Unlocking Energy Efficiency

1. Unlocking Energy Efficiency April 22, 2010

2. We embarked on this project to validate the potential, analyze the barriers inhibiting energy efficiency, and identify solutions that can overcome those barriers Project Background • During our research on GHG abatement, McKinsey encountered the puzzle of energy efficiency.

3. Project scope and approach Report approach Sponsors of the report • 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 SOURCE: McKinsey analysis

4. Central Conclusion of our work Energy efficiency offers avast, low-cost energy resourcefor the U.S. economy – but only if the nation can craft a comprehensive and innovative approach to unlock it. Energy efficiency offers avast, low-cost energy resourcefor the U.S. economy – but only if the nation can craft a comprehensive and innovative approach to unlock it. Significant and persistent barriers will need to be addressedat multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million buildings and literally billions of devices. Significant and persistent barriers will need to be addressedat multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million buildings and literally billions of devices. If executed at scale, a holistic approach would yield gross energysavings worth more than $1.2 trillion, well above the $520 billion needed for upfront investment in efficiency measures (not including program costs). If executed at scale, a holistic approach would yield gross energysavings worth more than $1.2 trillion, well above the $520 billion needed for upfront investment in efficiency measures (not including program costs). Such a program is estimated toreduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly23 percent of projected demand, potentially abating up to 1.1 gigatons of greenhouse gases annually.

5. Residential Commercial Industrial Non-energy intensive processes in medium establishments Lighting Steam systems Programmable thermostats Energy management for waste heat recovery Attic insulation Freezers Iron & steel processes Pulp & paper processes Non-energy intensive processes In large establishments Clothes washers New building shell Building utilities Basement insul. Heating Waste heat recovery Duct sealing Home HVAC maintenance Retro- commissioning Energy management for energy-intensive processes Water heaters Windows Energy management for non-energy-intensive processes Cooking appliances Chemical processes Noncommercial electrical devices Refrigerators 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 Computers PotentialTrillion BTUs Non-energy intensive processes in small establishments Air sealing Non-PC office equipment Add wall sheating Water heaters Electrical devices Refrigeration Cement processes Boiler pipe insulation Community infrastructure Lighting Ventilation systems Slab insulation Electric motors Dishwashers Energy management forsupport systems Building A/C Homeheating Wall insulation Home A/C Energy efficiency offers the most affordable means of delivering energy Average cost forend-use energy savings Dollars per MMBTU 24 22 18.70 Average electricity price 20 18 16 13.80 Average price of all fuels 14 12 10 6.90 Average natural gas price 8 6 4 2 0 Source: EIA AEO 2008, McKinsey analysis

6. Carbon emissions End-use consumption Gigatons CO2e* Quadrillion BTUs 39.9 36.9 -9.1 30.8 -28% -18% -23% -29% Baseline case, 2008 Baseline 2020 NPV-positive case, 2020 Significant energy efficiency potential exists in the U.S. economy Industrial Commercial Residential Savings 4.3 3.9 -26% 3.2 Baseline case, 2008 Baseline 2020 NPV-positive case, 2020 * Includes carbon emission abatement potential from CHP Source: EIA AEO 2008, McKinsey analysis

7. Contribution by energy source to 2020 efficiency potential Percent Significant efficiency potential across fuel types Savings Percent 26 23 20 18 1,080 TWh 2.9 TCF 250 MBOE 100%= 9.1 quadrillion BTUs 9.1 quadrillion BTUs End-useenergy 18.4 quadrillion BTUs Primaryenergy 1.1 gigatons CO2e Carbonemissions Electricity CHP Gas Oil Other Source: EIA AEO 2008, McKinsey analysis

8. 1 Carbon price Discount rate 10.3 10.0 9.8 Base-case 9.5 7.2 5.2 4 20* 40* 7 7 7 0 0 0 50 30 15 Potential remains attractive even under significant changes in assumptions Quadrillion BTUs, end-use energy 9.1 Industrial Commercial Residential Discount factor (%) 7 Carbon price ($ /ton CO2e) 0 * Utilizes retail rates (vs. lower “avoided cost” rate proxy of industrial rates) Source: EIA AEO 2008, McKinsey analysis

9. Transaction barriers Pricing distortions Ownership transfer issue Structural Behavioral Availability Agency Incentives split between parties, impeding capture of potential Owner expects to leave before payback time Unquantifiable incidental costs of deployment Regulatory, tax, or other distortions Additional opportunity-specific barriers inhibit energy efficiency OPPORTUNITY-SPECIFIC BARRIERS

10. Custom and habit Elevated hurdle rate Lack of awareness Risk and uncertainty Structural Behavioral Availability Regarding ability to capture benefit of the investment About product efficiency and own consumption behavior Practices that prevent capture of potential Similar options treated differently Additional opportunity-specific barriers inhibit energy efficiency OPPORTUNITY-SPECIFIC BARRIERS

11. Product availability Installation and use Capital constraints Adverse bundling Structural Behavioral Availability Combining efficiency savings with costly options Inability to finance initial outlay Insufficient supply or channels to market Improperly installed and/or operated Additional opportunity-specific barriers inhibit energy efficiency OPPORTUNITY-SPECIFIC BARRIERS