McKinsey Global Institute report from 2007 discusses the growth in US demand for energy. They collected a ton of data on how firms and consumers use energy around the world, and created a model of world demand for energy out to 2020. In line with this, they researched current best practices for energy efficiency around the world and described the gains that could be had if everyone upgraded to top-of-the-line equipment.The bottom line of their report is that cutting down on energy use and saving money go hand in hand. In the USA at least, we can have our cake and eat it, too.
Purchasing new energy products often provides a return of 10% or more on investment. The report states that if consumers switched to the latest major applicances, upgraded their heating and cooling systems (installing high-efficiency heat pumps, more insulation, and/or switching to water heating), installed compact fluorescent lighting, and had small appliances switch to standby, they could enjoy significant savings on their energy bill.
There are pennies on the ground here; why aren’t they being picked up? Everyone likes saving money but the returns to investing in new appliances might not be completely clear. For one thing, utility bills don’t provide any data to consumers that would help them cut down on energy use. Furthermore, utilities don’t have much of an incentive to get consumers to use less energy; as public companies, more energy means more revenue and bigger budgets. Furthermore, people and firms move from place to place, so it might not make sense to invest in a new fridge, for example, if you think you are going to move in less than a year. I’m encouraged that most of the savings in the report are possible through the positive-IRR decisions of firms and consumers, and that they don’t require a government subsidy.
Methodology: I’m concerned about how they estimated consumer and firm current energy demand and the returns to investing in top-of-the-line equipment. On aggregate across all households, the IRR from upgrading all of your household appliances might be very high. But it may be the case that some houses have an IRR of 30% or more and most have an IRR of about 5%, in which case they might not want to invest in new energy technology, especially if they’re planning on selling the house soon.
On the whole, however, their estimates are probably biased low. They estimated a base case of $50/barrel for oil, which David Rutledge and I think is unrealistic. They also described best energy practices circa 2007, whereas the technology is bound to improve vastly over the course of thirteen years.
Business Opportunity: There are clearly pennies on the ground here. I’m wondering why firms aren’t going around offering consumers free or discounted new appliances in exchange for a cut of the savings on their energy bill. Maybe there are firms doing this and I’m not aware of them, because I don’t pay an energy bill. Most firms that I know are focused more on sexier green products, like solar power.
For someone who laments people who discuss global warming and possible solutions without including any sort of cost/benefit analysis, this report is helpful. The data in the report is edifying, providing breakdowns of energy use across the economy, and the predicted growth in each field.