The elusive negawatt

As McKinsey points out, there are still hundreds of billions of dollars’ worth of unfulfilled but potentially profitable opportunities in energy efficiency available to households and companies. What is holding investors back?

One answer is price. In the eyes of many consumers, electricity and fuel are often too cheap to be worth saving, especially in countries where their prices are subsidised. Industrialists in Russia are profligate with natural gas, because it sells there at a quarter of the international price. Drivers in Qatar have little incentive to scrimp on petrol when they pay barely a dollar a gallon for it.
By and large, energy intensity is, not surprisingly, lower in countries where electricity prices are higher. It is no coincidence that Denmark has both high power prices and an energy-efficient economy. Among American states, for every cent per kilowatt-hour by which prices exceed the national average, energy consumption drops by about 7% of the average. George David, the boss of United Technologies, a conglomerate that makes air-conditioners, lifts and aircraft engines, among other items, argues that higher fuel and power prices are the only motor needed to drive energy efficiency.

But there are still plenty of profitable investment opportunities in energy efficiency, even in the places with the most expensive power. David Goldstein, author of a recent book on energy efficiency, points out that until recently businesses in New York lit their premises more brightly than did those in Seattle, despite New York’s much higher power prices. And Hawaii, the American state with the dearest power, is not the most efficient (although the one with the cheapest, Kentucky, does come bottom of the efficiency table).

The problem, analysts explain, is a series of distortions and market failures that discourage investment in efficiency. Often, consumers are poorly informed about the savings on offer. Even when they can do the sums, the transaction costs are high: it is a time-consuming chore for someone to identify the best energy-saving equipment, buy it and get it installed. It does not help that the potential savings, although huge when added up across the world, usually amount to only a small share of the budgets of individual firms and households. Despite recent price increases, spending on energy still accounts for a smaller share of the global economy than it did a few decades ago.

The Economist