curbing global energy demand growth - stanford university

20070727 Precourt Energy Efficiency Workshop final.ppt

Curbing Global Energy Demand Growth: The Energy Productivity Opportunity

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

Scott Nyquist, McKinsey & Company, Inc.July 2007


1

Overview

• Mapping global energy demand

• Top energy productivity opportunities

• Appendix

–China’s productivity opportunity

–The U.S. productivity opportunity


2

Global energy end-use demand map, 2003: U.S. and China are the largest energy usersEnd-use energy demand by sectorPercent; QBTUs

4735

45 4657

35

37

35 33

36

1828

20 217

422

Global

82

U.S.

86

Europe

20

Middle East

60

China

Transportation

Commercial and residential

Industry (steel, chemicals, other)

100% =


3

Energy demand growth accelerates from 1.7% to 2.2% per annum to 2020QBTUs

106158

66

95

137

180

43

63

60

36

Residential

Road transport

613

2020

Other industrial

Commercial

ChemicalsSteelPulp and paper

Air transport178 17

9

422

2003

1129

CAGR 2003-20Percent

2.2

1.7

1.93.13.13.62.2

2.2

2.4

Up from 1.7% 1986-2003

Consumer-driven


4

Developing regions will dominate, accounting for 85% of demand growth to 2020...

* Includes Baltic/Eastern and Mediterranean Europe and North Africa.** Includes Australia and Korea.

*** Includes South America and Mexico.Source: MGI Global Energy Demand Model

End-use energy demand growth by region, 2003-20 QBTUs

Developed

Developing

22

18

1715

15

21

16264

29

China Canada

191

North-western Europe

JapanIndia ROW

8

Other Asia**

Other Europe*

U.S. Latin Ame-rica***

TotalMiddle East

27 2


5

. . . as will consumer-driven sectors, particularly in developed economies

$50 OIL SCENARIO,BASE CASE GDP

End-use energy demand by region, 2003-20 Percent; QBTUs

53 54

47 46

613

2003

Consumer-driven

Industrial

100% = Quads

2020

60 62

40 38

167

2003

197

2020

48 51

52 49

416

2020

255

2003

Global Developed regions Developing regions


6

MGI forecasts higher energy demand growth than IEA in China, the Middle East and Europe

* Reconstructed CAGR 2004–2020 for WEO 2006.Source: IEA World Energy Outlook 2006; MGI Global Energy Demand Model

2003–2020 delivered energy demand growth

CAGR deltaIEA WEO 2006 CAGR*

0.4

1.9

0.3

0.9

0.7

0.7

1.2

1.6

1.5

1.2

0.5

0.7

MGI $50-oilCAGR

3.3China 4.0

Industry 3.84.1

Transport 5.35.8

Other sectors 2.13.3

Middle East 3.44.9

Industry 3.75.3

Transport 2.84.7

Other sectors 3.44.6

OECD Europe 0.91.6

1.0Other sectors 1.4

Industry 0.91.6

Transport 0.91.8


7

GDP, not oil price, main source of uncertainty –

2020 base case demand = 613 QBTUs

GDP Oil price

Scenarios

Global demand growth to 2020Percent• High 2.8 2.2• Low 1.7 2.1

670

565

606

Energy productivity

3.20.7

720

480

but energy productivity matters most


8

Global energy productivity 1980-2020 base caseEnergy productivity of the global economy – output per QBTUs$ Billions

94

79

59

202020031980

+34%

1.3% +19%

1.0%

Total change (percent)

CAGR (percent)


9

In the base case U.S. will see the lowest energy efficiency improvements across all sectors

Source: EIA; LBNL China Energy Group; McKinsey Global Institute analysis

Japan

1.0Europe

0.2

China

U.S.

1.5

2.0

Annual improvement of energy productivity indicators, 2003-20Percent

SectorIndicator

ResidentialEnergy efficiency

CommercialEnergy efficiency

RoadFuel economy

SteelEnergy efficiency

0.6

0.4

1.5

0.4

0.7

0.8

0.8

0.5 0.2

0.3

0.3

0.6


10

32

52

25

613

Commercial

13

Residential

13

Transportation

Transformation

2020 base demand

Industrial

2020 478

Large opportunities for improving energy productivity are available across sectors . . .Potential demand reduction in 2020 through enhanced energy productivityQBTUs

Capturing 135 QBTUs would cut global energy demand growth from 2.2% to 0.7% p.a.

Total opportunityPercent

24

10

10

38

18


11

3.2

1.7

1.5

2020

Transformation

Industrial

Transportation

Commercial

0.9

Residential

2020 base demand 35.3

27.3

0.7

Pursuing the energy productivity opportunity would also have a big impact on CO2 emissions Potential CO2 emission reduction in 2020 through enhanced energy productivityMetric tons (billions)

Capturing the energy productivity opportunity would cut global CO2emissions from 2.4% to 0.8% p.a.

Total opportunityPercent

21

9

11

40

19


12

Marginal abatement cost against PPM targets, 2030

Cost of abatementEuros per tCO2e

Abatement potentialGtCO2e per year

10 15 20 25 30 3550

50

-100

-150

-50

25-35

550 ppm

Marginal costEuros per tCO2e

35-40

450 ppm

40-50

400 ppm


13

Overview


• Appendix





14

In the US and Europe, capturing the energy productivity opportunity would cancel out growth for energy demand...

QBTU

* Includes Northwestern Europe, Baltic / Eastern and Mediterranean Europe and North Africa** Power generation and refining sectors.

Source: McKinsey Global Institute analysis

18

8

3

2

4

5

Industrial

88

Transformation**

2020 net demand

Residential

922003 demand

Base demandIncrease to 2020

Commercial

Transportation

24

5

2

7

5

86

2

89

Percent of total opportunity

34

15

11

19

21

Capturing the energy productivity opportunity would see US energy demand decreasing by 0.3% p.a. instead of growing by 1.1% p.a.

QBTU


27

10

8

33

22

Capturing the energy productivity opportunity would see US energy demand growing by 0.3% p.a. instead of 1.5% p.a.

United States Europe*


15

... while in China and the Middle East, it would almost halve the strong projected energy demand growth

* Power generation and refining sectors.Source: McKinsey Global Institute analysis

64

7

13

5

2003 demand

Base demandIncrease to 2020

Commercial

Transportation

Industrial

Residential

60

1

Transformation*

962020

1

22

4

4

29

20

3

1

2

Capturing energy pro-ductivity opportunities in China would reduce demand growth from 4.4% to 2.8% p.a. to 2020

Capturing energy pro-ductivity opportunities in Middle East would reduce demand growth from 4.5% to 2.3% p.a.

QBTU

Percent of total opportunity QBTU


China Middle East

25

5

4

47

19

19

6

30

30

15


16

The Top 5 priorities represent a large share of the total energyproductivity OpportunityBreakdown of the global energy productivity opportunity%, QBTU, Billion metric tons

* Residential and Commercial building sectors** Assuming the removal of 80 percent of fuel subsidies globally (largely in the Middle East, Venezuela, and Mexico)

Source: MGI analysis

16

6

6

100%

9

6

6

Other sectors

Road transportationfuel subsidies**

CO2 emissions

10

66

Power generation tail

China Buildings*

US Residential

4

Energy demand

4

55

China Industrial 13

= 135 QBTU = 8 billion tons


17

3.0Steel

1.0Chemicals

0.3Pulp and paper

8.9Other

SectorOpportunityQBTUs

Share of 2020 sector demandPercent

19

7

27

27

China’s industrial sector offers the single largest energy productivity opportunity


30.451.2

33.9

2003 Base-case growth 2003-20

13.1

Energy productivity opportunity

Abated 2020 demand

China industrial end-use demandQBTUs

10% of the total global opportunity


18

3

6

5

3

10

2

3

Introducing cutting-edge technologies and methods would curb industrial energy demand growth

Technology/method*

Industrial sectors affected

Energy savings as% of 2020 demand within affected sectors (unless otherwise specified)

* In order of largest to smallest by estimated absolute value of energy savings. ** Based on aluminum, chemicals, food processing, steel, pulp and paper, refining.

*** Percentage of total steam energy inputs.**** Percentage of total energy losses.

Source: U.S. Department of Energy; Lawrence Berkeley National Laboratory; MGI analysis

5***

Chemicals, food processing

Steel, metals

Across sectors

3****

Across sectors

Energy-intensive sectors**

Refining, pulp and paper

Across sectors

2-3

– Co-generation

Optimized motor-driven systems

– Plant-level energy system integration

Near-net-shape casting

Gasification

Membranes

– Steam best practices (operating and maintenance)

Heat recovery in production of mechanical or electrical power


19

Large energy productivity opportunities exist in China’s residential and commercial buildings


26.0

38.6

21.0


8.4


Abated 2020 demand

China buildings end-use demandQBTUs


7.0Residential

1.4Commercial



21

10


20

China's energy efficiency potential stands at 35 percent in the Commercial sector

* As an example, doubling energy efficiency for a given end use leads to a demand reduction of 50%.Source: LBNL, China Energy Group; MGI analysis

35

5

9

29

47Space heating

Water heating

Cooling

Lighting and other applications

Weighted total

Energy demand abatement potential*

49

26

9

17

Share of demand, 2005

%Examples of efficiencyimprovements

• Strong shift away from coal boilers to natural gas boilers

• Efficiency of natural-gas boilers increases from 70% to 90%

• Increased share of heat pumps

• Increased share of room A/C and heat pumps vs. centralized A/C

• Increased share of CFL

Assuming enforcement of current energy-efficiency policy to 2020 allows the capture of 25%, leaving a 10% potential


21

Impact of increasing consumer demand

for comfort

Efficiency improvements if policy

effectively enforced

Assuming enforcement of current energy-efficiency policy to 2020 allows the capture of 25%, leaving a 10% potential Key drivers of China commercial sector energy demand growth, 2003-20Percent

* Growth rate of delivered energy is below the growth rate of energy use because of increasing share of power, and associated generation losses, in end-use demand

Source: Lawrence Berkeley National Laboratory (LBNL) China Energy Group; McKinsey Global Institute analysis

1.9

0.7

5.64.8

Intensity increase

0.3

Building mix

Growth rate of delivered* energy

0.8

Efficiency improve-ment

Efficient technology choice

End-use penetration

Floor space

0.7


22

Residential sector is the single largest opportunity to reduce demand in the U.S.

Total QBTUs 2020

13

21

At EU levels

Base case

8 QBTUs = 34% of U.S. abatement

• Lighting• Heating and

cooling• Water heating• Appliances


23

All the energy-efficiency opportunities identified in the U.S. residential sector have an IRR above 10 percent

* ENERGY STAR home exceeding current building standard by 50%.** Based on future improvements.

Source: EIA; literature search; MGI analysis

% savings potential Description% IRR

Heating and cooling package

• 50 (new builds)• 25 (replacement)

• Based only on current technology*• Shell improvement assumed only

for new buildings

• ~10• ~10

Lighting • 65 • 100+ • Compact fluorescent lighting

Water heating

• 65 • 11 • High-efficiency electric water heater

• Solar water heater

Major appliances

• 40-60** • N/A(maybe ∞)

• Increasing appliance efficiency standards at 2–3% per year

Small appliance standby

• 40 • N/A(maybe ∞)

•• 14 Reduce standby-power requirements of televisions,set-top boxes, etc.

% of sector savings

• 10• 15

• 17

• 20

• 24


24

In oil-exporting countries, high oil prices boost GDP growth and consumer income...

GDP growth, 2003–2020CAGR

Source: Global Insight; MGI analysis

6.7• Middle East

6.0• Western Africa

6.9• Russia Belarus

4.6• Venezuela

3.8• Other exporting regions

4.3

4.9

4.2

4.0

3.6

4.9

5.5

4.5

4.2

3.7

0.6

0.6

0.3

0.2

0.1

Historical growth2002–2005

Growth in$50/bbl case

Growth in$70/bbl case

Growth delta between$70 and $50 casesExporting regions

Importing regions

3.5• United States

1.5• NW Europe

8.1• China

7.5• India

2.8• Other importing countries

3.4Global total

3.1

2.0

6.0

2.6

3.2

6.7

3.1

1.9

6.6

5.8

2.6

3.2 0

0

-0.1

-0.1

-0.1

-0.2


25

... while large fuel subsidies insulate consumers from oil price, leading to escalating fuel demand growth

* $50 crude oil equals 119 cents per gallon.Source: GTZ, International Fuel Prices 2005; BP Statistical Review; MGI analysis

Gasoline retail priceCents per gallon

117106

102

102

9191

79

723434

15

11Iraq

Venezuela

Iran

Libya

UAE

Yemen

Kuwait

Qatar

Saudi Arabia

Oman

Bahrain

Indonesia

Crude oil*

Middle East

The Middle East contributed half global light-distillate growth at high 2005 oil prices

79

47

87

2.6

2005

MiddleEast

53

ROW

2004

130.6

21

0.8

2001

Breakdown of global light-distillate-demand growthCAGR, %

% growthin year =


26

Removing 80 percent of fuel subsidies would reduce road-transportation fuel demand by 2.5 MBD


Road-transportation fuel demandMillion barrels per day

2.8

0.7

1.3

3.9Middle East

Mexico-CAM

Southeast Asia

Venezuela-Caribbean

0.2

0.2

0.4

1.7

Reduction%

43

30

8

30

2020 base caseExpected demand reduction


27

Some Russian heating is subject to fixed pricing; prices of actual usage are far lower than other countries

Source: Rosstat; MGI analysis

$/MBTU, 2005

0.25

District heat/m2/ month

0.50

Naturalgas main/ person/ month

6.82

12.50

0.242.15

District heat

Natural gas

UnitedStates

32.06

Japan (2004)

China

Communal heating tariff –Russian (Implied) residential heating price per MBTU

Russia Residential natural gas – other countries


28

Removing subsidies could reduce energy demand, especially Russia’s subsidy on heat

0.32China LPG/kerosene subsidy

0.37India LPG/kerosene subsidy

0.31India electricitysubsidy

0.07Russia electricitysubsidy

2.20Russia natural gas/heat subsidy

21

21

14

9

43

2020 QBTU reduction% of base case 2020, country fuel demand

Source: MGI Global Energy Demand Model


29

The traditional power generation technologies are improving efficiency

ST = Steam TurbineSource:IEA, World Energy Council

Older STEfficiency

~30-35%

Current Coal STEfficiency 38%

Super-CriticalEfficiency42-44%

Integrated GasificationCombined Cycle (IGCC)Efficiency>45%

Coal

Old ~35% Efficiency

Current38% Efficiency

Super-Critical42-44% Efficiency

Ultra Super-Critical42-44% Efficiency

Coal

Steam TurbineEfficiency 35%

Combined Cycle Gas Turbine (CCGT)Efficiency 50-55%

Advanced CCGTEfficiency 55-60%

Gas

Old ~35% Efficiency

Current38% Efficiency

Super-Critical42-44% Efficiency

Ultra Super-Critical42-44% Efficiency

CoalVarious developments to improve• Capital investment required• Construction time• Fuel cycle cost and fuel “burn-up factor”• Safety improvements

Nuclear

Increased competitiveness against coal and gas fired power plants


30

Gas efficiency can be improved dramatically in China and Russia by moving towards CCGT

* Russian power generation also exports significant amounts of heat which is not included, making the efficiency artificially low. Efficiency including heat exports is 61% which is still low (80% possible)

Source: IEA 2003, Platt’s UDI

Japan 44%

U.S.

35%

44%

China

51%

EU

India

Russia*

42%

26%

1.94

5.39

4.27

0.49

0.05

5.42

EU

India

Japan

China

U.S.

Russia

Russia has significant Steam turbine gas which is far less efficient than CCGT. Its power builds going forward will

move to CCGT, improving efficiency

Gas based Power Generation Efficiency (%)

Gas Consumption in Power Generation (Quad BTU)


31

Replacing the inefficient power–generation tail would save 12 QBTU of demand globally

* Based on current final power demand by region** Fuel savings valued at market price, i.e. not taking into account subsidized prices for power generation


0.20.6 0.5

0.9

3.4

0.9 0

3.3

0

4.2

Russia

03.7

China

1.2

00

1.2

U.S.

0.50

1.1

EU

0

0

1.0

India

0.20.7

Japan

Naturalgas

CoalOil

Energy demand reduction from replacing least efficient capacity*QBTU

• A significant amount of inefficient capacity could be retired and replaced by new capacity at world-class efficiency with a 10% IRR*, especially in China and Russia

• Overall, this would yield 12 QBTU of energy savings


32

Distorting policies and market imperfections reduce energy productivity capture

Examples

Policy distortions

• Fuel subsidies for transportation (e.g., Middle East)• Energy subsidies to households (e.g., Russian gas) • Lack of financial incentives for public industries

(e.g., China steel)• U.S. power regulation shelters consumers from real energy

prices

Lack of information

• Households unaware of the cost of their energy choices –and often make choices based on non-financial factors

• Fragmented energy costs often go unnoticed by companies

Agency issues

• Appliances makers don’t adopt efficient materials and technologies if consumers are unwilling to pay for them

• Landlords and tenants opting for lower energy productivity when benefits don’t accrue to them

Other factors

• High hurdle rates in many commercial and industrial companies

• Credit constraints for municipal (MUSH) and residential segments


33

High hurdle rates reduce the level of efficiency investments

Source: EIA NEMS Commercial Model Documentation, 2005; disguised client interview, May 2006

"In the commercial sector, many energy-efficiency investments have 6- to 12-year paybacks, way above the typical 2-year cutoff used in capital budgeting."

Interview with manufacturer of energy-efficient equipment

46

27

Will never invest(infinite discount rate)

27

Less than 2 years(discount rate > 50%)

More than two years(discount rate <50%)

Distribution of required payback of US commercial sector consumers

73% of users will disregard energy-efficiency invest-ments with a pay-back time above 2 years (IRR < 50%)


34

The energy productivity opportunity

• Spectacular opportunities exist to improve energy productivity in all regions and all sectors

• Improving energy productivity would not compromise the comfort and welfare of consumers

• If pursued, a win-win for the economy (business and individuals) the environment, and supply security

• However, targeted policy interventions will be required to overcome market failures and inefficiencies


35

Overview


• Appendix





36

l

. . . and across most regions100% = 135 QBTUs

28

6

9

10

21

2

6

18Other

Middle East

China

Russia

Japan

Other Europe

Northwestern Europe

United States

Developed

Developing


37

77

29

Commercial

9

Other industries

Chemicals

Transportation

40

8

Residential

Steel

China energy demand in 2003 was 60 QBTUs with 57% from industry and 54% in coal100% = 60 QBTUs

Source: IEA; MGI Global Energy Demand Model 2007

Industrial sectorsEnd-use energy demand by sector

4334

11

21

54

Petroleumproducts

Biomass

Natural gasHydro

Coal

Nuclear Other

Primary demand by fuel


38

China’s economy is energy-intensive, while per-capita consumption remains low by global comparison

* Northwestern Europe includes Belgium, France, Germany, Iceland, Ireland, Luxembourg, the Netherlands, Norway, Switzerland, and the United KingdomSource: McKinsey Global Institute analysis; MGI Global Energy Demand Model 2007

U.S.

Northwestern Europe*

Japan

Korea

Middle East

12,600

8,900

Global

China

7,200

31,400

33,000

15,100

4,400

Energy-intensity, 2003BTUs per dollar of real GDP

45

54

129

163

175

316

67

Energy consumption per capita, 2003BTU millions


39

China end-use energy demand will grow at 4.4% annually to 2020QBTUs

1733

14

11

1

16

14

34

24

55

44

60

2003

2

124

2020

Other industries

Chemicals

SteelAir transportRoad transport

Commercial

Residential

CAGR 2003-20Percent

4.4

2.2

5.7

7.26.76.37.1

4.1

Source: McKinsey Global Institute; MGI Global Energy Demand Model 2007

Consumer-driven


40

CO2intensity per outputKg per dollar of real GDP, 2020

China’s economy will remain one of the most CO2-intensive to 2020

2003

2020

1.82.1

0.20.30.5

0.7

1.81.5

0.20.30.40.6

GlobalNorthwestern

Europe Japan China Middle EastU.S.

Source: MGI Global Energy Demand Model 2007

CO2intensity per capitaTons, 2020

3.03.0

9.08.3

19.0

3.8 4.35.8

9.710.6

19.8

4.7


41

With current policies, China will see significant energy efficiency improvements


Japan

1.0Europe

0.2

China

U.S.

1.5

2.0


SectorIndicator



RoadFuel economy


0.6

0.4

1.5

0.4

0.7

0.8

0.8

0.5 0.2

0.3

0.3

0.6


42

13.1

64.3

95.92020

59.52003 demand

Base demand increase to 2020

7.0Residential

1.4Commercial

0.9Transportation

Industrial

5.4Transformation*

The largest remaining demand-abatement opportunities in China are found in residential and industrial sectorsPotential demand reduction in 2020 through enhanced energy productivityQBTUs

Capturing energy productivity opportunities in China would reduce demand growth from 4.4% to 2.8% p.a. to 2020


25

5

4

47

19

Percent of 2020 sector demand

* Power generation and refining sectors.Source: McKinsey Global Institute analysis

21

10

9

20

10


43

3.0Steel

1.0Chemicals

0.3Pulp and paper

8.9Other



19

7

27

27

China’s industrial sector offers the single largest energy productivity opportunity


30.451.2

33.9


13.1


Abated 2020 demand

China industrial end-use demandQBTUs



44

Reducing costs offers additional opportunities to shift global energy productivity potential

Plant construction costs can be 30-40% lower in China . . .

Source: McKinsey analysis

21 18

2115

9

8

8

19

19

7

3100

EU/U.S.

2

610

China, Western standard

Spare partsPipingElectrical and instrumentation

Building

Civil engineering

Engineering design andcommercial

Equipment

34%

66

Percent

Plant location

. . . with an additional 30-40% savings opportunity by applying Chinese engineering standards and processes

100

20-40

EU/U.S.

60-70

China, Western standard

China, Chinese standard

30-40%

30-40%

Plant location

• Chinese engineering standards use lower-cost Chinese equipment and tailor plant setup and configuration to local processes

• Chinese processessubstitute cheaper labor for capital


45

Introducing cutting-edge technologies and methods would curb Chinese industrial energy demand growth

Technology/method*Industrial sectors affected

Energy savingsPercent of 2020 demand within affected sectors (unless otherwise specified)

* In order of largest to smallest by estimated absolute value of energy savings *** Percentage of total energy losses; based on aluminum, chemicals, food processing, steel, pulp and paper, refining** Percentage of total steam energy inputs

Source: U.S. Department of Energy; Lawrence Berkeley National Laboratory; McKinsey Global Institute analysis


Co-generation Across sectors

Steam best practices Across sectors**

Plant-level energy system integration

Energy-intensive sectors***

Optimized motor-driven systems Across sectors

Gasification Refining; pulp and paper

Membranes Chemicals; food processing

Near-net-shape casting Across sectors 10

6

2

3

5

3

2-3


46

Large energy productivity opportunities exist in China’s residential and commercial buildings


26.0

38.6

21.0


8.4


Abated 2020 demand

China buildings end-use demandQBTUs


7.0Residential

1.4Commercial



21

10


47

Impact of increasing consumer demand

for comfort

Impact of technological catch-up with

developed regions

Increasing energy uses per square meter will more than offset projected energy efficiency improvements

1.9

0.7

5.64.8

Floor space End-use penetration

Intensity increase

0.3

Building mix

0.8

Efficient technology choice

0.7

Efficiency improve-ment

Growth rate of delivered* energy

Key drivers of China commercial sector energy demand growth, 2003-20Percent

* Growth rate of delivered energy is below the growth rate of energy use because of increasing share of power, and associated generation losses, in end-use demand

Source: Lawrence Berkeley National Laboratory (LBNL) China Energy Group; McKinsey Global Institute analysis


48

Building-standards comparison – limitation of heat leakage in wall/window/roofWatts per sq.m.

China has potential to improve heating efficiency through higher-efficiency building shells

Wall Window Roof

Source: ERI; literature search

0.45

0.36

0.44

0.46

0.50

1.16

Canada 1

Russia 1

U.S. 1

U.K.

Germany

Beijing 4.0

2.0

2.9

2.8

1.5

N.A. double deck required

0.40

0.33

0.19

0.45

0.11

0.80Beijing temperature-equivalent areas

Harbin temperature-equivalent areas

0.52

0.27

0.17

0.30

0.32

0.42

Harbin

North Japan

Stockholm

Canada 2

Denmark

Russia 2

2.5

2.9

2.0

2.2

2.3

2.4

0.15

0.31

0.23

0.50

0.12

0.24


49Source: LBNL China Energy Group; McKinsey Global Institute analysis

Technology shifts will drive significant change in fuel mix

Example of the shift in the share of space-heating technologies in Chinese office buildingsPercent

59.5

8.0

28.0

26.0

14.0

40.0

10.0 8.0

2020

Heat pumpElectric heaterSmall cogen

Gas boiler

District heating

Coal boiler

2000

4.0

0 0

2.5

Overall shift away from coal to electricity and gasCommercial sector final energy demandPercent; QBTUs

20

47

20 18

19

6

49

5

3.1

2003

124

7.7

2020

Heat

Coal

Petroleum productsNatural gas

Power

100% =

CAGR 2003-20Percent

5.6

4.8

-2.62.5

13.9

10.9


50

Overview


• Appendix





51

U.S. energy demand growth will accelerate to 2020U.S. end use energy demand by sectorQBTUs

23 29

1921

15

18

19

22

11

93 1

2003

31

5

110

2020

Other industrialPulp and paperSteel

Chemicals

Air transport

Road transport

Residential

Commercial3

92

CAGR 2003-20Percent

1.10.8

-2.81.7

0.6

2.7

1.0

0.7

Source: McKinsey Global Institute; MGI Global Energy Demand Model 2007

Consumer-driven

Up from 1.0% 1980-2003

1.5

$50 OIL SCENARIO,BASE CASE GDP


52

The U.S. remains the most energy-intensive developed region

2003

2020

33.031.4

4.47.28.9

12.6

34.4

21.8

3.66.06.3

10.7

GlobalNorthwestern



5445

163175

316

67 8085

183198

327

82

Energy per capitaBTU millions, 2020

Total energy intensityThousand BTUs per real dollar GDP, 2020


53

CO2intensity per outputKg per dollar of real GDP, 2020

U.S. will continue to produce the highest CO2emissions per capita to 2020

2003

2020

1.82.1

0.20.30.5

0.7

1.81.5

0.20.30.40.6

GlobalNorthwestern



CO2intensity per capitaTons, 2020

3.03.0

9.08.3

19.0

3.8 4.35.8

9.710.6

19.8

4.7


54

U.S. will see the lowest energy efficiency improvements across all sectors


Japan

1.0Europe

0.2

China

U.S.

1.5

2.0


SectorIndicator



RoadFuel economy


0.6

0.4

1.5

0.4

0.7

0.8

0.8

0.5 0.2

0.3

0.3

0.6


55

18.0

8.0

4.0

5.0

92.02003 demand

Base demand increase to 2020

Residential

3.0Commercial

2.0Transportation

Industrial

Transformation*

88.02020

Large opportunities for improving energy productivity are available across sectors in the U.S.Potential demand reduction in 2020 through enhanced energy productivityQBTUs

Capturing the energy productivity opportunity would see U.S. energy demand decreasing by 0.3% p.a. instead of growing by 1.1% p.a.


34

15

11

19

21



56

Residential sector is the single largest opportunity to reduce demand in the U.S.

Total QBTUs 2020

13

21

At EU levels

Base case

8 QBTUs = 34% of U.S. abatement

• Lighting• Heating and

cooling• Water heating• Appliances


57

2020

1.9

9.5

6.7

0.9

Segment mix

U.S.

+42%

Europe Tech-nologyKey drivers of gap

Lower fuel economy of the U.S. light-vehicle stock leads to 37% extra demand vs. Europe for the same miles driven – a gap increasing to 42% in 2020Average fuel economy of light-vehicle stockLiters per 100 km, gasoline equivalent

2005

1.2

1.6

10.3

7.5+37%

Tech-nology

Europe U.S.Segment mix

Key drivers of gap


58

Several technologies and methods have the potential to curb U.S. industrial energy demand growth

Technology/method*Industrial sectors affected

Energy savingsPercent of 2020 demand within affected sectors (unless otherwise specified)

* In order of largest to smallest by estimated absolute value of energy savings *** Percentage of total energy losses; based on aluminum, chemicals, food processing, steel, pulp and paper, refining** Percentage of total steam energy inputs

Source: U.S. Department of Energy; Lawrence Berkeley National Laboratory; McKinsey Global Institute analysis


Co-generation Across sectors

Steam best practices (ops & maint) Across sectors

Plant-level energy system integration

Energy-intensive sectors

Optimized motor-driven systems Across sectors

Gasification Refining; pulp and paper

Membranes Chemicals; food processing

Near-net-shape casting Steel, metals 10

3

6

2

3

5

3


59

There are many barriers preventing energy efficiency investments in the U.S.

Policy distortions

Lack of information

Agency issues

Other factors

Source: Department of Energy (DOE); McKinsey analysis

Challenges Emerging solutions

• Small commercial and residential ratepayers do not understand efficiency opportunities

• Contractor risk / 3rd party credibility• Electricity costs small percentage of

ratepayers budget

• Power regulation shelters consumers from real energy pricing

• Purchaser and operator of appliances distinct from entity paying energy bill

• Traditional utility incentive is to encourage more energy use

• Energy efficiency benefits shared by all ratepayers, not just those who make investments

• Metering and decoupling• Include more energy efficiency regulation in

building codes • Tax/ban inefficient products • Implement incentives through performance

based rates and modified decoupling schemes

• Collect EE surcharges from all ratepayers and use proceeds for education and subsidies

• Educate and inspire customers through multiple marketing channels

• Partnership / certification for installers/contractors

• Accrue benefits over time and share with ratepayers up front or at set intervals

• Energy efficiency requires high up front costs for a future benefit stream

• Skepticism and opportunity costs often result in companies requiring short pay back periods

• Provide upfront discounts for efficient products and/or tax inefficient products

• Simplify investment decision through partnerships with retailers and contractors

• Many products sold do not use most energy efficient technologies available

• Efficiency is not a focus for many R&D and product development efforts

• Continually increase efficiency requirements in building codes and appliance standards

• Increase R&D in energy efficiency


60

Change between 2003 and energy productivity case

-8%

Scenario

Fuel mix 2020QBTU, Percent

2418

8

5

6

6

11

1

40

Base case

11

1

32

EnergyProductivity

RenewablesHydroNuclear PetroleumproductsGas

Coal

Power generation

26 19

2719

44

36

7

7 16

110

Base case

16

88

EnergyProductivity

Renew-ablesHydroNuclear Petroleumproducts

Gas

Coal

Total primary demand

-11%

3%

200%

-8%

1%

3%

175%

-9%

-7% -4%

Energy productivity would more than cancel the projected growth of fossil fuel demand

Source: MGI analysis, McKinsey Integrated Power Perspective 2007, McKinsey GEM practice


61

The energy productivity opportunity

• Spectacular opportunities exist to improve energy productivity in all regions and all sectors

• Improving energy productivity would not compromise the comfort and welfare of consumers

• If pursued, a win-win for the economy (business and individuals) the environment, and supply security

• However, targeted policy interventions will be required to overcome market failures and inefficiencies

curbing global energy demand growth - stanford university

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