Unlocking Energy Efficiency in the U.S. Economy MIT NESCAUM - - PowerPoint PPT Presentation

Unlocking Energy Efficiency in the U.S. Economy

August 25, 2010 MIT NESCAUM Endicott House Symposium Presentation by Ken Ostrowski

McKinsey & Company 1

|

• 7 leading institutions joined with McKinsey to co-

sponsor

• Analyzed 250+ abatement opportunities across 7

sectors of the US economy – buildings, power, transportation, industrial, waste, agriculture and forestry

• Provided comprehensive

mapping and fact base of U.S. GHG options

• Highlighted challenge to

achieve projected targets

• Published in December

2007 U.S. GHG Abatement Cost Curve – December, 2007

• 12 leading institutions joined with McKinsey to co-

sponsor

• Analyzed 675+ energy efficiency opportunities in

stationary uses economy-wide (with regional breakdown)

• Provides granularity behind

attractive opportunities

• Explores key implementation

barriers and potential solutions

• Published in July 2009

U.S. Energy Efficiency – July, 2009

McKinsey has released two major US energy related research reports in the past three years

McKinsey & Company 2

|

• 200
• 150
• 100
• 50

50 100 150 200 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Cost $(2005 real) ton CO2e Abatement implied by proposed legislation: 3.5-5.2 gigatons

* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets; targets calculated off the 2030 U.S. GHG emissions of 9.7 gigatons CO2e/year (reference case) Source: McKinsey analysis

Low-range case 1.3 gigatons Mid-range case 3.0 gigatons High-range case 4.5 gigatons Increasing commitment and action Potential Gigatons CO2e/year

2007 US GHG abatement research identified 3.0 to 4.5 gigatons of reduction potential available with concerted economy-wide action

McKinsey & Company 3

|

• 110

1.0 1.2 1.4

• 50

1.8 2.0 0.2 2.2 2.4 2.6 2.8 3.0 3.2 0.4 0.8

• 40

0.6

• 20
• 10

1.6 10 40 50 70 80 100 20

• 100
• 70
• 80

30 60 90

• 120
• 30
• 60
• 90
• 230

Residential electronics Commercial electronics Residential buildings - Lighting Fuel economy packages – Cars Cellulosic biofuels Industry – Combined heat and power Conservation tillage Fuel economy packages – Light trucks Coal mining – Methane mgmt Nuclear new-build Natural gas and petroleum systems mgmt Afforestation of pastureland Reforestation Winter cover crops Coal power plants – CCS new builds with EOR Biomass power – Cofiring Industry – CCS new builds on carbon- intensive processes Coal-to- gas shift – dispatch of existing plants Car hybridi- zation Industrial process improvements Manufac- turing – HFCs mgmt Distributed solar PV Commercial buildings – New shell improvements Abatement costs <$50/ton

Potential Gigatons/year Cost Real 2005 dollars per ton CO2e

Low-, mid- penetration

• nshore wind

Active forest management

GHG reduction opportunities are widely distributed across efficiency and clean power solutions – 2030 mid-range case

McKinsey & Company 4

|

Following our research on U.S. GHG abatement, many people raised the puzzle of energy efficiency. “If so attractive, why not captured” We extended our research to validate the potential, analyze the barriers inhibiting energy efficiency, and identify solutions that can

• vercome those barriers

Energy Efficiency Project background

McKinsey & Company 5

|

We employed a rigorous approach to understand the potential, barriers, and solutions to unlocking energy efficiency in the U.S.

Analyzed stationary uses of energy across residential,

commercial, and industrial sectors, including CHP

Examined over 675 efficient end-use measures, but only

existing technologies

Focused on productivity; not on conservation (no

changes in lifestyle or behavior)

Analyzed NPV-positive applications of energy efficiency;

based on incremental capital, operations, and lifetime energy costs – excluded program costs and indirect benefits – discounted at 7 percent

Identified the potential for energy efficiency, the barriers,

and potential solutions – no attempt to declare how much potential will be achieved

McKinsey & Company 6

|

Central Conclusion of our work

Significant and persistent barriers will need to be addressed at multiple levels to stimulate demand for energy

efficiency and manage its delivery across more than 100 million buildings and literally billions of devices. If executed at scale, a holistic approach would yield gross energy

savings worth more than $1.2 trillion, well above the $520 billion needed for upfront investment in

efficiency measures (not including program costs). Such a program is estimated to reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent of

projected demand, potentially abating up to 1.1 gigatons

• f greenhouse gases annually.

Energy efficiency offers a vast, low-cost energy

resource for the U.S. economy – but only if the nation can craft a

comprehensive and innovative approach to unlock it. Energy efficiency offers a vast, low-cost energy

resource for the U.S. economy – but only if the nation can craft a

comprehensive and innovative approach to unlock it.

Significant and persistent barriers will need to be addressed at multiple levels to stimulate demand for energy

efficiency and manage its delivery across more than 100 million buildings and literally billions of devices. If executed at scale, a holistic approach would yield gross energy

savings worth more than $1.2 trillion, well above the $520 billion needed for upfront investment in

efficiency measures (not including program costs).

McKinsey & Company 7

|

Carbon emissions Gigatons CO2e* End-use consumption Quadrillion BTUs

* Includes carbon emission abatement potential from CHP SOURCE:EIA AEO 2008, McKinsey analysis

A significant NPV-positive energy efficiency potential exists in the U.S. economy

Industrial Residential Commercial

• 9.1

Baseline 2020 Baseline case, 2008 30.8 36.9 39.9 NPV- positive case, 2020 3.9 3.2 NPV- positive case, 2020 Baseline 2020 4.3 Baseline case, 2008

• 26%

Savings

• 23%
• 18%
• 29%
• 28%

McKinsey & Company 8

|

SOURCE: EIA AEO 2008, McKinsey analysis

Primary energy End-use energy Electricity CHP Gas Oil Other Carbon emissions 100%= 9.1 quadrillion BTUs 1,080 TWh 2.9 TCF 250 MBOE

The potential is spread across all fuel types and could lead to significant GHG emissions reductions

Contribution by energy source to 2020 efficiency potential Percent Savings Percent

26 23 20 18

9.1 quadrillion BTUs 18.4 quadrillion BTUs 1.1 gigatons CO2e

McKinsey & Company 9

| * Numbers rounded to 50 trillion BTUs Source: EIA AEO 2008, McKinsey analysis

Trillion BTUs in 2020*

Northeast Midwest Southeast West Savings (Percent) Share of US Total

29 26 18 15

Reduction from BAU

22 23 23 24

450 350 300 200 200 350 Oil Gas Electricity 700 1,650 100 500 600 1,150 650 150 100 2,600 550 250 1,050 150 2,350 850 1,000 1,400 Other 450 Southwest

12 22

Southeast and Midwest represent over half of the nation’s EE potential, though every region has a commensurate reduction potential

McKinsey & Company 10

|

2020 Electricity energy efficiency potential (relative to AEO 2008 reference case)

1 Includes small differences in technology performance and cost assumptions, discount rates, and electricity rates between the two reports 473 372 141 EPRI realistic achieve- able potential EPRI maximum achieve- able potential EPRI economic potential ~1,080 McKinsey NPV – positive potential TWh Billion kWh

44%

Comparison between EPRI and McKinsey energy efficiency potential values, year 2020

McKinsey & Company 11

|

2020 Electricity energy efficiency potential (relative to AEO 2008 reference case)

1 Includes small differences in technology performance and cost assumptions, discount rates, and electricity rates between the two reports 372 473 141 EPRI realistic achieve- able potential EPRI maximum achieve- able potential EPRI economic potential ~250 McKinsey includes more types

• f electrical

devices1 ~160 McKinsey includes wider set of technologies in selected end-uses1 McKinsey includes additional market segments ~80 ~180 McKinsey allows accelerated equipment replacement (i.e., prior to end of life) ~60 McKinsey assumes evolution of LED lighting technology & economics

• ver time1

~120 EPRI estimates greater heat pump and commercial lighting potential1 ~1,080 McKinsey NPV – positive potential TWh Billion kWh

44%

Comparison between EPRI and McKinsey energy efficiency potential values, year 2020

McKinsey & Company 12

|

SOURCE: EIA AEO 2008, McKinsey analysis

Discount factor (%) Carbon price ($ /ton CO2e) Residential Commercial Industrial 9.1 7

Quadrillion BTUs, end-use energy

Potential remains attractive even under significant changes in assumptions

Base-case

5.2 7.2 10.0 40* 4 20*

Discount rate

9.5 9.8 10.3 7 7 7 15 30 50

Carbon price

* Utilizes retail rates (vs. lower “avoided cost” rate proxy of industrial rates)

McKinsey & Company 13

|

2,500 2,000 1,500 1,000 7,000 7,500 8,000 8,500 9,000 9,500 Potential Trillion BTUs 10 12 14 16 18 2 20 22 5,000 24 4 3,500 6 8 Average cost for end-use energy savings Dollars per MMBTU 5,500 6,000 6,500 3,000 500 4,500 4,000 Industrial** Residential Commercial

SOURCE: EIA AEO 2008, McKinsey analysis

Non-energy intensive processes in medium establishments Computers Refrigerators Non-PC office equipment Electrical devices Cement processes Community infrastructure Electric motors Energy management for support systems Home A/C Noncommercial electrical devices Chemical processes Energy management for non-energy-intensive processes Energy management for energy-intensive processes Waste heat recovery New building shell Pulp & paper processes Energy management for waste heat recovery Lighting Programmable thermostats Cooking appliances Non-energy intensive processes in small establishments Steam systems Attic insulation Iron & steel processes Clothes washers Building utilities Heating Home HVAC maintenance Water heaters Windows Air sealing Add wall sheating Refrigeration Boiler pipe insulation Lighting Ventilation systems Dishwashers Building A/C Non-energy intensive processes In large establishments Basement insul. Duct sealing Retro- commissioning Wall insulation Home heating Slab insulation Water heaters* Freezers* 13.80*

Energy efficiency offers the most affordable means of delivering energy: all sources expressed in end-use BTUs

Energy savings, 2020

McKinsey & Company 14

|

Energy efficiency offers the most affordable means of delivering energy: Electric EE expressed in TWh

1,050 1,000 100 63.87* 10 100 110 20 30 40 50 60 70 80 90 Average cost for end-use energy savings Dollars per MWh 650 700 750 800 850 600 900 950 Potential TWh 550 500 50 450 400 350 300 250 200 150 1,150 1,100 Computers Refrigerators Non-PC office equipment Energy management for energy-intensive processes

• Elec. Devices

Waste heat recovery Community infrastructure Iron & steel processes Electric motors Home A/C New building shell improvements Energy management for support systems Energy management for non- energy-intensive processes Pulp & paper processes Energy management for waste heat recovery Lighting Non-energy intensive processes in large est. Heating systems Non-energy intensive processes in small est. Non-energy intensive processes in medium est. Programmable thermostats Insulation Clotheswashers Building utilities Non-commercial electrical devices Basement insulation Duct sealing Refrigeration improvements Attic insulation Boiler pipe insulation Lighting Ventilation systems Home HVAC maint. Dishwashers Air sealing Cement processes Building A/C Windows Add wall sheathing Cooking appliances Slab insulation. Wall insulation. Water heaters* Heating systems* Freezers* * Average price of avoided electricity consumption at the industrial price; $121.47/MWh represents the highest regional price SOURCE: EIA 2008; NEMS 2008; McKinsey analysis

Industrial Commercial Residential

Energy savings, 2020

McKinsey & Company 15

|

The fundamental nature of energy efficiency creates challenges

FUNDAMENTAL ATTRIBUTES OF ENERGY EFFICIENCY Full capture would require upfront outlay of about $50 billion per year, plus program costs Requires

• utlay

Fragmented Potential is spread across more than 100 million locations and billions of devices Low mind- share Improving efficiency is rarely the primary focus

• f any in the economy

Difficult to measure Evaluating, measuring and verifying savings, is more difficult than measuring consumption

McKinsey & Company 16

|

OPPORTUNITY-SPECIFIC BARRIERS

Additional opportunity-specific barriers inhibit energy efficiency (1/3)

Structural Behavioral Availability Transaction barriers Unquantifiable incidental costs of deployment Pricing distortions Regulatory, tax, or other distortions Agency Incentives split between parties, impeding capture of potential Ownership transfer issue Owner expects to leave before payback time

McKinsey & Company 17

|

OPPORTUNITY-SPECIFIC BARRIERS

Additional opportunity-specific barriers inhibit energy efficiency (2/3)

Structural Behavioral Availability Custom and habit Practices that prevent capture of potential Elevated hurdle rate Similar options treated differently Lack of awareness About product efficiency and own consumption behavior Regarding ability to capture benefit of the investment Risk and uncertainty

McKinsey & Company 18

|

OPPORTUNITY-SPECIFIC BARRIERS

Additional opportunity-specific barriers inhibit energy efficiency (3/3)

Structural Behavioral Availability Product availability Insufficient supply or channels to market Installation and use Improperly installed and/or operated Capital constraints Inability to finance initial outlay Combining efficiency savings with costly options Adverse bundling

McKinsey & Company 19

| Percent, 100% = 9,100 trillion BTUs of end-use energy efficiency potential

SOURCE: Energy Information Agency’s Annual Energy Outlook 2008; McKinsey analysis

Opportunities group into actionable clusters based on barriers

Industrial Total (Trillion BTUs) Energy support systems Energy-intensive industry processes Non-energy intensive Industry processes 3,650 33 43 24 N = 330,000 enterprises 40 Commercial Total (Trillion BTUs) Existing private buildings Government buildings New private buildings Office and non- commercial equipment Community infrastructure 2,290 35 25 16 13 12 N = 4.9 million buildings, ~3 billion devices 25 Residential Total (Trillion BTUs) Existing non-low income homes Existing low-income homes New homes Electrical devices & small appliances Lighting & major appliances 3,160 41 19 10 19 11 N = 129 million homes, 2.5 billion devices 35 CHP is an additional cluster with potential of 1.4 qBTUs of primary energy

McKinsey & Company 20

|

Source: McKinsey analysis

Barriers

Structural Agency issues Transaction barriers Pricing distortions Ownership transfer issues Behavioral Risk and uncertainty Awareness and information Custom and habit Elevated hurdle rate Availability Adverse bundling Capital constraints Product availability Installation and use

Solution strategies

Information flow Educate users on energy consumption Promote voluntary standards/labeling Establish pricing signals Capital outlay Increase availability

• f financing vehicles

Provide incentives and grants Raise mandatory codes + standards Support 3rd-party installation

In addition to barriers, we identified a set of solution strategies. The challenge is mapping solutions against barriers to achieve success

Agency issues

McKinsey & Company 21

|

Source: McKinsey analysis

Barriers

Structural Agency issues Transaction barriers Pricing distortions Ownership transfer issues Behavioral Risk and uncertainty* Awareness and information Custom and habit Elevated hurdle rate Availability Adverse bundling Capital constraints Product availability Installation and use

Solution strategies

Information flow Educate users on energy consumption Promote voluntary standards/labeling Establish pricing signals Capital outlay Increase availability

• f financing vehicles

Provide incentives and grants Raise mandatory codes + standards Support 3rd-party installation

Example: Addressing barriers in non-low income homes

Educate users on energy consumption Promote voluntary standards/labeling Competing uses for a constrained budget Capital constraints Limited availability of contractors Product availability Improper installation and use of measures Installation and use

Manifestation of barrier

Landlord-tenant issues Agency issues Research, procurement and preparation time Transaction barriers Limits payback to time owner lives in home Ownership transfer issues Limited understanding of energy use and potential Awareness and information Behavioral 40% discount factor Elevated hurdle rate Competing uses for a constrained budget Limited availability of contractors Improper installation and use of measures Landlord-tenant issues Research, procurement and preparation time Limits payback to time owner lives in home Limited understanding of energy use and potential Behavioral 40% discount factor

Potential approach

Home labeling and assessments

McKinsey & Company 22

|

Behavioral 40% discount factor Limited understanding of energy use and potential

Source: McKinsey analysis

Solution strategies Manifestation of barrier Potential approach Home labeling and assessments Barriers Structural Agency issues Transaction barriers Pricing distortions Ownership transfer issues Behavioral Risk and uncertainty* Awareness and information Custom and habit Elevated hurdle rate Availability Adverse bundling Capital constraints Product availability Installation and use Information flow Educate users on energy consumption Promote voluntary standards/labeling Establish pricing signals Improper installation and use of measures Limited availability of contractors Competing uses for a constrained budget Limits payback to time owner lives in home Landlord-tenant issues Research, procurement and preparation time Capital outlay Increase availability

• f financing vehicles

Provide incentives and grants Raise mandatory codes + standards Support 3rd-party installation Innovative financing vehicles Tax and other incentives Required upgrades at point of sale/rent Develop certified contractor market

Example: Addressing barriers in non-low income homes

McKinsey & Company 23

|

A portfolio of solution strategies can be designed balancing cost, risk and benefit across the opportunity clusters

Industrial Commercial Residential CHP Proven Piloted Emerging Cost of saved energy $/MMBTU Experience with relevant approach* Bubble area represents size of NPV- positive potential expressed in primary energy 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Combined heat and power New private buildings New homes Existing private buildings Existing non-low- income homes Non energy-intensive industry processes Energy-intensive industry processes Energy support systems Community infrastructure Government buildings Existing low- income homes Office and non- commercial equip. Lighting & major appliances Electrical devices and small appliances

McKinsey & Company 24

|

Building blocks of a comprehensive energy efficiency strategy

Energy efficiency potential analysis Customer & Business implications Regulatory and legislative strategy Program and delivery mechanism design Organization and capabilities Stakeholder Alignment

“What to do” “How to do it”

McKinsey & Company 25

|

Summary observations

Recognize energy efficiency as an important energy resource while the nation concurrently develops new energy sources Forge greater alignment among stakeholders Launch an integrated portfolio of proven, piloted, and emerging approaches Identify methods to provide upfront funding Foster development of next-generation energy efficient technologies