Jan. 29, 2007 issue - Forget the old cliche that conserving energy is a form of abstinence—riding bicycles, dimming the lights, lowering the thermostat and taking fewer showers. These days conservation is all about efficiency: getting the same—or better—results from just a fraction of the energy. When a slump in business travelers forced Ulrich Römer to cut costs at his family-owned Hotel am Stadtpark in Hilden, Germany, in 2002, he found that he didn't have to skimp on comfort for his guests. Instead, he replaced hundreds of the hotel's wasteful incandescent light bulbs with energy-saving compact fluorescent ones, getting the same light for 80 percent less power. He bought a state-of-the-art water boiler with a digitally controlled pump, and wrapped insulation around the pipes. Spending about €100,000 on these and other improvements, he slashed his €90,000 fuel and power bill by €60,000—a 60 percent return on investment, year after year after year. As a bonus, the hotel's lower energy needs have reduced its annual carbon emissions by more than 200 metric tons. "For us, saving energy has been very, very profitable," he says. "And most importantly, we're not giving up a single comfort for our guests."
Multiply savings like Römer's across the economy, and it's clear why energy efficiency is no longer an issue just for the eco-fringe, but one of the hottest topics in business—and a way to add billions of dollars to the bottom line. What's more, with the world worried about energy supplies, efficiency turns out to hold the key. As global leaders convene in Davos, Switzerland, this week at the World Economic Forum, they'll discuss power shifts, none of which has more positive potential than the move from squandering to saving energy. "Increasing energy efficiency is the largest, least expensive, most benign, most quickly deployable, least visible, least understood and most neglected way" to meet future energy demand, says energy guru Amory Lovins, head of the Colorado-based Rocky Mountain Institute.
It's an idea whose time has come, though. When oil spiked to more than $70 a barrel last year, oil use in the industrial world fell for the first time in 20 years, according to the International Energy Agency. That shows how quickly energy saving can come back in vogue, but the IEA is cautious. It warns that world energy demand will surge by 50 percent through 2030, outstripping even the most aggressive scenario for boosting alternative sources of energy, like biofuels or solar power. "Even moderate efficiency improvements will contribute more to meeting future demand than all the alternative fuel sources combined," says Paul Waide, an efficiency expert at the IEA.
Efficiency is also a great way to lower carbon emissions and help slow global warming. But the best argument for efficiency is its cost—or, more precisely, its profitability. That's because burgeoning energy demand requires immense investment in new supply, not to mention the drain of rising energy prices. In the IEA's emissions-cutting strategy, consumers and industry would have to invest $2.4 trillion over the next two and a half decades in more-efficient equipment, improved buildings and better-mileage cars. But those investments would slash fuel and electricity bills by an estimated $8.1 trillion and avoid another $3 trillion of investment in oil wells, pipelines and power plants. Each dollar invested in efficiency generates more than $4 in savings, while the "payback period" is usually no more than four years.
No wonder efficiency has moved to the top of the political agenda. On Jan. 10, the European Union unveiled a plan to cut energy use across the continent by 20 percent by 2020. Last March, China mandated a 20 percent increase in energy efficiency by 2020. Even George W. Bush, the Texas oilman, is expected to talk about energy conservation in his State of the Union speech this week.
The good news is that the world is full of proven, cheap ways to save energy. Here are the seven that could have the biggest impact:
INSULATE INSULATE
Space heating and cooling eats up 36 percent of all the world's energy. There's virtually no limit to how much of that can be saved, as prototype "zero-energy homes" in Switzerland and Germany have shown. From polyurethane "outsulation" that's sprayed on the outside of buildings to airtight, "superglazed" windows, there's been a surge in innovative ways of keeping heat in and cold out (or vice versa). State-of-the-art insulation follows the law of increasing returns: if you add enough, you can scale down or even eliminate heating and air-conditioning equipment, lowering costs even before you start saving on utility bills. That's what Texas Instruments discovered in 2005 when it cut construction costs by 30 percent for its new, hyperefficient chip-making plant in Richardson, Texas. The cost savings produced by reflective roofing (the firm junked 100 tons of AC equipment) and letting in more daylight (it reduced lighting costs by 80 percent) helped keep the plant's 1,000 jobs in the United States as well. Studies have shown that green workplaces (ones that don't constantly need to have the heat or AC running) have higher worker productivity and lower sick rates.
CHANGE BULBS
Lighting gobbles up 20 percent of the world's electricity, or the equivalent of roughly 600,000 tons of coal a day. Forty percent of that powers old-fashioned incandescent light bulbs—a 19th-century technology that wastes most of the power it consumes on unwanted heat.
Compact fluorescent lamps, or CFLs, not only use 75 to 80 percent less electricity than incandescent bulbs to generate the same amount of light, but they also last 10 times longer. Phasing old bulbs out by 2030 would save the output of 650 power plants and avoid the release of 700 million tons of carbon into the atmosphere each year. In recent weeks, Wal-Mart, the world's largest retailer, announced an ambitious plan to sell 100 million bulbs by the end of the year. Each $2 bulb can lead to savings of more than $30 in power and replacement costs down the road. In December, Dutch electronics firm Philips became the first major bulb manufacturer to announce a gradual phaseout of the production of incandescent bulbs. That's great news—of any conservation investment, replacing bulbs produces the quickest and easiest payback.
COMFORT ZONE
Water boilers, space heaters, air conditioners and other heating and cooling technologies have been notoriously inefficient—only a fraction of the energy pumped into them is actually used to change the temperature. The heat pump has altered that equation. It removes ambient heat from the air outside or the ground below and uses it to supply heat to a building or its water supply. In the summer, the system can be reversed to cool buildings as well.
Most new residential buildings in Sweden are already heated with ground-source heat pumps; George W. Bush's ranch in Crawford, Texas, uses one for heating and cooling. These systems consume almost no conventional fuel at all. (They use liquid natural gas in a closed cycle to exchange heat, like Freon in an AC, and need a small electric current to keep the compressors going.) The payback time depends on local fuel costs and building size; in Sweden, it's typically six to nine years for residential construction, and one or two years for large commercial buildings. Several countries have used subsidies to jump-start the market, including Japan, where almost 1 million heat pumps have been installed in the past two years to heat water for showers and hot tubs.
REMAKE FACTORIES
From steel mills and aluminum plants to pulp and paper factories, industry eats up about a third of the world's energy. The opportunities to save are vast. Japanese steelmakers such as Mitsubishi Heavy Industries have been leading the way since the 1980s, cutting energy use by more than 70 percent by using heat from steel furnaces to run turbines that generate electricity. In Ludwigshafen, German chemicals giant BASF runs an interlocking complex of more than 200 chemical factories, where heat produced by one chemical process is used to power the next, or create electricity for another. At the Ludwigshafen site alone, such recycling of heat and energy saves the company €200 million a year and almost half its CO2 emissions. Now BASF is doing the same for new plants in China. "Optimizing energy efficiency is a decisive competitive advantage," says BASF CEO Jürgen Hambrecht.
GREEN DRIVING
A quarter of the world's energy—including two thirds of the annual production of oil—is used for transportation. Some savings come free of charge: you can boost fuel efficiency by 6 percent simply by keeping your car's tires properly inflated (which is why carmakers are working on electronic tire-pressure sensors). Gasoline-electric hybrids like the Toyota Prius or Lexus RX400h improve mileage by a further 20 percent over conventional models. Hybrid technology, however, still costs a premium of as much as $6,000 per car.
Until those prices come down, the better deal is a diesel, which gets up to 40 percent better mileage versus gasoline-powered cars.
Unlike their smoke-belching, slow-igniting ancestors, modern direct-injection diesels like Volkswagen's Passat TDI are clean and powerful, especially now that sulfur-free diesel has finally hit gas stations in the U.S. If by 2025 diesels represent one third of America's personal-vehicle fleet (about what the European figure is today), the U.S. would save 1.5 million barrels of oil a day—the amount it currently imports from Saudi Arabia. What's more, today's diesel engines are certified to run on up to 100 percent biodiesel as well, so the potential to slash oil use and carbon emissions down the road is even greater. Next: the diesel-electric hybrid, under development by Peugeot and DaimlerChrysler.
A BETTER FRIDGE
More than half of all residential power goes into running household appliances, producing a fifth of the world's carbon emissions. And that's true even though manufacturers have already hiked the efficiency of refrigerators and other white goods by as much as 70 percent since the 1980s. More improvements are in the works, promises Henrik Sundstrom, VP for environmental affairs for Sweden's Electrolux, the world's biggest appliance maker, including vacuum insulation for refrigerators and heat pumps for clothes dryers. While it's true that such top-of-the-line technology still carries a hefty premium, prices have been dropping fast for other "green" models. According to an IEA study, if consumers chose those models that would save them the most money over the life of the appliance, they'd cut global residential power consumption (and their utility bills) by 43 percent. Luckily, more than 60 countries have in recent years passed labeling laws that make it easier for consumers to choose wisely. And it works: after the European Union began requiring manufacturers to classify appliances according to power use in 1994, sales of highly efficient Class A appliances soared from close to zero to more than 80 percent today.
JUGGLE PAYMENT
Who says you have to pay for all your conservation investments? "Energy service contractors" will pay for retrofitting in return for a share of the client's annual utility-bill savings. "If I had a company I'd invest in my business, not my infrastructure," says Bernd Romanski, chief operating officer of energy-contracting business Hochtief Facility Management in Frankfurt, Germany; the firm's revenues have been growing by 30 percent each year. Hochtief recently renovated, at its own expense, the student union at cash-strapped Mainz University, splitting the 40 percent utility savings with the university for the next five years. In Beijing, Shenwu Thermal Energy Technology Co. specializes in retrofitting China's fuel-guzzling steel furnaces. Shenwu puts up the initial investment to install a heat exchanger that preheats the air going into the furnace, slashing the client's fuel costs. Shenwu pockets a cut of those savings, so both Shenwu and the client profit. In an even more novel approach, California utilities are paying consumers for "negawatts"—giving out extra rebates for cutting power use by 10 percent or more. California utilities like PG&E benefit by lowering peak electricity demand, which means they can avoid the billion-dollar expense of building additional power plants. There is even talk in California of creating a market to trade negawatts, passing savings along so that other utilities in the state can also avoid new plant construction.
If saving energy is so easy and profitable, why isn't everyone doing it? It has to do with psychology and a lack of information. Most of us tend to look at today's price tag more than tomorrow's potential savings. That holds double for the landlord or developer, who won't actually see a penny of the savings his investment in better insulation or a better heating system might generate. And in today's global real-estate boom, in which even a drafty hovel can fetch a fortune, efficiency standards rank unsurprisingly low on the list. "The savings rarely come in single, obvious chunks, but are hidden in a thousand little things," says Stefan Thomas of Germany's Wuppertal Climate Institute. In many people's minds, he says, conservation is still associated with abstinence and self-denial. Many environmentalists still push that view.
Smart governments can help nudge the market in the right direction. The EU's 1994 law on labeling was such a success that it extended the same idea to entire buildings last year. To boost the market value of efficiency, all new buildings are required to have an "energy pass" detailing power and heating consumption. Countries like Japan and Germany have successively tightened building codes, requiring an increase in insulation levels but leaving it up to builders to decide how to meet them. Tax breaks help owners of older buildings to retrofit. Today, the market for low-energy building materials has grown so big in Europe and Japan that many supplies—such as windows—come cheaper in the high-tech insulated version than in the old-fashioned, energy-wasting style. (And there's a boom in the insulation business to boot.)
A gradually rising fuel-efficiency minimum would do the same to vehicles; as an added carrot, Amory Lovins suggests a subsidy to help poorer drivers get their clunky old gas guzzlers off the road. Technically, since most energy savings pay for themselves, subsidies shouldn't be necessary. "But often they're the bait to get consumers to start thinking," says Thomas. Once the market is up and running, he says, they can be dropped—as in the Netherlands, where sales of efficient appliances remained high even after a temporary subsidy expired.
The most powerful incentives, of course, will come from the market itself. Over the past year, sky-high fuel prices have focused minds on efficiency like never before. Relentless pressure to cut costs has finally forced more companies to do some math on their energy use. Recent oil- and gas-price hikes by Russia have started to force some of the world's most energy-inefficient economies—Ukraine and Belarus—to think about efficiency measures. Even Russian energy giant Gazprom has caught on to efficiency, lured by the fledgling market in carbon credits. In a deal with Germany's Dresdner Bank announced last week, Gazprom plans to fix leaks in its infamously decrepit gas pipelines and replace its aging pumps and compressors, not only to cut energy waste but to generate up to €2 billion in carbon credits.
Will it be enough? With global demand and emissions rising so fast, we may not have any choice but to try. Efficient technology is here now, proven and cheap. Compared with all our other options, it's the biggest, easiest and most profitable bang for the buck, by far.
With Akiko Kashiwagi in Tokyo, Quindlen Krovatin in Beijing and Stephen Glain in Washington
