03 April 2009
Energy Efficiency: Easier Said Than Done
An Interview with Matthew H. Brown and David Fridley
Achieving energy efficiency sounds like a self-evident goal. Of course you want to use energy efficiently, who wouldn’t? But when you begin to analyze the myriad ways energy forms part of our social and economic infrastructure, and weigh the cost versus benefits of wringing more productivity from every energy dollar, you realize how complex the pursuit of efficiency becomes. Historically, increasing energy efficiency has received great attention when prices are high, but less so when prices fall.
Businesses and industries, and national, state, and local governments undertake the challenge in many ways. Charlene Porter, eJournal USA managing editor, talked to two experts who have watched public officials and business enterprises test a variety of policies to achieve energy efficiency in their operations in the United States and abroad.
Based in Centennial, Colorado, Matthew H. Brown is a partner with ConoverBrown, a consulting firm working with state, local, and international governments on energy issues.
David Fridley is staff scientist in the Environmental Energy Technology Division at the Lawrence Berkeley National Laboratory in San Francisco. He’s also working with the China Energy Group, helping China move toward sustainable development through energy efficiency.
Q: Energy efficiency has been an issue in public discussions for decades now. Though it might sound simple enough, is there a single, well-defined way to achieve energy efficiency?
Brown: There is no single magic bullet or method to achieve energy efficiency. Energy efficiency comes about through a mixture of government policies and private-sector initiatives, through voluntary programs and standards, through mandatory codes, through financing mechanisms to support it. It’s a clever mixture of all of those elements which eventually gets you to something that is more efficient.
Q: What’s the perspective on that question from the Lawrence Berkeley National Laboratory, David Fridley? Have your scientists found a straight line to get to energy efficiency?
Fridley: Getting there is difficult. Each of us demands some kind of a service from energy. That might be light to read by, heat for comfort in our homes, or locomotion and transport. Really, the whole concept of energy efficiency is: How do we get more of those services delivered to us using less energy? Therein lies the rub. Sometimes it is a technology fix; sometimes it is a behavior change. All of these things have a dual outcome. In terms of society, the purpose of energy efficiency is to save energy. If you save energy you reduce emissions, and you reduce some of the environmental consequences of having produced that energy.
For you and me, as consumers, the consequence of energy efficiency is saving money. There are two different motivations involved. If energy efficiency saves you money, why doesn’t everyone automatically do it? It is a combination of lack of understanding, or split incentives, or “market failures” — as we broadly call them — that have to be addressed through approaches and policies and technologies that Matthew mentioned.
Q: Matthew, you worked on this issue in many jurisdictions, in state, local, and national governments, on a couple different continents. Do you see particular cultural predispositions that might complicate — or maybe facilitate — a plan to energy efficiency?
Brown: Everybody is struggling with the same basic things that David mentioned, but yes, there are absolutely cultural predispositions that emerge in this policy area. When I was working at the International Energy Agency in Paris as a consultant for a couple years, I learned about some Japanese conservation programs that reflected the importance of “saving face” in Japanese culture. The programs were called the Top Runner programs, and they rely heavily on the idea that if you as a corporation fail to comply with the program goals and commitments you’ve made in an energy efficiency initiative, it is publicized that you haven’t complied.
Q: A company is exposed as a public failure?
Brown: Yes, so while the standards are voluntary in a sense, there is a strong incentive to comply.
Now, would that same type of penalty be as effective in North America or South America? Or in Europe? It probably wouldn’t have the same effect. When you get to the design of things like penalties and incentives, I think you end up with some very different programs. The United States has tended in the last decade or so to rely on financial incentives and to shy away from codes or mandates. I think that is more peculiar to the United States, contrasted to a number of European countries, which have been able to rely more effectively on mandates and standards and codes.
Q: David, how do you see the inclusion of China’s cultural norms in the implementation of its efficiency policies?
Fridley: There are very distinct cultural differences in energy efficiency programs. In the United States, we rely heavily on self-policing for compliance to mandatory minimum efficiency standards for appliances, for example. That is because we have a culture in which competing companies are always aware of what other companies are doing: They buy each other’s products; they test how they perform. If they find someone cheating, they have no qualms about reporting that discrepancy to the media or to the government. In China, companies do not have a culture of reporting on cheating by other companies. So self-policing has not been an effective way to achieve compliance.
We are working with the Chinese government to come up with various policies to promote enforcement and compliance. One of them is very much reliant on this cultural trait of shame that Matthew mentioned with regard to Top Runner. They are annually doing some spot-testing of appliances for compliance to the efficiency standards, and the names of those who aren’t meeting the standards are publicized.
Q: The U.S. Energy Star program gives the equivalent of a “good citizen” award to appliance manufacturers who build efficient products. Would you say that is based on the cultural converse?
Fridley: That’s a very interesting example. I spent many years working with the U.S. Environmental Protection Agency [EPA] on China’s comparable energy efficiency product labeling program. One of its aims was to transfer much of the experience and procedures from the successful Energy Star program to the Chinese program.
But here’s where the cultural difference came into it. Energy Star is in part successful because it is aimed at communicating with the consumers buying the final product. The idea is to make consumers want to choose the energy-efficient product. That’s the whole point of a voluntary program. You have to orient your message to the consumer, promote your program and work with manufacturers, retailers, and public sector entities. It’s been a very effective approach in the United States.
In China, there is no cultural tendency to pander to the consumer. It’s a country where the manufacturing sector dominates and has the biggest voice on what happens. So even though they have developed this voluntary energy efficiency label, it has gotten nowhere near the traction of Energy Star, because they aren’t really out there replicating that attempt to attract consumers.
China is the workshop of the world and, in view of the global economic downturn, is now facing enormous overcapacity in virtually every sector. So it is cutthroat competition. Manufacturers have liked the endorsement label because it is a way for them to distinguish themselves from competitors who are producing the exact same thing as they are producing.
A couple years ago, we had a program in which the United States, Australia, and China jointly developed a minimum efficiency specification for external power supplies, those little brick-like units that charge your mobile phone, laptop, and so forth. The Chinese industry produces about half of these made in the world. It is a low-profit-margin business with high competition, so earning that high-efficiency mark was desirable as a way for them to distinguish themselves from the rest of the pack of manufacturers, and perhaps gain a bit of a commercial advantage.
Q: We’ve mentioned some cultural obstacles to adaptation of energy efficiency programs from one nation to another, but Matthew, you must have also encountered some programs where an adaptation was made successfully?
Brown: Energy Star is probably one of the more successful voluntary programs. The U.S. Environmental Protection Agency (EPA) has made an active effort to work with other governments. The other would be in the area of labeling of buildings. A number of European countries have taken the lead in developing building-labeling programs. There’s been a lot of interest in the United States in mimicking those labeling programs. Typically what they do is disclose the energy use characteristics of a building, and will also very often reveal the emissions effect of a given building.
Q: How widely is this being done in Europe?
Brown: This is getting quite a lot of use in a number of European countries, and it’s getting a lot of attention in U.S. states.
Another concept that is getting some interest is “white tags.” The idea is that utilities are required to reduce their sales by X percent — 1 percent per year, for example. In order to comply with the requirement, they must own enough white tags to meet the requirement. One white tag is equivalent to a predetermined amount of energy sales reduced – one MWh [megawatt hour], for example. The utilities can buy that white tag from a company that has reduced its energy usage by one MWh and verified that reduction. This system is both a compliance mechanism – since the utility must own enough white tags to meet its efficiency requirements — and it provides a new source of revenue for companies that invest in energy efficiency. It’s a program that is having some success in Italy and a number of other European countries, and has provoked some interest in the United States. Connecticut has probably made the most progress with this approach.
Q: So far, we’ve talked about programs where a government body is the leading player, and in others, industry is the principal player in bringing about energy efficiency. David, how does this leadership issue play out in China with its history as a command economy?
Fridley: There have been dramatic changes in China in that regard. What really characterizes the change is that two decades ago a great portion of China’s economy was in state hands. Today most of the economy is not in state hands, it’s in private ownership. The government had used some policies very effectively in the 1980s and 1990s, such as setting energy quotas, doing energy audits, establishing energy efficiency service centers, forced retirement of old equipment, and so forth. They worked well in a command-and-control economy where the government was really driving this to push down the energy intensity of the economy. But those policies pretty much disappeared as more and more of the economy went into private hands.
The struggle of the Chinese government in the 2000s is to find market-friendly policies that can achieve these same goals and that don’t rely on command-and-control measures. This has led to a different kind of partnership between government and business. About 65 percent of China’s energy is consumed by industry, so that is the critical area. In the United States, we tend to focus more on commercial and residential because industry does well on its own, and it is a much smaller part of our economy.
In China the question is: How do you introduce efficiency policy into the industrial sector? One of the approaches they took was to look around the world and see what worked elsewhere. We helped them to compile industrial efficiency policies from around the world. After numerous workshops with the government and industrial organizations, everyone agreed to attempt to adapt the Dutch voluntary agreements. This was a negotiation between the Dutch government and a dozen industrial sectors to reduce their emissions by a certain percent by a certain year. It was successful and, in some sectors, exceeded their goals.
The Chinese decided to adopt this as a pilot in the iron and steel sector in Shandong Province. Basically the government stepped back from the project, saying, “We will provide you with technical assistance, energy auditors, and other experts.” What turned out in the end to be most valuable to the companies was that the government promoted and advertised their successes. Again, steel is a high-volume, low-margin industry in China, so for these iron and steel companies to say, “We are energy efficient and the government recognizes it,” that was very valuable to them.
That really demonstrates the change in the government-business relationship over the last 10 years or so. The move has been toward government setting policies and direction and business implementation.
China has experienced its own energy crisis because their energy consumption has soared as the economy boomed in the last few years. That’s brought about a move from voluntary agreements to actual mandates for efficiency procedures with quantitative targets that each sector must meet. Instead of telling each sector how to meet those targets, the government set a requirement for a certain amount of energy savings that the industries must meet, and each sector is on its own to figure out how to do it. Some of the international assistance in this regard is to create tools to help each sector – iron and steel, chemicals, refining, cement-making – to evaluate their operations to figure out how they can best reach the targets for lowered consumption.
Q: If there are so many ways to design an energy efficiency program, how is anybody supposed to get started?
Brown: The most effective programs are always going to be some sort of combination of approaches: the mandatory, regulatory approach; the incentives; and the consumer education and information approach.
There are five categories of things you can do to boost energy efficiency. In the mandatory area, you have efficiency resource standards, sometimes called efficiency portfolio standards. Then you have appliance standards and building codes as your options for regulatory action. The other approach is in the creation of incentives. Those could be financial incentives for individual homeowners, individual companies, businesses, and so on. They could be incentives for utilities to act in a certain way, known as performance-based incentives. Then finally, you have the information and education programs such as Energy Star.
The U.S. experience is instructive and interesting because efficiency activities are unfolding in two different ways at the same time. You have actions coming from the federal government and from the states. Those two levels of government have been approaching the efficiency issue in different ways. The federal government has shied away from strengthening codes and standards in recent years, so the innovation in that area has been at the state level. The states, to the extent that they can, have been developing more efficient appliance standards, stricter building codes, and energy-efficient resource standards in addition to financial incentives. The federal government has focused more on incentives. So it has been interesting to watch these two approaches unfold.
Q: Describe for me one of the most effective efficiency initiatives you’ve ever seen.
Fridley: My favorite was watching a program that managed to dovetail solutions to two environmental goals at once. Under the Montreal Protocol to eliminate emissions of chlorofluorocarbons, China faced having to phase out use of CFCs in refrigerators and air conditioners. At the same time, they had started engaging internationally about how to improve and extend their efficiency standards. So one of the more effective efficiency programs I’ve seen in recent times was the CFC-Free, Super-Efficient Refrigerator Program. The idea was that if refrigerator manufacturers were redesigning compressors and other components to get rid of CFCs, they could increase the efficiency at the same time. It was extremely successful.
Brown: I have a couple of favorite programs. One is standards for a variety of household appliances. California really has been the leader in putting together appliance standards, researching where efficiency levels should be set, working with manufacturers to do so. They have also done some work on compliance and enforcement, though that has been limited. One of the successes of the California-based standards is that they have been mimicked in numerous other states. And they have been mimicked in federal legislation. So there’s been a percolating-upward of appliance standards that were set initially in California.
The other one I liked is a financing program run out of Connecticut. It is an “on-bill” financing program, right on the utility bill. What happens is the utility will help you identify what measures you can install to make your small business more energy efficient. They offer rebates to bring down the cost of these improvements. Then they will fill in the rest of the cost of the efficiency improvements with a loan, typically a zero percent interest loan. As a result of the combination of the rebate and the zero interest loan, the customer is in a net cash-positive position from day one, and paying for the efficiency improvements through their energy bill. They don’t have a separate bill to pay. That’s been mimicked in a couple of states, and it’s an effective program because the customers are in that net cash-positive position from the outset, because it is easy for customers to engage in and sign up for, because it’s done working through the private sector, since contractors actually install the efficiency measures.
The opinions expressed in this interview do not necessarily reflect the views or policies of the U.S. government.
