Chairman’s Message

Tatsuya Terazawa

Tatsuya Terazawa
Chairman and CEO
The Institute of Energy Economics, Japan

Chairman’s Message
“Why Energy Efficiency?”

Message for March 2023

For many, pursuing energy efficiency is not as attractive as developing renewable energies. While you can see the tall towers of wind power generation, you cannot easily appreciate most of the energy efficiency measures that have been introduced. Even if energy efficiency is considered less attractive, it does not mean that it is not as important as renewables. In fact, energy efficiency could and should play a major role in our paths towards carbon neutrality.

<Main Points>

  • Energy efficiency should contribute to about 40% of the GHG emissions reduction by 2050.
  • Energy efficiency measures are less expensive than most supply side measures.
  • Energy efficiency measures are much faster to deliver results.
  • Energy efficiency enhances energy security.
  • Behaviors, products, process, and structures all need improvements.
  • Limits to energy efficiency necessitate investment in fossil fuels.

  • 1. Contribution of energy efficiency

    According to the Advanced Technology Scenario of IEEJ’s Outlook 2023, 43% of the emissions reduction by 2050 are to be achieved through energy efficiency and conservation measures. The IEA’s Net Zero Emissions (NZE) scenario also envisions that 40% of the GHG emissions reduction by 2050 will be achieved by demand side measures, which include fuel switching and electrification. This is just to say that substantial reduction in GHG emissions cannot be realized without remarkable energy efficiency improvements.

    2. Cost benefits

    So why do we expect so much from energy efficiency?
    The Marginal Abatement Cost (MAC) of various means to reduce emissions shows that many energy efficiency or conservation measures are far less expensive than supply side measures. In fact, some of the measures can be achieved at negative costs. One conservation example is the adjustment of temperature of air conditioners. Other than a little less comfort, raising the room temperature setting during summertime would reduce energy consumption and lower your energy bill.
    The cost benefit of saving energy is very important as we face price hikes under the energy crisis. With better efficiency, we can lower our energy consumption, lower our energy bills and lower our emissions.
    Energy efficiency is particularly important for the emerging/developing economies. With their strong anticipated economic growth and rising living standards, their energy consumption is bound to increase. As many of them currently have modest economic means, reducing their energy consumption growth with less costly measures will be vital.

    3. Speed

    Many of the needed technologies for energy efficiency improvements are already commercially available. There is no need to wait for R&D or for a series of demonstrations projects; they can be acquired and used right away. As such, most energy efficiency measures do not require long periods to obtain permits nor lengthy construction time. They can be in place in a relatively short period of time.
    As we are facing a global climate crisis, it is vital to start reducing GHG emissions as soon as possible. As global warming is caused by an accumulation of GHG, the earlier the reduction, the better for the climate. In this regard, the speed with which energy efficiency measures can be deployed is a precious advantage.

    4. Energy security

    For an energy importing country like Japan, energy security is a very serious issue. Energy efficiency helps enhance energy security by reducing the need for imports. In Davos, in January 2022, Fatih Birol chief of IEA, reiterated that “Energy efficiency is so important in the world's journey to net zero, to keep global warming at 1.5 degrees Celsius, that it's nicknamed the first fuel". As such, it can be considered as an indigenous source of energy and any improvement in energy efficiency is like developing an oil or gas field domestically.
    Looking back in history, Japan’s major response to the oil crises of the 1970’s was the enhancement of energy efficiency, including the rapid improvement of vehicle fuel standards. As we face another energy crisis today, we should strengthen our energy efficiency measures again.

    5. Behavioral changes

    What can be done to improve conservation and energy efficiency?
    The quickest is behavioral change. Most behavioral changes can be done right away. One historical example is Japan’s response to the 2011 Great East Japan Earthquake, the nuclear accident in Fukushima and the following power shortages. To avoid further rotating blackouts which had been required for several weeks, the Government set a target to reduce peak demand by 15%. The request by the Government for energy users to cut peak demand was widely accepted by companies as well as households. The average temperature for air conditioning in offices during the summer was raised from 26℃ to 28℃ and the luminance inside offices was reduced by one third, with hallways turned dark. The surprising developments were that after the crisis, room temperature was lowered slightly and the hallways lightened again; the room temperature is now set at 27℃ and the luminance kept a third lower. This experience shows that some behavioral changes can have long lasting effects.

    6. Product innovation

    Energy efficiency improvement of consumer appliances can play a great role. Japan’s “Top Runner Program” which requires suppliers of 32 products to improve their individual energy efficiency to a level comparable to the best products within a given time limits has been quite successful. The energy efficiency of air conditioners, refrigerators and TV sets has so far improved by as much as 30%, 50% and 30% respectively. The shift from internal combustion engines to hybrid engines has improved the fuel efficiency by one third, on top of an energy efficiency improvement for internal combustion engines of 50% already achieved over the years.

    7. Process innovation

    The core of energy efficiency improvement in response to the oil crises in the 1970’s has been led by the industrial sector. The industries, which comprise 46% of the energy consumption in Japan today, meticulously scrutinized their operations to eliminate any heat waste. With continuous efforts, between 1973 and 1990, Japan succeeded in improving its energy intensity (measured as final energy demand divided by GDP) by 35%.
    Improving the logistics of freight transportation, which comprises 10% of the energy consumption in Japan, was also helpful.

    8. Structures

    As about one third of the energy consumption in Japan takes place in buildings and housing, improving their insulation can be very efficient. Over the years, larger buildings in Japan have significantly improved their levels of insulation and reviewed their operational energy efficiency with better air conditioners, and ventilation.

    9. How much can be expected from saving energy?

    According to IEA’s NZE scenario, the global energy intensity is required to improve by 4% every year until 2030. This rate of improvement is quite ambitious considering the 1.3% annual improvement achieved globally between 2017 and 2020.
    These numbers need to be put in context. I noted the energy intensity improvement in Japan in response to the oil crises of the 1970’s was 35% over nearly 20 years. The energy intensity improvement that was achieved in Japan following the earthquake and the nuclear accident was 20% over nearly 10 years. The response to crises must have helped achieve such impressive improvements. But these improvements in response to crises represent roughly a 2% annual improvement. To continuously achieve a 2% annual energy intensity improvement over years should be viewed as very impressive.
    In light of these facts and histories, achieving a 4% annual improvement until 2030, as portrayed by IEA, is very ambitious to put it mildly. It is also important to note that some of the “low-hanging fruits” for achieving energy efficiency improvement have already been harvested because of past efforts. In general, energy efficiency faces diminishing returns in the absence of breakthrough in innovation or policies.

    10. The Gap

     What if there is a shortfall between the actual annual improvement and the projected NZE scenario of a 4% annual improvement? What about the so called “rebound effect” that could emerge and slow down our efforts? A difference of 2% per year may seem small, but a shortfall of 2% point every year, over 10 years, would eventually lead to a difference of more than 20% in energy demand. The difference is significant!
    To avoid such a great energy demand difference, it is clear that we need to do whatever we can to narrow the gap between the actual annual improvement and the NZE scenario. We need more actions, investment and policies to enhance energy efficiency. Energy efficiency must be highlighted much more.
    Japan will continue to strengthen its energy efficiency efforts particularly in areas with potential for improvement. Japan will strongly support the energy efficiency measures for SMEs, for insulation of smaller buildings and housings, and for demand side management.
    At the same time, we must be prepared for a most likely shortfall in the actual improvement in energy efficiency which would emerge as additional energy demand. With more energy demand, there will have to be more energy supply. As the NZE scenario already incorporates the maximum deployment of renewable energies, which energy could fill in the gap?
    Unless we could succeed in developing renewable energies and nuclear beyond the “maximum”, we will have to tap into fossil fuels for the supply gap. This will necessitate additional investment for fossil fuels which could be “an inconvenient truth” for many. This will also highlight the need for “decarbonizing fossil fuels” through the production of blue hydrogen and CCUS.