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Energy Efficiency Gains Will Help to Reduce Supply Risk

As global energy demand continues to increase apace, concerns about our planet's existing energy supplies are underpinned. Additional gains in energy efficiency may, at least partially, solve this pressing issue. 

Global energy demand continues its rapid growth underpinned by population growth, urbanization and steadily rising incomes across the globe. The United Nations predicts that the world population will reach 10.5 billion people by 2050, compared to around today's 7.3 billion people. During the coming 35 years, urbanization is likely to go up by 70 percent and the emerging middle class set to expand. Both are key elements behind the quick rise in energy consumption. "Energy consumption per capita is already increasing rapidly across all major emerging economies. This looks set to continue, which without energy efficiency is bound to have major implications on global energy demand," said Eugène Klerk, Head of Global Thematic Research at Credit Suisse. Total demand for energy has more than doubled since 1990. The US is not the world's largest energy consumer any longer, but was overtaken by China at the end of last year. "Without further efficiency gains and assuming convergence (to the levels of developed countries), we see incremental energy demand from global emerging markets equaling almost 2.5 times the current total for Europe and the US combined" by 2050, Klerk stressed. And the issue is pressing: CO2 emissions show no signs of slowing down, with 2013's increase the strongest in 3 decades. 

Energy Consumption increases with urbanization and income levels

Energy Consumption increases with urbanization and income levels

Sources: Phetkeo Poumanyvong, Shinji Kaneko, Shobhakar Dhakal "Impacts of urbanization on national transport and road energy used: Evidence from low-, middle- and high-income countries", Hiroshima.

Supply Risks Looming

The strong increase in total energy demand expected over the coming decades is also likely to create supply concerns at multiple levels. As energy reserves of key resources such as oil and gas decline, their marginal cost of extraction increases. "Considerable uncertainty remains on the impact from a global energy perspective," Klerk underlined. "The increasing import resilience of many key countries leaves them increasingly vulnerable to political risk and price volatility, which is at historical highs." Here too, greater efficiency will help reduce supply risk. Fortunately, there are numerous on-going initiatives. The global energy efficiency market is worth over 310 billion US dollars annually and growing, according to the International Energy Agency's (IEA) "Energy Efficiency Market Report 2014." This qualifies energy efficiency as the world's "first fuel" or "hidden fuel."

Residential Buildings Offer Most Potential

Final energy demand can be broken down in three broad and end-user based categories: buildings, transport and industry. It is surprisingly neither the transport nor industrial sectors that consume the most energy, but residential buildings. Adequate energy efficiency measures in this area could have a massive impact on global energy consumption. "The unrealized energy efficiency potential in buildings is significant, as only 20 percent has been realized to date compared to around 40 percent in industry and around 35 percent in the transport sectors" Klerk explained. "If fully captured, increased building efficiency would reduce (global) energy demand by 20 percent more than the global use of energy by shipping and air transport combined," he underlined. Potential efficiency improvements include space- and water heating, lighting and appliances in residential buildings. "Buildings stand out as the sector not only with the largest potential efficiency gains, but also as being a sector where efficiency gains only come at a moderate cost for society," Klerk noted. Credit Suisse estimates the building sector's annual resource efficiency savings potential at 200 billion euros in Europe and 1.9 trillion US dollars for the US.

Share of energy usage split by end category

Share of energy usage split by end category

Sources: International Energy Agency, Credit Suisse Research

Transport – A Huge and Growing Market

Transport is the sector, which has driven energy consumption in the last 4 decades, with the highest compound annual growth rates compared to buildings and industry. "Total consumption has doubled in 40 years, driven by strong transport growth," Klerk explained. Cars and trucks dominate the transport sector's energy demand representing three times that of air, shipping and rail combined. The sector's growth is currently underpinned by the rising spending power in emerging markets. There is a definite upside to additional car penetration in these markets. "Lifting every single emerging economy to the average transport energy consumption of developed countries today would imply an increase of the total transport energy consumption across these countries to rise by 4.5 times the current total of Western Europe, the US and Japan combined by 2050," Klerk underlined. Investments in cars' fuel economy standards are the sector's most important short-term efficiency driver. Tougher standards are likely to increase the average fuel economy to a range of 3.9 to 6.7 liters of gasoline equivalent per 100 kilometers. "Standards provide a strong signal for markets to deploy efficient technologies and services over the next 20 years," the IEA said.

Great potential for additional car penetration in Emerging Markets (per 1,000 inhabitants)

Great potential for additional car penetration in Emerging Markets (per 1,000 inhabitants)

Source: Credit Suisse Research

Industrial Energy Demand

Industrial energy intensity, a measure of energy efficiency, calculated as units of energy per unit of GDP has improved in the OECD by about 2 percent annually between 1995 and 2010. China, whose booming industries have been spurring the industrial sector's energy demand over the past 25 years, has managed to improve its energy efficiency at twice that rate. "By 2040, average industrial energy intensity worldwide is projected to improve by 40 percent compared to 2010," ExxonMobil forecasts in its report "The Outlook for Energy: A View to 2040." In general terms, "improved energy efficiency compared with today's levels will reduce oil and gas import bills for the five largest energy-importing regions by almost 1 trillion US dollars in 2040," the IEA forecasts. Greater energy efficiency will not resolve the world's energy issue on its own, but is part of the solution.