Boosting Europe's energy productivity

Beyond bottom-line energy savings, there are seven major categories of opportunity for companies to improve energy efficiency.

MGI pinpoints seven areas in which companies can improve energy efficiency—and thus increase their output per energy consumed.

As their employees and customers call for action on climate change, companies have tended to focus on renewable energy, such as solar power. But now businesses are shifting their focus to increasing energy efficiency. Companies recognize the savings that higher efficiency can deliver at today's energy prices. But those companies are achieving only a fraction of the commercial opportunities possible through innovation.

European companies are in a strong position to capitalize on a drive for higher energy efficiency, and Europe's public policy makers are setting incentives that should act as a springboard for companies' efforts. The European Commission estimates that Europe wastes at least 20 percent of its energy. The European community has responded by implementing efficiency standards that are often much higher than in North America, Russia, or Asia's emerging markets.

The McKinsey Global Institute (MGI) estimates that there is scope to invest close to €30 billion annually in boosting energy efficiency across Europe. The obvious starting point is for companies to cut their own energy bills. Nokia Siemens Networks estimates that its customers—operators of mobile networks—can save 30 percent on the electricity used to power base-station facilities with virtually no investment, thanks to such simple measures as partial shutdowns of equipment during night hours. Insurer Swiss Life has set a target of reducing its energy consumption 15 percent by 2010, through such measures as optimizing operating times for heating and lighting.

Popular elevator
Beyond bottom-line energy savings, MGI sees seven major categories of opportunity. First, higher-efficiency technology in buildings is a lucrative and growing market. In Germany's residential sector alone, we see an additional annual market potential of €2 billion for building insulation and €0.4 billion for better insulated windows. Otis, one of the world leaders in elevators, has seen its Gen2 elevator, which uses 75 percent less energy than conventional models, become the fastest-selling line in the company's history.

Higher-efficiency electrical devices, including lightbulbs, are another promising area. Compact fluorescent lighting, which uses less than 20 percent of the energy of incandescent bulbs, is rapidly becoming the global norm. Osram, which makes lamps and lighting systems, today generates as little as 3 percent of its revenue from incandescent bulbs. If an EU ban on incandescent lighting materializes in 2012, as is being discussed, the ban would accelerate a shift to compact fluorescent lighting with an additional annual market of potentially €0.5 billion in Europe.

A third business opportunity is in transportation. With consumers increasingly attracted to buying fuel-efficient cars, suppliers of innovative technologies, such as start-stop automatic transmissions and engines with variable valve control, will benefit.

Off-peak action
Another active area is that of "transparency-creating" products that educate consumers about the impact of their energy consumption. Smart electricity metering could establish two-way communication between utilities and customers. Such metering would show about how much energy an appliance—a dishwasher, say—would use at different times of the day and how much this would cost. Evidence from the United States suggests that consumers armed with such information use energy-intensive devices somewhat less often. When they do turn on the devices, they use them more at off-peak times.

A further opportunity lies in customizing large systems in office buildings and industrial facilities. These systems would integrate air-conditioning, heating, lighting, and ventilation, for instance, to optimize energy use. A sixth area is the growing role for energy service companies (ESCOs), which both supply energy and monitor demand. The McKinsey Institute sees the potential for ESCOs to boost their revenue €100 million a year solely by helping commercial customers save on their lighting bills. Finally, banks and institutional investors have substantial scope to generate new business through the financing of investments in energy efficiency. Dutch banks, for instance, have started to offer discounted loans to consumers who want to boost the energy efficiency of their homes.

While public policy has a vital role in creating effective incentives, Europe will not reap the full rewards of higher energy efficiency without the innovation and dynamism of business. If companies became fully engaged in boosting energy productivity—the output Europe achieves from the energy it consumes—the Continent could hold energy demand at today's levels instead of seeing demand grow 1.2 percent a year, as happens today. This efficiency drive would help cut greenhouse gas emissions by almost 1 billion tons in 2020—more than the combined CO2 emissions of Britain and France. All it would take is using technologies available today. European businesses could secure large financial returns in this area—and establish leading market positions in cutting-edge technologies for which there will be worldwide demand.

Diana Farrell is director of the McKinsey Global Institute, McKinsey's economics research arm.

This article originally ran in Businessweek.

Related Articles