Unlocking Energy Efficiency in the U.S. Economy MIT NESCAUM Endicott House Symposium Presentation by Ken Ostrowski August 25, 2010
McKinsey has released two major US energy related research reports in the past three years U.S. GHG Abatement Cost Curve – December, 2007 U.S. Energy Efficiency – July, 2009 � � 7 leading institutions joined with McKinsey to co- 12 leading institutions joined with McKinsey to co- sponsor sponsor � � Analyzed 250+ abatement opportunities across 7 Analyzed 675+ energy efficiency opportunities in sectors of the US economy – buildings, power, stationary uses economy-wide (with regional transportation, industrial, waste, agriculture and breakdown) forestry � � Provided comprehensive Provides granularity behind mapping and fact base of attractive opportunities U.S. GHG options � Explores key implementation � Highlighted challenge to barriers and potential achieve projected targets solutions � � Published in December Published in July 2009 2007 | McKinsey & Company 1
2007 US GHG abatement research identified 3.0 to 4.5 gigatons of reduction potential available with concerted economy-wide action Cost $(2005 real) ton CO 2 e 200 150 Increasing Low-range case Mid-range case High-range case 4.5 commitment 1.3 gigatons 3.0 gigatons gigatons and action 100 50 0 -50 Abatement implied by proposed legislation: -100 3.5-5.2 gigatons -150 -200 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Potential Gigatons CO 2 e/year * Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis | and have quantifiable targets; targets calculated off the 2030 U.S. GHG emissions of 9.7 gigatons CO2e/year (reference case) McKinsey & Company 2 Source: McKinsey analysis
GHG reduction opportunities are widely distributed across efficiency and clean power solutions – 2030 mid-range case Abatement Cost costs <$50/ton Real 2005 dollars per ton CO 2 e Low-, mid- 100 penetration Nuclear onshore wind new-build 90 Fuel 80 economy Industrial 70 Coal mining Distributed packages – process – Methane 60 solar PV Light trucks improvements mgmt 50 Residential Active forest 40 electronics management 30 Residential buildings - 20 Lighting 10 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 -10 Potential -20 Gigatons/year -30 Biomass Industry – -40 power – Industry – CCS new Cofiring Combined -50 builds on Manufac- heat and -60 carbon- turing – power Car intensive HFCs mgmt -70 hybridi- processes -80 zation Coal power plants Cellulosic -90 – CCS new builds biofuels -100 with EOR Natural gas Coal-to- -110 Commercial and gas shift – Conservation Commercial electronics -120 Winter petroleum dispatch of tillage buildings – cover crops systems existing plants New shell mgmt Reforestation improvements -230 Fuel economy Afforestation of packages – Cars pastureland | McKinsey & Company 3
Energy Efficiency Project background Following our research on U.S. GHG abatement, many people raised the puzzle of energy efficiency . “If so attractive, why not captured” We extended our research to validate the potential, analyze the barriers inhibiting energy efficiency, and identify solutions that can overcome those barriers | McKinsey & Company 4
We employed a rigorous approach to understand the potential, barriers, and solutions to unlocking energy efficiency in the U.S. � Analyzed stationary uses of energy across residential, commercial, and industrial sectors, including CHP � Examined over 675 efficient end-use measures, but only existing technologies � Focused on productivity ; not on conservation (no changes in lifestyle or behavior) � Analyzed NPV-positive applications of energy efficiency; based on incremental capital, operations, and lifetime energy costs – excluded program costs and indirect benefits – discounted at 7 percent � Identified the potential for energy efficiency, the barriers, and potential solutions – no attempt to declare how much potential will be achieved | McKinsey & Company 5
Central Conclusion of our work Energy efficiency offers a vast, low-cost energy Energy efficiency offers a vast, low-cost energy resource for the U.S. economy – but only if the nation can craft a resource for the U.S. economy – but only if the nation can craft a comprehensive and innovative approach to unlock it. comprehensive and innovative approach to unlock it. Significant and persistent barriers will need to Significant and persistent barriers will need to be addressed at multiple levels to stimulate demand for energy be addressed at multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million efficiency and manage its delivery across more than 100 million buildings and literally billions of devices. buildings and literally billions of devices. If executed at scale, a holistic approach would yield gross energy If executed at scale, a holistic approach would yield gross energy savings worth more than $1.2 trillion , well above the savings worth more than $1.2 trillion , well above the $520 billion needed for upfront investment in $520 billion needed for upfront investment in efficiency measures (not including program costs). efficiency measures (not including program costs). Such a program is estimated to reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent of projected demand , potentially abating up to 1.1 gigatons of greenhouse gases annually. | McKinsey & Company 6
A significant NPV-positive energy efficiency potential Industrial exists in the U.S. economy Commercial Residential End-use consumption Carbon emissions Gigatons CO 2 e * Quadrillion BTUs Savings 39.9 4.3 36.9 3.9 -9.1 -23% -26% 30.8 3.2 -18% -29% -28% Baseline Baseline NPV- Baseline Baseline NPV- case, 2020 positive case, 2020 positive 2008 case, 2020 2008 case, 2020 * Includes carbon emission abatement potential from CHP | McKinsey & Company 7 SOURCE:EIA AEO 2008, McKinsey analysis
The potential is spread across all fuel types and could lead to significant GHG emissions reductions Contribution by energy source to 2020 efficiency potential Percent Savings 26 23 20 18 Percent 1,080 TWh 2.9 TCF 250 MBOE 100%= 9.1 quadrillion End-use 9.1 quadrillion BTUs energy BTUs 18.4 quadrillion Primary BTUs energy Carbon 1.1 gigatons emissions CO 2 e Electricity CHP Gas Oil Other | SOURCE: EIA AEO 2008, McKinsey analysis McKinsey & Company 8
Southeast and Midwest represent over half of the nation’s EE potential, though every region has a commensurate reduction potential Savings (Percent) Trillion BTUs in 2020* Reduction Share of Electricity Gas Oil Other from BAU US Total 450 350 1,150 650 2,600 22 29 Southeast 100 22 12 550 250 1,050 150 Southwest 300 200 850 1,000 2,350 23 26 Midwest 150 700 600 1,650 23 18 200 West 350 100 1,400 450 500 24 15 Northeast * Numbers rounded to 50 trillion BTUs | McKinsey & Company 9 Source: EIA AEO 2008, McKinsey analysis
Comparison between EPRI and McKinsey energy efficiency potential values, year 2020 2020 Electricity energy efficiency potential (relative to AEO 2008 reference case) TWh Billion kWh ~1,080 473 44% 372 141 EPRI EPRI EPRI McKinsey realistic maximum economic NPV – achieve- achieve- potential positive able able potential potential potential 1 Includes small differences in technology performance and cost assumptions, discount rates, and electricity rates between the two reports | McKinsey & Company 10
Comparison between EPRI and McKinsey energy efficiency potential values, year 2020 2020 Electricity energy efficiency potential (relative to AEO 2008 reference case) TWh ~60 Billion kWh ~120 ~1,080 ~180 ~80 ~160 ~250 473 44% 372 141 EPRI EPRI EPRI McKinsey McKinsey McKinsey McKinsey McKinsey EPRI McKinsey realistic maximum economic includes includes includes allows assumes estimates NPV – achieve- achieve- potential more types wider set of additional accelerated evolution of greater heat positive able able of electrical technologies market equipment LED lighting pump and potential potential potential devices 1 in selected segments replacement technology & commercial end-uses 1 (i.e., prior to economics lighting end of life) over time 1 potential 1 1 Includes small differences in technology performance and cost assumptions, discount rates, and electricity rates between the two reports | McKinsey & Company 11
Potential remains attractive even under significant changes in assumptions Carbon Base-case Discount rate price 10.3 Quadrillion BTUs, 10.0 9.8 9.5 end-use energy 9.1 7.2 Industrial 5.2 Commercial Residential Discount factor (%) 7 4 20* 40* 7 7 7 Carbon price ($ /ton CO 2 e) 0 0 0 0 50 30 15 * Utilizes retail rates (vs. lower “avoided cost” rate proxy of industrial rates) | McKinsey & Company 12 SOURCE: EIA AEO 2008, McKinsey analysis
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