Demand Better

In 2009, the Ontario government embarked on a bold policy experiment: to transform Ontario’s electric power sector radically, to base it largely on renewable sources such as wind and solar, and to establish a new industry in Ontario based on those technologies. Most Ontarians, probably thinking about it only in passing, likely saw that as a good thing.

And then everyone was mugged by reality, or by several realities. It turned out that the Ontario residents who would actually live with the new generating facilities were not so keen, and several Liberal members of the provincial legislature felt the consequences directly in the 2011 election. Upon reflection, many people in Ontario were not so sure that paying from twice to ten times the market rate for electricity was such a good bargain, despite the touted future benefits. The policy of preferring Ontario suppliers then ran into the inconvenient reality of longstanding international trade obligations.

And for all that, the policy only addressed itself to something less than 20 percent of Ontario energy use, the rest being made up by transportation and heating fuels. As Kermit the Frog put it, it’s not easy being green.

Like many environmental initiatives over the last decade, Ontario’s Green Energy Act was motivated by the issue of climate change. According to sources that were accepted by most governments as authoritative, most notably the Intergovernmental Panel on Climate Change, countries such as Canada needed to reduce their greenhouse gas emissions by at least 80 percent over the next four to five decades, in effect, rebuilding the whole energy system.

The case for urgent and radical action seemed so compelling that the unavoidable costs and tradeoffs involved were simply wished away (but not washed away, as it turns out) by political rhetoric. Those same costs and tradeoffs have led to unintended effects such as those experienced by Ontario. More often, they have paralyzed policy makers due to the large new capital investment and industrial adjustment challenges—and, of even more significance in Canada, the exacerbation of regional tensions between so-called hydrocarbon provinces and so-called hydro provinces.

In the national debate in Canada today, the focus of virtually all commentators is principally on questions of supply: on the one hand—for those who emphasize environment—wind, solar and biofuels; on the other—for those who emphasize economic growth—oil sands, natural gas and export pipelines. If the objective of energy policy is economic development or energy security, there is some logic to focusing on supply. But if the driving objective is environmental protection, then a fixation on supply is perverse—akin to viewing the problem through the wrong end of a telescope.

More time looking from the demand end of the system—the right end—reveals a wealth of possibilities that are otherwise invisible to policy makers.

It is important to start with several fundamental perspectives.

First, energy transformation is a long game, because the system is made up of many highly interconnected and interdependent parts, most of which have lives measured in decades, sometimes many decades. Power generation plants typically live for up to 60 years or more; as important, they are connected to consumers by equally long-lived transmission systems, with even planning and approval to develop new ones requiring multiple years and great controversy.

Second, it takes a great deal of energy to produce and transport useful energy products such as gasoline, natural gas and electricity, meaning that it often takes several units of energy at the supply end to produce one unit of useful end-use energy. Reduced energy demand therefore has large and beneficial multiplier effects.

Third, it is essential to keep environmental protection as an objective of energy policy in realistic perspective. Most policy makers know, or eventually discover, that affordable cost most often trumps environment; security often trumps both; and the lure of economic development usually pushes environment even further to the bottom of the priority list.

We have seen this time and again in consumer—and voter—reactions to escalating gasoline prices, to changes in regulated power rates and to the supposed perils of carbon taxes. Polling results show environment dropping below economy whenever the economic outlook is clouded. We rarely see security arise as a primary consideration, but that is mainly because the system works as well as it does; on the rare occasions when it fails, no one is in any doubt as to what the highest priority is.

As to the priority given to economic development, there are many examples where it has purportedly or actually trumped other energy objectives. Oil sands production in Alberta has become the most infamous in this regard. But Quebec has long used low-priced hydro power to attract electricity-intensive industry and subsidize consumers, despite the fact that this encourages overconsumption—in high use of electricity for space heating, for instance, by general agreement a misuse of high-quality energy in a low-quality application. And, of course, Ontario has gone the other way, adding consumer costs in order to subsidize a new industry.

The proper focus of energy policy is all four aims: security, affordable cost, environmental protection and economic development. As it turns out, a demand perspective can serve all four, but none more than the objective of environmental protection.

Fourth, it is important to emphasize that the environment is about more than climate change. Over the past decade, a great deal of effort has gone into thinking about the problem of reducing greenhouse gas emissions, or carbon for short (although carbon dioxide is only one source of emissions, it is by far the most important). By and large this effort has focused on supply, often through development and deployment of low-carbon energy sources such as wind, nuclear or biofuels. But one of the great mistakes of the rush to try to eliminate carbon from the energy economy was the inexplicable blindness in many quarters to other environmental or social consequences.

Start with “clean” electricity. Hydro power is clean in emission terms but almost always entails controversy, mainly driven by environmental concerns over things such as wildlife habitat. Wind power is emission free but has proved intrusive on the landscape, running up against competing social values. And ethanol production for fuel, especially when based on corn, is energy, land and water intensive, and contributes to food price inflation.

No form of energy production comes without environmental or social costs, and policy that ignores this point simply displaces the carbon problem.

To be clear, reducing supply-side impacts—including the carbon footprint of all energy supplies—is a vital necessity. But this is not enough. What if we spent at least half of our time looking through the telescope from the demand end? What would we see?

We would first be reminded that the purpose of energy is to fuel and power the economy—to deliver energy services that we need and desire: heating/cooling, mobility and electrical applications, including lighting and electronics. We do not demand oil or electricity; we demand what they give us, and what they give us can be achieved by using different mixes of fuels, technologies, capital equipment and management methods.

But in Canada, we tend to spend more energy achieving these benefits than our economic peers, even other cold, resource-based countries. Simply put, Canada is a laggard in managing energy use; we are ranked third highest among the 34 members of the Organisation for Economic Co-operation and Development in energy use per capita and energy use per unit of gross domestic product (referred to as energy intensity). Americans generate nearly a quarter more economic activity per unit of energy than Canadians do, Swedes a third more, Norwegians half more and the British over twice as much. Even Australia, with its resource-based economy, low population density and large distances between urban centres, generates 30 percent more economic activity per unit of energy than Canada, and uses nearly a fifth less energy per person.

On a more encouraging note, Canadian energy intensity has been steadily falling. There are several factors behind this, some of which have pushed it higher and some lower, but energy efficiency accounts for 80 percent of the intensity decline, driven by investment in new capital and technology. Homes and commercial buildings are better insulated and have more efficient heating equipment; vehicles’ controls have gotten better and their materials lighter; and the energy efficiency of lighting technology continues to improve. According to Natural Resources Canada estimates, these and other improvements resulted in an economy-wide energy efficiency increase of about 18 percent between 1990 and 2009, reducing emissions by 67.3 megatonnes and decreasing energy expenditures by $26.9 billion in 2008.

This fact, combined with the performance of comparator countries, suggests the potential to further reduce the energy intensity of Canada’s economy. One of the best-known sources for estimates on energy efficiency potential is a major U.S. consulting firm, McKinsey and Company, whose analysis of the American economy suggests that the United States could reduce its demand for energy in the residential, commercial and industrial sectors by nearly a quarter, at a net economic saving. Underscoring the point, the U.S. Energy Information Administration is projecting a continuing decoupling of economic growth and energy use, with energy use per unit of GDP—as well as corresponding energy-related emissions per unit of GDP—projected to decline nearly 50 percent between 2010 and 2040. (This analysis is controversial and many argue that this low-cost potential, or much of it, is illusory or that improved energy efficiency produces a “rebound” when users essentially spend the reduced energy cost by using more energy. Against these arguments stand the observed facts that energy intensity has steadily declined over recent decades, mainly driven by increased energy efficiency. In other words, not only are efficiency gains real, but also, at most, a fraction of them are being obviated by rebound effects: our rich society continues to get richer using proportionately less energy. )

Continuing our investigation from the demand end, we would see that half of the energy we use is in the form of heat: space heat, domestic hot water and industrial process heat. Canada is particularly heat intensive because of our climate and industrial structure, but, even world-wide, close to half of energy use on average is in the form of heat. And yet in a further perverse consequence of over-attention to electricity and transportation energy supply, we have largely ignored this fact.

The potential savings here is substantial. A building like the Manitoba Hydro Place—awarded a platinum rating under the Leadership in Environmental and Energy Design (LEED) green construction standard, and incorporating renewable energy and efficiency features such as geothermal heating, passive air handling and automated solar shades—takes 70 percent less energy to heat and cool than a conventional office building of comparable size. If these efforts to reduce energy demand for space and water heating and cooling were replicated for every commercial building, we would see a 5 percent reduction in overall energy use in Canada. If we include homes as well as commercial buildings, we start getting energy-use reductions of 15 percent. And while building costs and energy performance vary widely, depending on design, location and management practices, meeting LEED silver or gold standards can add as little as 2 percent to total costs, according to the Canada Green Building Council, and reduce energy use by up to a third, according to the National Research Council.

This effect is compounded by the fact that less than half of the primary energy that enters the economy is actually used. The rest leaves as lost energy, essentially in the form of waste heat from power plants, buildings, industrial processes and vehicles. Not all this energy can be effectively or economically captured, but much can, through combined heat and power systems, waste heat recovery systems and district energy systems, in which a central heat source serves multiple buildings. To put it in perspective, if for the sake of argument 20 percent of waste heat could be captured, that would be the energy equivalent of meeting all of the energy needs of all commercial and institutional buildings in Canada from environmentally benign sources. And yet this resource is largely being ignored by policy makers.

Finally, we would see from a demand perspective that over half of our energy budget is spent in urban and small town communities—and that those communities themselves can be sources of energy.

Canada’s communities were and are organized around certain suppositions, including an abundance of land, low-cost energy, abundant water, readily available dumping grounds for waste, and a relatively young and increasingly wealthy population. But all those suppositions are now or are becoming obsolete.

We are increasingly land constrained in most communities. Of course, this is Canada and there is lots of land, but sprawl has multiple costs: much near-to-urban land has alternative uses such as agriculture or provides ecosystem services such as water management; low-density development is getting increasingly expensive; and one of the consequences of sprawl is productivity-killing traffic congestion. While future energy costs are uncertain, a smart bet would be on them growing, especially if and when we begin to price electricity and carbon at their real cost. Water, if not actually scarce in most places in Canada, is becoming more expensive to deliver. The era of conveniently located garbage dumps is long in the past.

We are also getting older. According to census data, in 1971 the median Canadian was 26.2 years of age. In 2011 that Canadian was 39.9 years old. Statistics Canada estimates that in 2036 the median will be somewhere between 42 and 45 years with consequences for housing, access to services and mobility that will reshape our communities. Whether we continue to become wealthier is an open question, but it seems highly unlikely that we will again witness the explosive growth in affluence that characterized the second half of the 20th century.

All things taken together, it is difficult to escape the need for us to rethink many habits from the past century, extending to the way we design, grow and organize the communities in which we live. And while ideal urban policies are obviously hotly contested, if we consider this process with energy in mind, various opportunities come into focus—including some that help resolve other community challenges. The following are just a few examples.

These sorts of synergistic effects also point toward the potential for changes in the organization of our energy delivery infrastructure. Locally generated power and heat can be combined or integrated with more traditional energy approaches by tying them all together with three grids: gas, electricity and thermal energy. Traditionally the gas and electricity grids have been entirely separate, both physically and institutionally (most notably the way they are regulated), while thermal grids were a rarity. But in future, the gas delivery system—supplied partly from local waste and biofuel sources—could be the backbone of a more distributed electricity generation system. Gas-fired generation would function as one of the primary “batteries” required for development of more intermittent renewable sources such as solar, as well as helping support thermal energy distribution systems, which would draw on local renewable sources such as geothermal.

A lot of this is still about supply. But when we view supply through the prism of energy demand, the focus is on the desired service, encompassing the many combinations of technology and fuel that can deliver it. The economic incentive from the supply perspective is to sell more energy; from the demand perspective it is to achieve high levels of energy service at low cost and high levels of reliability and safety—and so tending toward efficiency. On this view, it is by no means fanciful to envisage many buildings and parts of communities as possible net contributors to the energy system, significantly reducing environmental effects of all sorts.

All this adds up to a new way of dealing with energy at the demand end, an idea much more transformational, economically efficient and environmentally benign in its implications than any of the central supply technologies that we have in front of us today. The power or gas utility becomes the energy service utility.

To place this idea in perspective, traditionally a hospital or a university or an office building (or a home, for that matter) contains all manner of equipment to produce space heat and hot water, as well as rarely used backup power systems. Most of the equipment is old, much of it is badly run and energy inefficient, and some of it is unsafe—leaving facility owners with one more headache that they are not well suited to manage. New energy equipment and energy-efficiency investments compete in the capital budget with MRI machines, computers and productivity-enhancing improvements to buildings, so—for good reasons—often fall to the bottom of the priority list.

In the future, energy management could increasingly be undertaken at the scale of neighbourhoods and communities. Even in individual buildings, the system manager—and owner—may not be the building owner but rather an energy utility that delivers a package of energy services, drawing on diverse resources including energy efficiency. In British Columbia, Fortis has already struck an arrangement with Delta School District to replace conventional boilers in 19 schools with a mix of high-efficiency condensing boilers and geo-exchange systems. Fortis BC, through a separate business entity, owns and operates these energy systems in exchange for a return overseen by the provincial regulator.

Everyone potentially wins in this world—in community health, productivity, energy efficiency, safety and environmental performance.

Such a vision of our energy future will not come about easily or quickly. But the alternative would be simply to walk away from the carbon challenge, or attempt to address it only through means that, by themselves, are far more costly in economic, social and environmental terms.

At the beginning of this essay I suggested that underlying our energy challenges are several tensions or tradeoffs among energy objectives. These include the industrial adjustment issues associated with moving away from a carbon-based energy system, the particular regional tensions that this engenders in a country that sometimes takes badly to such tensions and the practical challenges of essentially rebuilding in a short time a system of capital stock that took more than 100 years to build in the first place.

Nothing makes these challenges go away, but some approaches make them harder and some make them easier. A supply-dominated approach will make energy cost more and leads to a less robust system (dominated by electric power supplied over long and vulnerable transmission systems). A demand emphasis on higher efficiency and local sources offsets those costs and makes the system more resilient. The massive industrial adjustment issues are unavoidable, and neither a supply focus nor a demand focus cures this problem. A demand focus, however, is regionally neutral. As Canadians we are not hydro people or oil people. We are energy-using people, and our habits are remarkably similar from one side of the country to the other. As to the cost of changing our capital stock, it is happening all the time—especially at the community level—and for many reasons. If we attend to how we transform all of our capital stock, bit by bit pointing things in a better direction, the cost and difficulty of doing so will be spread much more widely over time, among regions, among industries and among individual Canadians.

The argument here—to repeat a point already emphasized—is not to avoid the fundamental changes needed in our energy supply systems, but to simultaneously make the complementary demand-side changes that can help the environment most, at lowest cost and soonest. As underscored by a recent report from the International Energy Agency, energy efficiency can play a key role in halving growth in global energy demand and carbon emissions, stabilizing long-term energy prices while the slow process of decarbonizing supply plays itself out.

In a liberal society, policy has limited reach in shaping our energy choices and communities. But many policy measures are at hand to drive such a vision—at least as many as on the supply side. It starts with the pricing of energy and carbon. It entails more investment by government and private entities in demand-end technology development. It includes increased attention to energy in the rethinking of what we mean by truly sustainable communities. And it includes a fundamental rethink of regulatory frameworks, to allow the necessary reshaping of the energy delivery system.

A bit more time looking through the other end of the telescope could prove rewarding.

This essay was written with the generous support of Max Bell Foundation, as part of The 40th Anniversary Max Bell Essays and Lectures.