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Unlocking Energy Efficiency in the U.S. Economy
August 25, 2010
MIT NESCAUM Endicott House SymposiumPresentation 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
0
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 case1.3 gigatons
Mid-range case3.0 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 2.00.2 2.2 2.4 2.6 2.8 3.0 3.20.4 0.80
-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
Cellulosicbiofuels
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
CostReal 2005 dollars per ton CO2e Low-, mid-
penetration onshore 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 overcome 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 onlyexisting 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 of 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
Baseline2020
Baselinecase,2008
30.8
36.9
39.9
NPV-positivecase, 2020
3.9
3.2
NPV-positivecase, 2020
Baseline2020
4.3
Baselinecase,2008
-26%
Savings
-23%
-18%
-29%
-28%
McKinsey & Company 8|SOURCE: EIA AEO 2008, McKinsey analysis
Primaryenergy
End-useenergy
Electricity CHP Gas Oil Other
Carbonemissions
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
OilGasElectricity
700 1,650
100500
600
1,150 650
150
100
2,600
550 250 1,050
150
2,350850 1,000
1,400
Other
450
Southwest
1222
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
EPRIrealisticachieve-ablepotential
EPRImaximumachieve-able potential
EPRIeconomicpotential
~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
EPRIrealisticachieve-ablepotential
EPRImaximumachieve-able potential
EPRIeconomicpotential
~250
McKinseyincludesmore typesof electricaldevices1
~160
McKinseyincludeswider set oftechnologies in selectedend-uses1
McKinseyincludesadditionalmarketsegments
~80
~180
McKinseyallowsacceleratedequipmentreplacement(i.e., prior to end of life)
~60
McKinseyassumes evolution of LED lighting technology & economics over time1
~120
EPRIestimates 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
0
Quadrillion BTUs, end-use energy
Potential remains attractive even under significant changes in assumptions
Base-case
5.2
7.2
10.0
40*4
000
20*
Discount rate
9.59.810.3
777
153050
Carbon
price
* Utilizes retail rates (vs. lower “avoided cost” rate proxy of industrial rates)
McKinsey & Company 13|
2,5002,0001,5001,0000 7,000 7,500 8,000 8,500 9,000 9,500
PotentialTrillion
BTUs
10
12
14
16
18
2
20
22
5,000
24
4
3,500
6
8
Average cost forend-use energy savingsDollars per MMBTU
0
5,500 6,000 6,5003,000500 4,5004,000
Industrial**
Residential
Commercial
SOURCE: EIA AEO 2008, McKinsey analysis
Non-energy intensive processesin medium establishments
Computers
Refrigerators
Non-PC office equipment
Electrical devices
Cement processes
Community infrastructure
Electric motors
Energy management forsupport 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 processesin small establishments
Steam systems
Attic insulation
Iron & steel processes
Clothes washers
Building utilities
HeatingHome HVACmaintenance
Water heaters
Windows
Air sealing
Add wall sheating
Refrigeration
Boiler pipe insulation
Lighting
Ventilation systems
Dishwashers
Building A/C
Non-energy intensive processesIn large establishments
Basement insul.
Duct sealing
Retro-commissioning
Wall insulationHomeheating
Slab insulation
Water heaters*
Freezers*
13.80*
Energy efficiency offers the most affordable means of
delivering energy: all sources expressed in end-use BTUsEnergy savings, 2020
McKinsey & Company 14|
Energy efficiency offers the most affordable means of deliveringenergy: Electric EE expressed in TWh
1,0501,0001000
63.87*
0
10
100
110
20
30
40
50
60
70
80
90
Average cost for end-use energy savingsDollars per MWh
650 700 750 800 850600 900 950
PotentialTWh
55050050 450400350300250200150 1,1501,100
Computers
Refrigerators
Non-PC office equipment
Energy management for energy-intensive processesElec. 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
IndustrialCommercialResidential
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 outlay
FragmentedPotential is spread across more than 100 million locations and billions of devices
Low mind-share
Improving efficiency is rarely the primary focus of 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
AgencyIncentives 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-intensiveindustry processes
Non-energy intensiveIndustry processes
3,650
33
43
24
N = 330,000 enterprises
40
Commercial
Total (Trillion BTUs)
Existing privatebuildings
Government buildings
New private buildings
Office and non-commercial equipment
Communityinfrastructure 2,290
35
25
16
1312
N = 4.9 million buildings,~3 billion devices
25
Residential
Total (Trillion BTUs)
Existing non-lowincome homes
Existing low-incomehomes
New homes
Electrical devices & small appliances
Lighting & majorappliances
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
BarriersS
tru
ctu
ral
Agency issues
Transaction barriers
Pricing distortions
Ownership transfer issues
Beh
av
iora
l
Risk and uncertainty
Awarenessand information
Custom and habit
Elevated hurdle rate
Av
ailab
ilit
y
Adverse bundling
Capital constraints
Product availability
Installationand use
Solution strategiesIn
form
atio
n flo
w
Educate users on energy consumption
Promote voluntary standards/labeling
Establish pricing signals
Cap
ital o
utla
y
Increase availability of financing vehicles
Provide incentivesand grants
Raise mandatory codes + standards
Support 3rd-partyinstallation
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
BarriersS
tru
ctu
ral
Agency issues
Transaction barriers
Pricing distortions
Ownership transfer issues
Beh
av
iora
l
Risk and uncertainty*
Awarenessand information
Custom and habit
Elevated hurdle rate
Av
ailab
ilit
y
Adverse bundling
Capital constraints
Product availability
Installationand use
Solution strategiesIn
form
atio
n flo
w
Educate users on energy consumption
Promote voluntary standards/labeling
Establish pricing signals
Cap
ital o
utla
y
Increase availability of financing vehicles
Provide incentivesand grants
Raise mandatory codes + standards
Support 3rd-partyinstallation
Example: Addressing barriers in non-low income homes
Educate users on
energy consumption
Promote voluntary
standards/labeling
Competing uses for a constrained budgetCapital
constraints
Limited availability of contractorsProduct
availability
Improper installation and use of measuresInstallation
and use
Manifestation of barrier
Landlord-tenant issuesAgency
issues
Research, procurement and preparation
timeTransaction
barriers
Limits payback to time owner lives in
homeOwnership
transfer issues
Limited understanding of energy use
and potentialAwareness
and information
Behavioral 40% discount factorElevated
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 strategiesManifestation of barrier Potential approach
Home
labeling and
assessments
BarriersS
tru
ctu
ral
Agency
issues
Transaction
barriers
Pricing distortions
Ownership
transfer issues
Beh
av
iora
l
Risk and uncertainty*
Awareness
and information
Custom and habit
Elevated
hurdle rate
Av
ailab
ilit
y
Adverse bundling
Capital
constraints
Product
availability
Installation
and use
Info
rmatio
n flo
w
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
Cap
ital o
utla
y
Increase availability
of 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
clustersIndustrial
Commercial
Residential
CHP
Pro
ven
Pilo
ted
Em
erg
ing
Cost of saved energy $/MMBTU
Ex
peri
en
ce
wit
h r
ele
va
nt
ap
pro
ac
h*
Bubble area represents size of NPV-positive potential expressed in primary energy
0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0
Combined heatand power
New privatebuildingsNew homes
Existing privatebuildings
Existing non-low-income homes
Non energy-intensiveindustry processes
Energy-intensiveindustry processes
Energysupport systems
Community infrastructure
Governmentbuildings
Existing low-income homes
Office and non-commercial equip.
Lighting &major appliances
Electrical devices andsmall 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
“Wh
at
to d
o”
“Ho
w t
o d
o 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