Energy Efficiency is one of the new mantras in the industry. It has become a go-to reference in most commercial pitches – from renewables to hydrocarbons – and even generated a (well-deserved) Nobel prize. It has been claimed that, with a strong push in efficiency, the size of the global economy could double in 20 years with only a marginal increase in energy demand and that energy efficiency alone could cause greenhouse gas emissions to peak before 2020 (yes, 2020 is arriving in two months).

Nevertheless, in yet another episode of the clash between idealism and pragmatism, Global energy demand keeps rising and guess what… at twice the average rate of growth of 2010. Needless to say, there’s no energy demand increase without the corresponding CO2 emissions. I (kind of) understand the value of slogans as a rallying cry to society, but their simplistic nature hides many important facets of reality. Let’s try and do some expectation management.

tl;dr | Energy efficiency is fundamental to the sustainable growth of Society. But it’s no miracle.

The Numbers

As the global economy rose more than 6% in 2018, Energy consumption across the World rose with it – according to BP this rise is around 2.9%. This datum, in and by itself doesn’t tell much, since there’s a historical (and logical) relationship between economic output and energy demand, but let’s look at another metric – Energy Intensity (or how many units of energy per economic unit).

Image 1 – Global YoY Variation of the World’s GDP, Primary Energy Consumption and Energy Intensity
(Sources: BP/World Bank)

As you can see on the rightmost chart, when we compare 2018 to 2017, we only used 3% less energy to achieve the same economic output – even with the IEA stating that investment in energy efficiency posted double digit growth. In another words, the forces driving up demand outpaced our increase in efficiency.

Not just that, the thirst for all fossil fuels rose in 2018, with natural gas claiming nearly 45% of the increase in total energy demand. Fossil fuels covered 70% of the growth in demand for the second year running. Even with renewables growing tremendously, it’s still not enough to meet the increase in demand for electricity around the world. The result is obvious: global energy-related CO2 emissions increased to 33.1 Gt (just for scale that’s 13 times the weight of Loch Ness in Scotland), up 1.7%.

The Drivers

Several factors contributed to this scenario. Steel manufacturing consumes an enormous amount of energy. According to the World Steel Association, crude steel production for 64 reporting nations reached 1808.6 Mt in 2018, up by 4.6% compared to 2017. Over 50% of all this steel is made in China and, if it wasn’t for China’s proactivity when it comes to energy efficiency (probably to the reader’s surprise), the world energy consumption would be way worst (view image 2 for the magnitude of this issue).

Image 2 – Changes in Global Energy Intensity with and without China (Source: IEA)

The IEA estimates that weather conditions last year were also responsible for almost 20% of the increase in demand, as average winter and summer temperatures in some regions approached or exceeded historical records. Cold snaps drove demand for heating and, more significantly, hotter summer temperatures pushed up demand for cooling.

Another major factor is transportation.

Road transportation, which now accounts for about 22% of the world’s demand of energy, is seeing immense growth, particularly in emerging economies, which boost demand for mobility as the middle class expands. This is particularly important, since the major increase in passenger vehicle sales is in the category of large (i.e. energy intensive) sport utility vehicles (SUVs), with the global share rising from 30% in 2014 to 41% in 2017.

Aviation also contributed significantly to the increase, as passenger kilometres flown increased by 6.5% to 8.2 trillion revenue passenger kilometres (RPK), with the number of passengers reaching a record 4.3 billion – 30% of them in Low Cost Carriers.

The hidden Leviathan

With recent explosive growth in markets for new Communication Technology (CT) devices—smartphones and tablets in particular—and the transition of the television (TV) from a basic receiver into a digital media centre and entertainment hub, these ‘digital’ consumer devices now dominate global sales of consumer electronics.

In parallel, the Internet-of-things (IoT) phenomenon (the interconnection of devices over the internet) is set to boom, for example, devices which were static, such as humidifiers and air conditioners, are now sold with remote smartphone control.

All these devices are connected by high-speed (e.g. 4G can consume 50x more than 2G and we are beginning to implement 5G) wireless access networks which, aside from getting more powerful, are getting more ubiquitous as the middle class expands in emerging markets and initiatives try to bring internet to all corners of the globe.

Although the centralization of processes (e.g. cloud computing) generated great increases in demand efficiency, both from processing, storage and transmission standpoints, just like in the sectors mentioned before this increase in efficiency is not match for the rising demand – global internet traffic has tripled since 2015, and is expected to further double by 2022 (CISCO).

According to the NRDC, back in 2015 they were estimating that data centre electricity consumption would be roughly 140 TWh by 2020 in the US alone. Guess what: according to the IEA by 2018, data networks were already consuming 260 TWh globally – roughly 1.1% of total global electricity demand, with mobile networks accounting for two-thirds of that. According to the agency, in a moderate efficiency-improvement scenario of 10% per year, electricity demand could rise nearly 10% to around 280 TWh in 2021.

Image 3 – Historical and Expected electricity use in internet data transmission networks. Notice the impact that energy efficiency can have in predictions for 2021. (Source: IEA)

Another nail in the coffin is blockchain – whose impact is unpredictable and will depend on the establishment (or not) of said paradigm as well as the underlying technology (there are several competing at this time, with very different energy consumptions). Nevertheless, Bitcoin mining alone, which is this technology’s largest reference, now accounts for an estimated 73TWh/year of estimated consumption.

What to expect

Worldsteel expects global steel demand growth to stabilize over the long-term at a compound annual growth rate of around 1%, now that Chinese steel demand has peaked. It’s good news for global energy demand but it’s still a solid increase. Also, the Chinese economy is not necessarily driven by demand, as the PRC constantly uses domestic investment to balance it economy (e.g. the Trade War). So… who’s to say.

When it comes to weather, it has been more than proven that a changing climate leads to changes in the frequency, intensity, spatial extent, duration, and timing of extreme weather and climate events (such as cold snaps or heat waves), maybe resulting even in unprecedented extreme events. In another words, extreme events can be linked to changes in the mean, variance, or shape of probability distributions, or all of these (view image 4).

Image 4 – Effect of changes in temperature distribution on extreme weather events (Source: IPCC)

We should be curbing down our emissions to prevent these phenomena. We are doing the opposite. I believe at this point, it’s safe to assume more energy demanding weather patterns will increase in frequency.

When it comes to transportation, EV’s are taking their time to pick up pace, not just due to logistical and operational issues, but also economic and social ones. China’s EV sales saw their first monthly decline in July. In August, the decline was far steeper. This comes after China scaled back subsidies to the industry. Increased stricter emission standards may also backfire, since dealers than offer older cars at deep discounts. Europe registers about little more than half the passenger car sales of China (15.2M vs. 27M). In the old continent we appear to be on track to sell 500k EV’s in 2019, which is still just a 3% of the total sales.

In the meanwhile, back in 2016, the ICAO predicted around 7.2 trillion RPK for 2018. That value was surpassed by almost 10%. Their estimations for 2025 were 10 trillion RPK.

Finally, our thirst (and that of our children) for online content and connectivity is most likely a mere shadow of what the future holds. How infrastructure and devices will evolve is hard to predict – for example, the World’s most powerful computer (China’s Tianhe-2) uses 18MW of power, while a futuristic quantum computer would use only 25kW (although one will most likely not replace the other as they are very different in use and nature).

Energy Efficiency may be one of the new mantras in the industry, but it’s no match for our desire for it.

Hugo Martins | Analyst

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