, expanding what is “achievable”, (the core of the onion) will require making the complex menu of energy efficiency improvements much easier for ordinary people to access, and will require support and development of the efficiency supply business.

The reason we are trapped today is that we have accepted that energy efficiency should be calculated, as the economists say “ceteris paribus,” i.e. everything else remains equal. Well, it doesn’t. Everything changes and we also have to change.

Let’s begin by changing the peeling narrative!

Other columns by Hans Nilsson