Memorandum by Leonard G Brookes BA, PhD,
Fellow of the Energy Institute[1]
ENERGY EFFICIENCY FALLACIES
1. PREAMBLE
1. There are two reasons why the Government
might be interested in influencing the level of consumption of
fuel and electrical energy:
1. in an effort to meet international obligations
on emission of greenhouse gases;
2. in an attempt to bring the predicted supply
and demand for fuel and electrical energy into balance.
2. Neither of these goals has much if anything
to do with fuel efficiency,[2]
however defined,[3]
because, even if we could bring about a genuine rise in overall
fuel productivity, a tall order in itself, it does not follow
that this would automatically deliver a reduction in fuel consumption
at the macroeconomic level. Support for this contention in the
published literature first appeared in 1865 in "The Coal
Question" by the great nineteenth century economist W. Stanley
Jevons. Other economists, including the author of this evidence
and Professor Daniel Khazzoom of San Jose State University, have
developed the idea more recently.[4]
3. Jevons' thesis may be summarized briefly
as saying that—at the level of the economy as a whole—for
a resource (fuel in this case) to offer greater utility per unit
is for it to enjoy a reduction in its implicit price with all
that that implies for demand. This not to say that such an outcome
is necessarily bad, provided the action is economically justified,
only that it is associated with higher, not lower, levels of energy
consumption over the economy as a whole. It has been the experience
of developed countries since the dawn of the industrial revolution
for economic growth to be stimulated first by absolute substitutions
of energy for other factors of production followed in due course
by relative substitution of fuel for other factors with—for
most of the time—rising energy productivity outstripped
by rising total factor productivity, hence rising total energy
consumption alongside rising energy productivity (see Section
4.2). Appendix A illustrates the process for any economic resource
experiencing a rise in productivity. The lesson is that the result
is not reduced resource consumption: it is raised economic
output accompanied by increased resource consumption. But beware
of the pitfalls explained in Section 3 of concentrating productivity
improvement on one resource in isolation from other relevant resources—fuel
efficiency is simply part of general economic efficiency not legitimately
pursuable as an independent goal.
2. TWO DEFINITIONS
OF EFFICIENCY
4. There is more than one definition of
fuel efficiency. We need concern ourselves here with only two
of the possible definitions. These are (1) engineering efficiency
(the ratio between the output of a system in terms of useful heat
and work and the energy originally stored in the fuel consumed)
and (2) economic efficiency (which peaks when the total cost of
fuel and all the other resources employed to deliver a given benefit
is at a minimum). Both energy conservationists and Government
bodies frequently confuse the two—seeming to treat them
as synonymous or jumping from one definition to the other without
seeming to realise that they have done so. The most common failing
is to seek to reduce fuel input for a given output—an engineering
approach—and then claim cost effectiveness as if the exercise
had been conducted on economic principles.
5. High levels of engineering efficiency are
frequently only bought at high economic cost. Yet it is a cost
that is often forced upon us by planning and building regulations.
Builders of new dwellings are required to incur substantial costs—adding
significantly to the price of the house—to meet the high
levels of insulation demanded; and, where fitting an additional
room into the roof space was once a fairly simple and inexpensive
operation, it now almost invariably means a new roof to accommodate
the insulation blocks between rafters that are now required as
soon as even modest structural changes are proposed. In many instances
it may be a better economic proposition to continue to incur familiar
fuel costs and keep the old standards of insulation yet we continue
to be told that measures to raise energy efficiency in general
more than pay for themselves whilst at the same time serving environmental
ends.
6. Those who tell us that such advocated or
enforced measures to save fuel yield an economic return (an improvement
in the economic efficiency of an energy service) are jumping from
one definition to the other. They are claiming that there exists
an alternative allocation of the economic resources currently
deployed by us that enables us to produce all the goods and services
that we now enjoy but at lower total cost and with a lower level
of consumption of fuel.
7. There is clearly a conflict here. Maximum
engineering efficiency does not at the same time deliver improved
economic efficiency (lower total cost) unless by sheer chance.[5]
One would at least expect that before putting forward a fuel-saving
measure as an economic proposition its advocates would have established
that its costs are likely to be lower than the costs of the fuel
saved. The author has argued elsewhere (see footnote 4) that even
this criterion is insufficient if yet another—even lower
cost—allocation of relevant resources exists that serves
all the same purposes, for this would imply that a total cost
over and above the minimum possible total cost may have been incurred
in order to yield a fuel saving. Let us examine the possible criteria
that might be adopted to determine whether a measure that sets
out to save fuel is cost effective.
3. TWO CRITERIA
OF COST
EFFECTIVENESS OF
A MEASURE
TO SAVE
ENERGY[6]
8. Figure 1 below illustrates the difference
between the partial criterion and the fully sufficient criterion
for maximum economic efficiency of allocation of resources that
include fuel. The first simply compares totals (total cost of
the fuel saving measure v. total cost of fuel saved) while the
second is based on full incremental optimisation (with the fuel-saving
measure not pursued beyond the point where marginal cost is equal
to marginal saving).
9. Let us assume that we are adding successive
layers of fibreglass wool insulation between the joists of a house
in order to reduce fuel cost. Take the curve ADC as representing
a family of combinations of annual fuel cost and annuitised insulation
expenditure that yield the result of keeping a house at a minimum
temperature of 70°F throughout the year. The dotted line
AB is the locus of a point such that the sum of the annual cost
of fuel and insulation is a constant, equal to the expenditure
on fuel when no insulation is employed. It follows that it is
at 45° to both axes. D is the point on the curve where the
tangent to it has a slope of 1. (This tangent is also at 45°
to both axes.)
10. All points on the curve to the left
of AB meet the simple criterion—insulation cost is lower
than the cost of fuel saved, with C—when the costs are equal—yielding
the maximum saving. But all points other than D are uneconomic
because a solution above D fails to take full advantage of the
cost savings that insulation makes possible, whilst below D the
incremental expenditure on insulation exceeds the incremental
saving on fuel cost. Most importantly, solution D is indifferent
as between the roles of fuel and insulation. It is the point at
which both resources are used to maximum economic efficiency.
The illustration can be extended to more than two resources with
the optimum solution at the point where a tangential hyperplane
touching the solution surface has a slope of 1 in relation to
all pairs of axes.
11. It follows that fuel or any other source
of energy—and indeed any other economic resource—cannot
be used with greater economic efficiency than in a system in which
all the resources involved are used with maximum economic efficiency.
This makes fuel efficiency simply part of general economic efficiency[7]
not pursuable as an independent goal. Any attempt to go beyond
the optimum solution or to stop short of it[8]
results in a hidden cost due to sub optimal employment of one
or more of the resources involved. Thus energy saving campaigns
are destined to be uneconomic operations leading—in the
absence of optimal allocation of all relevant resources by sheer
luck—to biased sub-optimal allocations of resources with
consequent sacrifice of economic output.
12. It further follows that optimal allocation
of the economic resources available to us—fuel included—and
measures to reduce consumption of any given resource—fuel,
for example—are two quite different exercises. Neither one
implies the other. If one's object is to serve, for example, some
environmental end, fallacious ideas about the economics of activities
that involve fuel do not help. Putting the economic spotlight
on such activities is as likely to throw up cases where economic
optimality calls for the substitution of fuel for other resources
as cases where substitution in the other direction is indicated.
The right course, given the object, is to bear down on energy
use directly, outlawing it (if it is of a particularly damaging
kind), rationing it (if you have in mind a total that you are
not prepared to exceed) or taxing it (if you believe you can reflect
in the tax the environmental damage that concerns you).
13. Similar considerations apply, mutatis
mutandis, if the object is to force future fuel demand to
fit predictions of future fuel supply. But one is deluding oneself
and/or those at the receiving end of such action if one attempts
to justify it or represent it as having economic merit. Limiting
the availability of fuel, whatever the purpose or the means chosen,
involves an economic cost unless by sheer chance the action taken
happens to coincide with the action necessary to achieve general
economic optimization.
4. MISLEADING
INDICATORS AND
DISINFORMATION
14. There are two macroeconomic parameters
that are frequently used to illustrate trends in the relationship
between fuel consumption and economic output. They can both be
misleading as indicators of trends in fuel efficiency. They are:
1. The energy coefficient, [9]namely
the energy growth rate divided by the economic growth rate; and
2. The energy ratio, namely energy consumption
per unit of economic output.
4.1 THE
ENERGY COEFFICIENT
15. In the late nineteen seventies energy
conservationists pointed with satisfaction to a fall in the energy
coefficient as indicating that the OPEC oil price rises had engendered
an overdue respect for energy, resulting in improvements in the
efficiency of energy use. However close analysis revealed that
the energy/output ratio had maintained its long term secular fall
of 1 per cent per annum throughout the period of the OPEC price
rises. Given an economic growth rate of 2.5 per cent per annum
before the first OPEC price rise combined with a secular fall
of 1 per cent per annum in energy intensity of output, we can
express the energy coefficient at the beginning of the period
as:
(2.5 -1)/ 2.5 namely 0.6[10]
16. It follows that it only needs the economic
growth rate to fall to 1 per cent for the energy coefficient to
fall all the way to zero without anyone having done anything to
improve the efficiency of energy use above its long term trend.
It was in fact damaged economic performance, not raised energy
efficiency, that was responsible for the decline in the energy
coefficient during the 70s.
4.2 THE
ENERGY/OUTPUT
RATIO
17. Movements of this parameter can also
be misleading. With only fairly rare exceptions multifactor productivity
growth has routinely exceeded energy productivity growth.[11]
This means (1) that, in normal times, falls in energy consumption
per unit of output owe more to rising output (the denominator)
under the influence of rising productivity of non-energy factors
of production than they do to rising energy productivity itself,
with the risk of claiming undue credit for improved energy productivity;
and (2) that energy consumption will continue to rise with economic
growth notwithstanding continuing energy productivity growth.
4.3 DISINFORMATION
18. The Government's Energy White Paper
justifies its bullish views on what energy efficiency measures
can do for our international obligations and our own energy future
by claiming that energy consumption has increased by only 10 per
cent in the last 30 years while economic output has doubled. The
White Paper goes on to say that it is proposed to accelerate this
trend.
19. One can "prove" almost anything
one likes by carefully choosing one's end points and ignoring
structural changes like the decline in manufacturing and the rise
in services.[12]
Energy consumption rose by 10 per cent in the 80s alone despite
the decline in manufacturing during that decade. In the last few
years economic growth has been maintained by retail sales supported
by dissaving. Such economic activity does not call for much energy
consumption to support it but it is clearly unsustainable for
very long.
CONCLUSIONS
20. It would be rash indeed to base policy
on the White Paper's highly questionable figuring and misconceptions
about energy efficiency as an economic alternative to fuel supply.
As we have seen from earlier sections of this evidence the claims
made for what can be achieved by energy efficiency measures are
generally muddled and do not stand up to reasoned economic analysis.
23 September 2004
1 Before his retirement from full time work in 1980
Leonard Brookes was responsible for Economics, Forecasting and
Energy Policy at the London HQ of the United Kingdom Atomic Energy
Authority. He subsequently worked as a consultant to public and
private bodies including the UKAEA, the CEGB, the Electricity
Council, the ODA (with Maxwell Stamp Associates), the International
Atomic Energy Agency, the US Electric Power Research Institute,
the Commonwealth Scientific Office, and as an attached specialist
on projects with a number of economic and engineering private
consultancies. He is the author of many papers published in learned
and specialist journals on the subject of energy economics and
policy (most recently in Energy Policy for June 2004) and was
editor/compiler and part author in partnership with Dr Homa Motamen-then
of Imperial College-of "The Economics of Nuclear Energy"
published by Associated Book Publishers in 1981. He was also,
by invitation, the author of the Open University's course unit
on Energy that formed part of their course on Statistical Sources. Back
2
The author prefers to talk in terms of fuel where possible. "Energy"
is primarily an engineer's term. The resource that causes us concern
when physical supply is constrained or price is raised is fuel
in its various forms. One does not ordinarily buy energy except
in such forms as electrical energy, a secondary resource. Back
3
Some confusion is created by the fact that government agencies
seems unclear on how they define energy efficiency-see Section
2. Back
4
See for example "Energy Efficiency Fallacies Revisited"
published in Energy Policy Vol 28 Nos 6 and 7, June 2000. Dr Harry
Saunders, who directs an economic consultancy in California, has
published papers claiming that for what he calls "the Khazzoom-Brookes
Postulate" there are tenable conditions when the postulate
is consistent with neo-classical growth theory (see again Energy
Policy Nos 6 and 7, June 2004). Back
5
To demand improvements in engineering efficiency without regard
to economic efficiency would be to show disregard for the value
of non-energy resources and almost certainly to damage economic
performance by misallocating national economic resources. High
levels of the engineering efficiency of energy use are of interest
to engineers in individual cases-for example to achieve high speeds
or high levels of endurance in military applications-but such
characteristics are often only achieved at great cost in the use
of other resources and thus have no relevance to national energy
policies. Back
6
The analysis here was first published by the author in Energy
Policy. Vol 32, No: 8, June 2004. under the title "Energy
Efficiency Fallacies-a Postscript". Back
7
The author first heard this contention enunciated orally (though
without proof offered) by Professor Nathan Rosenburg. Professor
of Economics at Stamford University, California, at a workshop
held by the US Electric Power Research Institute at Palo Alto,
California in January 1981. Back
8
This is an imporatant proviso. An unbiased analysis might conclude
that the optimum solution in a particular case involves raising
fuel input at the expense of some other input. To fail to make
the necessary adjustment would mean accepting an economic cost
in the shape of sub-optimal use of other resources in order to
produce a lower then economically justified level of fuel input.
Whatever the justification for such action, it has no place in
a programme devoted to raising fuel efficiency. Back
9
Economists refer to this as "the output elasticity of energy
consumption". Back
10
It is mathematically proper to treat exponential rates by simple
addition and subtraction in this way. Low nominal rates are very
close to the corresponding exponential rates and may be similarly
treated. Back
11
Schurr, one time Deputy Director of Energy Studies at the US
Electric Power Research Institute, put this down to the beneficial
effect of the use of energy upon the productivity of capital and
labour. Back
12
1973 was a peak year for UK energy consumption with a higher
level of consumption than in the early 80s. Consumption in the
70s after 1973 was depressed by economic damage arising from the
OPEC oil price hikes. 1973 is consequently much loved by "disinformers"
as a starting point for statistics "proving" that energy
efficiency has delivered the goods. Back
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