Achieving growth with fewer emissions
While our Outlook 2020 suggests that global growth will be slow but steady, one metric that will continue to rise is greenhouse gas emissions.
Economic activity drives carbon emissions. Energy production, today primarily by fossil fuels, is one of the largest contributors. Since 2000, global electricity demand has increased by around 70%. It now accounts for 19% of total consumption, compared to just over 15% in 20001. Even with slowing global growth, demand for energy is going up in both advanced and emerging economies.
Reducing carbon emissions
At the same time, the Paris Agreement commitments signed in 2016 necessitate that countries reduce their carbon emissions. Current stated policy scenarios indicate a temperature rise that is 3C above pre-industrial levels instead of the 1.5C ambition. To achieve their pledges, policy response from governments will be inevitable.
Yet, how can countries address the health of their citizens and the planet without limiting growth?
Increased renewable energy, electrification, and energy efficiency are seen as three cornerstones of a transition to a low-carbon, and still productive, economy. While the first two are frequently covered, energy efficiency provides attractive and distinct opportunities – both for governments and for investors.
Making more output with less energy
Energy efficiency is a concept that focuses on the products, services, technologies and infrastructure that help organisations, companies and individuals to reduce their energy consumption, make better use of clean energy production, or implement systems and management tools to improve energy use.
Increasing energy efficiency, represented by declines in energy intensity (the amount of energy consumed per unit of economic activity), has the benefit of partially offsetting increases in total energy usage.
In fact, in some advanced economies, electricity usage has recently been flat or even declined. This has been due to increased energy efficiency in industry, buildings, and consumer goods driven by technical innovation and regulation. For example, minimum energy performance standards for electric motors in industrial settings. Similarly, 98% of refrigerators are now covered by environmental performance standards.
Energy use for lighting has also declined, especially with many countries mandating a move to LED lighting. The result is that electricity usage across advanced economies has grown by only 0.3% since 2010, instead of potentially 1.6% without the increase in energy efficiency1 (see chart).
However, these improvements are slowing down. In 2018, global energy intensity improved by only 1.2%, the lowest rate since the start of the decade2. This third consecutive year of slowing energy intensity improvements represents a lost opportunity. Improvements have meant that the world generated more output for the amount of energy used compared to prior years. That said, if energy intensity had improved at a rate of 3% (instead of between 1-2%) during the same period, the additional output generated would have been nearly equivalent to addition of another German economy to global growth.
Realising both growth and global goals
Global demand for electricity will rise with growing populations and incomes. Energy efficiency provides the prospect for governments to support economic ambitions without associated climate damage.
Recognising this dual benefit, one target within one of the United Nation’s Sustainable Development Goals (SDGs) is to achieve average annual energy intensity improvements of 2.6%. Unfortunately, given the below-median performance in recent years, this average now needs to be above 3%3.
Achieving this ambition will mean increasing the current level of investment in energy efficiency. For the last three years, such investment has hovered around US$240bn4 a year and, based on current and planned policies of countries, total spending between 2016 and 2050 is projected to be around $29tn3. To achieve the improved energy efficiency of the SDG target and a 2C scenario, will mean an additional $8tn of investment.
Investing in energy efficiency
For investors, a first option is to consider the focal areas of existing energy efficiency investments – in buildings and industry sectors. Electricity production for use in these two sectors alone accounts for 23% of global greenhouse gas emissions5.
For buildings, improving energy efficiency can range from improving the exterior envelope; heating, ventilation and air conditioning and controls; appliances or lighting. Buildings have attracted the highest share of global investments in energy efficiency, at $139bn. In industrial sectors, the highest intensity energy industries, such as chemicals, iron and steel, cement, pulp and paper, and aluminium provide the greatest opportunity for scale reduction in energy usage. This can be achieved through application of best available techniques across furnace/boilers, steam systems, electric motors and control systems, heat exchanges and recycling.
The next investment option is around energy service companies (ESCOs) that deliver efficiency based on long-term contracts tied to energy performance. The global ESCO market grew to $30.9bn in 2018 from $28.6bn in 20176. While differences exist in ESCO markets between countries and regions, the ability to implement efficiency projects that generate energy, and cost, savings provides potential for attractive returns.
A final option is to invest in green bonds which are securitised on energy efficiency projects. Green bonds are fundamentally fixed income instruments issued by governments, multinational banks or corporations where the issuer commits to use the proceeds for specified climate-related programmes or assets. In the energy efficiency field these can range from mortgage loans for energy improvements in residential buildings (or green mortgages) to rooftop solar projects, or energy grid improvements. Green bond issuance is estimated to reach $236bn in 2019 which is a 40% increase on 2018 issuance7.
Making a positive difference
Investors who want to use their capital to make a positive contribution to the transition to a low-carbon economy have a range of investment opportunities, as highlighted in our Outlook 2020. Opportunities available in energy efficiency may be less well known than those in say renewables or electric vehicles. However, unlike many other sectors, energy efficiency opportunities are driven primarily by existing technologies and the value of costs savings. Improvements in energy efficiency have potential to benefit both the companies who use them and our planet, and moreover the investors who select them.
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