Liebreich: Energy Efficiency Key To Covid Recovery

Michael Liebreich
Senior Contributor 
BloombergNEF

We are living through one of the most extraordinary years in recent history, a year none of us will ever forget. Much has been written about the parallels with 1918, the year of the Spanish Flu, but I want to start by taking you back even further, to 1868, a year in which a number of developments occurred which still resonate today.

1868 was the year the U.S. states ratified the Fourteenth Amendment to the Constitution, one of the Reconstruction Amendments designed to address citizenship rights for freed slaves. Who then would have thought that in 2020 Americans would still be taking to the streets 152 years later to demand that the “equal protection of the laws” enshrined in that Amendment be finally delivered to all citizens?

1868 was the year of a critical election, ultimately won by General Ulysses Grant, the victorious commander of the Union Army in the American Civil War. A young inventor applied for a patent for an electric voting machine. His name? Thomas Edison. 1868 was also year zero for smart infrastructure: the world’s first traffic light was installed at the junction of Great George Street and Bridge Street in Westminster, London.

Finally, 1868 was the year in which the U.K. Prime Minister of the day, Benjamin Disraeli, stated that “where there is no efficiency, there can be no economy.” It may have taken 152 years for the truth of his words to become fully apparent, but the twin challenges of Covid-19 and climate change mean that their time has definitely come.

The climate imperative

Let’s start before the pandemic, using 2019 as our baseline. The previous decades had seen two powerful, conflicting trends. On the one hand, incredible improvements on almost every metric of human wellbeing: reduction in poverty, improvement in health, reduction in hunger, inclusion in education, empowerment of women, lengthening of lifespan, extension of voting franchises. On the other hand, systemic damage to the environment, threatening to breach a number of planetary boundaries, among them the ability of our atmosphere to cope with ever-increasing emissions of greenhouse gases.

By last year, the average global surface temperature had already risen by 1.1 degrees Celsius since pre-industrial times. According to the UN Environment Programme’s most recent Emissions Gap Report, if we want to limit the eventual temperature rise to 2 degrees Centigrade we need to reduce annual emissions by around 25% by 2030, or 2.7% per annum. To stay under 1.5 degrees Celsius of warming, the required reduction would be 55%, or 7% per annum.

And that is before accounting for economic growth. While growth in GDP may be a poor way of measuring overall human well-being, it happens to be a great way of measuring job creation – and if you think jobs don’t matter, watch the news. Over the coming decade, we are going to need around 3% economic growth per year if we are to continue to raise living standards in the developing world and maintain social stability in the developed world (particularly given that global population is set to keep growing at over 1% per year for a few more decades).

Putting the need to reduce emissions together with the need to deliver economic growth, staying under 2 degrees Celsius means we need to achieve annual reductions in carbon intensity of 5.7% per unit of economic activity, or 10% to stay under 1.5 degrees of warming. To put this in perspective, over the past decade we have managed to average 2.4% improvements per year; since 2015, the year in which renewable energy achieved “grid parity”, we nudged that up to 2.8%; the best year in recent history saw only 3.6%. This has to change.

We have to get carbon out of our economy somewhere between 3 and 7 percentage points per year faster than we have been doing so far. And there are only two ways to do it: on the supply side, taking carbon out of our energy system (clean energy); and on the demand side, taking energy out of our economy (energy productivity). In most discussions, the supply side grabs most attention, sucking all the air out of debate about demand-side efficiency. But the fact is, we will get nowhere near our climate targets without a step change in energy use, as well as production. Indeed, most models of climate-compatible energy pathways see around half of the heavy lifting being done by improved energy productivity.

A quick aside on terminology. ‘Energy productivity’ refers to reductions in energy use per unit of economic output, while ‘energy efficiency’ refers to reductions in energy use per unit of physical output. Improvements in energy productivity are driven by a combination of energy efficiency improvements and shifts to a higher-value, less energy-intensive economic mix.

The historic rate of energy efficiency improvement is around 1%. Improving on that has proven exceptionally hard. For every successful policy, there are probably three failures, and there is a huge literature trying to explain this, but generally it is around human behavioral factors, rather than lack of technology or underlying economics.

Recent acceleration

The past decade has seen a very palpable acceleration. The poster child is LED lighting. At the start of the last decade, LEDs made up less than 2% of global lighting sales; today the figure is over 50%. The efficiency of LED lights, already five times better than filament bulbs, will continue to increase and they will soon be ten times as efficient. The success of LEDs has not only delivered significant savings in power demand for lighting, but also in air conditioning demand in warm countries (every filament light bulb acts as a heater). And the solar revolution in the developing world is really an LED revolution: the more efficient the demand side, the less new power supply you have to build, and the more you can achieve with simple solar rooftops.

The Jevons Effect, whereby savings achieved through energy efficiency are squandered by increases in usage of efficient products and services, is proving not to be as powerful as opponents of climate action make out – research confirms there may be a bounce-back, but it is generally restricted to 10-25% of the energy saved.

Some other highlights. Buildings account for almost 40% of global energy-related greenhouse gas emissions. In November 2019, the U.S. Green Building Council announced that it had passed the milestone of 100,000 commercial buildings achieving LEED certification. An incremental 1.1% of the U.S.’s commercial space now comes under LEED certification each year. Over 550,000 buildings have been certified in 50 countries under the U.K. Building Research Establishment’s Environmental Assessment Method (Breeam), with over 2 million more registered for future certification. And over 65,000 buildings worldwide have now been designed, built and tested to the extremely demanding Passivhaus standard.

In Holland, Energiesprong uses a combination of standardization, prefabricated building components and third-party finance to deliver net-zero-energy homes on a pay-as-you-go basis. In the U.S., Nate “the House Whisperer” Adams is taking existing homes off the gas grid, dramatically reducing their energy use and giving encouragement to those municipalities banning gas in new homes and putting the wind up the American Gas Association, which is fighting to make gas bans illegal.

On the finance front, green mortgages are moving mainstream after many years on the fringes of the market. U.K. high-street bank Barclays launched a flagship product in 2018. BNP Paribas teamed up with E.ON to offer green mortgages in France and Dutch pension provider ABP has committed 0.5 billion euros to the sector. Some 40 European banks are now working with the Energy Efficient Mortgages Action Plan to provide cheap finance for energy retrofits as well as energy-efficient home purchases. In the U.S., Property Assessed Clean Energy (PACE) finance may have declined from its peak of $2 billion per year, but the biggest sustainable debt issue of 2019 was $22.8 billion issued by Fannie May, backed by green mortgages.

The humble ESCO, around since the 1970s, has been turbo-charged by the availability of digital performance data, and is now being financed off-balance-sheet by companies like Switzerland’s SUSI Partners and the U.K.’s SDCL (where I am senior advisor), which has also floated Europe’s first quoted energy efficiency yieldco on the London Stock Exchange.

Pioneering tech

In fact digitization is an all-round energy efficiency game-changer, enabling more efficient use of built infrastructure from office desks to water pipes, highway lanes to parking spaces. Meanwhile, digital innovation by companies like Smartwires, Octopus, Ohme and BNEF Pioneers Enbala and Limejump enable smart management of existing electrical infrastructure. Digitization also enables more efficient use of public transport and other assets, and it is key to some of the sticky changes we are seeing during the Covid pandemic, but we’ll get on to that.

Industry heavyweights like Siemens, Honeywell, Mitsubishi, GE, ABB and Schneider Electric have built substantial businesses delivering energy-efficient products to major clients. The big cloud services operators have found ways of averting the Armageddon once threatened by surging data center emissions. But the giants aren’t getting it all their own way.

Mitsubishi Heavy Industries competes with start-up Climeon to sell Organic Rankine Cycle engines that can turn low-grade waste heat into useful power. Honeywell is touting its machine-learning capabilities to reduce energy use, but so is venture-funded Tado and crowd-funded Vestemi. Everywhere, it seems start-ups – many of them BNEF Pioneers – are bringing new energy efficiency technologies to market. These include thermal batteries from companies like SaltX, SunAmp, Tepeo and EnergyNest; aerogels from Aspen Aerogels, phase-change materials and innovative thermal storage from Phase Change Energy Solutions, Highview Power and others. Metron, Uptake and Akselos and a myriad of other start-ups are promoting their internet of things, machine learning and digital-twin products against Siemens, GE and the other big data behemoths.

Technology improvements mean that heat pumps now operate efficiently at higher and lower temperatures than ever before. Over the past decade, global heat pump sales have beaten those of air conditioners in terms of growth by 12% to 5% per year (albeit from a much lower base). The year more heat pumps are sold globally than air conditioners, which should take just over a decade, there will be a huge celebration in the Liebreich household. High-end EVs are now heated by heat pumps, which increases their range dramatically in cold weather. Scotland’s Star Renewables has been extracting heat from Norwegian fjords and the River Clyde to keep local toes toasty warm. Developers are looking at mining heat from abandoned and flooded coal workings.

The list of innovations in energy efficiency is growing by the day. Bliss it is in this dawn to be alive, but to be a thermodynamics geek is very heaven (pace William Wordsworth)!

The politicians awaken

By the end of last year, politicians were waking up to the fact that energy efficiency is not just vital from a climate perspective, but also good economics. For a net energy-importing nation, energy inefficiency and the impact of fuel imports on the balance of payments act as twin economic handbrakes. And improvements are eminently deliverable.

The G20 has been championing energy efficiency for nearly a decade, in 2014 producing a comprehensive Energy Efficiency Action Plan. A year later, its Energy Efficiency Finance Task Group put together a deep dive into the $220 billion invested globally each year in energy efficiency, expertly dissecting the various mechanisms and still very much worth reading. The EU, as part of the preparations for its Green Deal, adopted the Energy Performance of Buildings Directive, expected to drive the uptake of heat pumps, insulation materials and small-scale renewables. Belgium, France and the U.K. pressed forward on building energy efficiency retrofits, with the U.K. government committing 9.2 billion pounds, expected to be targeted on social housing and public buildings, like schools and hospitals.

The current U.S. federal administration may have done little to promote energy efficiency – less than nothing, in fact, in the case of its rollback of vehicle CAFE standards – but states certainly have been active. The American Council for an Energy-Efficient Economy’s 2019 State Energy Efficiency scorecard gave top scores on everything from appliance standards to combined heat-and-power to Massachusetts, California, Rhode Island, Vermont, and New York, but also noted great improvements in Maryland, Hawaii and New Jersey. New York City’s Climate Mobilization Act puts a limit on emissions from existing buildings, starting in 2024, en route to an 80% cut by 2050. And the Green New Deal, which looks like informing the U.S. Democrats’ electoral offer in this November’s elections, has energy efficiency and building renovations at its heart.

Energy efficiency has also been making a clear move to center stage in multilateral and global diplomacy. At the end of 2018, the International Energy Agency convened a Commission for Urgent Action on Energy Efficiency, on which I am delighted to serve, and we have just published a final report with ten recommendations – of which the fourth relates entirely to finance. At the UN Global Climate Action Summit, the Energy Efficiency Global Alliance launched the Three Percent Club of countries and companies committed to 3% annual energy efficiency improvements, supported by 15 countries and 13 major business organizations. And the U.K. hosts of COP26 in Glasgow have indicated that energy efficiency will be one of the major threads on which they will be asking participants to focus.

In summary, by the end of 2019, there was a real sense that things were finally starting to happen in the historically off-Broadway world of energy efficiency. Now, suddenly, Covid-19 is pulling energy efficiency to the beating heart of global policymaking.

Covid-19 and the stimulus

Within the first few months of this year, it was clear that the pandemic would be followed by a stimulus dwarfing that of the Great Financial Crisis, as I pointed out in my March piece for BloombergNEF (Covid-19, the Low-Carbon Crisis). I cautioned against ambulance-chasing, saying that “as soon as the immediate crisis has passed and attention moves to reflating economies, that is the time to ensure that clean energy, transport and smart infrastructure are at the heart of any longer-term stimulus.” And I argued that energy efficiency should be at the heart of the effort: “They say you should mend your roof when the sun shines – well you should insulate your building stock when there is excess capacity in the construction industry. Now would be a good time for a massive, coordinated effort involving policy-makers, industry, financiers and consumers.”

The vast majority of economists and commentators agree on the need to “build back better”, but seem strangely uninformed about what that involves. In May, Cameron Hepburn, director of the Smith School of Enterprise and Environment, Nobel Laureate Joseph Stiglitz and Lord Nick Stern of Stern Review fame, sent out a questionnaire to 231 central bank officials, finance ministry officials, and other economic experts from G20 countries, asking them to rank policy ideas in terms of their ability to support economic recovery at the same time as bend the curve of emissions downwards.

Top of the experts’ list for long-term climate impact were clean energy infrastructure investment, clean research and development spending, green spaces and natural infrastructure investment, and energy efficiency building upgrades. So far so good. However, when asked about which policies would have the best long-term economic multiplier effect, the respondents plumped for liquidity support for households, start-ups and small companies; investment in healthcare and connectivity; direct cash transfers or wage increases; and direct provision of basic needs.

This is simply wrong: of course in the short term there is a need to inject cash into the economy, and I was among the first to argue that it needed to be put in the hands of “the bottom 50%”, not just the banks and big companies. But cash transfers deliver a derisory long-term multiplier effect compared to energy efficiency. Directing stimulus money towards upgrading buildings, appliances, vehicles and industrial equipment would put large numbers of people back to work and fill their pockets with cash to spend in their communities, and at the same time upgrading our productive asset base for the long term. It would also reduce the longer-term risk of climate damage and deliver a range of co-benefits, from improved air quality to enhanced skills and reduced economic exposure to fuel price volatility. Energy Efficiency is the Swiss Army Knife of stimulus spending.

All is still to play for. The team at the Bloomberg has been tracking global Covid stimulus spending announcements, and the running total as at the time of writing was $12 trillion; of this, the biggest contributors were the $2.3 trillion of measures passed by the U.S. Congress in March and the $3.3 trillion released by the EU and its individual states. BloombergNEF, meanwhile, has been tracking any green earmarks and conditions in the use of these funds. It reports that so far, $509 billion has been awarded to carbon-intensive sectors, with less than $20 billion of that subject to conditions on emissions reduction; only a tiny $12.3 billion explicitly targets climate solutions. But that figure is clearly going to increase.

The need for an efficient recovery

Stimulus spending must be directed to a green recovery, with energy efficiency at its heart. The risk otherwise is that we see a repeat of what happened at the time of the Great Financial Crisis. In 2009, energy-related CO2 emissions were down 2.2% but then, with the help of stimulus packages biased towards fossil-based industries and infrastructure, in 2010 they rebounded by 4.5%, the fastest ever annual growth on record. In order to forestall a repeat of this, last week the IEA published a Sustainable Recovery Plan, focusing on actions governments should take over the coming three years to avoid a rebound in emissions, and to accelerate global structural change to a low-carbon energy and transport system. The goal of the plan, according to the IEA, is to ensure that 2019 was the peak year for global emissions.

Working with the International Monetary Fund, the IEA calculates that its plan would add 1.1% to GDP, create 9 million jobs, eliminate 4.5 metric gigatons of greenhouse gas emissions and ensure that 2019 was the year of peak global emissions. This is the sort of thinking the world needs right now. At the heart of the IEA Sustainable Recovery Plan is energy efficiency. And, of those 9 million jobs, fully 4 million relate to energy efficiency – through retrofitting buildings, upgrading appliances and vehicles or improving industrial efficiency. The electricity system accounts for half as many, 2.1 million, just behind transportation, with 2.2 million.

None of this is to suggest that other potential contributors to a green recovery should be ignored. Energy efficiency should be complemented by electric vehicle charging infrastructure, new public transport investments, renewable energy projects, grid upgrades, power storage, hydrogen pilots and R&D – all have a role to play. There also needs to be a focused initiative to lock in energy-saving behavior like working from home, video conferencing, remote medicine and the like, which have become ubiquitous during the pandemic, but which might reverse after it passes. But none of these programs can match energy efficiency investment for the combination of immediate stimulus and long-term economic and climate benefits; and none has suffered such woeful under-investment for decades.

Luckily, policy-makers appear to be listening. A leaked document on the EU’s planned 1 trillion-euro stimulus package includes no less than 91 billion euros – over half of the 163 billion euros earmarked for green measures – to fund building retrofits, intending to trigger a total of 350 billion euros including private finance over the seven-year budget cycle 2021 to 2027. Germany has just announced a 2030 target for the built sector of a 55% reduction in non-renewable energy use versus 2008. If these sorts of targets and figures survive into final budgets, it would be the first time in my career tracking the low-carbon transition that I have seen governments earmarking resources at the appropriate scale to match the scale of the opportunity and the rhetoric on efficiency.

Summary – the time is now

So there you have it – I believe energy efficiency’s time has finally come. The drivers are all there: the long-term challenge of climate change, the short-term demands of the Covid-19 stimulus. Technologies are in place, the pilots done, the impacts proven. The economics work, the metrics are in place and the money is there; I have not even mentioned how perfectly energy efficiency investment fits with the trend towards sustainable finance. And the policy makers are coming on board, readying themselves to act at a scale we have never seen before.

Sometimes it takes decades for a sector to become an overnight success. I’ll leave you with another quotation from Benjamin Disraeli – not the one about lies, damn lies and statistics, principally used these days by those wanting to ignore warnings by scientists – but this one: “The secret of success in life is to be ready for opportunity when it comes.”

For the energy efficiency sector, opportunity has arrived. Don’t let it slip past.

Michael Liebreich is founder and senior contributor to BloombergNEF. He is on the international advisory board of Equinor.

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