In my previous post I outlined my view of what President Obama could do to put our money where his mouth is on energy strategy.  I said that using the modus operandi that we should never let a good crisis go to waste meant that the politically correct thing to do would be to double down now before the voters strip him of his majorities in Congress to get his energy policy implemented.

But in a market environment where the PIIGS are driving the Bears to bring panic back to the markets does the president dare risk another bold strategy move?  My reaction is Obama has one chance to get his policy in place and he better use it boldly and use it now.  Political capital is useless if you don’t spend it to create more political leverage.

But how does the President build a case for his energy transformation aspirations?

One place to start might be that bastion of establishment thinking McKinsey & Company.  Remember back in 2009, McKinsey put out a paper subtly essentially accusing Obama of being too narrow in his thinking about the impacts of stimulus spending.  Back then the rest of us were shocked by the size of the numbers so it has taken a while to get used to all those zeros, but McKinsey said that transforming the energy economy was a good investment long term.  It urged an investment of $520 billion over the next ten years which was a far cry larger than the $15 billion Obama was planning to spend.  McKinsey said that $520 billion invested would produce over $1 trillion in savings from energy efficiencies throughout the economy and would ripple through to growth for years thereafter.

See:  http://www.mckinsey.com/clientservice/electricpowernaturalgas/US_energy_efficiency/ to read the full McKinsey report which says that the US economy could reduce annual non-transportation energy consumption by 23% by 2020, eliminating $1.2 trillion in wasted energy use by removing the barriers to energy efficiency.  Those are numbers the President should like. In addition, McKinsey said doing these things would also reduce greenhouse gas emissions by 1.1 gigatons per year or the equivalent of ALL the cars and light trucks now on America’s highways.

To realize these energy efficiency savings, McKinsey said the US must transform its energy rules, policies, practices and the information we use to make individual choices—gulp!

The Big Five Issues in Energy Transformation

According to McKinsey, here is what must be done to achieve these savings:

  1. Make Energy Efficiency a Priority as we also develop new clean energy supply sources.
  2. Establish National Energy Efficiency Standards to build the savings in for the future.
  3. Provide upfront financing options to make it happen
  4. Align the interests and incentives of utilities, government, business and consumers around achieving energy efficiency goals.
  5. Encourage R&D on new technology and applications to improve energy productivity.

Sound pretty apple pie doesn’t it?  But getting all these interests aligned requires changing the way we live and work.  It will limit our options and cost more—maybe much more for our energy services.

One of the biggest criticisms of McKinsey’s work was that it took an overly simplistic view of the savings potential.  This is often called the concept of “negawatts” that is we can save our way into a cleaner energy future for less by just using less.  In theory this sounds like a great idea and there are passionate evangelists for the concepts like Amory Lovins.

But any homeowner faced with choices for how to make that home more energy efficient realizes that negawatts are not free. It costs money to reinsulated the attic, or swap out old drafty windows and doors.  It costs more to buy that high efficiency washer and dryer than the kind we’ve used for 20 years.  And it will be a cold day in August before I will give up my old beer refrigerator in the garage!

For business it is a similar story but a different calculus.  Swapping out light fixtures is not something a businessman will do if the landlord is paying the electric bill.  But a manufacturer who has high demand charges and could benefit from shifting his energy use off peak could save big time. And then there is the peer pressure to be green and the bragging rights like the sign on the Safeway gasoline station pump where I get gas which proudly proclaims that 100% of the energy used to run this gas station comes from clean solar power.

If the government waits for the convergence of guilt, cost and bragging rights to get us to make wiser energy choices it is going to take a while.  But McKinsey is providing cover for the mother-of-all regulatory regimes in this transformation process. Oh, it sounds benign but you know this is going cost you, don’t you!

So hear our confession of sins:

  • We confess that we are addicted to oil to drive our cars and make all the things we must have to live our lives.  We get much of that oil from countries that do not like America and that makes America vulnerable in both a strategic and practical sense.
  • We know our addiction causes giant wealth transfers of funds that rob our country of the productive reuse of those resources for growth and improvements in our standard of living.
  • We know our environment is fragile and we abuse it and that we need to be better stewards of the planet and make rules that reduce our impacts responsibly.
  • We know we must do better but alone we are weak and captive to the energy infrastructure, rules and products that are available to us.
  • We must work, and travel, and produce the goods and services needed by our economy and so we use energy to live our lives and grow our businesses so we are sorry for our sins and promise to repent—when it is convenient, easy and does not cost more than we’re now paying.

You see the problem don’t you?

Changing our energy behavior to produce the energy efficiency and savings we say we want requires that we change our lives in ways we are not yet prepared to face on our own.  The Obama energy strategy knows we are weak and need to be prodded along to change our ways and do more than confess our sins.  Redemption requires regulations that require we follow the way to truth and light.

And there is some truth that the way of lighting efficiency can make a big difference.  California has been a pioneer among the states in energy efficiency adopting standards more than 20 year ago to make products more efficient—and it worked.  The energy intensity of California is roughly 50% of the national average.  And if the other 49 states would have followed California’s lead we would be having a very different conversation today about energy efficiency.

But remember we are addicts to energy use and it is so easy to fall off the wagon.  Consider this, in the four years from 2001 to 2005 when the popularity of big screen high definition TVs rose fast the additional energy required to operate those first generation HD TVs sold in California effectively offset more than 20 years of energy efficiency gains from washers, dryers and all other major household appliances!  Yikes.  That’s why the California Energy Commission adopted new rules to set higher energy efficiency standards on TVs now going into effect.  Fortunately California is a big enough market that the efficiency standards required to sell HD TVs or automobiles or other consumer goods into the Golden State tend to have a ripple effect across the nation—but it is coincidence and convenience not regulation that achieves that beneficial result.

There is truth in the McKinsey logic that a national strategy focused on energy efficiency would make a material difference, but that strategy will not be easy or cost-free.

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