Dan Lewis: More energy efficiency will ultimately increase, not reduce, demand for energy

Dan Lewis is Chief Executive of the Economic Policy Centre which has just published his new paper, Securing our Energy Future: Why and how it must be done

When it comes to getting bang for your buck, you’d be lucky indeed to get a small pop or even a pipsqueak out of a whole gamut of spectacularly expensive and ineffective energy policies we have in place in today’s Britain. As I wrote yesterday in the Yorkshire Post and as covered in The Engineer, we have got to get back to basics and put energy security first, affordability second and environmentally clean power third.

Unfortunately, right now, British energy policy is all back to front. We are over-rewarding low impact, intermittent technologies while failing to secure investment for big impact, long lifespan, clean and secure technologies like large hydro, nuclear, interconnectors and a Severn Tidal Barrage or Tidal Lagoons. This will only lead to even greater future dependence on expensive, tight supplies of imported gas from the LNG spot market and very possibly, power cuts from the middle of the next decade.

And in surveying the miserable, rent-seeking landscape that we call British Energy Policy, it would also break a long British policy-making tradition not to set up or help finance an oddly-named quango of questionable benefit. I was astonished to find a Wales Centre of Excellence for Anaerobic Digestion, partly sponsored by the Welsh Assembly. I wonder, is this a good use of taxpayers' funds?

And then aside from the general lack of focus and waste, there are those policies which actually have the opposite effect of that intended. Exhibit A has to be energy efficiency and that is the theme for this platform piece today.

"It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth."

That quote is from an economist, William Stanley Jevons in his 1865 book, The Coal Question, which illustrates quite nicely just how long this canard has been around. It has since become known as the Jevons Paradox (ie that technological progress that increases the efficiency with which a resource is used, tends to increase - rather than decrease - the rate of consumption of that resource). Energy efficiency should be understood as the numbers of dollars produced per barrel of oil equivalent input. To that end, those figures nation by nation are reproduced here:

Contrary to received opinion, the UK is one of the most energy efficient countries of the world, producing $940 per barrel of oil equivalent input, giving it a world ranking of seven and far ahead of most its European neighbours.  But the central fact is that, for reasons that will be explained, it is not possible to produce more from less, only less from less, or much more from more. The trend throughout world history is that as any country becomes richer, it produces more dollars per barrel of oil equivalent, as it learns to allocate capital more efficiently. But because that same country has more money from GDP growth it rebounds as an additional economic input and becomes an indirect additional energy input. Only a recession sends this trend into temporary reverse.

Here are some real world examples of how this might happen.

A typical UK consumer decides to religiously switch off all lights, standby buttons, phone chargers when all these appliances are not in use and to run his washing machine and dishwasher at night. He makes an estimated saving of say, £200 per year. But what does the consumer do with that extra money?

Obviously he/she does not burn it in its cash form and take it out of circulation, contracting by a miniscule amount the money supply available to the private sector. This consumer may choose instead to make an additional trip to Spain with a budget airline, or to buy more electronic goods which are invariably made in China where many fewer dollars of output are created per barrel of oil equivalent input (less than $200). This consumer may have reduced his personal energy footprint, but in reality, what has really happened is that he has transferred and expanded it to elsewhere in the wider global economy. So a reduction made at the micro level does not translate into a reduction at the macro level, merely an overall increase in global energy demand because more capital has been made available.

Another example, as Horace Hering has argued, is how larger and wider-bodies passenger aircraft were developed partly in the belief that they would replace smaller aircraft and reduce the number of flights. This idea was recently rehashed again for the launch of the Airbus A380, the world’s largest passenger aircraft. What actually happens is that the lower cost per passenger led to a massive increase in air travel, much greater than that offset by the increased size of the aircraft.

One further example would have to be with road vehicles. In the last 20 years, the internal combustion engine of an ordinary car has become even more efficient, churning out more speed for less power, whilst delivering it at a lower price, with probably much greater improvements in terms of vehicle weight and hybrids just around the corner. Think of it this way; there would certainly not be more vehicles on the road if they had become less efficient and much more costly.

The truth is that you can't reduce energy demand through energy efficiency, unless you are committed to contracting the money supply, reducing purchasing power and ultimately engendering a recession. You can't save energy, because the money from that energy saving rebounds typically into the money supply and this may even have a multiplier effect if it is given over to a bank which lends out typically 7 times what is on deposit (in pre-Basel II times, capital adequacy ratio was usually 12-13%). So putting your savings into a bank account may be the most energy intensive action you can take.

In woefully small academic circles, the debate about the inefficacy of energy efficiency measures continues. In 1980, economists Daniel Khazzoom and Leonard Brookes (and Chief Economist at the UK Atomic Energy Agency) agreed that attempts to reduce energy consumption by increasing energy efficiency at the micro level would merely raise aggregate demand for energy across the national economy.

In 1992, US economist Harry Saunders argued that “energy efficiency gains can increase energy consumption by two means: by making energy appear effectively cheaper than other inputs; and by increasing economic growth, which pulls up energy use” and named Khazooms and Brookes’ work, the Khazzoom-Brookes Postulate.

For all this, highly respected consultancies such as McKinsey continue to produce large studies on curbing global energy demand and energy efficiency remains a mainstay of UK energy policy, capped as it is with the aptly-named quango, the Energy Savings Trust, a body to which far too many who should know better are in a state of high deference (particularly the BBC, which shows virtually no understanding of the subject and almost all the national newspapers in receipt of large advertising commissions from the Energy Savings Trust and one suspects, some PR companies and conference organisers).  

To be fair, some environmentalists have recognized the rebound effect. In a paper for the Cambridge Centre for Climate Change Mitigation Research , it was estimated that the direct rebound effect would be an additional energy demand of 10%, but the compound effect would be 31% by 2020 and 52% by 2030.

This acknowledgement of the rebound effect though has led some greens to believe more fervently in green taxes to soak up the rebound effect, the limits of which I’m ready to recognize as well.

Britain’s policy-making establishment must come round to the idea that the country needs more energy, not less and that the long-term solution is to promote the expansion of clean and secure energy whose input has no negative environmental impact.

For all these reasons, I’m afraid I’m not convinced of the wisdom of making over an allowance of up to £6,500 over to up to 23 million households to make energy efficiency improvements, much as that may help the energy efficiency industry. It’s not that they won’t cut their personal energy bills and save money – they will. The real issues are:

1. What will they then do with the money they have saved which will rebound as an additional energy input?
2. Would not this money be better spent on achieving a clean and secure energy supply in the first place, for a fraction of the cost and at no environmental impact?

Once the economy picks up, energy consumption is going to keep on rising in the UK. If you don’t believe me now, just look at the historical data and keep tabs going forward on total energy demand, electricity demand, population growth and crucially, imports from less energy efficient countries to whom we have unknowingly exported our energy demand.

One day, I hope, the penny will drop on the futility of energy efficiency, and William Stanley Jevons will deserve the credit. For as he said in landmark book The Coal Question in 1865:

“The reduction of the consumption of coal, per ton of iron, to less than one third of its former amount, was followed, in Scotland, by a ten fold increase in total consumption, between the years 1830 and 1863, not to speak of the indirect effect of cheap iron in accelerating other coal-consuming branches of industry”.