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Thematic Insights: Global Energy Winners

12.04.2017

Energy Conservation: A Necessary Pillar of Any Energy Plan

Thematic Insights: Global Energy Winners

“Changing the carbon emissions path? No silver bullet, need action on many fronts”

BP Energy Outlook 2035 (2015)

The world runs on energy

We all use energy in different forms throughout the day. While we are often not aware of our energy consumption, no matter what we do, energy is a part of it. From switching on the light in the morning, brewing coffee, to commuting to the office, using a PC at work, or watching TV, we constantly consume energy as part of our activities. A lot of energy comes in the form of indirect energy, so even as we are jogging, we burn calories from food that was produced and transported by the use of energy, and we wear clothes and jogging shoes that are made from petrochemicals. Even during the night, the refrigerator and the home heating systems continue to run. As societies develop, so will their per-capita consumption of primary energy. People buy cars, commute, travel by airplane and use electrical devices. The industry produces more steel and aluminium, and manufactures and transports more goods. As a result of the increased world population, primary energy consumption rose 280% between 1965 and 2015.

Carbon emissions have to be lowered

While the world constantly consumes more energy, with very brief interruptions there has been a growing concern about man-made carbon emissions and their impact on the global climate. In December 2015 at the international convention on climate change in Paris, a draft treaty was negotiated by representatives of 195 countries and adopted by consensus. It calls for very substantial contributions by each country to reduce carbon emissions.

But with the overall growth in primary energy consumption remaining strong, countries and therefore the global community risk missing the deadlines in the plan to rein in global warming at well below 2°C above pre-industrial levels. The IEA estimates that according to their scenario, the world must follow the lower emission curve to preserve a 50% chance of containing global warming to a maximum of 2°C. Even if the world reduces carbon emissions, but only to the tune of their Intended Nationally Determined Contributions (INDCs) submitted by governments, emissions would stabilize but likely be much too high to be consistent with the 2°C goal, let alone to keep it “well below” 2°C.
China plans to increase nuclear energy electricity very substantially. However, with its considerable risks in terms of waste disposal and nuclear accidents, nuclear energy is not a silver bullet. Renewable energy, traditionally in the form of hydroelectricity, or new renewable energy in the form of solar, wind, and geothermal, is growing rapidly and can command a much larger share in the future. But despite the strong growth of new renewables, hydro, and nuclear, fossil fuel consumption is still projected to grow and therefore lead to even higher carbon emissions.

Can energy conservation help solve the problem?

Energy conservation does not have the best reputation. In the past, energy conservation meant simply reducing an activity that is considered worthwhile. But nowadays, with technological advances, there is no longer the classic tradeoff between an activity and its considerable unwanted consequences on the environment. The idea is to maintain the same output, but with a much lower energy input. If a job can be done with a much lower input, but the quality of the output is still at least the same, why not do it the smart, energy-efficient way?

Given this context, we want to highlight three interesting areas:

  • Air conditioning: In emerging-market countries, the climate is mostly hot, and with growing wealth consumers want rooms to be air conditioned. In countries like the US, air conditioning has a long tradition and is one of the biggest consumers of electricity. Small changes in energy efficiency can make a considerable difference.
  • Boilers/water heaters: In emerging-market countries, with expanding wealth, consumers are connected to the electricity grid and switch from heating water mainly with wood to electric boilers.
  • Lighting/LED: Lighting by the use of a traditional light bulb is an extremely inefficient use of energy, as the majority of energy produced is wasted as heat. Large consumers of electricity for lighting are industrial users, if we think about roads, industrial buildings, parking garages, or hotels.

Conclusions

Almost all the countries in the world have agreed to dramatically lower carbon emissions. While there are timelines and checkpoints planned for the future, it is almost certain that some countries will miss their ambitious goals. In the wake of this dramatic transformation, the role that energy conservation could play is often not given enough focus, in our view.

To simply produce more energy and then to waste most of it seems an unwise strategy, especially given the consideration that higher energy production comes at a cost. Direct costs are often paid by consumers in the form of feed-in tariffs. Indirect costs are manifold: more wind mills can negatively impact the landscape, and the nuclear buildout is expensive and carries the risk of nuclear waste and accidents.

Energy conservation, on the other hand, offers a very attractive opportunity to reduce primary energy consumption without having to change our way of living. In fact, energy efficiency should always be the starting point in any discussion about energy policy. Only the amount of energy really needed after all energy conservation efforts have been implemented should be produced.

At Credit Suisse Asset Management, we believe it is still likely that world’s primary energy consumption will continue to rise, driven by development in emerging markets starting from a low level, but also by world population growth. However, rather than trying to solve the problem after the fact by trying to figure out how to produce enough energy in a sustainable way, energy conservation should really be the top priority to consider first. Otherwise, many countries might simply not live up to their committed carbon emission reduction targets. As a consequence, we are shareholders in a variety of leading companies in the space of energy conservation, such as LED lighting solution installers, producers of more efficient kitchen appliances, and more efficient water boilers and air conditioning equipment.

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