Commentary

Energy Efficiency Vital on the Path to Net Zero

Investors can help emerging economies leapfrog advanced nations by maximising investments in energy efficiency, explains Stephanie Kelly, Head of Greenwheel at asset manager Redwheel.

With so much focus on future transformational technologies to tackle climate change, it is easy to overlook the low hanging fruit of making the most of the energy we use. Only around a third of the primary energy we extract ends up being having a useful purpose like lighting or heating a room that needs it. This inefficiency not only incurs excessive costs on consumers at a time where the cost of living is already high but also contributes to economic vulnerability, energy resource depletion and global greenhouse gas (GHG) emissions.  

Beneficial, but with barriers 

Improving energy efficiency brings a range of benefits including improving consumer welfare and boosting economic value; increasing economic and societal resilience to energy-related shocks; and mitigating climate change.  

However, it is an immensely complex challenge encompassing interconnected technical, economic and social aspects. Various barriers stand in the way: an absence of sufficient physical infrastructure to facilitate increasing efficiency; a lack of availability or awareness of the most energy efficient technologies or actions; insufficient and misaligned incentives; underdeveloped and insufficient supply chains and skills; high initial capital costs deterring business and household investment; a lack of access to finance; governmental policies; and a range of behavioural factors. 

Closing the efficiency gap  

Amid this wide variety of barriers, we have identified three priorities to dramatically narrow the energy efficiency gap. First, consumers and businesses can embrace simple changes in behaviours to reduce energy service demand. Secondly, existing energy efficient technologies and systems need to be deployed to reduce non-useful final energy demand and optimise systems across sectors and geographies. Finally, switching to more efficient fuel systems, particularly electrification for transport and heating. Crucially, many of these actions are already available, cost-effective, and can be swiftly implemented, mitigating the need for a rapid transition in the more challenging and costly elements of energy systems. 

Investment opportunities  

Existing energy-efficient technologies – specifically, ones with the lowest barriers to widespread and rapid deployment – require no or little adaptation to local circumstances, have a clear advantage over existing technologies with no clear competitor, and where public policy or other developments have unlocked (or are soon likely to unlock) their potential. At a global level, energy-efficient technologies that display many of these characteristics include LED lighting, a range of industrial efficiency equipment and practices (e.g. energy management systems, and potentially electrification in some cases), high-efficiency appliances and air conditioners, and high-efficiency aviation and shipping. Investors have an opportunity not just to seek out these solutions but also to engage with investee companies in priority sectors to actually use them.   

The second clear investment opportunity is in technologies and businesses that are seeking to overcome barriers to widespread and rapid deployment of key energy-efficient technologies and practices. For example, the development of enabling infrastructure (e.g., smart meters and grids), the expansion of key supply chain bottlenecks (including skills), and, innovative business models that seek to address other barriers, such as capital cost and behavioural dynamics. 

Emerging markets – a compelling frontier  

Improvements in energy efficiency are particularly attractive to emerging economies because of the opportunity to maximise efficiencies to boost economic development while also minimising damaging pollution and GHG emissions.  

Emerging markets will shape global energy trends in coming decades, and as these economies grow rapidly in a warming world, so will their demand for energy-using infrastructure, products, and services. The demand for certain energy services, such as electrified transport modes, electrified industrial processes, infrastructure, and efficient cooling, will rapidly increase. For example, space cooling currently accounts for 10% of global electricity consumption, but demand is expected to triple by 2050 as extreme heat becomes more common. As such, it will be essential to be more efficient with the energy we use to cool spaces.  

Stepping up our efforts 

As responsible investors, it is incumbent upon us to think not just about transformation through disruption but also making the most of what we have by maximising energy efficiency. Emerging economies present a particularly compelling opportunity to temper future global energy demand by potentially ‘leapfrogging’ advanced economies through the deployment of more efficient options to begin with. 

Enhancing energy efficiency is a critical investment that holds the key to achieving a sustainable future. By taking decisive action to address barriers, harnessing available technologies, and leveraging emerging markets’ potential, we can make significant progress towards a net-zero future. The time to prioritise energy efficiency and embrace its transformative power starts now. 

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