The negawatt versus the megawatt

Energy efficiency has often been seen as the ugly sister to renewable energy, but there is nothing ugly or unglamorous about saving money, reducing energy costs and lowering emissions. While the clean tech sector tends to focus on investment in renewables as a means of cutting carbon, there is growing evidence that investing in "negawatts", a term coined to describe a megawatt of power avoided or saved from use on the energy grid, will provide a better return.

According to Amory Lovins of the Rocky Mountain Institute, energy efficiency is “the largest, least expensive, most benign, most quickly deployable, least visible, least understood, and most neglected way to provide energy services”. While that may seem a strong statement, there is widespread agreement that increasing energy efficiency can bring both financial and environmental benefits.

The opportunity for energy efficiency investment is immense – the International Energy Agency calls it the "fifth fuel" after oil, coal, gas and nuclear. According to a recent report from the McKinsey Global Institute, Curbing Global Energy Demand Growth: The Energy Productivity Opportunity, increased energy efficiency is the biggest and most cost-effective lever to attack greenhouse gas (GHG) emissions. It could deliver up to half of the reductions of global GHG required to cap the long-term concentration of GHG in the atmosphere to 450 to 550 parts per million – a level many experts believe will be necessary to prevent the mean temperature increasing by more than two degrees centigrade, leading to "dangerous" levels of climate change.

On a more local level, recent increases in input and commodity costs are putting pressure on management, with some companies having seen input costs increase 100 per cent in the past year. Increasing concern about carbon emissions is forcing corporations to rethink their approach to energy management. This is creating an entirely new awareness of the need to deploy technology and energy management solutions to cut costs and carbon emissions. As exposure to energy risk and energy prices grows, this is becoming a key issue for management.

This pressure is further increased by name-and-shame projects such as the shareholder-driven Carbon Disclosure Project, which puts pressure on companies to report their carbon emissions and plans for mitigation. This is especially powerful in the retail and financial services markets, where there is significant competition to promote the green credentials of their brand.

Demand side pressures are augmented by growing concerns about our ability to build new generation capacity, given environmental and planning constraints. Some commentators have even suggested that the UK will be facing power supply problems within the next five years. Research by management consultancy McKinsey has shown that each additional £1 spent on energy efficiency avoids £2 of investment in electricity supply, another reason that increasing efficiency is becoming a critical economic issue.

Perhaps even more importantly, there is the opportunity to boost energy productivity using existing technologies, in a way that pays for itself and frees up resources for investment or consumption elsewhere. McKinsey’s analysis suggests that annual investment of $170bn (£115bn) would result in a cut in energy demand of between 20 and 24 per cent by 2020 and a CO2 saving of 7.9 billion tonnes. McKinsey calculated that, at an oil price of $50 a barrel, $170bn annual investment would generate more than $900 billion in annual energy savings, a 17 per cent annual rate of return. This would reduce global oil consumption by 21m barrels a day, from today’s level of 86 million barrels a day.

While many energy efficiency market drivers are similar to those in the renewable energy market, Evolve Energy has found first hand that investing in energy efficiency delivers greater carbon reductions and financial return than investing in renewables.

We recently conducted some research on the return on investment for a typical 4GW wind turbine in comparison to energy efficiency measures implemented for a large supermarket brand. We found that to generate one megawatt of wind energy costs about £1m, while to save one megawatt through energy efficiency measures costs £350,000. For companies investing in wind technologies it could take 20 years to achieve payback, whereas it would only take just over one year through energy efficiency. On a wider environmental point, businesses can reduce up to three times the amount of CO2 for every £1 invested. This comparison shows that energy efficiency can provide a greater economic and environmental reward.

What this means for an average business is an opportunity to invest relatively small amounts of capital in exchange for significant returns, a crucial requirement for company boards demanding to see tangible results.

The key to achieving this energy efficiency is measurement, based on the doctrine that what gets measured gets managed. Companies from retailers to manufacturers need a constant gauge of their energy use to find out which parts of the business are the main offenders in terms of wastage. The critical advantage is having the know-how to determine customers’ technical requirements, and thereby identify and evaluate opportunities for energy efficiency measures. Then, using intelligent IT systems, the emissions profile of a building, or a network of buildings, can be addressed. It’s the communication of information that is central to this process; information is what drives return on investment.

In addition to the current case for energy efficiency, there is little doubt that the role energy efficiency can play in tackling our dependence on fossil fuels will become ever more critical as energy prices continue to rise and economic circumstances bite harder.

Of course, it is vital to analyse the full implications of a purchasing decision, taking into account the effects on servicing and operational costs, and good suppliers of energy efficiency solutions will have the crucial technical know-how to determine a customer’s requirements, and to identify and evaluate opportunities for energy efficiency measures.

But overall energy efficiency is proving to be one of the most cost-effective abatement options to meet long-term emissions reductions and businesses need to realise that long-term changes in mitigating emissions and costs will also provide a positive impact on general operations.

The economics make it clear that investment in negawatts rather than megawatts provides a greater financial and environmental return than many other green initiatives.

Gary Parke is chief executive of Evolve Energy.