Select Committee on Science and Technology Minutes of Evidence


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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