Invisible Fuel

The biggest innovation in energy is to go without…

The cheapest and cleanest energy choice of all is not to waste it. Progress on this has been striking yet the potential is still vast. Improvements in energy efficiency since the 1970s in 11 IEA member countries that keep the right kind of statistics (America, Australia, Britain, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands and Sweden) saved the equivalent of 1.4 billion tonnes of oil in 2011, worth $743 billion. This saving amounted to more than their total final consumption in that year from gas, coal or any other single fuel. And lots of money is being invested in doing even better: an estimated $310 billion-360 billion was put into energy efficiency measures worldwide in 2012, more than the supply-side investment in renewables or in generation from fossil fuels.

The “fifth fuel”, as energy efficiency is sometimes called, is the cheapest of all. A report by ACEEE, an American energy-efficiency group, reckons that the average cost of saving a kilowatt hour is 2.8 cents; the typical retail cost of one in America is 10 cents. In the electricity-using sector, saving a kilowatt hour can cost as little as one-sixth of a cent, says Mr Lovins of Rocky Mountain Institute, so payback can be measured in months, not years.

The largest single chunk of final energy consumption, 31%, is in buildings, chiefly heating and cooling. Much of that is wasted, not least because in the past architects have paid little attention to details such as the design of pipework (long, narrow pipes with lots of right angles are far more wasteful than short, fat and straight ones). Energy efficiency has been nobody’s priority: it takes time and money that architects, builders, landlords and tenants would rather spend on other things.

In countries with no tradition of thrifty energy use, the skills needed are in short supply, too. Even the wealthy, knowledgeable and determined Mr Liebreich had trouble getting the builders who worked on his energy-saving house to take his instructions seriously. Painstakingly taping the joins in insulating boards, and the gaps around them, seems unnecessary unless you understand the physics behind it: it is plugging the last few leaks that brings the biggest benefits. Builders are trained to worry about adequate ventilation, but not many know about the marvels of heat exchangers set in chimney stacks.

Snug as a bug in a rug

For new buildings, though, energy efficiency is becoming an important factor. The 99-storey Pertamina Energy Tower being built in Jakarta, for example, will be so thrifty that wind, solar and geothermal energy can meet all its power needs. “Energy-plus” buildings can even harvest energy from their environment and inhabitants and export it. Like cars, new buildings are typically much more efficient than the ones they replace.

But old cars are scrapped more often than old houses. The biggest problem in energy efficiency is adapting existing buildings. Circle Housing, a large British housing association, has 65,000 dwellings, with tenants whose incomes are typically below £20,000 ($32,000) a year, low by British standards. Annual energy bills in the worst properties can be a whopping £2,000, so Circle is knocking some of the houses down. Their replacements bring the bills down to about £450. In new “passive houses”, built from mass-produced prefabricated energy-efficient components at roughly the same cost as ordinary ones, bills fall to £350. The inhabitants have to get used to not opening windows, which wastes heat and upsets the ventilation system. But Europe already has 30,000 such buildings, and more are on the way.

For Circle’s existing stock, with bills averaging £1,240 a year, “energy champions”—tenants who are trained to help others with similar housing and lifestyles—offer simple tips (switching off appliances, turning down thermostats) that save an average of £250 a year. Helping tenants shop around for good deals on gas and electricity saves another £150. But after that it gets much more expensive. Refitting a house with double glazing, cavity-wall and loft insulation, a heat pump and an energy-efficient boiler may save another £150, but requires an investment of £3,000 to £8,500. In most houses and offices, saving £3 a week is not worth a lot of hassle. Tenants do not want to invest in properties they do not own, and landlords do not really care how much their tenants pay for their energy. Besides, better insulation may simply mean that people wear lighter clothes indoors rather than turn the heating down.

One answer to this market failure is to bring in mandatory standards for landlords and those selling properties. Another involves energy-service companies, known as ESCOs, which guarantee lower bills in exchange for modernisation. The company can develop economies of scale and tap financial markets for the upfront costs. The savings are shared with owners and occupiers. ESCOs are already a $6.5 billion-a-year industry in America and a $12 billion one in China. Both are dwarfed by Europe, with €41 billion ($56 billion) last year. Navigant Research, the consultancy, expects this to double by 2023.

That highlights one of the biggest reasons for optimism about the future of energy. Capital markets, frozen into caution after the financial crash of 2008, are now doing again what they are supposed to do: financing investments on the basis of future revenues. The growth of a bond market to pay for energy-efficiency projects was an encouraging sign in 2014, when $30 billion-40 billion were issued; this year’s total is likely to be $100 billion.

“The price of fossil fuels will always fluctuate. Solar is bound to get cheaper”

Solar energy is now a predictable income stream drawing in serious money. A rooftop lease can finance an investment of $15,000-20,000 with monthly payments that are lower than the customer’s current utility bill. SolarCity, an American company, has financed $5 billion in new solar capacity, raising money initially from institutional investors, including Goldman Sachs and Google, but now from individual private investors—who also become what the company calls “brand ambassadors”, encouraging friends and colleagues to install solar panels too.

The model is simple: SolarCity pays for the installation, then bundles the revenues and sells a bond based on the expected future income stream. Maturities range from one to seven years. The upshot is that the cost of capital for the solar industry is 200-300 basis points lower than that for utilities.

A virtuous circle is emerging which is confounding the doomsters. It rests on five elements. The first is abundant energy, above all from new solar technology: a sliver now, but also a dagger in the heart of the fossil-fuel industry. The grid parity which Hawaiian rooftops offer today will be possible in many more locations in future—and not just on rooftops in direct sunlight, but from any surface in daytime. That shapes the future investment climate. The price of fossil fuels will always fluctuate. Solar is bound to get cheaper.

The second part of the circle is storage. Batteries are getting cheaper, more powerful and more prevalent, for example in electric cars. So, too, are other ways of storing energy, such as warm water and ice. That deals with the biggest disadvantage of solar power, its intermittent nature. Some of this may be achieved through big interconnectors that can shift power to countries with the right geography for hydro-electric generation. But even more important may be the aggregation of lots of small-scale storage.

That reflects the third element: distribution. Consumers are now in a position to be small producers and storers of energy. That creates resilience in the network, along with greater efficiency and more innovation. Perhaps fuel cells will become smaller and cheaper, making up a network of micropower stations wherever the gas pipelines run. Perhaps they will remain toys for the rich. But whereas innovation in the power network of the past—big, centralised and regulated—was slow, in the new, decentralised grid of the future it will move ever faster.

The fourth part of the circle is intelligence. The internet has made it possible for its users to generate, store and manage data efficiently. Now processing power and algorithms will do the same for electricity. Whether that comes from smart meters which manage consumption in the home or from individual smart devices programmed to maximise their efficiency remains to be seen. Given the risk of cyber-attacks, security will need serious thought. But overall the grid is getting smarter, not dumber.

The fifth and final part is finance. Business models for new energy systems are now proven, both in the rich world and in emerging economies. A wave of money is breaking over the old model, sweeping away incumbents. If they and their friends in government try to hold it back, everyone will suffer.

Invisible fuel. [online] Available at: < http://www.economist.com/news/special-report/21639016-biggest-innovation-energy-go-without-invisible-fuel> [Accessed 21 January 2015].