The “smart” way to get energy efficiency right

By Lefteris Charalambous

Similarly to other goods discussed through our cases, electric power has also been challenged by the global trends of urbanization and sustainability. Generation is having difficulties in meeting the rapid increase in demand, especially taking into consideration environmental and social concerns. Although energy efficiency seems to have great potential in dealing with this issue, it has not really taken-off. I strongly believe that the development of “smart” infrastructure is one of the key elements to help spread energy efficiency measures.

As energy efficiency I define all measures implemented in buildings and vehicles in order to minimize demand amounts and optimize demand patterns (minimize peak, smoothen demand curves). Energy efficiency seems to be an easy way to meet increased demand without developing new capacity and having to deal with the resulting environmental issues. In this spirit, energy efficiency measures are always in the first part of the GHG abatement cost curves developed, with positive NPV projects [1].

In my opinion, there are two main challenges holding us back from yielding the full potential of energy efficiency.

Firstly, the structure of the current energy efficiency industry is very fragmented and modular making the development of integrated solution difficult. Many players (governments, energy regulators, energy service companies, contractors, engineers, software companies, equipment manufacturers etc.) are involved in energy efficiency making coordination, communication to the public and development of standards very difficult. Furthermore, the uncertainty and sometimes lack of focus of the continuous evolving regulatory framework drives opportunistic rather than strategic actions in the industry.

Secondly, the industry players have not been able to communicate the value of energy efficiency to the majority of the consumers. Most of the potential is found in existing, small residential buildings. Residential clients seem to be much more reluctant to make changes in their existing structures without clear benefits and guidance through the implementation. The industry players have not been able to deal with these issues and have been focusing almost exclusively on large commercial clients. Some countries are using enforcement through standards and subsidies (e.g. in Germany) that can be expensive for the government and result in inefficiencies (e.g. reduced completion).

“Smart” technologies can act as enablers to deal with the above challenges and create integrated energy efficiency solutions that will deliver the expected savings. The development of a smart grid and infrastructure can create a platform with common standards for all players involved (similarly to a common operating system), facilitating the integration of the currently modular and many times incompatible parts. Moreover, the interactive aspect of smart technologies can help the consumer understand, measure and manage savings. Hence the value is communicated, measured and realized in a very tangible way. Finally the data collected can help players in the industry further understand consumer demand and behavioral and develop relevant products.

An important open question is who will develop and benefit from this “smart” infrastructure. Is this the new role of utilities or previously irrelevant players will dominate this market (e.g. software companies)? How will the government regulate this new domain?


[1] Road towards a low carbon future: Global GHG Abatement cost curve, McKinsey & Company, 2009



One thought on “The “smart” way to get energy efficiency right

  1. Lefteris,

    Thanks for this post.

    I’d offer two more factors that stops us from capturing the value of energy efficiency:

    1. Costs are upfront, but value is delivered over time.
    2. Consumers see value in saving energy, but the process of doing so is onerous. Many people understand they shouldn’t keep lights on in the house, or let water run, but they simply forget. If you locked the door and realized you had left the light on in the living room, would you go back in the house and turn it off? Most people wouldn’t.

    To address some of these factors, in addition to the one you mentioned, I’d use the smart thermostat company Nest as a model (full disclosure: I interned at Nest over the summer). Nest has motion sensors that turn down the energy use when people are away. It also offers several other features, like the ability to control your thermostat from your mobile phone. On average, people can cut their energy usage by 20% with a thermostat like Nest. In addition to the energy savings, Nest offers a few extra benefits:

    1. It’s a private company, and the purchase is made by a consumer. No involvement of any other actors are needed.

    2. It’s main benefit is energy savings- but it provides other benefits upfront, immediately, so that consumers see a more immediate value in the purchase.

    3. It’s easy. Consumers don’t need to do anything to save energy- the sensors do the work for them.

    Of course, this model may not work for all types of energy efficiency, but I’m really excited about Nest and its potential.

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