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THE REEAL ENER
RGY SOLU
UTION
As alwayss, this letter as well as additional conten
nt will be available on my
blog (http
p://thehardde eal.blogspot.ccom) as well.
Summaryy
There is a tremendouss opportunity in the U.S. to o address conncerns about
energy im
mports as welll as global waarming. Theree is an obvious way to
address bboth without hurting U.S. productivity and competiitiveness. By catching up tto other regio ons of
the worldd in terms of ““energy productivity,” thee U.S. can keeep energy con
nsumption as well as
Greenhou use Gas (GHG) emissions constant without the need for federal m mandates or ssubsidies. Thiss
opportunity may be tw wice as big as that associatted with solaar, wind and oother renewaable energy. In
terms of investment im mplications, tthis opportun
nity points to companies ooutside of the usual crowd of
high‐beta solar, wind aand smart grid d plays.
Introducttion
This letterr is about com
mbining best practices from
m all over thee world rather than addingg to the copio
ous
commenttary on the black and whitee view of the world.
For examp ple, most of u
us assume thaat emerging m markets are w
well behind th
he U.S. in term
ms of deployiing
the latest technologiess to enhance efficiency. Reead on, becau
use there mayy be some surprises in store.
Energy prroductivity
I would likke to introducce the concep
pt of energy p
productivity –– i.e. the amo
ount of energyy used to pro
oduce
1
a unit of G
GDP. A recentt McKinsey sttudy compares the U.S. with other countries in term ms of energy
productivvity.
1
Wasted Energy: How the US can reeach it Energyy Productivityy Potential; Cu
urbing Globall Energy demand
Growth: TThe Energy Prroductivity Op
pportunity
It becomees clear that tthe U.S. uses more than tw unit of GDP as Japan. Whaat
wice as much energy per u
explains this tremendo ous gap?
Some histtorical perspe ective will help solve this m
mystery. Japaan – like mostt of Europe – has never beeen
rich in ressources. As a result, because they don’tt like being deependent on undependable and somettimes
outright hhostile countrries for their eenergy needss any more than we do, theey have focussed on doing more
with less. Has this meaant that they’ve become leess competitivve? In fact, allthough the “Toyota modeel” of
continuou us improveme ent seems to have been th horoughly disscredited becaause of recen nt quality woees, it
has been at the core of productivityy enhancemeents and explaains their susttained exportt success. Eneergy
efficiencyy is one of the
e outcomes off this kind of process. By applying a series of continu uous
improvement projects – each with internal rates of return in excess of the cost of capital (typically from
5% to close to 40%), they have been able to reduce cost and maintain their competitiveness in exports
while enhancing their energy productivity at the same time. These improvements are not necessarily
about the latest technological breakthroughs in terms of solar and wind technology or smart grids.
Rather, they are about using cogeneration facilities to capture more of the heat that would otherwise go
out the smoke stack of refineries, steel mills and other energy hogs.
Why haven’t we done this here? Until recently, energy was abundant and cheap in the U.S. Quick, what
was the price of a barrel of oil in 1998? Answer: $8. This had a number of consequences. For instance,
homes were poorly insulated. I used to live in a typical house in the New York suburbs with a roof with
almost no insulation, drafts everywhere because of big gaps in doorways, air conditioning unit openings
and single pane windows. My heating bill ‐ for a modest‐sized house ‐ was at times over $1000 per
month. Industrial users similarly have traditionally not had much of an incentive to invest in energy
productivity.
The graph above shows how the savings opportunities are across the board with residential
representing the single biggest opportunity.
Some receent studies, ssuch as that d
done by Valero’s Houston rrefinery showws how attracctive these
investmen nt are at current energy prrices withoutt a dime of go
overnment suubsidy or thee need for
favorable e legislation. R
Remember, these are basiic measures ssuch as installling a new airr compressor and
installing a flare gas recovery compressor.
oject by manyy thousands o
If you multiply this pro of other comp panies and po
ossible measu ures, you get aan
idea of the scope of this opportunitty. (Of coursee, Valero as a stock may bee a long or a sshort here; that's
not the pooint).
Comparisson with rene
ewable energgy opportunitty
To put thiis in context, if we assumee that some leegislation will be passed reequiring that up to 20% off
energy coonsumption b be renewable e and moreovver assume geenerously thaat half of that will be from
solar, win
nd, geothermaal and other h high‐flying technologies, th his would equ pportunity of 10%
uate to an op
of 110 or 11 QBTU – haalf of the savvings from energy producttivity. And rem member thesse are real savvings
as opposeed to the “ren newable enerrgy” which req quires significcant materials and energyy inputs to pro
oduce
the requirred solar panels, wind turbbines, etc.
McKinseyy's summary o
of where enerrgy savings co
ould come fro
om is quite interesting:
‐ Daniel Grasman