A Policy Perspective on
Energy Efficiency Cost Curves
Hillard
Hill
d Huntington
H i
Energy Modeling Forum
Stanford University
NCSL TASK FORCE ON ENERGY SUPPLY
DECEMBER 9, 2009
SAN DIEGO, CALIFORNIA
Presentation Objective
• Explain McKinsey approach/results.
¾ Energy use in 2020 can be reduced by 23% with very little additional
cost.
¾ Initial investment of $520 billion saves $680 billion ((net)) or $1200 billion
(gross) in energy costs.
• Explain why their approach/findings differ from other
analysis.
analysis
¾ McKinsey costs may be three times lower, or
¾ McKinsey energy savings may be considerably greater.
• Key take-home messages:
¾ Many efficiency investments appear worthwhile but they are not a silver
g climate change.
g
bullet for avoiding
¾ Need for disclosing key assumptions.
2
McKinsey’s Approach
• For each end use, compute total NPV costs for all existing
and new technologies.
• Assume that consumers discount all future values at 7% per
year (about = to supply investments).
investments)
• Compare new and existing NPV cost estimates.
• Net costs required
q
for choosing
g more over less efficient new
technology (required switching cost).
¾ Consumer not allowed to keep old equipment in place.
• Th
These out-of-pocket
f
k expenses exclude
l d indirect
i di
opportunity
i
costs for investment.
¾ Are there important indirect costs in saving energy?
¾ Quality of service, early retirement, etc.
3
McKinsey’s Efficiency Cost Curves
US Greenhouse Gas Abatement Costs, 2030
250
Costs in 20
005$ per Ton
n
200
150
100
Market Failure #2:
Society does not value
climate change damages
Market Failure #1:
Consumers fail to make
profitable investments
50
0
-50
-100
00
0.0
05
0.5
10
1.0
15
1.5
20
2.0
25
2.5
30
3.0
35
3.5
Gigatons
g
CO2 Reduction
Out-of-Pocket Expenses
4
Energy Efficiency: Technical vs Economic
Greater technical energy efficiency
Common barriers for
all new technologies
Technologist’s profitable efficiency
If environmental
externalities
were internalized
?
Private costs ≠
societal costs
Common market attributes:
•Technologies differ with respect to risk,
•Technologies differ with respect to quality
Economist’s profitable efficiency
Address real market failures:
•Information as public good,
•Average cost pricing of utilities
Baseline efficiency trend
Consumers will
eventually adopt
Passage of time
Source: Mark Jaccard, Simon Fraser University
5
Why Actual Costs May Be Higher
• Conditions vary widely across consumers buying the same
type of equipment. (heterogeneity)
• Consumers often value quality more than costs.
• New
N
technologies
t h l i are often
ft riskier.
i ki
• Lower operating costs or improved quality may increase
gy use.(rebound
(
effect))
energy
• Opportunities may be less profitable if everyone invests.
(fallacy of composition)
¾ Lower demand reduces prices and value of future energy savings.
• Policies may be costly. (policy costs)
¾ $.01/KWH utility program cost (Nadel & Geller 1996)
6
Adoption is Seldom Universal
Source:http://www.physics.udel.edu/~watson/scen103/appliances.html
emrg
energy and materials research group
Kyoto-NCCP:
y
GHG tax or
equivalent cap applied in 2000
200
$ / tonne
CO2e
150
CIMS
100
50
MARKAL
30
60
90
120
150
180
GHG reduction (MT CO2e)
Jaccard-Simon Fraser University
Source: Mark Jaccard, Simon Fraser University03/2007
8
Concluding Perspectives
• Out-of-pocket expenses makes energy efficiency gap at least
three times larger than when other indirect costs are
incorporated.
• Behavior/policy is critical; cannot focus on the technologies
alone.
• Policy implications
¾ Some policies may be cheap < average policy costs.
¾ Cannot identify cheap policies until you know market failure - why
consumers forego
g profitable
p
investments.
¾ Price the social costs imposed by climate change/oil vulnerability.
¾ Avoid overselling efficiency as the “silver bullet”.
¾ Avoid
A oid underselling
nderselling efficienc
efficiency as cost ineffecti
ineffective.
e
9